The  Service 

1.  This  War  Tax  Service  when  sent  you  is  complete  to 
the  time  of  subscription.  It  is  kept  up  to  date  by 
the  insertion  of  new  pages  as  often  as  new  regulations, 
rulings  or  decisions  are  released. 

2.  Reports  of  new  matter  are  sent  you  by  first  class 
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division  is  complete  in  itself  including,  as  it  does, 
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a  compilation  of  the  regulations,  decisions  and  rul- 
ings in  force  January  1,  1922,  forms,  new  matters, 
and,  where  necessary,  an  index. 

4.  All  paragraphs  are  numbered  for  reference  pur- 
poses. The  paragraph  numbers  appear  in  bold- 
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graphs to  which  back  reference  is  shown. 

5.  The  numbering  of  paragraphs  and  pages  is  con- 
secutive throughout  the  Service,  except  for  the 
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of  new  matter  in  place. 

The  Corporation  Trust  Company 

37  Wall  Street,  New  York 

Bsamaiifii  ifwwii     i    i    i       r  :..,r         1  i      ■■  1  r  ===== 


Knivri 

THE 

WAR  TAX  SERVICE 
1922 


Reporting 
Estate  Taxes 
War-Profits  and  Excess-Profits  Taxes 
Capital  Stock  Tax 
Stamp  Taxes 
Sales  (Excise)  Taxes 
Tax  on  Telegraph  and  Telephone  Messages 
Tax  on  Admissions  and  Dues 
Special  Taxes  on  Occupations 


Copyright  1922  by 

tote  ^ib^^ot^  mmi4  w&s^s^s 

37  Wall  Street,  New  York 
Affiliated  with 

(Sift  (Earjmratum  ISxtxnt  (&ampun#  Sgafrm 

15  Exchange  Place,  Jersey  City 


Chicago,  112  W.  Adams  Street 
Pittsburgh,  Oliver  Bldg. 
Washington,  Colorado  Bldg. 
Los  Angeles,  Title  Ins.  Bldg. 
Wilmington,  du  Pont  Bldg. 

(Corp.  Trust  Co.  of  America) 
Portland  Me.,  281  St.  John  St. 


Philadelphia,  Land  Title  Bldg. 
Boston,  53  State  Street 

(Corporation  Registration  Co.) 
St.  Louis,  Federal  Reserve  Bank  Bldg. 
Detroit,  Dime  Savings  Bank  Bldg. 
Albany  Agency,  158  State  St. 
Buffalo  Agency,  Ellicott  Square  Bldg 


10-30-22. 


CONTENTS 

Pages 


Estate  Taxes : 

1918  Act  -  3 

1921  Act  -  -  124 
War-Profits  and  Excess-Profits  Taxes  :* 

1918  Act  -                                           -  -  301 

1921  Act  -  -  401 

Capital  Stock  Tax  on  Corporations  -  601 

Stamp  Taxes  -              -  701 

Sales  (Excise)  Taxes                      -      -      -      -  -  901 

Tax  on  Telegraph  and  Telephone  Messages       -  -  1101 

Tax  on  Admissions  and  Dues    -                     -  -  1301 

Special  Taxes  on  Occupations    -  -  1501 

Miscellaneous  Law  Provisions  and  Regulations  having  a 

General  Application  -      -      -      -      -      -  -1601 

Forms,  Finder,  etc. : 

Table  of  Forms,  Guides  to  Revenue  Acts  of  1918  and 

1921  by  Sections,  Table  of  Court  Cases,  List  of 

Internal  Revenue  Districts  and  Collectors,  etc.  -  1701 


Running  Table  of  Contents  for  Each  Subject — Yellow  Supplementary 

Page  1,  at  the  Back  of  Each  Division  of  the  Book. 
Indexes — Blue  Pages  Throughout  the  Book. 


^SPECIAL  EXCESS-PROFITS  TAX  RULINGS. 

See  the  white  pages  immediately  following  the  blue-page  1918  Act 
Index  in  the  excess-profits  tax  division  of  the  book.  Please  read  the  foreword 
to  these  supplementary  rulings. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         2  SERVICE 


SERVICE  DEPARTMENT 


.         TAX  SERVICE 
-REPORT  NO.  57-  1922  SERVICE 
JANUARY  4,  1923. 
FINAL  REPORT  FOR  TKS  1922  SERVICE. 


Enclosed  herewith  are  pages  for  insertion  in  you 
1S22  Service  book,  all  being  for  substitution. 


'Excess  Profi 


w 

its  Tax"  division: 

/ 

upplementary  Bulletin  Rulinjp: 
Sec.  325.  Art.  853.  -  7/8. 
Perpetual  Check  Sheet  J 


"Stamp  Taxes?1'  division:  / 

]  767-768  (See  note  at  tl^  asterisk  on  page  763.) 

/ 


*    w  * 


/tHc)  192/  SERVICE, 


As  stated  apove  th/s  is  the  final  report  to  sub- 
scribers to  thG/1922  s/rvice.     The  next  report  (to 
those  who  n&vo  Renewed:  their  subscriptions)  will  be 
Report  No.  1,   &23  S  err  vice,  which  will  include  the 
United  States  Supranre  Court  decisions  in  the  Green- 
port  Basin  Co.!  a nor  tne  Baltimore  and  Ohio  R.  R.  Co. 
cases.     (The  yi  esprit  Report  was  delayed  as  Bulletin 
No.  52  was  not  printed  by  the  Government  until  after 
New  Years . } 


vary  truly  yours, 


I'HE  CORPORATION  TRUST  COMPANY. 


Wlp  Corporation  Qvmt  (Eompattg 


SERVICE  DEPARTMENT 

37  WALL   STREET,   NEW  TORE 


WAR  TAX  SERVICE 

-REPORT  NO.  56- 
DECEMSER  21,  1922. 
'  Enclosed  herewith  are  pages  designated  as  follows 

"Extase  Profile  Tax"  division: 

Supplementary  Bulletin  Kulingpf: 

^/Sec.  325.  Art.  817.  -  f.  (Mew,) 
\/£ec.  326.  Art,  83§.  -/25  to  28.  (New.) 
v/feec.  326.  Art.  845.  -j  7,  (New.) 
^Perpetual  Check  Shee^t  (For  substitution.) 

#    *  y 

THE  192;i  WAR  TA^  SERVICE. 

The  new  1923  War!  Tax  Se/rviee  will  be  ready  for  die 
tribution  on  January  |  1,  19^3  %o  those  whose  subscrip- 
tions have  been  renewed.  / 


w 


truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


1# 


ifl 


£ri  en 


SERVICE  DEPARTMENT 

37   WALL    STREET,   JXMlff  YOEK 


WAR  TAX  SERVICE 

-BEPOBT  NO.  55- 

DECEMBEH  6.  1922, 

Enclosed  herewith  are  pages  as  designated  below, 
all  for  substitution  except  as  otherwise  noted: 

'Excess  Profits  Tax"  division:' 

Supplementary  Bulletin  Rulings: 
/Sec.  326.  Art.  631.  1  25- 
/  Sec.  326 .  Art.  840.  -  i, 
^Perpetual  Check  She©" 

/ 

"Saie^  Taxes"  division: 

V953  (No*'.)  . 
v  Sales  /axes  Supplementary  Page  1. 

"Telegraph/ and  Telephone"/divi  sion : 

y    11^6-1104  (N^j/Form  72?  on  page  1103 J 

"Occupations  Taxefr  division: 

^//Occupat^ns  Taxes  Supplementary  Page  1 


¥ery  truly  yours , 
THE  CORPORATION  TRUST  COMPANY 


1 


1 


St}?  Corporation  Uxmt  (Eompattg 

SERVICE  DEPARTMENT 


WAS  TAX  i^evfC- 

-REPORT  NO.  54- 

NOVEMBER  29,  1922/ 

Enclosed  herewith  are  pages  for  a'u' 
dicated  below: 

"hsalek  Taxes"  division: 

/ 951-952  (New  matter  begin! 


"Occ/patiiiis  Taxes"  division: 
1537-1538  (New  mat 


4 


4 


f 

4 


4 


4 


Gtye  Corpmatimt  ©rust  (Hompany 


SERVICE  DEPARTMENT 


37    WALL    STREET.    NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  53- 
NOVEMBER  22,  1922. 
Enclosed  herewith  are  pages  designated  as  follows: 

'Excess  Profits  Tax"  division: 

Supplementary  Bulletin  Rulings: 

tfS©c.  327.  Art.  901./-  41  to  45.     (For  substitut- 


V!3MT«A"=l3a  30IVH33 


(Sip  (Enrpot&ium  OLruat  (Eout|iang 

SERVICE  DEPARTMENT 

3T    WALL  STREET,    NKW  YORK. 


WAR  TAX  SERVICE 
-BEPGBT  HO.  52- 
NOVEMBEB  6,  1922.  / 


'  Enclosed  herewith  are  pages  designated  as  follows, 
all  for  substitution  except  as  jefEherwise  noted: 


Title  Page  and  page  2 


"Sales  Taxes"  dhzisicn: 

//g09-910/(New  Form/?2SA  on  page  909  ) 
J/951-95^  (New  mairaer  begins  at  <||  4795. 
j/Sales  ^Taxes  Supplementary  Pag©  1 

"Occupational  Taxes"  yGivision : 

//153'/l53^ [New.  ) 
/  009(1  patrons  Taxes  Supplementary  Page  1 

"ForjjLa/  Fklder,  etc.,''  division: 


7; 


>5-l?06 


y@ry  truly  yours, 


THE  CORPORATION  TRUST  COMPANY . 


9 


*W0 


Ui}2  (Ect^av&iwvL  mxvim  (Ecmpatig 

SERVICE  DEPARTMENT 

37    WALL  STREET,    NEW  YORK 


WAR  TAX  SERVICE 

-HEFOBT  KO.  51-  .. 

OCTOBER  17,  1922, 

Enclosed  herewith  are  pages  for  substitution  as 
indicated  below: 

"Sale&  Taxes"  division:  J 

1/ 907-908  (Revised  Form  728.)  y/ 

"Admissions  and/Dues"  division:  / 

/1305-1^06  (Revised  Form  72^/) 

/  ^ery  yfxxly  yours, 

THE  COREQfiATIQN  TRUST  COMPANY , 


9 
0 
$ 

I 

$ 


Sty?  (Eorparatum  Enmi  (Eimtpatuj 

SERVICE  DEPARTMENT 

37    WALL    STR£ET,    NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  HO.  50- 

V 

SEPTEMBER  27,  1922. 
Enclosed  herewith  are  pages  as  designated  below: 

'Estate  Taxes"  division: 

</#25-226  (For/substitutior/for  page  225.) 

/Estate  Tax  Supplementary  Page  3  (For  substitution  J 

I  / 

'Admissions  and  Dyes"  division:  / 

^V567  (New/)  / 
/Admissions  and  Dtfes  Taxes  Supplementary  Page  1  (For 
/         /  substitution.) 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY . 


iDIVSI32  XAT  RAW 


-ioI)  8$; 
cj2  xjbT  q 


□  US 


0  SHT 


$f|*  d-z^^mBU  Iruat  (Beiitpatuj 

SERVICE  DEPARTMENT 

3T    WALL  STREET.    NEW  YORK 


--REP0BT  MO.  49- 

SEPTEMBER  13,  1922.  - 

Enclosed  herewith  are  pages  designated^lf  follows 
for  substitution  except  as  otherwise  no; 

"Estate  Taxes"  division: 

/^Estate  Tax  Ijfare-p&s;©  (To  f^f  page  3.  -  See  at 

Fq^s  705  and  706  under 
1921  Law  Provisions".) 

'Excess  Profits  j&x"  division 

Suppleijre  ntaryy?fui  let  in  Rulings: 

,  \rt.  813.  -  13-14  (14  is  new]. 

»T325.  Art.  813.   -  15.  (New.) 
rerpetual  Check  Sheet 

"Formg,  Finder,  etc.,"  division: 

1703-1704  (Revision  under  "Estate  Tax".  See  above.) 

Very  truly  yours , 


'    .NATION  TRUST  COMPANY . 


V 

( 


Ofijfc  (tatpamtmn  Wmst  (Emniuaty 


SERVICE  DEPARTMENT 

3T   WALL  STliEET,    NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  HO.  48- 
SEPTEMBER  8,  1922. 


Enclosed  herewith  are  pages  designated  as  follows 
for  substitution  except  as  otherwise  noted; 

/ 

li^lsion: 


Excess  Profits  Tax"  di 

SupgJ^menta/y  Bulletin  Rulings  ;t. 
K    89c.  jg02.  Art.  732.  -  1.  (New.) 
£/€ac/326.  Art,  838.  -  15. 
>etual  Check  Sheet 

Very  Jfcptfly  yours, 

iPQRATION  TRUST  COMPANY 


(I 
(I 

i 


Sfty*  (Enrjioratim!  ©rust  (Eompang 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPOHT  MO.  47- 

SEPTEMBER  1,  1922, 

Enclosed  herewith  are  pages  designated  as  follows, 
for  substitution; 

"Excess  Profits  Tax"  division: 

Supplementary  Bulletin  Hulings: 
V$4o.  325.  Art.  815  -  3  (Foj^ 
•erpetual  Check  Sheet 

•y  truly  yours, 

CORPORATION  TRUST  COMPANY. 


~3  ij 


QHp  (Earimraium  ©ritst  (totpattij 


SERVICE  DEPARTMENT 

;JT    WAtlfe   STUKKT.    NKW  VOttK 


WAR  TAX  SERVIC  S 

-REPORT  MO.  46- 

AUGUST  28,  1922.  *r 
Enclosed  herewith  are  pages  designate&^is  follows: 

"Excess  Profits  Tax"  division:  ^JT 

/ 465  to  468  (Substitute  for  pass's  465-466 .  -  New 
j>  j  matter  begins  at  q  1289.) 

Excess  Profits  jrax  Supplementary  Pages  1-2  (For  / 
f  ^Substitution . ) 

/        y&ry  truly  yours , 

/ THE/TORPOR AT I Otf  TRUST  COMPANY . 


t 


SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  MO.  45- 
AUGUST  24,  1922. 


/ 


Enclosed  herew 


si gnat ed  as  follows 


"Stamp  Taxes"  division, 

773  (New. ) 

i/  Stamp  Taxes  Supplementary/pages  1-2  (For  substitu 

tion, ) 

truly  yours, 
IFORATION  TRUST  COMPANY. 


0%  CBnriiuratiiw  amist  (Eumpauij 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  NO.  44- 


AUGUST  17,  1922. 

/ 


Enclosed  herewit 
for  substitution  exc 

"Estate  Taxes'*  division: 

i/2£5  (New.  ) 

/Estate  Tax  Supplementary 

"Excess  Profits  Tax"  divisi 

Supplementary 
i/  ,  Sec.  326. 
Perpetual? 


as  follows 
icated ; 


youn 


THE  CORPORATION  TRUST  COMPANY . 


I 
I 


alii?  (Enrjinratuin  Sntst  QTompang 


SERVICE  DEPARTMENT 

S7    WALL   STREET,  NEW 


WAR  TAX  SERVICE 


f 


-REPORT  NO.  43-  / 

AUGUST  10,  1922. 

/ 

Enclosed  herewith  are  pages/designated  as  follows 
for  substitution  except  as  otherwise  indicated; 


"Estate  Taxes"  division: 


/ 


J  Forepage-Forepage 
\j  223-224  (New.      Reproducing  revised  form  ?04.) 

"Occupations  Taxes"  division:  / 

150?  to  1512  (Repr/ducing  revised  forms  11,  il-A 
and/732.  ) 


"Forms,  Finder,  etc.,"  divisiij 

V .1703-1704 
\j  1709-1710 


Very  truly  yours , 
THE  CORPORATION  TRUST  COMPANY . 


Uiii?  dm^nratttm  ©rust  (Emnjiauy 


SERVICE  DEPARTMENT 


WALL   STREET,    NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  42- 

AUGUST  7,  1922 

SPECULATIONS  63,  relating  to  E3t&£©  Tax  under  the 
Kevenue  Act  of  1921,  were  released  /or  publication  to 
day  and  are  reproduced  on  the  accompanying  pages  (be- 
ginning on  page  158^".  / 

P 

The  enclosed  p4fi6§  are  designated  as  follows,  al 
for  substitution: 

"Estate  Taxes"  division: 

V  Forepage-Forepage 

33-34 
/125-126  \ 

\j  157  to  218  (Substitute*  for  page  with  M157M  on  on© 
side\  aii^/"218"  on  the  other.    Do  not 
remove  pages  219  to  222.) 
Estate  Tax  Supplementary  Pages  1  to  3 


Very  truly  yours , 


THE  CORPORATION  TRUST  COMPANY . 


oivnaa 


©hr  (Unrunraihm  ©ntat  (totpjwg 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-BEPOHT  NO.  41- 

AUGUST  3,  1922. 

Enclosed  herewith  are  pages  for  substitution  desig 
nated  as  follows: 


'Excess  Profits  Tax"  division: 

Supplementary  Bulletin  Ruli; 
Sec.  326.  Art.  833 
/Perpetual  Check  Shae; 


"Stamp  Taxes"  division: ^ 

*  707-708, /and  733-73^f  These  pages  are  reprinted  to 
/   embody  ajpTa  to  reflect  an  on-preas  change 
/     made  y'the  Government  in  Article  37  (f), 
/       «J  Sijfi,  providing  that,  as  in  the  case  of 
/         stamps  for  documents,  the  additional  can- 
l         illation  oy  means  of  three  parallel  in- 
cisions is  not  required  for  stamps  of  the 
value  of  less  than  50  cents. 

"Telegraph  and  Telephone"  division: 

*Tel.  &  Tel.  Supplementary  Page  1 

"Forms,  Kinder,  etc.,"  division: 
2/1707-1708 

Very  truly  yours , 


THE  CORPORATION  TRUST  COMPANY , 


4 


i 


Wht  (Enrpuratuin  (Burnt  (ftmttpattg 

SERVICE  DEPARTMENT 

:$T    WAJLL   M'fRKET,    NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  MO.  40- 

AUGUST  2,  1922. 

Regulations  59  relating  to  the  special  taxes  on  oc 
cupations  and  businesses  and  on  the  use  of  boats  im- 
posed by  the  Revenue  Act  of  1921  were  released  for  L 
publication  to-day.    A  reprint  , of  those  regulations,  f 
together  with  associated  matters  aro  sent  herewith. 

Enclosed  are  pages  designated  as  follows: 

'"Occupations  Taxes"  division: 

j/' Special  Taxes  on  Occupations  Fore-Page  (For  sub- 
stitution for  the  Fore-Page  now  in  the 
/  binder  facing  page  1501.) 

/ 1501  to  1506  (For  substitution  for  pages  1501  to 
1506. ) 

(Do  not  remove  pages  150?  to  1512  -  forms  -  now 

in  the  binder. )  . 
1/1513  to  1536  (For  substitution'  for  pages  15 13  to 

1540  how  in  the  binder.) 
occupations  Taxes  Supplementary  Page  1  (For  substi 

tut ion. ) 

Very  truly  yours , 


THE  CORPORATION  TRUST  COMPANY. 


Oll)T  (Eitrtinratum  (UnuU  (Emupauy 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPOKT  NO,  39- 

J'JLY  27,  1922. 

Enclosed  herewith  are  pages  des/gnated  as  follows 
for  substitution  except  as  otherwi/e  indicated: 

"Excpss  Profits  Tax"  division: 

'Supplementary  Bulletin  Rulings; 
i  Sec,  326=  Art.  845,  /-6 
1  Sec.  326.  Art.  854.  --/l-2 
^  Sec.  326.  Art.  854.  7 3-4  (New.) 


Perpetual 


Check  She< 


"Stamp  Taxes"  division: 

^761-762  (Reprinting  waef  adviaable  to  insert  foot- 
)n  page  #62,  because  of  the  elimin- 
from  tMe  Service  of  temporarily  in 


note 
ation 

sertej3  Regulations  40  (1918  Act). 


"Telegraph  and  Telephone 

^  1117-1118  (New 


division: 

matt/r  begins  at  r  5591.) 


"Forms,  Finder,  etc.,"  divi\ioi 

\  1705-1706 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


®t|?  (Enrjuiraium  ©rust  dompattg 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  NO.  38- 

JULY  21 ,  1922, 

Enclosed  herewith  are  pages,  for  substituj/fon ,  de- 
signated as  follows: 

'•Capital  Stock  Tax"  division: 


Capital  Stock  Tax  Supplementary 


'Stamp  Taxes"  division: 

/.707-708* 
/771-772* 

/ Stamp  Taxes  Supplementary 


"Telegraph  and  Telephone"  division 

Tel.  and  Tel.  Suppleme; 


i 


•y  Page  1. 


*In  noting  differences  between  Reg.  40  (1918  Act 
and  Reg.  40  (1921  Act)/rj  the  tabulation  at  the  top  of 
page  708  as  mailed  yesterday  (7-20-22)  we  failed  to 
give  conside/ation  t/  T ,  D.  025),  which  amends 

Art.  4  (h)  Art.  4 /l ) ,  and  Art,.  5  ( i )  of  Reg.  40  (1918 
Act),  to  re/ad  exactly  as  those  particular  paragraphs 
read  in  Rerg.  40  Act)  -  hence  there  are  no  dif- 

ferences Lo  he  JK)ted  at  q  3561,  ^  3564a,  and  q  3584  anc 
page  708  /(here/ith)  has  been  changed  accordingly.  Page 
771  (hereUitJr  for  substitution)  is  reprinted  to  change 
the  small  type  numeral  under  bold  face  paragraph  number 
4027  from  3553a  to  3564a. 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


3%  (Enrjmratum  Uvmt  (&ompm\# 


SERVICE  DEPARTMENT 

;:vr    Wa.',L  STREET,    NEW  YORK 

wAE  TAX  SERVICE 

-REPOitf  NO.  37- 

JULY  20,  1922, 

Enclosed  herewith  are  pages  designated  as  follows 
all  for  substitution  except  as  otherwise  noted: 


"Ex/ess  Pron 
/  317-3 


rofits  Tax"  division: 
317-318 

Supplementary  Bulletin  Rulings; 
c/   Sec.  326,  Art.  831.  ~  23- 
A  Sec.  326.  Art.  857.  -  3 


I  Sec.  331.  Art.  941 
^Perpe/ual  Check 
//431-432 


20  (New. ) 


"Capital  Stock/Tax"  division 

]  f  643 

"Stamp  Takes"  divisi 

70/  to  73^ (On  pages  709  to  736  are  reproduced 

Regulations  40  (1922  Ed.)  released 
today,  July  20.     Pages  707-708  were 
reprinted  in  order  to  list  on  page 
708  the  essential  differences  be- 
tween the  old  and  new  regulations.) 

771-772 


"Telegraph  and  Telephone"  division: 

^1117-1118  (For  substitution  for  page  1117.) 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY 


« 

4 

4 

f 
4 

4 


Wire  Corporation  Utmi  <2Jompmtg 

SERV'CX  DEPARTMENT 


WaR  tax  service 

-REPOBT  NO.  36- 

JULY  12,  1922. 

Enclosed  herewith  are  pages  designated  as  follows 
for  substitution: 

"Excess  Profits  Tax"  division: 

Supp 1 em^n t a ry  Bu 1 1 a  t  Lrf  fi u 1 i  ng s : 
/    j    S«£.  326.  Art  ,/3L  ~  23-24 

v    Perpetual  Che^K  Sheet, 
/  465-46^  (New  matter  beginning  at  Q  1288.) 
/  Excess-Prof  its^ax  Supplementary  Pages  1-2 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY . 


0%  ®or|u!rat!nii  QJntat  (Eampaug 

SERVICE  DEPARTMENT 

:JT    WALL   STK1CIST,    Nk\V  VORK 


WAR  TAX  SERVICE 

"REPORT  NO.  35-> 
JULY  7,  19^£ 


Enclosed  herewith  are  pap£s  designated  as  follows 
all  for  substitution  ©xceptyms  otherwise  indicated, 

"Excess  Fronts  yax  division: 

Supplementary  Bulle/in  Rulings; 
/fy§fO.  312,  Arte 791.  -  3-4 
/ Sfec.  326.  An£.  836.  -  21-22 
l/Jec.  326.  aft.  836.  -  23-24  (New.) 
\j  perpetual/ Check  Sheet, 


'Capital  Stoik  Tax"  cjrvision: 

/643  (ijew^tter  begins  at  q  3170.) 
^  Capital  Stock  Tax  Supplementary  Page  1 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY . 


QJhc  (Unrjuiratton  ©mat  (Eontpmtg 


SERVICE  DEPARTMENT 

:5T    WALL  STREET,    N15>V  ><>UIv 


WAR  TAX  SERVICE 

-REPORT  NO.  34- 

JULY  5,  1922. 

REGULATIONS  NO.  55  -  1922  EDITION , 
Stamp  Taxes  on  Documents. 

These  Regulations,  promulgated  June  12,  1922,  are 
released  for  publication  to-day,  July  5-    A  reprint 
thereof,  with  other  matters,  is  sent  herewith  in  ac-  M\ 
cordance  with  the  su'bjoinatf'listing. 

"Stamp  Taxes"  division: 

>/707-708  (For  substitution/  -  Particular  attention 

//s  called  to  the  matter  on  page  708.) 
737  to  768  /For  substitution,  -  Caution:  Pages  769  . 

to  772  -new  in  the  binder  are  not  to  be 
removed . ) 

Stamp  Taxes  Supplementary  Pages  1-2  (For  substitu- 
tion. ) 

Note:     The  date  "July  5"  may  be  inserted  in  the  ap- 
proval line  following      3993  on  page 
761.) 

REGULATIONS  40  -  1922  EDITION. 
Stock  Issues  and  Transfers,  etc. 

Regulations  40  (1922  Edition)  are  well  advanced  and 
will  be  promulgated  and  released  soon,  we  are  lead  to 
believe . 

Very  truly  yours , 
THE  CORPORATION  TRUST  COMPANY. 


®tj#  QJoriuiraiinn  must  (Snutytatuj 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  NO.  33- 

JUNE  30,  1922. 

Enclosed  herewith  are  pages  designated  as  fol 
for  substitution  except  as  otherwise  indicated; 

"Excess  Profit^  Tax"  division: 

Supplementary  Bulletin  Rulings. 
y Sec .  325 .  Art .  Z&l.  -  23 
^ec/  326.  Art^858.  J  7-8 
^Perpetual  CJileck  Sheet 
'463  to/465  Hifefo.  ) 

Excess-(Pro£#X3  Tax  Supplementary  Pages  1-2 


Very  truly  yours, 
THE  CORPORATION  TRUST  COMPANY. 


4 

4 
4 

4 

4 
4 
4 


QJlir  gjiu'fuiratum  Olrust  (Enm^.auj 

SERVICE  DEPARTMENT 

:JT    WAIJL  STREET,    NKW  YORK 


WAR  TAX  SERVICE 

-REPORT  MO.  32~ 
JUNE  26,  1922. 
Enclosed  herewith  are  pages  designated  as  follows: 

Estate  Taxes"  division:  f  I 

(/  219  to  222  (For  substitution  fon/pAfip  219.) 

'Excess  Profits  Tax"  division:  / 

Supplementary  Bulletin  Rulings; 

v  Sec.  326.  Art.  838.  -  /-10  (For  substitution.) 
/  Art.  838.  yil-12  (New.) 

/  Art.  838./  13-14  (New.) 

j       J       Art.  838/-  15  (New.) 
'Perpetual  Check  Sheet  (For  substitution. 


fcapital  Stock  Tax"  division: 

Capital  Stock  Tax  /  Index  Pages  1  to  5  (New 

five  blue/Capital  Stock  Tax  -  Index  Pages 
dated  l~2r-2£  having  been  removed  as  per 
Report  getter  No.  31.) 
Note:    Pages/620-630  dated  1-2-22  should  be  removed 
front  tJne  binder  if  this  has  not  already 
b«en  /done 


'Saks  Taxes"  division 

y  951  (For  substitution'.  -  Recent  cash  discount  rul 
/  ing  revoked . ) 

/Sales  Taxes  Supplementary  Page  1  (For  substitution 

'Forms*  Finder,  etc.,"  division: 

J  1705-1706  (For  substitution.) 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


3Jl)£  (&&t$&it mum '  ©rust  (Baiupang 

SERVICE  DEPARTMENT 

37    WALL  STREET,    NEW  YORK 

^      ,  TAX  SERVICE 

-REPORT  NO .  31- 
JUNE  22,  1922. 

Enclosed  herewith  are  pages  designated  as  follows 

CAPITAL  STOCK  TAX  REGULATIONS .  -  1922  EDITION . *  . 
(Released  to-day,  June  22,  1922.) 

'Capital  Stock  Tax"  division: 

^Remove  and  destroy  the  "Capital  Stock  Fore-Pagb'V 
facing  page  601. 
601-602  (For  substitution.) 
/  609  to  628  (All  for  substitution.) 
'^/Capital  Stock  Tax  Supplementary  Page  L/TFcr' sub- 
stitution.) 

\J  Remove  and  destroy  the  five  blue  Capital  Stock  Tax 
IndeyK  Pages.  (A  r&vi&M  index  is  in  the 
printer's  hands  andyshould  be  ready  for 
ing  as  a  part  jsf  the  next  Report,) 
Regulations  M  (under  the  1921  Act), 
,ions  50  ( I9L8  Act)  revised  to  apply 
If  considered  as  a  "revision", 

1  be  said  to  "have  been  re- 
the  subject  matter  undergone 
the  changes  within  the  Art- 
differences,  however,  in  the 
refinements  of  expression  and  the 
wit  in  formal  regulations  of  es- 


.et- 


na: 

"These  are  ne^ 
not  old  Regu 
to  the  1921 
the  regulations  may  r: 
written.    Net  only  hai 
much  rearrangement 
icies  are  miny.  T3 
main  repres* 
initial  embc< 


tablished  policy  and  practice,  rather  than  modified 
interpretations,  going  to  the  fundamentals.  Part- 
icular attention  is  called  to  Art.  15,  "Fair  aver- 
age value  of  capital  3tock"  beginning  at  <J  3039. 


"Forms,  Finder,  etc.,"  division: 

/  1707  to  1710  (For  substitution. 


Very  truly  yours , 

THE  CORPORATION  TRUST  COMPANY . 


Bfy  (Hiixpmalum  ©mat  fanpuug 

SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  NO.  30-  , 

JUNE  16,  1922 

Enclosed  herewith  are  pages  designated  as  follows  * 
for  substitution  except  as  othervy£se~noted: 

"Capital  Stock  Tax"  division: 

/639  to  643  (For  substitution  for  pagos  639-640.) 
/Capital  Stock  Tax  Supplementary  Page  1 

"Forms,  Finder,  etc.,"  d 
V 1705-1706 

Very  truly  yours, 
CORPORATION  TRUST  COMPANY. 


I 

i 
I 
i 


SERVICE  DEPARTMENT 

£7  WAUCi  6TR1SBT,   PWB'W  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  29- 
JUNB  9,1922. 

.Enclosed  herewith  aro  pages  designated  as  follows, 
for  substitution  except  m  otherwise"" noted: 

"Estate  Taxes"  division:  / 

»     / 157-218  (For  substitution/for  page  157.) 
\ff  219  (Now.  Pi        HB  and  St  19  show  revised  Form  714.) 

"Excess  Pro. 0. to  Tax"  division: 

i/ Supplementary  Bulletin^  Rulings: 

/.Sec,  326.  Art .  q4i.  -  3 
y      l/ Perpetual  Olieok/ Sheet 
/  Excess-Profits  Tax  /supplementary  Pages  1-2. 

'"•■"Capital  Stock  Tax"  division:  / 

^603-606  (Form  707 for  1923  Return.) 
\    / 651-640  {(now.    f^ias3achua©tts  Truats"  decision.) 
"••./Capital  ptock  Tax  Supplementary  Pago  1. 
/ 

"Stamp  Taxes"  ^ivision: 
\     /.771-772J  (New  Matter  begins  at  f  4029.) 
\  J  Stamp  Tkxes  Supplementary  Pages  1-2. 

"Sales  Taxes"  division: 

J  Sales  Tu^i  Supplementary  Page  1 

"Foriha,  Finder,  etc.,"  division: 
/  1705-1706 

Very  truly  yours, 
TUB  CORPORATION  TRUST  COMPANY. 


(5 


( »n 


(Corporattntt  ©rust  (Company 

SERVICE  DEPARTMENT 

37    WALL   STREET,    NKW  YORK 


WAR  TAX  SERVP 

-REPORT  NO.  21 
JUNE  2,  19G2 

Enclosed  herewith  are  pajges  designated  as  follows 

Excess  Profits  Tax"  division: 

Supplementary  Bulletin  Rulings; 
/  Sec.  325i.  Art.  8p.  -  9-10  (For  substitution 
/sec.'329.  Art.  fid.  -  11-12  (New.) 
/sec.  325.  Art./813.  -  13  (New.) 
/  ^Perpetu/al  CheGK  Sheet  (For  substitution.) 
/  461-462  (For  sub/titution. ) 

'Sales  Taxes"  division: 

"945  to  951  (Fo/  substitution  for  pages  945-946. 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY , 


T3UHT 


3Ilt£  CHerjuiratUm  ©rust  (Esw|  tntj 


SERVICE  DEPARTMENT 

:*T     MALI.    STREKT,     NKYV  VORK 


WAR  TAX  SERVICE 


-REPORT  NO.  27- 
MAY  26,  1922. 


Enclosed  herewith  are  pages  designated  as  follows: 

"Estate  Taxes"  division: 

/^155  to  157  (For  substitution  for  page  155.; 

"Capital  Stock  Tax"  division: 

'  ^'607-608  (Bei/ig  revised  "Return"  for  foreign  cor-  j_ 
po/ations /for  substitution.] 

"Forms,  Finder,  etci"  division/ 

1705-1706/ (For  substitution.) 

/        *    #  # 

kwE^T  CHOCOLATE  AS  "  CANDY if  . 

The  Circuit  Court  of  Appeals  for  the  First  Circuit 
reversed  (May  16,  1922)  the  decision  of  the  District 
Court  in  Baker  &  Co.  vs.  Malley  and  holds  that  the 
statute  ( 1918  Act  taxing  at  5  per  centum  sales  of  candy 
by  the  manufacturer  -  the  rate  under  the  1921  Act  is  3 
per  centum,  q  4506)  is  to  be  construed  as  the  Commis- 
sioner construed  it,  there  *>being  no  "reasonable  doubts 
as  to  the  legislative  intent  to  tax  such  products  as 
sweet  chocolate  when  manufactured  and  sold  for  consump- 
tion in  the  form  sold,  and  not  for  cooking  or  domestic 
purposes".     Tne  full  opinion  goes  forward  as  a  part  of 
our  next  report. 

Very  truly  yours 5 
THE  CORPORATION  TRUST  COMPANY . 


3IX  v 


>IVfl38  XAT  SI  AW 


Stye  (Enrjmratfon  ©rust  (Kampunt} 


SERVICE  DEPARTMENT 

37    WALL   STREET,    NEW  \ORK 


WAR  TAX  SERVICE 

-REPORT  NO.  26-  / 

WAR  TAX  SERVIC  * 
MAY  19,  1922. 

Enclosed  herewith  are  pages  designated  as  follows, 
for  substitution  except  as  otherwise,  noted: 

"Estate  Taxes"  division: 

j/l55  (New.  )  / 

/ Estate  Tax  Supplementary  Pa^ge  3 

/ 

"Excess  Profits  Tax/'  division: 

/  Supplementary  Bulletin/feulings 
/gee/  326.  Art.  808.  -  7-8. 
/     ^/Perpetual  Check/ Sheet 
^461-462 /  / 

J  Excess  profits  Ta:/ Supplementary  Pages  1-2. 

'  Occupations  T^xes"  divisk 

"  ^515-1^16 
/1517-ldl8 
^/L539-15*4<LX 
^/Occupations  Taxes  Supplementary  Page  1. 

"Forms,  Finder,  etc./'  division: 

^  1709-1710  (Calling  attention  to  the  U.  S.  Supreme 
Court  decision  holding  the  Child  Labor 
Tax  Law  unconstitutional.) 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY 


■ 


©I)?  (fJnrpxiration  (Urnst  (£mnpanxt 


SERVICE  DEPARTMENT 

:«T    WAUL   STRJKJET,    NKW  YORK 


WAR  TAX  SERVICE 

/ 

i  s 


■REPORT  NO.  25-  . 
MAY  10,  L922. 


Enclosed  herewith  are  page's  designated  as  follows 


/  / 


"Estate  Tax"  division: 

r  '  T  J' 

153-154  (For  substitution  for  page  153.  ) 
V  Estate  Tax  Supplemental  Page  3  (For  substitution 

>  // 
" Exc  e  8  8 -Pr o f i t  s  Tax "/d  ivi s  i  o  n : 

Supplementary  Bulletin  Rulings: 

Sec.  326/  Art.  858.  -  5-6  (For  substitution. 
/Sec.  326.  Art.  858.  -  7  (New.) 
Perpetual  Check  Sheet  (For  substitution.-] 

r/  / 

" Fo vpaJJ  F i ndarr/  etc."  division: 
\4m-\ifkf  \?Gr  substitution. ) 

r  /  Very  truly  yours, 

*  / 

%     /  THE  CORPORATION  TRUST  COMPANY. 


turn® 

TUBMTtfAH: 


S&r  (Ewrjjwratian  $xu$t  (Emitiiautf 

S  £  R  V I C  E    DfcPAR T M E N T 


Enclosed 


WAR  X-AX  SERVIQJ 

/  > 
(EPORT  N0.^~ 

MAY  £  ^1922 

;ewithy&fe  pages  designated  as  follows: 


Excess-Profits  Taxy^secLion 

Supple^ntarwBulietin  Rulings: 

*^fty  326/Art,  336.   -  19-20  (For  substitution.) 
rfrtf-  Zjd>  Art.  836.  -  21-22  (New.) 
//^rpe^ual  Check  Sheet  (For  substitution.) 


Very  truly  yours 


THE  CORPORATION  TRUST  COMPANY. 


K 


©l|r  (Hnrporattnn  GJrust  Qlmitpang 


SERVICE  DEPARTMENT 


WAR  TAX  SERVICE 

-REPORT  NO.  23- 
MAY  3,  1922. 

Enclosed  herewith  are  pages  designated  as  follows: 

Estate  Tax  Section:  / 

y^l43  to  153  (For  substitution  for  page  143.; 
/Estate  Tax  Supplementary  Pages  1  to  3  (For  substi- 
tution for  Estate  Tax  Supplementary  Pages  1-2 
now  in  the  binder  immediately  before  the  yel- 
low guide  card  marked  "Excess  Profits  Tax".] 

Forms,  Finder,  etc.  Section: 

1705-1706  (For  substitution.) 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY, 


( 
( 

I 


(Uif?  (&8X$zvzixnil  Xxnst  (ilnmpamj 

SERVICE  DEPARTMENT 

CT    "WA.UL  STIvEJET,    NEW  TOSK 


WAR  TAX  SERVICE 

-REPORT  NO.  22- 

APRIL  19,  1932.  < 

y 

Enclosed  herewith  are  pages  designated  as  follows 

/ 

Excess  Profits  Tax  Section  - 
/  Supplementary  Bulletin  Rulings: 

//Sec.  326.  Art.  836.  /  19  (For  substitution.) 
Sec.  3^6.  Art.  838/-  7-8  (For  substitution.) 
Sec.  #26.  Art.  83^.  -  9  (New.) 
>^Sec./326.  Art.  §08.  -  5  (For  substitution.) 
a   /Perpfetual  Chec^ Sheet  (For  substitution. ) 
/459-460/(For  substitution  for  page  459.) 
//461  (Neiv.) 

Very  truly  yours, 

E  COLORATION  TRUST  COMPANY. 


Stye  Glnrporatinn  SJntat  dmnpatig 

SERVICE  DEPARTMENT 

3T    WALL   STREET,    NEW  "YORK. 


VAR  TAX  SERVICE 

:PEPORT  NO.  21- 

APRIL  14,  1922 

Enclosed/herewith  are  page^ designated  as  follows, 
til  for  substitution  except  ad  indicated: 

/  / 
141  to  143  (For  substitution  for  page  141.) 

Supplementary  Bulletin  Rulings: 

t/Set.  326.  Art.  84p<  -  11  (New.) 

vS^c.  326.  Art.  860.  -  1-2 

V^ec.  326.  Art/858.  -  5 

^Perpetual  Chjgfck  Sheet 

1?;$5-1706 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY, 


\ 


5£i 


Ul}?  Corporation  ©mat  C5oitqj$mjj  j 

SERVICE   DEPARTMENT  5 


3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 


-REPORT  NO.  20- 
APRIL  7,  1922. 


Enclosed  herewith  are  pages  designated  as  follows: 

i  /  / 

;^/l41-142  (For  substitution.)  / 

| ^/fSstate  Tax  Supplementary  Page" 1  (For  eubstitution. ) 
^/Sales  (Excise)  Taxe.  Supplementary  Page  1  (For  sub- 
stitution. ) 

/ 

Very  truly  yours, 
THE  CORPORATION  TRUST  COMPANY. 


TH3MTHA< 


Obr^nratum  ©rust  dnmpsng 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YOItI£ 


WAR  TAX  SERVICE 

-REPORT  NO.  19- 
APRIL  6,  1922. 
Enclosed  herewith  are  pages  designated  as  follows 


/ 

i-fcin  Ruli 


Supplementary  Bulletin  Rulings: 

j|  Bee.  326.  Art.  &33.  -  3-4  (For  substitution.) 
4  *       "  /M        -  5-6  (New/) 

/        »  /  "       -7  (New.  / 

/'Sec.  326.  Art/  836.  -  19  (For/'  substitution. ) 
/Sec.  327.  Art.  901.  -  39-40 /(New.  ) 

•/  "  41  (New.) 

i/Sec.  351.  Art.  941.  -  15-16  (For  substitution 
*  »  17-18  (New.) 

^Perpetual  Chkcjk  Sheet  (For  substitution .  ) 
/945-946  (For  substitution  for  page  945.) 

Very  truly  yours, 

■  / 

THJI^ORPORATION  TRUST  COMPANY, 


Zi)t  (Eoiyoratum  ©rust  ©mttpatti} 


SERVICE  DEPARTMENT 

37  WAUL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  18-  / 

/ 

MARCH  30,  L922/ 

7 

Enclosed  herewith  are  pages/  designated  as  follows  : 

/ 135  to  141  (For  cuts ti tut ion  ^or  page  135.) 
/Estate  Tax  Supplementary  Pag^'  1  (For  substitution.) 
Supplementary  Bulletin  Rulings: 

/Sec.  326.  Art.  831.  -  23  (For  substitution.  ) 
*^TSec.  326.  Art,  845.  -  jp-6  (For  substitution.) 
/     /Perpetual  Check  Sheet /(For  substitution.) 
(/Sales  (excise)  Taxes  Supplementary  Page  1  (This  sheet 

/  is  to  be/inserted  immediately  following 
/    page  94^.    The  yellow  sheet  now  there, 
|     or  immediately  following  the  blue  Manu- 
I     facturyr's  Sales  Taxes  index,  should  be 
I  destroyed.) 
^705-1706  (For  substitution.  ) 


Tp  CORPORATION  TRUST  COMPANY 


33IV5 


Uty?  (Eorpcraiinu  ©rust  (Enmpang 

SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICI 

-BBPORT  HO.  X' 
MARCH  22, 

Enclosed  herewith  aro /pages  designated  as  follows 

Stamp  Taxes  Supplementary  /age  1  (For  substitution,) 
/945  (New. )         /       /  / 
/Sales  (Excise)  Jaxes  Supplementary  Page  1  (For  substi 
i  ft  tutlonj 

^1539-1540  (Fo// substitution  for  page  1539.) 
[/  Occupations  Hik^a /CuppXemcntary  Page  1  (For  substitu- 
X//  tionj 


(7 


Vary  truly  your  si, 
OBPOBATIOH  THUET  COMPANY. 


Ti/13MT^A^3a  30IVF13S 


ollol 


Sndua  10%)  I  egal  xTfrtotaw Iqqu&  Nlil  (aeioxSf)  adlA8 


(Enr^mnttum  ©rust  (Eotnpattg 

SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YOMl 


WAR  TAX  SERVICE 

-REPORT  NO.  16- 

MARCH  16,  1922. 

Enclosed  herewith  are  pages  designated  as  follows 

Supplementary  Bulletin  Rulings:/ 

/Sec.  326.  Art,  862.  -  5-6  (For  substitution.) 

^-Sec.  326.  Art.  862.  -  7-8  (New. ) 

/Sec.  326.  Art.  862.  -  9-10  (New.) 

/Sec.  326.  Art.  862.  -  11-12  (New.) 

/Sec.  326.  Art.  862.  -  13  (New.) 

\  / 

fSec.  327.  Art,  901.  -/31-32  (For  substitution.)  . 

^Sec.  327.  Art.  901.  -  33-34  (New.) 

/Sec.  327.  Art.  901.  -  35-36  (New.) 

y'  Sec.  327,  Art.  901./-  37-38  (New.) 

Perpetual  Check  Sheet  (For  substitution.) 


y    Very  truly  yours, 
THE  CORPORATION  TRUST  COMPANY. 


®tf?  (Eorporaitrm  ©rust  (Enmpatty 

SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  15- 
MARCH  7,  1922. 

Enclosed  herewith  are  pages  designated  as  follows: 

Supplementary  Bulletin  Rulings; 
//pec.  326.  Art.  831.  -  21-22.   (For  substitution.) 
i/Sec.  326.  Art.  831.  -  23.  (New.) 
/Perpetual  Check  Sheet  (For  substitution . ) 
//Excess-Profits  Tax  Supplementary  Pages  1-2.  (For  sub- 
stitution. ) 
j/1703-1704  (For  substitution.) 


*    *  # 

REVENUE  STAMPS  ON  POWERS -OF-ATTORNEY . 

The  power-of-attorney  given  by  a  taxpayer  to  an 
attorney,  or  other  person  to  represent  him  for  it) 
before  the  bureau  must  carry  a  25^  Internal  Revenue 
stamp,  properly  cancelled.     If  the  power-of-attorney 
is  not  stamped  (tax-paid)  everything  stops. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


gmjtjraoID  tain®  imitjnntnalD  i^M 


f)33  XAT  HAW 


Wqt  (Eurporattntt  (Frust  OJmttpaitg 

SERVICE  DEPARTMENT 

3T  W.AUL  STREET,  NEW  YORK. 


i 

I 


-BKPOBT  NO.  13-  / 
WAR  TAX  SERVICE 

/ 

-REPORT  NO.  1^/ 

MARCH  2,  1922. 

Enclosed  herewith  are  tne  Admissions  Tax  Regula- 
tions, fully/  indexed,  releAsod  for  publication  February 
28,  1922.     The  pages  accompanying  this  report  are 
designated  as  follows,  all  for  insertion  as  a  unit, 
^between  page  1320  ana  £ne  blue  Dues  Tax  index. 


1321  to  1^66 


Admission^  and-  Dues;/ Supplementary  Page  1  (For  substi- 

l  tut ion.) 
ylndex  Pages  1  to  6.  -  Admissions. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


Wl}t  (EatpWman  ©rust  ©cmptrng 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  13- 

FEBRUARY  28,  1922. 

j  Hegulations  62,/eIeased  >March  1  1922 

Enclosed  herewith  are  pages  designated  as  follows: 
Reproduction  of  Form  11203.  (Insert  between  pages  424 
/  and  425.) 

Excess-Profits  Tax  -  1921  Ac/£  -  Index  Pages  1  to  8. 

(New.  -  Insert  immediately  before  the  "Capital 
/  '  Stock  Tax"  guide/card.) 

1101  to  1117  (For  substitution  for  pages  1101  to  1117 
now  in  the  binder.    This  includes  the  revised 
Regulations  57/  released  to-day,  and  the 
necessary  reprinting  of  other  matters.) 

Tel.  and  Tel.  Supplementary  Page  1  (For  substitution. 

/  To  follow  page  1117. ) 

Tel.  and  Tel.  Index  P^ges  1  to  3  (New.    To  follow  yel- 
low Supplementary  Page  1,  just  inserted.) 

*    *  * 

REVISED  ADMISSIONS  TAXES  REGULATIONS. 

Revised  Regulations  43,  Pt.  1,  Admissions,  have 
come  from  the  Government  presses,  for  release  to-day. 
These  are  being  reproduced  for  the  Service,  and  will 
be  mailed  to  subscribers  at  the  earliest  possible  mom- 
ent . 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY . 


2%  Corporation  ©rust  OJompang 

SERVICE  DEPARTMENT 

3T   WALL  STREET   NEW  YORK 


WAR  TAX  SERVICE 


— REPORT  No.  12— 
February  24-28,  1922.* 

*This  report  letter  with  its  accompanying  pages  is  being  mailed  by  us  so  as  to 
reach  subscribers  in  the  continental  United  States  on  the  day  of  the  release  of  Regula- 
tions 62,  i.e..  on  March  1,  1922. 

Regulations  62,  released  March  1,  1922. 

Enclosed  herewith  are  pages  designated  as  follows: 
431  to  459  (being  a  reprint  of  those  Articles  of  Regulations  62  which 
relate    specifically  to  the  excess-profits  tax  for  1921.  — 
Released  March  1,  1922.) 
Also  enclosed  are: 


Supplementary 
the  trouble  caused 
future  convenience 
obvious. 


Bulletin  Rulings  (all  for  substitution).  We  regret 
by  these  substitutions  the  necessity  for  which,  for 
(forward  references  to  1921  Law  and  Reg.  62)  is 


/  {Insert 
/  .Sec.  301, 
^Sec.  301 

✓  Sec.  301 
^  Sec.  301 
A/Sec.  302 

Sec.  303 
/Sec.  312 
ySec.  320 
/Sec.  325 
/  Sec.  325 
V^Sec.  325 

V  Sec.  325 
//  Sec.  325 
tfSec.  325 

/  Sec.  326 
/Sec.  326 
\j  Sec.  326 
/jBec.  326 
/Sec.  326 
/Sec.  326 
/Sec.  326 
v,  Sec.  326 
/  Sec.  326 
/  Sec.  326 


according 
,  Art.  711- 
.  Art.  714 
.  Art.  715 
.  Art.  719 
.  Art.  731 
.  Art.  741 
.  Art.  791 
.  Art.  801 
.  Art.  811 
.  Art.  812 
.  Art.  813 
.  Art.  815 
.  Art.  816 
.  Art.  818 
.  Art.  831 
.  Art.  833 
.  Art.  834 
.  Art.  835 
.  Art  836 
.  Art.  837 
.  Art.  838 
.  Art.  839 
.  Art.  840 
.  Art.  841, 


to  left 
I. 

.—1-2, 

.—1-2 

.— 1. 

.— 1. 

.— 1. 

.—1-2. 

.— 1. 

.— 1. 

.—1-2. 

.—1-2. 

.—1-2. 

.— 1. 

.— 1. 

.—1-2. 

.—1-2. 

.—1-2. 

.—1-2. 

.—1-2. 

.—1-2. 

.—1-2. 

— 1. 

,—1-2. 

—1-2. 


hand  column  first;  then  right  hand  column/) 

■  i 

-2.  */ 
-2.  ^ 

'"  V 


Sec.  326.  Art.  843.— 
Sec.  326.  Art.  844.— 
Sec.  326.  Art.  845.— 
Sec.  326.  Art.  846.— 
Sec.  326.  Art.  850.— 
Sec.  326.  Art.  851. — 
Sec.  326.  Art.  852.— 
Sec.  326.  Art.  853.— 
Sec.  326.  Art.  854.— 
Sec.  326.  Art.  855.— 
Sec.  326.  Art.  857.— 
Sec.  326.  Art.  858.— 
Sec.  326.  Art.  859.— 
Sec.  326.  Art.  862.— 
Sec.  326.  Art.  871.— 
Sec.  327.  Art.  901.— 
Sec.  328.  Art.  911.— 
Sec.  328.  Art.  912.— 
Sec.  328.  Art.  913.— 
Sec.  328.  Art.  914.— 
Sec.  331.  Art.  941.— 
Sec.  335.  Art.  952.— 
Sec.  337.  Art.  971.— 
Perpetual  Check  Sheet 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


IVR33  XAT  RAW 


SERVICE  DEPARTMENT 


3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 


-REPORT  NO.  11- 


FEBRUARY  24,  1922. 


Enclosed  herewith  are  pages  designated  as  follows; 


Supplementary  Bulletin  Rulings;  / 
j^Zzo..  326.  Art.  831.  -  21-22.   [Fyt  substitution.) 
/^Perpetual  Check  Sheet.  (For  substitution.) 


Admissions  and  Dues  Tax  -  Supplementary  Page  1  (For 

substitution. ) 


REGULATIONS  62  RELEASED  MARCH  1,  1922. 

The  big  regulations  interpreting  the  Excess  Profits 
Tax  for  1921  law  (the  "Regulations  45"  of  the  1921  Act) 
will  be  released  by\ the  Government  on  March  1,  1922. 
A  copy,  in  Service  forta,  will  be  in  your  hands  on  the 
morning  of  that  day  —  Wednesday  next. 


*    #  # 


Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


Wqz  (Eor^nration  ©rust  (Sum^aiti; 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  10- 
FEBBUARY  17,  1922. 
Enclosed  herewith  are  pages  designated  ae  follows: 
/?69-770  (For  substitutibn. )  / 

!  / 

*    *  * 

OUltTA  BOARD&f. 

The  U.  S.  Circuit  Cqurt  of  Appeals  for  the  Fourth 
Circuit  has  affirmed  the\  District  Court  decision  in 
Baltimore  Talking  Board  Company  vs.  Miles,  Collector, 
that  Ouija  Boards  are  games.  (Bee.  900,  Revenue  Act  of 
1918. ) 

Very\t3?iily  yours, 


THE  CORPORATION  TRUST  COMPANY. 


federalism  ©rust  (Hnntpattg 


SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YORK. 


WAR  TAX  SERVICE 

-REPORT  NO.  9- 

FEBRUARY  15,  1922, 

Enclosed  herewith  are  pages  obsignated  as  follows 
I  / 
Supplementary  Bulletiii  Rulings/ 

/^Sec.  328.  Art.  93j2.  -  l-2/(For  substitution.) 


^Perpetual  C^eck  Sheet  (For  substitution 

! 

V 


Wry  truly  yours, 
THE  CORPORATION  TRUST  COMPANY 


Ccrporattmt  SJntat  dompattg 


SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 
-REPORT  NO,  8™ 

FEBRUARY  12,  1922,  I 

Enclosed  herewith  afe/pAgas-  <$$lRva/e&  as  follows: 
Enclosed  herewith  are  pages  designated  as  follows:  J 

/423  to  430  (For  substitution  for  page  423.  -  The  new 

pages  carry  reproductions  of  Forms  1120  and 

y  ii22.) 

1609  to  1612  (For  substitution.  4  Form  843,  reproduced 
on  pages  1609-1610  supersedes  Forms  46,  47 J 
and  47A. ) 

1703-1704  (For  substitution. ) 
/  1711  to  1716  (For  substitution.) 

Also  enclosed  is  a  full  size  copy  of  the  Corpora- 
tion Return  Form  1120,  released  February  13,  1922. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY, 


6  OSII  era' 


.  YHAC 


©Iff  Corporation  ©mat  Company 

SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  7- 

•KEPQBT  MO,  6~ 
FEBRUARY  9,  1922, 

Enclosed  herewith  are  pages  6?e signaled  as  follows 

/  / 

Supplementary  Bulletin  Rulings/ 

^/Sec.  326.  Art.  831.  /-  21  /For  substitution.) 
p  Sec.  326.  Art.  836- /-  15/16  (For  substitution.) 
fSec.  326.  Art.  836./-  1JT-18  (New.) 
/Sec.  326.  Art.  836.1  -  19  (New.) 
/Perpetual  Check  Shej'et /(For  substitution.) 

*  ;  *  # 

FORM  1120.  -  EXCESS-PROFITS  TAX  RETURN. 

1/ 

This  form  will  be  released  by  the  Government  on 
Monday,  February  13,  1922. 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY. 


4 


1 


0%  (tepnrattmt  SJniBt  (Enmpang 


SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK. 


WAR  TAX  SERVICE 
-REPORT  NO.  6- 
FEBRUARY  6.  1922, 


Enclosed  herewi 


th  are  pages  designated  as  follows 


Supplementary  Bulletin  Rulings; 


836.  - 

9-10  (For  substitution.) 

836.  - 

11-12  (New. ) 

836.  1 

13-14  (New. ) 

836.  - 

15  (New. ) 

:  Sheet 

(For  substitution.) 

/769  (New.) 

f Stamp  Taxes  Supplementary  Page  1  (For  substitution.) 

Very  truly  yours, 
THE  CORPORATION  TRUST  COMPANY. 


.  YHA 


3J1|£  (£0r$mrait0tt  Emai  (Emnpatig 


SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YOH£ 


WAR  TAX  SERVICE 

-REPORT  NO.  5- 
JANUABY  31,  1922, 

Enclosed  herewith  are  "Excess-Profits  Tax"  pages  rf. 

designated  as  follows; 

Supplementary  Bulletin  Rulings; 

^  Sec,  325.  Art,  615.,  -  3  (For  substitution,  } 
*-Sec.  326.  Art.  831.  -  19-20  (For  substitution.) 
~"Sec.  326.  Art.  831.  -  21  (New.) 

^Sec.  331.  Art.  941.  -  15-16  (For  substitution.)  ,|_ 
*  Perpetual  Check  Sheet  (For  substitution.) 

(Remove  and  destroy  pages  907  to  933,  both  in-  1 
elusive,  new  in  your  War  Tax  binder.    Then  insert 
the  following,  herewith  encloeed.) 
i/907  to  944  (For  substitution  for  pages  907  to  933  re- 
ferred to  above.    These  pages  carry  re- 
printed  Forms  728  and  728A,  and  Revised 
Regulations  47  and  48  (Revenue  Act  of 
1921)  released  for  publication,  February  ' 
1,  1922.) 

>/1703-1704  (For  substitution. ) 
/  1709-1710  (For  substitution.) 

«/  Blue  "Calendar  for  Excise  Taxes"  to  face  page  901 
/'Manufacturers'  Saleg  Taxes  -  Index  Pages  1-3  (Insert 

at  back  of  SALES  TAXES  division.) 
Is  Sales  Taxes  Supplementary  Page  1  (To  precede  the  blue- 
page  index  just  inserted  and  in  substi- 
tution for  the  similarly  designated  page 
now  in  binder. ) 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


BqmtiJD  tmrM  nnftn 


3DIVH: 


10%)  OS-ei 


S'V  bn»  8S 
I)  it  5n« 


"atxrf 


oqiq  oT)  I  tg 


;ht  hoitah 


Wip  Corporation  Sfrwai  Olompang 

SERVICE  DEPARTMENT 

3T  WAUL  STREET,  NEW  YORK. 


WAR  TAX  SERVICE 

-REPORT  NO.  4- 

JANUARY  24,  1922. 

Enclosed  herewith  are  pages  designated  as  follows 

*^21  to  423  (For  substitution  for  page  421.) 
^Excess-Profits  Tax  Supplementary  Page  1  (For  sufcstitu 

tion. ) 

Very  truly  yours, 

maex  fagei  -  Dwi ,  ( To/To  1  low  yellow  .Supplement  a 

I  J 
THE  CORPORATION  TRUST  COMPANY. 


Sty?  (Eorpnratimt  ©rust  Cnmpamj 


SERVICE  DEPARTMENT 
3T  wall  street,  nbw  york 


WAR  TAX  SERVICE 

-REPORT  HO.  3- 

JANUARY  23,  1922. 

Enclosed  herewith  are  pagee  designated  as  follows: 

Supplementary  Bulletin  Rulings: 

-Sec.  331.  Art.  941.  -  13-14  (For  substitution.) 

-  Sec.  331.  Art.  941.  -  15-16  (New.) 

»  Perpetual  Check  Sheet  (For  substitution . ) 

-  1303-1304  (For  substitution.) 
I  -  1305-1306  (New.  Form  729.) 

-1307-1318  (New.  Dues  Regulations.) 

-  Supplementary  Page  1  -  Admissions  and  Dues. (To  follow 

page  1318. ) 

-  Index  Pages  1-4.  -  Dues.  (To  follow  yellow  Supplementary 

Page  1  -  Admissions  and  Dues, 

just  inserted. ) 
-1703-1704  (For  substitution.) 
-1709-1710  (For  substitution.) 

Very  truly  yours, 

THE  CORPORATION  TRUST  COMPANY. 


5%  (Eorpnratum  (Urttst  OInmpang 


SERVICE  DEPARTMENT 

3T  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 

-REPORT  NO.  2- 

JANUARY  17,  1922, 

Enclosed  herewith  are  pages  designated  as  fellows: 

Supplementary  Bulletin  Rulings  (Bulletin  No.  2,  -  1922.) 
Foreword  to  Supplementary  Bulletin  Rulings  (For 

substitution  for  the  first  white  page 
following  blue  excess-profits  tax  index 
page  8 . ) 

--Sec.  301.  Art.  714.  -  3-4  (For  substitution . } 
-^Sec.  301.  Art.  714,  !-  5  (New,) 

—  See.  312.  Art.  791.  -  1-2  (For  substitution.) 
Sec.  312.  Art.  791.  -  3-4  (New.) 

Sec.  326.  Art.  831.  -  19-20  (For  substitution.) 

-  Perpetual  Check  Sheet  (For  substitution.) 
-Stamp  Taxes  Supplementary  Page  1  (For  substitution.) 

y  Stamp  Tax  Index  Pages  1  to  12  (Insert  at  back  of  STAMP 
TAXES  division. ) 


INTERNAL  REVENUE  BULLETIN. 

The  present  year's  Bulletin  issues  are  designated 
as  "Volume  I".    The  attention  of  subscribers  is  called, 
particularly  to  the  third  paragraph  from  the  bottom  on 
the  first  page  of  the  "Foreword"  enclosed  herewith 

Very  truly  yours, 


THE  CORPORATION  TRUST  COMPANY  e 


HAW 


(Eorporatiott  &rcst  (Sompang 

SERVICE  DEPARTMENT 

37  WALL  STREET,  NEW  YORK 


WAR  TAX  SERVICE 
•REPORT  NO.  1-  1922  SERVICE.  / 


JANUARY  4,  1922.  / 

The  pages  rent,  herewith  are  for  insertion  in  the 
n©w  'iUL2  V/'ir  :iV*  $?\<->y\r.B  tuck.     If  ::,h:U  h-.r  not 
reached  yen  please  hold  theft  e      gee  for  ar  day  or  two  - 
it  is  on  the  way. 

/ 

^135  (New.) 

/Estate  T-')X  Supplementary  Basra  *  (For  substitution. ) 
i/8upplementary  Bulletin  Rulings  (Bulletin  No.  52.) 
^Sec .  326 .  Art.  862.  1-2  (For  substitution. ) 

Sac.  3*6,  Art,  662,  3  4  (Hew.) 

^  See.  526,  Art.  862.  5  (Hew.) 

— Perpetual  Chock  Sheet  (Hew.)  4  this  is  to  be 

inserted  to  face  blue  pa«e  401, 
/  417  to  422  (To  follow  bine  vam  4l6.) 
(  Supplementary  Page  1  -  EKGes8~£rof its  Tax  (For  sufceti 

tut ion.) 

Y  1705-1706  (For  siibstitaitiOi>_.j/ 

Very  truly  yours, 


Qij-fiiftttnlD  tain®  iraitjnntpolD  <i$i) 

TH3MTf?Aq30  30IVH38 

HHOY  WrdTC  .TPI3HTB  JJAW  Tfc 


l8  x.«T  IBl 


W9fT 


esx 


I 


< 


< 


4L 


1-2-22.     (2)  8-4-22.    (3)  8-10-22.    (4)  9-13-22. 


ESTATE  TAXES 


1918  Law  Provisions.— In  effect  after  6:55  P.  M.,  Feb.  24,  1919  Page  3 

♦Regulations  No.  37  (1918  Act),  etc  Page  33 

Index  Blue  pages  following  page  124 

Forms: 

704  Executor's  60-day  notice  (resident  estates)  Page  27 

705  Executor's  60-day  notice  (nonresident  estates)  Page  29 

706  Return  of  gross  estate....  .  Page  11 

714        Transfer  agents'  60-day  notice:  Non-resident  decedents. Page  31 

Superseded  by  Form  714  reproduced  on  page  218. 
760         Affidavit  of  ownership  of  bonds  Page  88 

787  Insurance  companies'  60-day  notice:  Resident  decedent 

See  ^201.    [Not  in  use  under  1921  Act.] 

788  Insurance    companies'    60-day    notice:  Non-resident 

decedent.   See  *&207.    [Not  in  use  under  1921  Act.] 

791  Application  for  release  of  estate  tax  lien — Not  repro- 

duced.   See  p78. 

792  Certificate  releasing  estate  tax  lien — -Not  reproduced. 

See  H277. 

793  Claim  for  military  exemption  from  estate  tax. — Not 

reproduced — See  *][55. 

"Important  Caution  Notice. — See  amendments  to  Regulations  37  (1918  Act)  noted  at 
*i|776.    These  are  reflected  in  the  revised  table  of  contents  beginning  on  page  33. 


1921  Law  Provisions.— In  effect  after  3:55  P.M.,  Nov.  23, 1921  Page  125 


Regulations  No.  63  (1921  Act)  Page  158 

Index  to  Regulations  No.  63  Page  207 

Forms: 

704  Executor's  2-month  notice  (resident  estates)  Page  223 

705  Executor's  2-month  notice  (nonresident  estates)  Page    29 f 

706  Return  of  gross  estate  Page    11  f 

714        Transfer  agent's  notice:  Estate  of  nonresident  Page  218 

760         Affidavit  of  ownership  of  bonds  or  notes  Page 


791  Application  for^release  of  estate  tax  lien. — Not  repro- 

duced.   See  ^753. 

792  Certificate  releasing  estate  tax  lien. — Not  reproduced 

See  ^752. 

793  Claim  for  exemption  on  account  of  military  service. — 

Not  reproduced.    See  ^597. 

fTo  be  used  until  revised  forms  are  issued. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Estate  Tax  Fore-Page 


1-2-22      (3)8-*-22.      (3)  8-10-22.    (4)  9-13-22. 


ESTATE  TAXES 


1918  Law  Provisions— In  effect  after  6:55  P.  M.,  Feb.  24,  1919  Page  3 

♦Regulations  No.  37  (1918  Act)  etc  Page  33 

Index  Blue  pa'ges  following  page  124 

Forms: 

704  Executor's  60-day  notice  (resident  estates)  Page!  27 

705  Executor's  60-day  notice  (nonresident  estates)  Page  29 

706  Return  of  gross  estate  Page  11 

714         Transfer  agents'  60-day  notice:  Non-resident  decedents. Page  31 

Superseded  by  Form  714  reproduced  on  page  218. 
760         Affidavit  of  Ownership  of  Bonds  Page  88 

787  Insurance  companies'  60-day  notice:  Resident  decedent 

See  ^201.    [Not  in  use  under  1921  Act.] 

788  Insurance    companies'    60-day    notice:  Non-resident 

decedent.    See  ^207.    [Not  in  use  under  1921  Act.] 

791  Application  for  release  of  estate  tax  lien — Not  repro- 

duced.   See  p7S. 

792  Certificate  releasing  estate  tax  lien — Not  reproduced. 

#  See  ^277. ; 

793  Claim  for  military  exemption  from  estate  tax. — Not 

reproduced — See  ^55. 

""Important  Caution  Notice. — See  amendments  to  Regulations  37  (1918  Act)  noted  at 
^776.    These  are  reflected  in  the  revised  table  of  contents  beginning  on  page  33. 


1921  Law  Provisions.— In  effect  after  3:55  P.  M.,  Nov.  23,  1921  Page  125 

Regulations  No.  63  (1921  Act)  Page  158 

Index  to  Regulations  No.  63  Page  207 

Forms: 

704  Executor's  2-month  notice  (resident  estates)  Page  223 

705  Executor's  2-month  notice  (nonresident  estates)  Page    29 1 

706  Return  of  gross  estate  Page    11  f 

714  .       Transfer  agent's  notice:  Estate  of  nonresident  Page  21S 

760         Affidavit  of  ownership  of  bonds  or  notes  ;  Page  88 

791  Application  for  release  of  estate  tax  lien. — Not  repro- 

duced.   See  ^]  753. 

792  Certificate  releasing  estate  tax  lien.' — Not  reproduced 

See  11752. 

793  Claim  for  exemption  on  account  of  military  service. — 

Not  reproduced.    See  ^597. 

fTo  be  used  until  revised  forms  are  issued. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Estate  Tax  Fore-Page 


1-2-22. 

1918  ESTATE  TAX. 

BEING  TITLE  IV  OF  THE  REVENUE  ACT  OF  1918. 

In  effect  after  6:55  P.  M.  February  24,  1919. 
For  new  law  applicable  to  estates  of  decedents  dying  after  3.55  P.  M. 
November  23,  1921,  see  beginning  \416  herein. 

Note  carefully  fl464. 


CALENDAR. 

60-day  notice 

Resident  decedent  If  191  et  seq. 

Non-resident  decedent  1f204  et  seq. 

Return  (within  one  year  after  death) 

Resident  decedent  1f208 

Non-resident  decedent  1[221 

Tax  (due  and  payable  one  year  from  death)  1f223 

Non-resident  If  190;  1f223 


Title  IV.— Estate  Tax. 

1  Sec.  400.    That  when  used  in  this  title — 

2  The  term  "executor"  means  the  executor  or  administrator  of 
the  decedent,  or,  if  there  is  no  executor  or  administrator,  any 
person  who  takes  possession  of  any  property  of  the  decedent; 
and 

3  The  term  "collector"  means  the  collector  of  internal  revenue 
of  the  district  in  which  was  the  domicile  of  the  decedent  at  the 
time  of  his  death,  or,  if  there  was  no  such  domicile  in  the  United 
States,  then  the  collector  of  the  district  in  which  is  situated  the 
part  of  the  gross  estate  of  the  decedent  in  the  United  States,  or, 
if  such  part  of  the  gross  estate  is  situated  in  more  than  one  dis- 
trict, then  the  collector  of  internal  revenue  of  such  district  as 
may  be  designated  by  the  Commissioner. 

[Rates.] 

4  Sec.  401.  That  (in  lieu  of  the  tax  imposed  by  Title  II  of  the 
Revenue  Act  of  1916,  as  amended,  and  in  lieu  of  the  tax  im- 
posed by  Title  IX  of  the  Revenue  Act  of  1917)  a  tax  equal  to 
the  sum  of  the  following  percentages  of  the  value  of  the  net 
estate  (determined  as  provided  in  section  403)  is  hereby  im- 
posed upon  the  transfer  of  the  net  estate  of  every  decedent  dying 
after  the  passage  of  this  Act,  whether  a  resident  or  nonresident 
of  the  United  States : 

5  1  per  centum  of  the  amount  of  the  net  estate  not  in  excess  of 
$50,000 ; 

2  per  centum  of  the  amount  by  which  the  net  estate  exceeds 
$50,000  and  does  not  exceed  $150,000; 

3  per  centum  of  the  amount  by  which  the  net  estate  exceeds 
$150,000  and  does  not  exceed  $250,000  ; 

4  per  centum  of  the  amount  by  which  the  net  estate  exceeds 
$250,000  and  does  not  exceed  $450,000 ; 

6  per  centum  of  the  amount  by  which  the  net  estate  exceeds 
$450,000  and  does  not  exceed  $750,000; 

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1918  ESTATE  TAX  LAW. 


8  per  centum  of  the  amount  by  which  the  net  estate 
$750,000  and  does  not  exceed  $1,000,000; 

10  per  centum  of  the  amount  by  which  the  net  estate 
$1,000,000  and  does  not  exceed  $1,500,000 ; 

12  per  centum  of  the  amount  by  which  the  net  estate 
$1,500,000  and  does  not  exceed  $2,000,000; 

14  per  centum  of  the  amount  by  which  the  net  estate 
$2,000,000  and  does  not  exceed  $3,000,000  ; 

16  per  centum  of  the  amount  by  which  the  net  estate 
$3,000,000  and  does  not  exceed  $4,000,000 ; 

18  per  centum  of  the  amount  by  which  the  net  estate 
$4,000,000  and  does  not  exceed  $5,000,000 ; 

20  per  centum  of  the  amount  by  which  the  net  estate 
$5,000,000  and  does  not  exceed  $8,000,000 ; 

22  per  centum  of  the  amount  by  which  the  net  estate 
$8,000,000  and  does  not  exceed  $10,000,000 ;  and 

25  per  centum  of  the  amount  by  which  the  net  estate 
$10,000,000. 

s  The  taxes  imposed  by  this  title  or  by  Title  II  of  the  Revenue 
Act  of  1916  (as  amended  by  the  Act  entitled  "An  Act  to  provide 
increased  revenue  to  defray  the  expenses  of  the  increased  appro- 
priations for  the  army  and  navy  and  the  extensions  of  fortifica- 
tions, and  for  other  purposes,"  approved  March  3,  1917)  or  by 
Title  IX  of  the  Revenue  Act  of  1917,  shall  not  apply  to  the 
transfer  of  the  net  estate  of  any  decedent  who  has  died  or  may 
die  while  serving  in  the  military  or  naval  forces  of  the  United 
States  in  the  present  war  or  from  injuries  received  or  disease 
contracted  while  in  such  service,  and  any  such  tax  collected  upon 
such  transfer  shall  be  refunded  to  the  executor.  [See  Tf423  for 
provision  of  1921  Act  applicable  here.] 

[Determination  of  value  of  gross  estate.] 

7  Sec.  402.  That  the  value  of  the  gross  estate  of  the  decedent 
shall  be  determined  by  including  the  value  at  the  time  of  his 
death  of  all  property,  real  or  personal,  tangible  or  intangible, 
wherever  situated — 

8  (a)  To  the  extent  of  the  interest  therein  of  the  decedent  at 
the  time  of  his  death  which  after  his  death  is  subject  to  the  pay- 
ment of  the  charges  against  his  estate  and  the  expenses  of  its 
administration  and  is  subject  to  distribution  as  part  of  his  estate ; 

9  (b)  To  the  extent  of  any  interest  therein  of  the  surviving 
spouse,  existing  at  the  time  of  the  decedent's  death  as  dower, 
courtesy,  or  by  virtue  of  a  statute  creating  an  estate  in  lieu  of 
dower  or  courtesy; 

1  0  (c)  To  the  extent  of  any  interest  therein  of  which  the  dece- 
dent has  at  any  time  made  a  transfer,  or  with  respect  to  which 
he  has  at  any  time  created  a  trust,  in  contemplation  of  or  in- 
tended to  take  effect  in  possession  or  enjoyment  at  or  after  his 
death  (whether  such  transfer  or  trust  is  made  or  created  before 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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exceeds 
exceeds 

exceeds 
exceeds 
exceed* 
exceeds 
exceeds 
exceeds 
exceeds 


1-2-22. 


1918  ESTATE  TAX  LAW. 


or  after  the  passage  of  this  Act),  except  in  case  of  a  bona  fide 
sale  for  a  fair  consideration  in  money  or  money's  worth.  Any 
transfer  of  a  material  part  of  his  property  in  the  nature  of  a  final 
disposition  or  distribution  thereof,  made  by  the  decedent  within 
two  years  prior  to  his  death  without  such  a  consideration,  shall, 
unless  shown  to  the  contrary,  be  deemed  to  have  been  made  in 
contemplation  of  death  within  the  meaning  of  this  title ; 

1 1  (d)  To  the  extent  of  the  interest  therein  held  jointly  or  as 
tenants  in  the  entirety  by  the  decedent  and  any  other  person,  or 
deposited  in  banks  or  other  institutions  in  their  joint  names  and 
payable  to  either  or  the  survivor,  except  such  part  thereof  as  may 
be  shown  to  have  originally  belonged  to  such  other  person  and 
never  to  have  belonged  to  the  decedent;  [See  fl402.] 

12  (e)    To  the  extent  of  any  property  passing  under  a  general 

power  of  appointment  exercised  by  the  decedent  (1)  by  will,  or 
(2)  by  deed  executed  in  contemplation  of,  or  intended  to  take 
effect  in  possession  or  enjoyment  at  or  after,  his  death,  except 
in  case  of  a  bona  fide  sale  for  a  fair  consideration  in  money  or 
money's  worth ;  and 

13  (f)  To  the  extent  of  the  amount  receivable  by  the  executor 
as  insurance  under  policies  taken  out  by  the  decedent  upon 
his  own  life ;  and  to  the  extent  of  the  excess  over  $40,000  of  the 
amount  receivable  by  all  other  beneficiaries  as  insurance  under 
policies  taken  out  by  the  decedent  upon  his  own  life. 

[Determination  of  value  of  net  estate.] 

14  Sec.  403.  That  for  the  purpose  of  the  tax  the  value  of  the 
net  estate  shall  be  determined — 

15  (a)  In  the  case  of  a  resident,  by  deducting  from  the  value  of 
the  gross  estate— 

16  (1)  Such  amounts  for  funeral  expenses,  administration  ex- 
penses, claims  against  the  estate,  unpaid  mortgages,  losses  in- 
curred during  the  settlement  of  the  estate  arising  from  fires, 
storms,  shipwreck,  or  other  casualty,  or  from  theft,  when  such 
losses  are  not  compensated  for  by  insurance  or  otherwise,  and 
such  amounts  reasonably  required  and  actually  expended  for  the 
support  during  the  settlement  of  the  estate  of  those  dependent 
upon  the  decedent,  as  are  allowed  by  the  laws  of  the  jurisdiction, 
whether  within  or  without  the  United  States,  under  which  the 
estate  is  being  administered,  but  not  including  any  income  taxes 
upon  income  received  after  the  death  of  the  decedent,  or  any 
estate,  succession,  legacy,  or  inheritance  taxes; 

17  (2)  An  amount  equal  to  the  value  at  the  time  of  the  de- 
cedent's death  of  any  property,  real,  personal,  or  mixed,  which 
can  be  identified  as  having  been  received  by  the  decedent  as  a 
share  in  the  estate  of  any  person  who  died  within  five  years  prior 

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1918  ESTATE  TAX  LAW. 


to  the  death  of  the  decedent,  or  which  can  be  identified  as  having 
been  acquired  by  the  decedent  in  exchange  for  property  so  re- 
ceived, if  an  estate  tax  under  the  Revenue  Act  of  1917  or  under 
this  Act  was  collected  from  such  estate,  and  if  such  property  is 

included  in  the  decedent's  gross  estate;* 

1!  8  (3)  The  amount  of  all  bequests,  legacies,  devises,  or  gifts,  to 
or  for  the  use  of  the  United  States,  any  State,  Territory,  any 
political  subdivision  thereof,  or  the  District  of  Columbia,  for 
exclusively  public  purposes,  or  to  or  for  the  use  of  any  corpo- 
ration organized  and  operated  exclusively  for  religious,  charitable, 
scientific,  literary,  or  educational  purposes,  including  the  en- 
couragement of  art  and  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual,  or  to  a  trustee 
or  trustees  exclusively  for  such  religious,  charitable,  scientific, 
literary,  or  educational  purposes.  This  deduction  shall  be  made 
in  case  of  the  estates  of  all  decedents  who  have  died  since 
December  31,  1917;*  and 

1 9  (4)    An  exemption  of  $50,000 ; 

20  (b)  In  the  case  of  a  nonresident,  by  deducting  from  the 
value  of  that  part  of  his  gross  estate  which  at  the  time  of  his 
death  is  situated  in  the  United  States — 

21  (1)  That  proportion  of  the  deductions  specified  in  para- 
graph (1)  of  subdivision  (a)  of  this  section  which  the  value  of 
such  part  bears  to  the  value  of  his  entire  gross  estate,  wherever 
situated,  but  in  no  case  shall  the  amount  so  deducted  exceed  10 
per  centum  of  the  value  of  that  part  of  his  gross  estate  which  at 
the  time  of  his  death  is  situated  in  the  United  States ; 

22  (2)  An  amount  equal  to  the  value  at  the  time  of  the  de- 
cedent's death  of  any  property,  real,  personal,  or  mixed,  which 
can  be  identified  as  having  been  received  by  the  decedent  as  a 
share  in  the  estate  of  any  person  who  died  within  five  years  prior 
to  the  death  of  the  decedent,  or  which  can  be  identified  as  having 
been  acquired  by  the  decedent  in  exchange  for  property  so  re- 
ceived, if  an  estate  tax  under  the  Revenue  Act  of  1917  or  under 
this  Act  was  collected  from  such  estate,  and  if  such  property  is 
included  in  that  part  of  the  decedent's  gross  estate  which  at  the 
time  of  his  death  is  situated  in  the  United  States;*  and 

23  (3)  The  amount  of  all  bequests,  legacies,  devises,  or  gifts,  to 
or  for  the  use  of  the  United  States,  any  State,  Territory,  any 
political  subdivision  thereof,  or  the  District  of  Columbia,  foi 
exclusively  public  purposes,  or  to  or  for  the  use  of  any  domestic 
corporation  organized  and  operated  exclusively  for  religious, 
charitable,  scientific,  literary,  or  educational  purposes,  including 
the  encouragement  of  art  and  the  prevention  of  cruelty  to  chil- 
dren or  animals,  no  part  of  the  net  earnings  of  which  inures  to 

♦See  1T434,  H435,  and  ff439  for  retroactive  provisions  in  the  1921  Act. 
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1918  ESTATE  TAX  LAW. 


the  benefit  of  any  private  stockholder  or  individual,  or  to  a 
trustee  or  trustees  exclusively  for  such  religious,  charitable, 
scientific,  literary,  or  educational  purposes  within  the  United 
States.    This  deduction  shall  be  made  in  case  of  the  estates  of 

all  decedents  who  have  died  since  December  31,  1917  [See  fl440 
for  retroactive  provisions  in  the  1921  Act.]  ;  and 

24  No  deductions  shall  be  allowed  in  the  case  of  a  nonresident 
unless  the  executor  includes  in  the  return  required  to  be  filed 
under  section  404  the  value  at  the  time  of  his  death  of  that  part 
of  the  gross  estate  of  the  nonresident  not  situated  in  the  United 
States. 

25  For  the  purpose  of  this  title  stock  in  a  domestic  corporation 
owned  and  held  by  a  nonresident  decedent,  and  the  amount  re- 
ceivable as  insurance  upon  the  life  of  a  nonresident  decedent 
where  the  insurer  is  a  domestic  corporation,  shall  be  deemed 
property  within  the  United  States,  and  any  property  of  which  the 
decedent  has  made  a  transfer  or  with  respect  to  which  he  has 
created  a  trust,  within  the  meaning  of  subdivision  (c)  of  section 
402,  shall  be  deemed  to  be  situated  in  the  United  States,  if  so 
situated  either  at  the  time  of  the  transfer  or  the  creation  of  the 
trust,  or  at  the  time  of  the  decedent's  death. 

26  In  the  case  of  any  estate  in  respect  to  which  the  tax  under 
existing  law  has  been  paid,  if  necessary  to  allow  the  benefit  of 
the  deduction  under  paragraph  (3)  of  subdivision  (a)  or  (b) 
the  tax  shall  be  redetermined  and  any  excess  of  tax  paid  shall 
be  refunded  to  the  executor. 

[Notice  and  return  to  be  filed  by  executor.] 

27  Sec.  404.  That  the  executor,  within  sixty  days  after  qualifying 
as  such,  or  after  coming  into  possession  of  any  property  of  the 
decedent,  whichever  event  first  occurs,  shall  give  written  notice 
thereof  to  the  collector.  The  executor  shall  also,  at  such  times 
and  in  such  manner  as  may  be  required  by  regulations  made  pur- 
suant to  law,  file  with  the  collector  a  return  under  oath  in  du- 
plicate, setting  forth  (a)  the  value  of  the  gross  estate  of  the  de- 
cedent at  the  time  of  his  death,  or,  in  case  of  a  nonresident,  of 
that  part  of  his  gross  estate  situated  in  the  United  States;  (b) 
the  deductions  allowed  under  section  403;  (c)  the  value  of  the 
net  estate  of  the  decedent  as  defined  in  section  403 ;  and  (d)  the 
tax  paid  or  payable  thereon;  or  such  part  of  such  information 
as  may  at  the  time  be  ascertainable  and  such  supplemental  data 
as  may  be  necessary  to  establish  the  correct  tax. 

28  Return  shall  be  made  in  all  cases  where  the  gross  estate  at 
the  death  of  the  decedent  exceeds  $50,000,  and  in  the  case  of  the 
estate  of  every  nonresident  any  part  of  whose  gross  estate  is 
situated  in  the  United  States.  If  the  executor  is  unable  to  make 
a  complete  return  as  to  any  part  of  the  gross  estate  of  the  de- 
cedent, he  shall  include  in  his  return  a  description  of  such  part 
and  the  name  of  every  person  holding  a  legal  or  beneficial  in- 

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1918  ESTATE  TAX  LAW. 


terest  therein,  and  upon  notice  from  the  collector  such  person 
shall  in  like  manner  make  a  return  as  to  such  part  of  the  gross 
estate.  The  Commissioner  shall  make  all  assessments  of  the 
tax  under  the  authority  of  existing  administrative  special  and 
general  provisions  of  law  relating  to  the  assessment  and  col- 
lection of  taxes. 

[When  Collector  shall  make  the  return.] 

2  s  Sec.  405.  Tha  if  no  administration  is  granted  upon  the  estate 
of  a  decedent,  or  if  no  return  is  filed  as  provided  in  section  404, 
or  if  a  return  contains  a  false  or  incorrect  statement  of  a  ma- 
terial fact,  the  collector  or  deputy  collector  shall  make  a  return 
and  the  Commissioner  shall  assess  the  tax  thereon. 

[Payment  of  tax.   Extension  of  time.  Penalty.] 

30  Sec.  406.  That  the  tax  shall  be  due  one  year  after  the  de- 
cedent's death;  but  in  any  case  where  the  Commissioner  finds 
that  payment  of  the  tax  within  one  year  after  the  decedent's 
death  would  impose  undue  hardship  upon  the  estate,  he  may 
grant  an  extension  of  time  for  the  payment  of  the  tax  for  a 
period  not  to  exceed  three  years  from  the  due  date.  If  the  tax  is 
not  paid  within  one  year  and  180  days  after  the  decedent's  death, 
interest  at  the  rate  of  6  per  centum  per  annum  from  the  expira- 
tion of  one  year  after  the  decedent's  death  shall  be  added  as  part 
of  the  tax. 

31  Sec.  407.  That  the  executor  shall  pay  the  tax  to  the  collector 
or  deputy  collector.  If  the  amount  of  the  tax  can  not  be  deter- 
mined, the  payment  of  a  sum  of  money  sufficient,  in  the  opinion 
of  the  collector,  to  discharge  the  tax  shall  be  deemed  payment 
in  full  of  the  tax,  except  as  in  this  section  otherwise  provided.  If 
the  amount  so  paid  exceeds  the  amount  of  the  tax  as  finally  de- 
termined, the  Commissioner  shall  refund  such  excess  to  the  ex- 
ecutor. If  the  amount  of  the  tax  as  finally  determined  exceeds 
the  amount  so  paid,  the  collector  shall  notify  the  executor  of  the 
amount  of  such  excess  and  demand  payment  thereof.  If  such 
excess  part  of  the  tax  is  not  paid  within  thirty  days  after  such 
notification,  interest  shall  be  added  thereto  at  the  rate  of  10 
per  centum  per  annum  from  the  expiration  of  such  thirty  days' 
period  until  paid,  and  the  amount  of  such  excess  shall  be  a  lien 
upon  the  entire  gross  estate,  except  such  part  thereof  as  may 
have  been  sold  to  a  bona  fide  purchaser  for  a  fair  consideration 
in  money  or  money's  worth. 

32  The  collector  shall  grant  to  the  person  paying  the  tax  dupli- 
cate receipts,  either  of  which  shall  be  sufficient  evidence  of  such 
payment,  and  shall  entitle  the  executor  to  be  credited  and  al- 
lowed the  amount  thereof  by  any  court  having  jurisdiction  to 
audit  or  settle  his  accounts. 


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33  Sec.  408.  That  if  the  tax  herein  imposed  is  not  paid  within  180 
days  after  it  is  due,  the  collector  shall,  unless  there  is  reasonable 
cause  for  further  delay,  proceed  to  collect  the  tax  under  the  pro- 
visions of  general  law,  or  commence  appropriate  proceedings  in 
any  court  of  the  United  States,  in  the  name  of  the  United  States, 
to  subject  the  property  of  the  decedent  to  be  sold  under  the  judg- 
ment or  decree  of  the  court.  From  the  proceeds  of  such  sale  the 
amount  of  the  tax,  together  with  the  costs  and  expenses  of  every 
description  to  be  allowed  by  the  court,  shall  be  first  paid,  and  the 
balance  shall  be  deposited  according  to  the  order  of  the  court, 
to  be  paid  under  its  direction  to  the  person  entitled  thereto. 

34  If  the  tax  or  any  part  thereof  is  paid  by,  or  collected  out  of 
that  part  of  the  estate  passing  to  or  in  the  possession  of,  any 
person  other  than  the  executor  in  his  capacity  as  such,  such  per- 
son shall  be  entitled  to  reimbursement  out  of  any  part  of  the  estate 
still  undistributed  or  by  a  just  and  equitable  contribution  by 
the  persons  whose  interest  in  the  estate  of  the  decedent  would 
have  been  reduced  if  the  tax  had  been  paid  before  the  distribution 
of  the  estate  or  whose  interest  is  subject  to  equal  or  prior  liability 
for  the  payment  of  taxes,  debts,  or  other  charges  against  the 
estate,  it  being  the  purpose  and  intent  of  this  title  that  so  far 
as  is  practicable  and  unless  otherwise  directed  by  the  will  of  the 
decedent  the  tax  shall  be  paid  out  of  the  estate  before  its  dis- 
tribution. If  any  part  of  the  gross  estate  consists  of  proceeds  of 
policies  of  insurance  upon  the  life  of  the  decedent  receivable  by  a 
beneficiary  other  than  the  executor,  the  executor  shall  be  entitled 
to  recover  from  such  beneficiary  such  portion  of  the  total  tax  paid 
as  the  proceeds,  in  excess  of  $40,000,  of  such  policies  bear  to  the 
net  estate.  If  there  is  more  than  one  such  beneficiary  the  execu- 
tor shall  be  entitled  to  recover  from  such  beneficiaries  in  the 
same  ratio. 

[Tax  a  lien  for  ten  years.] 

35  Sec.  409.  That  unless  the  tax  is  sooner  paid  in  full,  it  shall 
be  a  Hen  for  ten  years  upon  the  gross  estate  of  the  decedent, 
except  that  such  part  of  the  gross  estate  as  is  used  for  the  pay- 
ment of  charges  against  the  estate  and  expenses  of  its  adminis- 
tration, allowed  by  any  court  having  jurisdiction  thereof,  shall 
be  divested  of  such  lien.  If  the  Commissioner  is  satisfied  that 
the  tax  liability  of  an  estate  has  been  fully  discharged  or  fully 
provided  for,  he  may,  under  regulations  prescribed  by  him  with 
the  approval  of  the  Secretary,  issue  his  certificate  releasing  any 
or  all  property  of  such  estate  from  the  lien  herein  imposed, 

36  If  (a)  the  decedent  makes  a  transfer  of,  or  creates  a  trust  with 
respect  to,  any  property  in  contemplation  of  or  intended  to  take 
effect  in  possession  or  enjoyment  at  or  after  his  death  (except 
in  the  case  of  a  bona  fide  sale  for  a  fair  consideration  in  money  or 
money's  worth)  or  (b)  if  insurance  passes  under  a  contract 
executed  by  the  decedent  in  favor  of  a  specific  beneficiary,  and  if 
in  either  case  the  tax  in  respect  thereto  is  not  paid  when  due,  ther? 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  9  SERVICE 


1-2-22. 


1918  ESTATE  TAX  LAW. 


the  transferee,  trustee,  or  beneficiary  shall  be  personally  liable 
for  such  tax,  and  such  property,  to  the  extent  of  the  decedent's 
interest  therein  at  the  time  of  such  transfer,  or  to  the  extent  of 
such  beneficiary's  interest  under  such  contract  of  insurance,  shall 
be  subject  to  a  like  lien  equal  to  the  amount  of  such  tax.  Any 
part  of  such  property  sold  by  such  transferee  or  trustee  to  a  bona 
fide  purchaser  for  a  fair  consideration  in  money  or  money's  worth 
shall  be  divested  of  the  lien  and  a  like  lien  shall  then  attach  to 
all  the  property  of  such  transferee  or  trustee,  except  any  part 
sold  to  a  bona  fide  purchaser  for  a  fair  consideration  in  money 
or  money's  worth. 

[Penalty  for  failure  to  file,  or  for  false,  notice  or  return.] 

37  Sec.  410.  That  whoever  knowingly  makes  any  false  statement 
in  any  notice  or  return  required  to  be  filed  under  this  title  shall 
be  liable  to  a  penalty  of  not  exceeding  $5,000,  or  imprisonment 
not  exceeding  one  year,  or  both. 

38  Whoever  fails  to  comply  with  any  duty  imposed  upon  him  by 
section  404,  or,  having  in  his  possession  or  control  any  record, 
file,  or  paper,  containing  or  supposed  to  contain  any  information 
concerning  the  estate  of  the  decedent,  or,  having  in  his  possession 
or  control  any  property  comprised  in  the  gross  estate  of  the  de- 
cedent, fails  to  exhibit  the  same  upon  request  to  the  Commissioner 
or  any  collector  or  law  officer  of  the  United  States,  or  his  duly 
authorized  deputy  or  agent,  who  desires  to  examine  the  same  in 
the  performance  of  his  duties  under  this  title,  shall  be  liable  to 
a  penalty  of  not  exceeding  $500,  to  be  recovered,  with  costs  of 
suit,  in  a  civil  action  in  the  name  of  the  United  States. 

[Assessment  and  collection  of  estate  taxes  accrued  under  prior 

Acts.] 

39  Sec.  1400  [of  the  Revenue  Act  of  1918].  (b)  *  *  *  Pro- 
vided further,  That  the  assessment  and  collection  of  all  estate 
taxes,  and  the  imposition  and  collection  of  all  penalties  or  for- 
feitures, which  have  accrued  under  Title  II  of  the  Revenue  Act 
of  1916  as  amended  by  the  Act  entitled  "An  Act  to  provide  in- 
creased revenue  to  defray  the  expenses  of  the  increased  appro- 
priations for  the  Army  and  Navy  and  the  extensions  of  fortifica- 
tions, and  for  other  purposes,"  approved  March  3,  1917,  or  Title 
IX  of  the  Revenue  Act  of  1917,  shall  be  according  to  the  pro- 
visions of  Title  IV  of  this  Act    *    *    *  . 


General  Administrative  Law  Provisions. 
[Read  under  Miscellaneous  Matters  at  back  of  the  book.] 


40       For  fl40  see  page  35. 


Coftvright  1922,  by  The  Corporation  Trust  Cowpnny. 
WAR  TAX  10  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


TREASURY  TJEPARTMENT 
U.  S.  Internal  Revenue 
Form  706— Revised  November,  1919 


ASSESSMENT  LIST.    Form  23  A.  Additional  Tax  Assessed  Audit  and  Claim  Record. 


  _  „   Additional  Tax,    Paid   Received  

(MonlJi)  (Year) 

   Interest      -     $  Paid   Amount,  t.... 

(Pago)  (Line) 

Gross  tax,  $ —  Paid  -..   Allowed,  $ — 


Page  Line   Rejected,  $. 


Interest,  $  Paid   By   Date    By  Date. 


TO  BE  FILED  !N  DUPLICATE.  „  . 

Collection  District   

Date  Filed  


RETURN  FOR  FEDERAL  ESTATE  TAX. 

AN  ITEMIZED  INVENTORY  BY  SCHEDULE  OF  THE  GROSS  ESTATE  OF  THE 
DECEDENT.  WITH  LEGAL  DEDUCTIONS. 

Decedent's  name  .   Date  of  death  ,  19. 

Residence  at  time  of  death  


GENERAL  INSTRUCTIONS— READ  WITH  CARE. 

1.  Penalties.— For  failure  to  file  return  when  due,  a  fine  not  exceeding  $500,  or  25  per  cent  added  to  the  tax,  or  both.  For 
knowingly  making  a  false  statement  in  this  return,  a  fine  not  exceeding  $6,000,  or  imprisonment,  or  50  per  cent  added  to  the  tax,  or 
any  or  all  of  the  three. 

2.  This  return  is  required  for  the  estate  of  every  resident  decedent  whose  gross  estate  exceeds  $50,000,  and  for  the  estate  of  every 
nonresident  decedent  any  part  of  whose  gross  estate  is  situated  in  the  United  States.  The  term  "United  States"  used  in  this  form 
means  only  the  States,  tiie  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

3.  This  return  is  due  one  year  after  the  date  of  death,  and  must  be  filed  with  the  collector  of  the  district  in  which  the  decedent 
had  his  permanent  residence  at  the  time  of  death,  or,  in  the  case  of  a  nonresident,  with  the  Commissioner  of  Internal  Revenue,  Treasury 
Department,  Washington,  D.  C. 

4.  Regulations  No.  37,  Revised,  1919,  should  be  carefully  studied  before  making  out  this  return. 

5.  All  papers  used  in  preparing  the  return  should  be  carefully  preserved  for  reference  or  inspection.  All  estate  tax  returns  are 
verified  by  an  internal  revenue  officer  before  the  tax  is  determined  by  the  Bureau. 

6.  If  the  decedent  left  a  will,  a  certified  copy  must  be  filed  in  duplicate  with  the  return. 

There  should  be  filed  in  duplicate  and  as  a  part  of  the  return  such  supplemental  data  and  statements  as  may  'be  necessary  to 
substantiate  the  return  and  establish  the  correct  tax. 

In  the  case  of,  the  estate  of  a  nonresident,  there  should  be  filed — 

1}  Certified  copy  of  will,  if  decedent  died  testate,  or  of  each  will  if  decedent  left  more  than  one,  to  govern  in  different  jurisdictions. 
2)  A  certified  copy  of  inventory  of  the  complete  gross  estate,  whether  situated  within  or  without  the  United  States.  Separate 

schedules  should  be  made  for  property  within  and  without  the  United  States,  respectively. 
(3)  If  any  deduction  is  claimed,  a  certified  copy  of  schedule  of  debts  and  expenses  allowed. 

7.  This  form  consists  of  cover  sheets,  general  information  sheet,  and  thirteen  schedules.  Care  should  bo  taken  to  see  that  the  return 
is  filed  complete  and  that  all  schedules  are  included  in  the  proper  order. 

The  inventory  of  the  gross  estate  must  be  set  forth  upon  the  schedules  provided,  and  may  not  be  attached  in  the  form  of  an  exhibit 

8.  The  questions  asked  under  each  schedule  should  bo  specifically  answered,  and  if  the  decedent  owned  no  property  of  any  claaa 
specified  under  the  schedule,  the  word  "None''  should  be  written  across  the  schedule. 

9.  If  there  is  not  sufficient  space  for  all  entries  under  any  schedule,  use  additional  sheets  of  the  same  size,  numbering  them 
consecutively  ao  follows:  Schedule  A-l,  A-2,  etc.,  and  insert  them  in  the  proper  order  in  the  return. 

10.  Any  property  owned  jointly  or  as  tenants  in  the  entirety,  should  bo  entered  under  the  schedule  for  the  particular  kind  of 
property  involved,  with  a  statement  of  the  origin,  nature,  and  extent  of  the  interest.  Jointly  owned  real  estate,  for  example,  should  be 
entered  on  Schedule  A. 

11.  Where  decedent  died  subsequent  to  February  24, 1919,  property  identified  as  received  from  an  wtato  taxed  within  five 
years,  and  subsequent  to  October  3,  1917,  or  identified  as  exchanged  for  such  property,  must  be  entered  in  Sehcdulo  G  exclusively 
and  not  under  any  other  schedule,  whether  real  estate  or  other  property. 

12.  Further  instructions  will  be  found  under  each  schedule.  Returns  not  in  accordance  with  the  instructions  upon  this  form  will 
not  be  accepted. 


[Front  page  of  Form  706  ] 


Copyright  1922,  by  The  Corporation  Trust  Company* 
WAR  TAX  11  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Estate  of  ,   District  of  -  -    

GENERAL  INFORMATION  SHEET. 

The  information  called  for  on  this  page  is  necessary  for  purposes  of  record  and  verification.   Fill  out  all  blanks  carefully. 

The  name  of  the  decedent's  legal  heirs  and  next  of  kin  are  required  whether  the  decedent  left  a  will  or  not.  If  the  will  namea 
flaore  than  ten  beneficiaries,  only  the  names  of  the  ten  principal  beneficiaries  are  required. 

State  whether  decedent  died  testate  or  intestate  »    

(Answer.) 

Permanent  residence  at  time  of  death  .   

Actual  place  of  death   —   Age  at  death  .1  

Business  or  employment-  .—    -  .  

Business  address   -•-  -  — -      


HEIRS  AT  LAW,  LEGATEES,  AND  BENEFICIARIES. 

Name. 

Relationship. 

Address. 

(IJ  ncre  space  Is  required,  lasort  additions!  ibeets  of  the  same  size.) 


[Page  1  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  12  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Estate  of   Distbiot  of    

GROSS.  ESTATE. 

SCHEDULE  A. 
REAL  ESTATE. 

INSTRUCTIONS. 

"Real  estate  should  be  so  described  that  it  may  be  readily  located.  The  legal  description  is  not  required  unless  necessary  to  show  the- 
exact  location.  The  character  of  the  buildings  should  be  stated  and  the  character  and  area  of  imimproYed  land.  For  location,  such' 
details  aa  the  following  may  be  necessary: 

City  on  town  property. — Street  and  number,  ward,  map  or  subdivision,  block  and  lot,  etc. 

Rural  property. — County,  township,  range,  block  and  lot,  street,  landmarks,  etc. 

If  any  item  of  real  estate  is  subject  to  mortgage,  the  unpaid  balance  of  the  mortgage  should  be  shown  under  "Description."  The 
full  value  of  the  property  and  not  the  equity  must  be  extended  in  the  value  column.  The  mortgage  must  be  deducted  under  Schedule  J 
of  this  return. 

Ail  rents  accrued  and  unpaid  should  be  apportioned  to  the  date  of  death  whether  due  at  that  time  or  not. 
For  further  instructions  see  Article  13  et  seq.,  Regulations  No.  37,  Revised,  1919.  " 

Did  the  decedent,  at  the  time  of  death,  own  any  real  estate?    (Answer  "Yes"  or  "No.")  


Description  of  real  estate. 


Grand  Total.. 


(If  more  space  Is  needed,  Insert  additional  sheets  of  same  size.) 


[Page  2  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  13  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Estate  of 


  DlSTEICT  OF 

SCHEDULE  B. 
STOCKS  AND  BONDS. 


INSTRUCTIONS. 

Give  a  complete  and  adequate  description  of  all  Bocuritiea,  as  follows: 

Stocks. — State  the  number  of  shares,  exact  title  o/  corporation,  common  or  preferred,  par  value,  and  quotation  at  which  returned. 
If  a  listed  security,  state  principal  exchange  upon  which  sold.   If  unlisted,  show  tho  address  of  the  issuing  company. 
Examples;  10  shares  American  Car  &  Foundry  Co.,  preferred,  par  $100,  at  98,  New  York  Exchange 
10  shares  Eagle  Manufacturing  Co.,  Red  Bank,  N.  J.,  common,  par  $25,  at  30,  unlisted. 
Bonds. — State  quantity  and  denomination,  exact  title,  kind  of  bond,  interest  rate,  and  due  dates.   State  the  exchange  upon  which 
listed  or  the  address  of  company,  if  unlisted. 

Example:  Ten  $1,000  Baltimore  &  Ohio  Railway  Co.  first  mortgage  4  per  cent  registered  60-year  gold  bonds,  due  1948, 
January,  April,  July,  and  October,  at  96,  New  York  Exchange. 
Listed  stocks  and  bonds  should  be  returned  at  the  mean  between  the  high  and  low  sale  prices  on  the  day  of  death;  if  there  was  no 
sale  on  the  day  of  death,  the  nearest  sale  price,  either  before  or  after  death,  and  within  a  reasonable  period  thereof,  should  be  taken. 

Unlisted  securities  which  are  actively  dealt  in  should  he  appraised  upon  the  basis  of  last  sales  prior  to  death.  The  source  of  the 
quotation  should  be  stated. 

Inactive  stock  and  stock  in  close  corporations  should  be  appraised  upon  the  basis  of  net  assets  of  the  company  at  the  time  of  death 
and  its  earning  capacity  during  the  five  preceding  years.  If  such  stock  forms  a  material  part  of  the  estate  there  must  be  submitted 
copies  of  statement  of  assets  and  liabilities  as  of  the  date  of  death  and  for  each  of  the  five  years  preceding  death,  and  a  statement  of 
net  earnings  per  year  for  the  same  period. 

Securities  returned  as  of  no  value,  nominal  value,  or  obsolete  should  be  listed,  last,  and  the  address  of  the  company  and  the  State  and 
date  of  incorporation  should  be  stated,  if  obtainable  from  the  certificate.  Copies  of  correspondence  or  statements  of  reasons  for  return 
at  no  value  should  be  retained  for  inspection. 

Interest  on  bonds  should  be  apportioned  to  the  date  of  death  computed  upon  the  basis  of  360  days  to  the  year  and  returned  in 
interest  column.  Dividends  upon  stock  declared  prior  to  death,  and  payable  after  date  of  death,  must  be  returned  separately  unless 
reflected  in  the  price  at  which  the  stock  is  returned. 

In  nonresident  estates  the  actual  depository  on  date  of  death  on  all  bonds  should  be  shotra. 

For  further  instructions  see  Article  15  et  seq.,  Regulations  No.  37,  Revised,  1919. 
Did  the  decedent  own  any  stocks  or  bonds?    (Answer  "Yes"  or  "No.")  


Description. 


Value  on  day  of  death. 


Interest  or  dividend*. 


TOTAT,  =   — -  $ 


Oil  AND  TOTAL. 


(U  raoro  apace  is  needed,  insert  additional  sheets  ol  same  size.) 


[Page  3  of  Form  706  ] 


CtjUlftytfAJ  1922,  iy  Ike  Corporation  Trust  Company. 
V  AR  FAX  14  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Estate  of    District  of  .... 

SCHEDULE  C. 
MORTGAGES,  NOTES,  CASH,  AND  INSURANCE. 


INSTRUCTIONS. 

The  lour  classes  of  property  on  this  schedule  should  be  listed  separately  in  the  order  given. 

Mortgages.— State  (1)  face  value  and  unpaid  balance,  (2)  date  of  mortgage,  (3)  name  of  maker,  (4)  property  mortgaged,  (5)  interest 
dates  and  rate  of  interest.  For  example:  Bond  and  mortgage  for  $5,000,  unpaid  balance  $5,000;  dated  January  1,  1910,  John  Doe  to 
Richard  Roe;  premises  22  Clinton  St.,  Newark,  N.  J.;  interest  payable  at  6  per  cent  per  annum  January  1  and  July  1;  interest  paid  to 
January  1,  1912. 

Nctes,  Promissory. — Give  similar  data. 

Cash  in  Possession. — List  separately  from  bank  deposits. 

Cash  in.  Bank.— Name  bant  and  amount  in  each  bank  and  give  serial  number  of  account.  Include  accrued  interest  in  income 
column,  or  indicate  if  included  in  total  on  deposit. 

Insurance. — The  proceeds  of  all  life  insurance  to  whomsoever  payable  must  be  returned  regardless  of  value.  Insurance  payable 
to  executor  must  be  returned  first.  State  (1)  name  of  company,  (2)  number  of  policy,  (3)  name  of  person  receiving  insurance.  Include 
full  amount  received. 

IMPORTANT. — If  there  is  insurance  payable  to  beneficiaries  other  than  the  executor,  deduction  may  be  taken  at  bottom  of  this 
page  equal  to  the  amount  returned  for  such  insurance,  but  not  exceeding  $40,000. 


For  further  instructions  6ee  Article  34  et  seq.,  Regulations  No.  37,  Revised,  1919. 
(1)  Did  the  decedent,  at  the  time  of  his  death,  own  any  mortgages,  notes,  or  cash?    (Answer  "  Yes"  or 
"No.")  

(3)  Was  any  insurance  payable  on  life  of  decedent  to  beneficiaries  other  than  executor?    (Answer  "Yes" 
or  "No.")  

Item 
No. 

Description. 

Value  on  day  of  death. 

Income  accrued 
death. 

to  date  of 

$ 

$ 

Less  amount  of  insurance  payable  to 
in  excess  of  $40,000  

beneficiaries  other  than  the  executor  not 

$  

******* 

*  *  * 

S 

s  

(If  moro  spaco  is  needed,  insert  additional  sheet  of  same  size.) 

o 


[Page  4  of  Form  706  J 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  15  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Estate  of 


DlSTBIOT  OF 


SCHEDULE  D. 


OTHER  MISCELLANEOUS  PROPERTY. 


INSTRUCTIONS. 


Under  this  schedule  include  all  items  of  gross  estate  not  returned  under  another  schedule,  including  the  following:  Debts  due  the 
decedent;  intereets  in  business;  claims,  rights,  royalties,  and  pensions;  leases,  judgments,  choses  in  action,  shares  in  estates  of  decedents 
or  trust  funds;  transfer  value  of  fire  and  other  protective  insurance;  household  goods  and  personal  effects,  including  wearing  apparel; 
farm  products  and  growing  crops;  live  stock,  automobiles,  etc. 

When  an  interest  in  a  copartnership  or  unincorporated  business  is  returned,  submit  in  duplicate  statement  of  assets  and  liabilities 
as  of  date  of  death  and  for  the  five  years  preceding  death,  and  statement  of  the  net  earnings  for  the  same  five  years.  Good  will  must 
be  accounted  for. 

In  listing  automobiles  give  make,  model,  and  year. 

Did  the  decedent,  at  the  time  of  his  death,  own  any  interest  in  a  copartnership  or  unincorporated  business? 


(Answer  "Yes"  or  "No.")  

Did  the  decedent,  at  the  time  of  his  death,  own  any  miscellaneous  property  not  returnable  under  any  other 
schedule?    (Answer  "Yes"  or  "No.")  


Item 
No. 


Description. 


Value  on  day  of  death. 


Accruod  Income. 


Total 


Grand  Total    


(If  more  space  Is  needed,  Insert  additional  sheet  of  same  slxe.) 


D 


[Page  5  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  16  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Estate  op  -    Disteict  of 

SCHEDULE  E. 
TRANSFERS/ 


INSTRUCTIONS. 

All  gifts  and  transits,  including  trusts,  -of  a  material  part  of  the  estate,  made  or  executed  by  the  decedent  within  two  years  prior 
to  the  date  of  death,  other  than  by  a  bona  fide  sale,  for  a  fair  consideration  in  money  or  money's  worth,  must  be  returned  under 
this 'schedule  and  the  value  of  the  property  shown  in  the  first  column.  The  value  must  also  be  extended  into  the  second  column  for 
inclusion,  in  the  gross  estate  unless  the  executor  has  clear  evidence  to  show  that  the  transfers  in  question  were  not  in  fact  made  in 
contemplation  of  death. 

All  gifts  and  transfers  made  in  contemplation  of  death  or  to  take  effect  at  or  after  death  without  such  consideration,  are  taxable 
and  must  be  included  in  the  gross  estate  regardless  of  the  date  of  transfer?  All  transfers  of  a  material  part  of  the  decedent's  estate 
made  more  than  two  years  prior  to  death  must  .be  returned  under  this  schedule,  but  the  value  need  not  be  extended  into  the  second 
column  if  the  executor  desires  to  contend  that  the  transfers  were  not  made  in  contemplation  of  death. 

In  all  cases  where  a  transfer  or  gift  is  listed  under  this  schedule,  but  the  value  not  extended  into  the  second  column  for  inclusion 
in  the  gross  estate,  the  executor  is  required  to  submit  as  a  part  of  the  return  documentary  evidence  in  the  form  of  affidavits  fully 
setting  forth  all  the  facts  and  circumstances  indicating  the  intent  of  the  decedent  in  making  the  transfer. 

Where  the  transfer  was  effected  by  deed  of  trust,  copy  of  such  instrument  should  be  filed  in  duplicate. 

Make  full  entry,  giving  name  of  transferee,  date  and  form  of  transfer,  description  of  property,  and  value  at  time  of  death. 

For  further  instructions  see  Article  22  et  seq.,  Regulations  No.  37,  Revised;  1919. 

(1)  Did  the  decedent,  during  the  period  within  two  years  prior  to  death,  make  any  transfer  of  a  material 

portion  of  his  estate  in  the  nature  of  a  final  disposition  or  distribution  thereof  without  a  fair  con- 
sideration in  money  or  money's  worth?    (Answer  "Yes"  or  "No"  ) 

(2)  Did  the  decedent,  at  any  time  prior  to  two  years  before  his  death,  make  any  transfer  or  create  any  trust 

in  contemplation  of  or  intended  to  take  effect  at  or  after  death  without  consideration?  (Answer  "  Yes" 
or  "No.")  

(3)  Did  the  decedent,  at  any  time,  make  a  transfer  of  a  material  portion  of  his  estate  without  consideration, 

but  not  believed  to  be  in  contemplation  of  death  or  intended  to  take  effect  at  or  after  death  ?  (Answer 
"Yes"  or  "No'')  

(4)  What  trusts,  if  any,  created  by  the  decedent,  were  in  existence  at  the  time  of  his  death  ? 


Details  of  transfer. 


Value  on  day  of  deatb. 


Value  to  be  included  1 
gross^estat*. 


Total. 


Grand  Total,. 


(U  mors  space  Is  needed,  insert  additional  sheets  of  same  size.) 


[Page  6  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  17  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Estate  of   District  of. 

SCHEDULE  F. 
POWERS  OF  APPOINTMENT. 


INSTRUCTIONS. 

Property  paeeing  under  a  general  power  of  appointment  exercised  in  the  decedent's  will  must  be  returned.  If  the  decedent 
exercised  a  general  power  tjy  deed,  the  property  must  be  included  in  the  gross  estate  if  the  deed  Was  made  in  contemplation  of  death 
or  intended  to  take  effect  at  or  after  death,  except  where  executed  for  a  fair  consideration  in  money  or  money's  worth. 

Certified  copy,  in  duplicate,  of  the  will  or  deed  conferring  the  power  upon  the  decedent,  and  of  the  instrument  by  which  the 
power  was  exercised,  must  be  filed  with  the  return. 

Property  passing  under  the  exercise  of  a  power  of  appointment  should  not  be  listed  under  any  other  schedule. 

For  further  instructions  see  Article  30  et  seq.,  Regulations  No.  37,  Revised,  1919. 

(1)  Did  the  decedent,  at  any  time,  by  will  or  otherwise,  transfer  property  by  the  exercise  of  a  general  power 

of  appointment?    (Answer  "Yes"  or  "No.")  

(2)  Did  the  decedent,  at  any  time,  by  will'  or  otherwise, exercise  a  limited  power  of  appointment?  (Answer 

"Yes"  or  "No.")  


Item 
No. 

Description  and  details. 

Value  on  day  of  death. 

Accrued  income. 

$ 

$ 

Total  

Ghakd  Total,  

S   

(If  more  space  Is  needed,  insert  additional  sheet  of  same  site.) 


r 

[Page  7  of  Form  706. J 


Copyright  1922,  by  The  Corporation  Trust  Company. 
W  AR  TAX  18  SERVICE 


1-2-22. 


ESTATE  TAX  RE GUL ATIO NS . — 1 918  LAW. 


Estate  op  -   District  of  

SCHEDULE  G. 

PROPERTY  IDENTIFIED  AS  TAXED  WITHIN  5  YEARS. 

(Taxed  under  Act  of  October  3, 1917,  or  Revenue  Act  of  1918.1 


INSTRUCTIONS. 

Before  executing  this  schedule  read  carefully  Articles  50  et  s"eq;  and  62,  under  Regulations  No.  37,  Revised,  1919. 

Property  identified  as  received  from  an  estate  taxed  within  five  years,  or  acquired  in  exchange  for  such  property,  must  be  included 
in  this  schedule  and  deduction  taken  under  Schedule  K.  In  order  to  be  entitled  to  this  exemption,  the  first  decedent  must  have  died 
subsequent  to  October  3, 1917,  and  the  second  decedent  must  have  died  on  or  after  February  25, 1919.  The  exemption  is  limited  to  the 
identical  property  received  or  property  identified  as  acquired  by  first  exchange  of  such  property.  No  exemption  is  permitted  for  prop- 
erty acquired  by  a  second  or  subsequent  exchange. 

If  property  identified  as  acquired  by  first  exchange  is  listed,  it  must  be  listed  in  such  manner  as  to  indicate  that  fact  and  to  show 
the  original  property  received  from  the  first  estate. 


If  property  is  acquired  by  exchange,. the  full  value  of  the  property  must  be  entered  in  this  schedule  and  carried  forward  to  the 
recapitulation  of  the  gross  estate,  even  though  the  present  decedent  gave  additional  valuable  consideration  over  and  above  the  value 
of  the  property  given  in  the  exchange.    In  such  cases  there  should  be  deducted  in  the  space  provided  below  the  proportion  of  the  pres- 
ent value  of  the  property  received  in  exchange  that  the  additional  consideration  bore  to  the  entire  consideration  given.   For  example: 
An  item  of  property  valued  at  $10,000  is  exchanged  for  an  item  of  property  valued  at  $15,000,  85,000  additional  being  given  by  the 
decedent.   The  full  value  of  the  property  received  in  exchange  should  be  listed  in  this  schedule,  but  one-third  of  the  present  value 
should  be  deducted  in  the  space  below  before  the  total  is  carried  forward  to  Schedule  K  as  a  deduction. 

Unless  property  can  be  clearly  identified,  the  deduction  can  not  be  taken.   The  burden  of  proof  rests  upon  the  person  claiming 
the  deduction. 

If  property  of  this  nature  has  been  received  from  more  than  one  estate,  give  separate  statements  for  each  estate,  repeating 
given  below: 

the  heading 

Estate  of  Prior  Decedent. 

Nam< 

i  of  decedent 

L_  _                           .    Date  of  death  

Residence  at  time  oi 
Name  and  address  o 

"Return  filed  with  collector  at...  _  _  . 

Item  I 

Xo.  1 

Description  of  property. 

Value  on  day  of  death. 

Accrued 

income. 

S 

$ 

Total  to  be  i 

ncluded  in  the  gross  estate  „  

$  

Less  proportion  of  present  value  of  property  acquired  by  exchange  representing 

Total  to  b 

e  Taken  as  Deduction  (see  Schedule  K)  

$  

$  

(If  more  space  is  needed,  insert  additional  sheets  of  same  size.)' 

<3 


[Page;8  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  19  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


.Estate  op 


—  _   District  of  

DEDUCTIONS. 
SCHEDULE  H. 
FUNERAL  EXPENSES  AND  ADMINISTRATION  EXPENSES. 


INSTRUCTIONS. 

Funeral  expenses  and  miscellaneous  administration  expenses  should  be  itemized.  Give  name  of  creditor  and  exact  nature  of 
•expense. '  Preserve  all  vouchers  and  receipts  for  inspection. 

No  deduction  may  be  taken  upon  the  basis  of  a  vague  or  uncertain  estimate,  but  a  close  estimate  is  deductible.  Where  the 
:is  estimated,  indicate  that  fact. 


Executors'  or  administrators'  commissions  may  be  estimated,  provided  that  the  commissions  will  be  awarded  by  the  court  of  probate 
jurisdiction  or  allowed  in  a  probate  account  and  will  be  paid. 

Attorneys'  fees  should  be  entered  in  the  exact  amount  paid  or  to  be  paid.  In  the  absence  of  an  award  by  the  court,  this  item  is 
not  deductible  in  these  States  where  the  fee  is  a  charge  against  the  executor  and  not  against  the  estate. 

Estate,  legacy,  raccessioh,  and  inheritance  taxes,  and  taxes  on  income  accrued  after  death,  are  not  deductible. 

For  further  instructions  see  Articles  37  et  seq.  and  69  et  eeq. ,  Regulations  No.  87,  Revised,  1919. 


No. 


Amount  of  item. 


Funeral  expenses: 


Total  Funeral  Expenses. 

Executor's  commission  

Attorney's  fee  ,  


Miscellaneous  administration  expenses: 


ToTAl.  MlBCBlLAMEOPB  EXPENSES.. 


Total 


H 


(11  man  ipaoe  fa  needed,  tatrt  nHlUaai  iheeU  <X  mm* 


[Page  9  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  20  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918'  LAW. 


Estate  of  C   District  of 

SCHEDULE  L 


DEBTS  OF  DECEDENT. 


INSTRUCTIONS. 

Itemize  fully  below  all  valid  debts  of  the  decedent  due  and  owing  at  the  time  of  death.   Preserve  all  vouchers  for  inspection. 

If  deduction  is  claimed  for  a  debt,  the'amount  of  which  is  disputed  or  the  subject  of  litigation,  only  such  amount  may  be  deducted 
as  the  estate  concedes  to  be  a  valid  claim.'  The  fact  of  litigation  should  be  stated.  If  any  debt  has  been  canceled  by  the  creditor,  no 
deduction  may  be  taken. 

Enter  notes  unsecured  by  mortgage  under  this  heading  and  give  full  details,  including  name  of  payee,  face  and  unpaid  balance, 
date  and  term  of  note,  interest  rates  and  date  to  which  interest  was  paid  prior  to  death. 

Care  must  betaken  to  state  the  exact  nature  of  the  cl»i"i  as  well  as  the  name  of  the  creditor.  If  the  claim  is  for  services  rendered 
over  a  period  of  time,  state  the  period  covered  by  the  claim'.  Example:  January  1,  1919.  Edison  Electric  Illuminating  Company,  for 
electric  service  during  December,  1918,  |25. 


Item 

No. 

Date  of  claim. 

Creditor  and  nature  of  claim. 

Amount. 

$ 

Total  .... 

(If  more  space  Is  needed,  Insert  additional  sheets  of  same  size.) 


[Page  10  of  Form  706.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  21  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Estate  of   District  of  

SCHEDULE  J. 

MORTGAGES,  NET  LOSSES,  AND  SUPPORT  OF  DEPENDENTS. 


INSTRUCTIONS. 

Mortgages. — Give  location  of  property,  name  of  mortgagee,  date  and  term  of  mortgage,  amount  and  unpaid  balance,  rate  of  inters  c. 
date  to  which  interest  wasvpaid  prior  to  death.  Enter  in  second  column  accrued  interest  apportioned  to  date  of  death.  Unsecured 
notes  should  be  listed  under  Schedule  I. 

Losses. — Losses  are  strictly  limited  to  net  losses  arising  from  fire,  storm,  shipwreck,  or  other  casualty,  or  from  theft  to  the  extent 
that  such  losses  are  not  compensated  for  by  insurance.  Losses  must  occur;  during  the  settlement  of  the  estate.  Depreciation  in  the 
value  of  securities  does  not  constitute  a  deductible  loss  In  listing  losses,  specify  nature.  If  insurance  was  received  on  account  of  los», 
state  the  amount  collected. 

Support  op  Dependents. — No  deduction  mav  be  taken  under  this  item  unless  the  local  law  permits  the  allowance,  the  local  court 
has  made  a  decree  specifying  the  amount  thereof,  and  in  fact  the  allowance  was  reasonably  required  for  1 " 
question.    In  listing  this  item,  give  the  names  of  the  dependents  and  their  relationship. 

For  further  instructions  see  Article  47  et  seq.  and  61,  Regulations  No.  37,  Revised,  1919. 


the  support  of  the  person  in 


TOTAt  I  $. 


Grand  Total  . 


(If  more  space  is  needed,  insert  additional  sheets  of  samo  size.) 


Item 

No. 

TCet  losses  during  administration. 

Amount. 

1 

$ 

1  $  

(If  more  space  is  needed,  Insert  additional  sheets  of  sam« 

sire.) 

Item 
No. 

Support  of  dependents 

Amount. 

• 

 !  s  

(If  more  space  is  neeild,  insert  addltonal  sheets  of  samo  sire.) 


[Page  11  of  Form  706. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  22  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 19 1 8  LAW. 


Estate  of   District  of  

SCHEDULE  K. 
PROPERTY  IDENTIFIED  AS  TAXED  WITHIN  FIVE  YEARS. 


INSTRUCTIONS. 

Enter  in  this  schedule,  by  separate  estates  if  more  than  one  estate  is  involved,  the  total  amount  deductible  8"  representing  property 
received  from  an  estate  taxe^i  within  five  years  or  acquired  by  exchange  for  property  so  received,  as  set  forth  in  Svaedule  G. 

IMPORTANT.— Care  must  be  observed  to  enter  in  this  schedule  only  the  present  value  of  the  property  actually  received,  or  if 
such  property  has  been  exchanged  for  other  property,  the  presant  value  of  such  other  property.  Where  the  exchange  was  equal,  the 
full  present  value  should  be  entered.  Where  the  decedent  in  acquiring  such  other  property  gave  additional  consideration,  there  should 
be  deducted  such  proportion  of  the  present  value  of  the  property  acquired  in  exchange  as  the  value  of  the  original  property  bore  to 
the  entire  consideration  given. 

For  further  Instructions  see  Article  60  et  seq.  and  62,  Regulations  No.  37,  Revised,  1919. 


Name  of  prior  decedent. 


Date  of  de ath. 


Total. 


(If  more  space  U  needed,  Insert  additional  sheets  of  same  site.) 

CHARITABLE,  PUBLIC,  AND  SIMILAR  GIFTS  AND  BEQUESTS. 

When  a  deduction  is  claimed  under  this  schedule,  there  must  be  submitted  (1)  certified  copy  of  will  or  instrument  of  gift,  (2)  receipt 
or  statement  showing  payment  or  acceptance,  (3)  affidavit  of  executor,  showing  whether  will  has  been  or  will  be  contested,  (4)  such 
other  document  or  evidence  as  may  be  specified  by  the  Bureau. 

For  further  instructions  see  Article  53  et  seq.  and  63,  Regulations  No.  37,  Revised,  1919. 


Kame  and  address  of  beneficiary. 


Character  of  Institution. 


Total  _  „   j 

(If  more  space  is  needed,  insert  additional  sheet  of  same  size.) 


K 


[Page  12  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  23  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


SCHEDULE  L. 

RECAPITULATION,  RATES  OF  TAX  AND  TAX  DUE,  AND  JURAT. 


Real  estate. 


Stocks  and  bonds    

Mortgages,  notes,  cash,  and  insurance  

Other  miscellaneous  property  

Transfers  

Powers  of  appointment  


Property  identified  as  taxed  within  five  years.. 
Total  Gross  Estate  _.  


DEDUCTIONS. 


Funeral  expenses. 


Administration  expenses: 

Executor's  fee   

Attorney's  fee  

Miscellaneous  

Debts  of  decedent-  

Unpaid  mortgages   

Net  losses  during  settlement. 

Support  of  dependents  


Property  identified  as  taxed  within  five  years... 

Charitable,  public,  and  similar  bequests.  

Specific  exemption  (resident  decedents  only).. 
Total  Deductions  _  


Total  gross  estate  (within  U.  S.  in  nonresident  estates). 

Total  deductions  (for  nonresident  see  Schedule  M)  

Net  Estate  foh  Tax._  


[Page  13  of  Form  706. 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  24  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


SCHEDULE  M. 

DEDUCTIONS — ESTATE  OF  NONRESIDENT.- 

If  the  decedent  was  not  a  resident  of  the  United  States,  Hawaii,,  or  Alaska,  no  deductions  whatever  are 
allowable  unless  the  yalue  of  that  part  of  his  gross  estate  situated  outside  of  the  United  States,  Hawaii,  or 
Alaska  be  set  forth.  If  it  be  desired  to.  claim  deductions,  execute  Schedules  H-I-J-K  and  compute  the 
deductions  allowable  as  follows : 


1.  Value  of  gross  estate  in -United  States  (Schedules  A-B-C-D-E-F-GX__   „. 



2.  Vahie  of  gross  estate  outside  of  the  United  States  (attach  itemized  schedule  showing  values)..  

3.  Value  of  total  grew  estate  wherever  situated  (1  plus  2)  

5.  Net  deductions  under  Schedules  H-I-J  (that  proportion  of  4  that  1  bears  to  3,  not  exceeding  10^  cf  3)^ 

6.  Schedule  K  (within  the.  United  States)       

7.  Total  deductions  allowable  (5  plus  6)                .  .       „                                                     .  . 

RATES  AND  TAX  DUE. 


Date  o»  Beats  

(Uate.) 

N«»  tSTATS. 

(l) 

(23 

(3) 

(O 

Cept.9, 1916,  to 
Mar.  2, 1917, 
inclusive. 

Mar.  3,  1817,  to 
Oct.  S,  1917, 
inclusive. 

Oct.  4, 1917,  to 
Feb.  24, 1919, 
inclusive. 

On  and  after 
Fab.  25, 1919. 

Amount  or  tax. 

Exceeding— 

Not  exceeding— 

Amount  of  block. 

Kate  per  cent. 

Hate  per  cent. 

Rate  per  cent. 

Rate  per  cent. 

$50,000 

$50,000 

1 

U 

2 

1 

$60,000 

150,000 

100,000 

2 

3 

4 

2 

150,000 

250,000 

100,000 

3 

<\ 

6 

3 

250,000 

450,000 

200,000 

4 

6 

8 

4 

450,000 

750,000. 

300,000 

*5 

7i 

10 

C 

750,000 

1, 000, 000 

250,000 

•5 

7i 

10 

8 

1,000,000 

1,500,000 

500,000 

C 

9 

12 

10 

1,500,000 

2,000,000 

500,000  ' 

c 

D 

12 

12 

2,000,000 

3,000,000 

1,000,000 

7 

10 

14 

14 

3,000,000 

4,000,000 

1,000,000 

8 

12 

16 

16 

4,000,000 
5,000,000 

5, 000, 000 
6, 000,000 

1,000,000 
1,000,000 

9 
10 

13J 
15 

18 
20 

18 
20 

6,000,000 
7,000,000 
8,000,000 

7,000,000 
8,000,000 
9,000,000 

1,000,000 
1,000,000 
1,000,000 

10 
10 

10 

15 
15 

15 

20 
20 

20 
20 

22 

22 

9,000,000 

10,000,000 

1,000,000 

10 

15 

22 

22 

10,000  000 

10 

15 

25 

25 

2—0289 


[Page  14  of  Form  706.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  25  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


JURAT  FOR  EXECUTORS  AND  ADMINISTRATORS. 

We-I   _  ^  _  _ 

the  undersigned  execut   — administrat  ...  ,  do  hereby  solemnly  swear-affirm  that  on  the   day  of 

 .   ,  19  ,  the    court  at    „... 

 i  granted  letters  testamentary  or  of  administration  upon  the  estate  of  the  foregoing  named  decedent  to    

 *  ;  that  have  made  diligent  search  for  property  of  every  kind  left  by  the  decedent;  that 

 have  carefully  read  the  instructions  printed  on  this  form;  that  hereon  is  listed  all  of  the  property,  tangible  and  intangible, 

forming  the  gross  estate  of  the  decedent  so  far  as  it  has  come  to  _  knowledge  and  information;  that  _  have  no 

knowledge  of  any  transfers  made  or  trusts  created  in  contemplation  of  death  or  to  take  effect  at  or  after  death,  except  as  stated  on  Sched- 
ule E;  that  to  the  best  of  knowledge,  information,  and  belief  the  value  shown  for  each  item  of  property  listed  hereon  was 

the  actual  and  full  value  of  the  same  at  the  time  of  decedent's  death;  and  that  the  debts,  expenses,  and  charges  entered  hereon  as 
deductions  from  the  gross  estate  are  correct  and  legally  allowable. 

JURAT  FOR  BENEFICIARIES,  CUSTODIANS,  AND  TRUSTEES. 


I-We 


the  undersigned  beneficiar  — Custodian — Trustee,  do  hereby  solemnly  swear-affirm  that  have  carefully  read  the 

instructions  printed  on  this  form;  that  hereon  is  listed  all  of  the  property,  tangible  or  intangible,  contained  in  the  gross  estate  of  the 

decedent  which  has  come  into  possession  and  control;  that  to  the  best  of  knowledge,  information,  and  belief, 

the  value  shown  for  each  item  of  property  listed  hereon  was  the  actual  and  full  value  of  the  same  at  the  time  of  the  decedent's  death; 
and  that  the  debts,  expenses,  and  charges  entered  hereon  as  deductions  from  the  gross  estate  are  correct  and  legally  allowable. 


(Name)  

(Address)  


(Name)   

(Address). 


(Name)....  

(Address). 


Subscribed  and  sworn  to  before  me.  at. 
this  —   day  of......   


..  19.. 


Notary  Public— Deputy  Collector. 
Note.— If  there  Is  more  than  one  executor  or  administrator  all  most  sign  and  swear  to  the  return. 

Attorney's  name  and  address..-  -.     ^  — 


[Page  15  of  Form  706.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  26  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


TREASURY  DEPARTMENT 
8.  Internal  Revenue— Estate  T 
Form  70*— Revised  Jiiy,  1919 


XJ.  8.  Internal  Revenue  Estate  Tax     SIXTY-DAY  NOTICE— ESTATE  OF  RESIDENT 


To  be  filed  in  duplicate  by  executor  or  person  in  possession  of  property.    (Observe  instructions  on  reverse  side.) 

District  

Date  filed  

Name  of  decedent.  -  -  

Date  of  death  .  ,  

Place  of  death  -  

Residence   

 ,  19.... 

Collector  of  Internal  Revenue. 


1.  I,   ,  pursuant  to  the  requirements  of  section  404  of  the  Revenue 

Act  of  1?18,  approved  February  24,  1919,  hereby  give  notice  that: 

(Fill  in  (a)  or  (6)  as  facts  warrant.) 

(a)  I  qualified  as  execut  .— administrat  :■— of  the  estate  of  the  above-named  decedent  in  the    

 Court  at  .•   .on  the...  .day  of.  ,  19  


(6)  I  had  actual  or  constructive  possession  of  property  or  an  interest  in  property  which  constituted  a  part  of  the  gross  estate  of  the 

above-named  decedent  on  date  of  death,  or  I  came  into  possession  of  such  property  on  the  .  ..day  of   , 

19.  ,  which  has  not  passed  into  the  charge  of  an  executor  or  administrator.  The  description  and  approximate  value  of  such  property 

at  the  time  of  death  were  as  follows: 

Description.  Value. 


f ... 


(Attach  schedule  if  raoro  space  Is  roqulred.) 

_  2.  To  the  best  of  my  knowledge  the  value  of  the  gross  estate  of  the  decedent  exceeds  $50,000,  and  the  approximate  values  of  the 
various  classes  of  property  comprising  the  gross  estate  at  date  of  death  were  as  follows:  "~ 

Real  estate     $  

Stocks  and  bonds     

Miscellaneous  personality     _  _ 

Property  transferred  (see  Instructions  5  (c))  „  .-.  

Property  owned  jointly   .-.  

Life  insurance  for  benefit  of  estate  _  

Other  life  insurance   ...    

values  will  be  accepted.)  Total™   


That  the  names  and  addresses  of  the  legal  representatives  of  the  estate  and  their  attorneys  insofar  as  known  to  me  are: 

Name.  Address. 


Executors 
Administrators 


Attorneya. 


I  hereby  ceettpy  that  I  have  carefully  read  the  instructions  on  the  reverse  side  of  this  form  and  that  all  the  statements  made  heroin 
ire  correct  to  the  best  of  my  knowledge  and  belief. 


Signature  -  

Designation  

(See  paragraph  2  ol  instructions  on  back.) 

Address  


[For  the  reverse  of  this  form  see  page  28.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  27  SERVICE 


1-2-22 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


rv.su 


[Reverse  of  form  704 — Estate  Tax.    For  obverse  of  this  form  see  page  27. 


INSTRUCTIONS 

1.  Estates  subject  to  notice.— -This  notice  must  be  filed  for  the  estates  of  All  resident  decedents,  the  gross  value  of 
which,  as  defined  by  the  law,  exceeds  $50,000. 

2.  Persons  required  to  file  notice. — Where  an  executor  or  administrator  has  been  appointed  by  court  decree,  he 
must  file  the  notice,  which  must  contain  a  statement  of  all  the  property  constituting  the  gross  estate  of  the  decedent. 
Except  as  hereinafter  mentioned,  all  persons  having  possession  of  any  property  of  the  decedent  at  the  time  of  his 
death,  or  acquiring  possession  thereafter,  must  file  this  notice.  This  requirement  applies  to  agents,  bankers, 
beneficiaries,  brokers,  custodians,  debtors,  factors,  fiduciaries,  guardians,  joint  owners,  partners,  safe-deposit 
companies,  transferees,  trustees,  warehouse  companies,  and  all  other-persons  having  possession  of  property  consti- 
tuting part  of  the  gross  estate  of  the  decedent.  Such  persons  are  relieved  of  the  duty  of  filing  notice  only  where  the 
executor  or  administrator  has,  within  the  time  prescribed,  filed  a  notice  including  the  property  in  the  possession 
of  such  persons.    In  case  of  doubt,  the  notice  should  be  filed. 

The  notice  may  be  executed  by  one  executor  or  administrator. 

3.  Time  for  filing  notice. — An  executor  or  administrator,  appointed  by  court  decree,  must  file  the  notice  within 
sixty  days  after  his  qualification.  Persons  having  possession  of  the  property  of  the  decedent,  when  required  to 
file  notice,  must  file  the  same  within  sixty  days  after  receiving  information  of  the  decedent's  death.  Where  po». 
session  of  the  property  was  obtained  after  the  decedent's  death,  the  notice  must  be  filed  within  9brty  days  after 

taking  possession. 

4.  Place  of  filing. — This  notice  must  be  filed  with  the  Collector  of  Internal  Revenue  for  the  district  of  which 
the  decedent  was  a  resident  at  time  of  death. 

5.  Gross  estate. — The  gross  estate  as  defined  by  section  402  of  the  Revenue  Act  of  1918,  approved  February  24, 
1919,  includes— 

(a)  Property  which  after  decedent's  death  is  subject  to  payment  of  charges,  to  expenses  of  administration, 

and  to  distribution  as  a  part  of  his  estate. 
(6)  Interest  of  surviving  spouse,  as  dower,  courtesy,  or  estate  in  lieu  thereof. 

(c)  Property  transferred  or  placed  in  trust  in  contemplation  of,  or  intended  to  take  effect  in  possession  or 

enjoyment  at  or  after  death. 

(d)  Property  held  jointly  or  as  tenants  in  the  entirety. 

(«)  Property  passing  under  a  general  power  of  appointment  exercised  by  decedent. 

(/)  (1)  Insurance  payable  to  a  decedent's  estate,  his  personal  representatives,  or  to  any  person  for  the  benefit 

of  the  estate. 

(2)  Insurance  payable  to  beneficiaries,  in  excess  of  $40,000. 
C.  Lien. — The  tax  is  a  lien  for  ten  years  upon  the  entire  gross  estate,  except  such  part  of  it  as  M  used  for  the 
payment  of  charges  against  the  estate  and  expenses  of  its  administration  allowed  by  any  court  having  jurisdiction. 

7.  Penalties. — The  penalty  for  knowingly  making  any  false  statement  in  this  notice  is  a  fine  not  to  exceed  $5,000, 
Or  imprisonment,  or  both.    Penalty  for  failure  to  file  notice  as  required  is  a  fine  not  to  exceed  $500,  aDd  cost  of  suit. 

8.  Delinquency  .—In  the  event  of  failure  to  file  this  notice  within  the  sixty  days  prescribed  by  law,  a  detailed 
explanation  under  oath  should  accompany  notice  when  filed.  2— wj» 


Copyright  1922,  by  The  Corfcrc'ion  Trust  Company. 
WAR  TAX  28  SERVICE 


1-2-22. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


'TREASURY  DEPARTMENT 
•U,  S.  Internal  Revenue—  Estate  Ta* 
Form  70S— Revised  Juiy,  1919 

SIXTY-DAY  NOTICE— ESTATE  OF  NONRESIDENT 


To  be  filed  in  duplicate  by  executor  or  person  in  possession  of  property.    (Observe  instruction*  on  reverse  sldo.) 


Name  pf  decedent. 

Date  of  death  

Place  of  dcalii  

Residence   


 ,  19- 

CoMMISSIONER  OF  INTERNAL  REVENUE, 

Estate  Tax  Division,  Treasury  Department, 
Washington,  D.  C. 


1,  I,    ,  pursuant  to  the  requirements  of  section  404  of  tho  Revenue 

Act  of  1913,  approved  February  24,  1910,  hereby  givo  notice  that  I  had  actual  or  constructive  possession  of  property  or  an  interest  in 
property  which  constituted  a  part  of  the  gross  estate  situated  in  the  United  States  of  tho  al>ovc-namod  decedent  on  date  of  death,  or  I 

carne  into  possession  of  cuch  properly  on  the   day  of  .-.  _  ,  19   The  description  and 

approximate  value  of  such  property  at  the  time  of  death  were  as  follows: 

Description.  Valtu. 


( Attach  schedule  it  more  space  is  required.) 
I  also  have  information  that  property  or  an  interest  in  property  situated  in,  tho  United  States  belonging  to  said  decedent  was  in 
the  possession  of  others,  as  Bhown  below: 

Name  of  possessor.  Address.  Description  of  property. 


2.  To  the  best  of  ray  knowledge  the  value  of  the  gross  estate  of  the  decedent  situated  in  the  United  States  is  $  

bnd  the  approximate  values  of  the  various  classes  of  property  comprising  such  gross  estate  at  date  of  death  were  as  follows: 

Real  estate   _    „   $  

Stocks  and  bonds  t,    .-.  „    

Miscellaneous  personalty   „  .._  

Property  transferred  (see  Instructions  4  (c))'  ..  

Property  owned  jointly       ....  ,  _  _  

Life  insurance  for  benefit  of  estate     „..   

Other  life  insurance   ~  ,   „  ,     

(Estimated  values  will  be  accepted.)  Total...   _   ,  

That  <he  names  and  addresses  of  the  legal  representatives  of  the  estate  and  their  attorneys  insofar  as  known  to  me  are: 

Nttme,  Address. 


r-ecutor  or  Administrator  { 

lOutside  United  States.. 


(In  United  States. 


fin  United 


Attorneys  { 

lOutside  United  States  _  -r-r--   _   

I  hereby  cebttfy  that  I  have  carefully  read  the  instructions  on  the  reverse  aide  of  this  form  and  that  all  the  statements  made 
herein  are  correct  to  the  best  of  my  knowledge  and  belief. 

Designation.. 


(See  paragraph  2  ol  instructions  on  bacIO 
Address     


[For  the  reverse  of  this  form  see  page  30.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  29  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


[Reverse  of  Form  705.— Estate  Tax.    For  obverse  of  this  f  orm  see  page  29. 


INSTRUCTIONS 


1.  Estates  subject  to  notice. — This  notice  must  be  filed  for  the  estates  of  all  nonresident  decedents  naving  any 
gross  estate,  as  defined  by  the  law,  consisting  of  property  situated  in  the  United  States,  which  includes  theJStates, 
the  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

2.  Persons  required  to  file  notice  and  time  of filing. — This  notice  must  be  filed  by  all  persons  having  possession  of  any 
property,  situated  within  the  United  States,  which  forms  part  of  the  gross  estate  of  a  nonresident  decedent.  The 
notice  must  be  filed  within  sixty  days  after. receiving  information  of  the  decedent's  death,  or,  where  possession  ia 
acquired  after  such  death,  within  sixty  days  after  taking  possession.  This  requirement  applies  to  agents,  bankers, 
beneficiaries,  brokers,  custodians,  debtors,  factors,  fiduciaries,  guardians,  joint  owners,  partners,  safe-deposit  com- 
panies, transferees,  warehouse  companies*  and  all  other  persons  having  possession  of  property  constituting  part  oi 
the  gross  estate 'of  the  decedent. 

3.  Place  of  filing. — This  notice  must  be  filed  with  the  Commissioner  of  Internal  Revenue,  Washington,  D.  C. 

4.  Gross  estate. — The  gross  estate,  as  defined  by  section  402  of  thajtevenue  Act  of  1918,  approved  February  24, 
1919,  includes: 

(a)  Property  which  after  decedent's  death  is  subject  to  payment  of  charges,  to  expenses  of  administration, 

and  to  distribution  as  a  .part  of  his  estate. 
(6)  Interest  of  surviving  spouse,  as  dower,  courtesy,  or  estate  in  lieu  thereof. 

(c)  Property  transferred  or  placed  in  trust  in  contemplation  cf  death  or  to  take  effect  in  possession  or  enjoy- 

ment at  or  after  death. 

(d)  Property  held  jointly  or  as  tenants  in  the  entirety. 

(e)  Property  passing  under  a  general  power  of  appointment. 

(J)  (1)  Insurance  payable  to  a  decedent's  estate,  his  personal  representatives,  or  to  any  person  for  the 
benefit  of  the  estate. 
(2)  Insurance  payable  to  beneficiaries  in  excess  of  $40,000. 

5.  Property  situated  in  the  United  States. — The  notice  is  required  only  with  reference  to  property  situated  in  the 
United  States.  This  includes  all  property,  whether  real  or  personal,  which  is  actually  situated  in  this  country, 
including  bonds,  money  on  deposit  in  domestic  banks,  and  debts  due  by  domestic  creditors.  It  also  includes  stock 
in  domestic  corporations,  wherever  the  certificates  may  be  kept,  and  life  insurance  payable  by  domestic  insuranco 
companies. 

6.  Liability  for  tax. — Any  person  in  possession  of  property  which  constitutes  a  part  of  the  estate  of  a  nonresident 
decedent  may  be  held  personally  liable  for  the  payment  of  the  estate  tax  in  the  event  that  the  property  is  removed 
from  the  jurisdiction  of  the  United  States  before  the  tax  has  been  satisfied,  or  provision  made  for  its  payment. 

7.  Lien. — The  tax  is  a  lien  for  ten  years  upon  the  entire  gross  estate,  except  such  part  of  it  as  is  used  for  th6 
payment  of  charges  against  the  estate  and  expenses  of  its  administration  allowed  by  any  court  having  jurisdiction. 

8.  Penalties. — The  penalty  for  knowingly  making  any  false  statement  in  this  notice  is  a  fine  not  to*  exceed  $6,000, 
or  imprisonment,  or  both.   Penalty  for  failure  to  file  notice  as  required  is  a  fine  not  to  exceed  $500,  and  cost  of  suit. 

9.  Delinquency. — In  the  event  of  failure  to  file  this  notice  within  the  sixty  days  prescribed  by  law,  a  detailed 
.  explanation  under  oath  should  accompany  the  notice  when  filed.  »— *»» 


aixfj  !o  obia  swwvot  ©if* 


WAR  TAX  30  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


TREASURY  DEPARTMENT 
.  B.  Internal  Rsvbhite—  Estate  Tax 
form  714— Revised  July,  1919 


SIXTY-DAY  NOTICE  FOR  TRANSFER  AGENTS-ESTATE  OF  NONRESIDENT 


This  notice  must  be  filed  in  duplicate.    (Observe  instructions  on  reverse  side.) 


Name  of  decedent  

Date  of  death  

Place  of  death  if  known 
Residence  


10. 


Commissioner  op  Internal  Revenue, 

Estate  Tax  Division,  Treasury  Department, 
Washington,  D.  C. 

The  undersigned,  pursuant  to  the  requirements  of  section  404  of  the  Revenue  Act  of  1918,  approved  February  24, 1919,  hereby  gives 

notice  that  on  the  day  of  „  ,  19  ,  a  communication  was  received  from  

-    ,  acting  in  the  capacity  of   , 

whoi-e  address  is   ,  directing  the  transfer  to   

  whose  address  is  „   the  stocks  or  bonds  listed 

below  of  the   ,   Company,  a  corporation-  organized  in  the 

United  States,  owned  by  the  above-named  decedent  at  time  of  death  and  entered  on  the  books  of  such  company  in  the  name  of 
   whose  address  is  


Number.  Description. 

Faco  value. 

(Attach  schedule  it  more  space  Is  required.) 
The  names  and  addresses  of  the  le<*al  representatives  of  the  decedent's  estate,  insofar  as  known  or  shown  by  the  records  of  this 

company,  are: 

Executor  or  |  In  United  States  

administratorj  Outside  United  States 

In  United  States  

Outside  United  States  

gned  has  informal 

Name  of  possessor. 


Name. 


Address. 


neyej 


The  undersigned  has  information  that  property  owned  by  the  decedent  at  the  time  of  death  was  in  the  possession  of  others  as  shown 
below: 


Address. 


Description. 


I  hereby  certify  that  I  have  carefully  read  the  instructions  on  the  reverse  side  of  this  form  and  that  all  statements  made  herein 
i  correct  to  the  best  of  my  knowledge  and  belief. 


Signature  .... 
Designation . 
Address  


[For  the  reverse  of  this  form  see  page  32.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  31  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


1JM0W  10  3TAT23-3THH0A  fl312WTr  HOI  aDITOK  YA0-YTXI2 


[Reverse  of  Form  714. — Estate  Tax.    For  obverse  of  this  Form  see  page  31 

INSTRUCTIONS 


1.  By  whom  notice  must  be  filed. — This  notice  must  be.  filed  by  each  company,  transfer 
agent,  or  registrar  requested  to  make  transfer  of  stocks  or  bonds  issued  by  a  corporation 
organized  in  the  United  States  belonging  at  time  of  death  to  any  person  who  died  outside 
the  United  States  since  September  8,  1916.  The  term  "United  States"  means  the 
States,  tiie  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

2.  Time  of  filing — This  notice  must  be  filed  by  the  company,  transfer .  agent,  or 
registrar  within  60  days  after  receipt  of  request  for  the  transfer  of  securities  belonging  to< 
any  person  dying  outside  the  United  States  or  within  60  days  of  receipt  of  information 
of  the  death  of  such  person. 

3.  Place  of  filing. — This  notice  must  be  filed  with  the  Commissioner  of  Internal 
Revenue  at  Washington,  D.  C. 

4.  Supplemental  data. — Copy  of  will,  inventory,  or  other  documents  received  with 
the  order  for  transfer  will  assist  the  Bureau  of  Internal  Revenue  if  submitted  with  this 
notice.  Transfer  of  stock  should  not  be  made  unless  notice  has  been  filed  with  the  Com- 
missioner of  Internal  Revenue  and  permission  to  make  such  transfer  has  been  granted. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
AVAR  TAX  32  SERVICE 


i-2-22.    (2)  8-4-22.  Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


REGULATIONS  No.  37* 

(Revised  January  21,  1921.) 
Relating  to  the 

ESTATE  TAX 

Under 

TITLE  IV  OF  THE  REVENUE  ACT  OF  1918 


CONTENTS 

Paragraph 

Section  400.     Definitions   1 

Section  401.     Description  of  tax   4 

Article  1.  Neither  a  property  nor  a  legacy  tax   40 

2.  Nature  of  transfer   41 

3.  The  various  statutes   42 

4.  Description  of  taxable  estates   43 

5.  Definition  of  "resident"   44 

6.  Manner  of  determining  liability   45 

7.  Rates  of  tax  ,   46 

8.  Computation  of  tax   51 

9.  Exempt  estates   54 

10.  Exemption  must  be  proved   55 

11.  Claims  for  refund   59 

Section  402.     Constitution  of  gross  estate  •   7 

Article  12.  Character  of  interests  included   60 

13.  Specific  property  to  be  included   62 

14.  Value   66 

15.  Rules  for  the  valuation  of  property  . .   69 

16.  Appraisal  of  household  and  personal  effects — General  provisions   79 

17.  Same— When  value  is  less  than  $2,000   80 

18.  Same — When  value  is  more  than  $2,000   S5 

19.  Same — Appraisers  and  basis  of  appraisals   87 

20.  Valuation  of  annuities,  life,  and  remainder  interests   95 

21.  Dower  and  courtesy   107 

22.  Nature  and  time  of  taxable  transfer  by  decedent   10S 

23.  Nature  of  transfer  in  contemplation  of  death   109 

24.  Reservation  of  income   110 

25.  Power  of  revocation  or  control   Ill 

26.  Valuation  of  property  transferred   112 

27.  Property  held  jointly  or  as  tenants  in  the  entirety   113 

28.  Taxable  portion   115 

29.  Husband  and  wife  Revoked* 

30.  General  rules  as  to  property  appointed   117 

31.  Special  rules — Powers  exercised  before  and  after  February  25,  1919   \20 

32.  Taxable  insurance  ,   122 

33.  Insurance  in  favor  of  the  estate   i53 

34.  Insurance  receivable  by  other  beneficiaries   124 

35.  Effective  date  of  insurance  provisions   125 

36.  Valuation  of  insurance   126 

Section  403.     Constitution  of  net  estate   14 

Article  37.  Deductions  in  the  case  of  resident  estates   127 

38.  General  provisions  relating  to  deductions   129 

39.  Effect  of  court  decree   130 

40.  Funeral  expenses   131 

41.  Administration  expenses   132 

42.  Executor's  commission   133 

43 .  Attorney's  fee   138 

44.  Miscellaneous  administration  expenses   140 

45.  Claims  against  the  estate   141 

46.  Taxes   142 

47.  Unpaid  mortgages  145;  amended  at  776* 

*See  H776. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         33  SERVICE 


1-2-22.    (2)  8-4-22.  Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Section  403.    Constitution  of  net  estate. — Concluded.  Paragraph 

Article  48.  Losses  from  casualty  or  theft   146 

49.  Support  of  dependents   147 

50.  Property  taxed  within  five  years   152 

51.  Property  originally  received   154 

52.  Property  acquired  in  exchange   155 

53.  Public,  charitable,  and  similar  bequests   158 

54.  Religious,  charitable,  scientific,  and  educational  corporations   159 

55.  Proof  of  exemption   163 

56.  Conditional  bequests   164 

57.  Effective  date   165 

58.  Specific  exemption   166 

59.  Manner  of  making  deduction  in  case  of  nonresident  estate   167 

60.  Situs  of  property   168 

61.  Deduction  for  claims  and  expenses   182 

62.  Property  previously  taxed   183 

63.  Public,  charitable,  or  similar  gifts   185 

64.  Determination  of  net  estate   187 

65.  Payment  of  tax   190 

Section  404.    Sixty-day  notice  and  return   27 

Article  66.  Resident  estates — When  notice  required   191 

67.  Same — Notice  by  executor  or  administrator   194 

68.  Same — Notice  by  others  than  the  executor  or  administrator   195 

69.  Same — Notice  when  no  executor  appointed   197 

70.  Same — Notice  where*property  not  within  executor's  control   198 

71.  Same — -'Insurance  companies'  60-day  notice  Revoked* 

72.  Same — Notice  required,  although  military  exemption  claimed   203 

73.  Nonresident  60-day  notice   204 

74.  Same — Transfer  agents'  60-day  notice   205 

75.  Same — Importance  of  requirement   206 

75  A.  Same. — Transfer  of  stock  of  non-resident,  how  made   206a 

76.  Same — Insurance  companies,  60-day  notice   207 

76-A.  Same. — Payment  of  policy  of  life  insurance  taken  out  by  resident 

and  non-resident  decedents,  how  made  Revoked* 

77.  When  return  required  in  case  of  resident  estate — Date  of  filing   208 

78.  Same — Procedure  where  no  return  has  been  made   209 

79.  Same — Investigation  where  return  has  been  filed   210 

80.  Same — Persons  liable  for  return   212 

81.  Same — Extension  of  time  for  filing  return   213 

82.  Same — Execution  of  return   214 

83.  Supplemental  data — Resident  estates   215 

84.  Same — Nonresident  estates   216 

85.  Returns  confidential   218 

86.  Disclosure  to  persons  having  material  personal  interest   219 

87.  Attorneys  must  have  authorization   220 

88.  Return — Nonresident  estates   221 

Section  405.— Revised  Statutes,  Sec.  3176.    Return  by  collector  29,8071 

Article  89.  Return  by  collector   222 

Section  406.    Payment  of  tax — Interest   30 

Article  90.  Payment   223 

91.  Payment  by  bonds  or  uncertified  check  230,266 

92.  The  executor  shall  pay  the  tax   267 

93.  Extension  of  time  for  payment   268 

94.  Interest  on  unpaid  tax   270 

Section  407.    Adjustment  of  tax — Interest   31 

Article  95.  Adjustment  of  tax  after  investigation   271 

96.  Interest  on  additional  tax   272 

Section  408.    Collection  of  tax— Reimbursement   33 

Article  97.  Remedy  not  exclusive   274 

98.  Right  to  reimbursement  not  enforcible  by  Bureau.   275 

Section  409.    Lien — Remedy  against  transferee  and  insurance  beneficiary   35 

Article  99.  Property  subject  to  lien   276 

100.  Release  of  lien  :  •        •  •  177 

101.  Remedy  in  case  of  property  transferred  by  decedent,  or  of  individual 

insurance   283 

*See  U776, 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         34  SERVICE 


1-2-22-  Reg.  37,  Rev.  1921. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Paragraph 

Section  410. — Revised  Statutes,  Sec.  3176.    Penalties  37,8071 

Article  102.  Nature  of  penalties  . . .   284 

103.  Penalties  for  false  and  fraudulent  notice  or  return   285 

104.  Penalty  for  failure  to  file  notice  or  return   286 

105.  Penalty  for  failure  to  exhibit  records  or  property    287 

Revised  Statutes,  Sees.  3220,  3225.    Claims  for  abatement  and  refund  8023,8047 

Article  106.  General  provisions   288 

107.  Claim  for  abatement   289 

108.  Accrual  of  interest  as  affected  by  abatement  claim   290 

109.  Limitation  of  time  to  file  claim  for  abatement  of  excess  tax   291 

110.  Claim  for  refund   292 

111.  Payment  of  claims   293 

Revised  Statutes,  Sees.  3229,  5292,  5293.  Compromise  or  remission  of  penalties   8059 

Article  112.  Power  to  compromise  or  remit   294 

Revised  Statutes,  Sec.  3467.    Personal  liability  of  executor  ,   8055 

Article  113.  Extent  of  liability   295 

Sections  1305,  1318.    Examination  of  records  and  taking  of  testimony  8002-8005 

Article  114.  Securing  evidence — Taking  of  testimony   296 

115.  Power  to  compel  compliance.  , .  297 

Section  1305 .    Remedies  for  collection  8000,8001 

Article  116.  Remedies  for  collection  of  tax   298 

117.  Executor's  duty  to  keep  records  , .  302 

118.  Executor's  duty  to  render  statements   303 

Section  1400.    Scope  of  repeal   39 

Article  119.  Scope  of  repeal     304 

120.  Interest  under  Revenue  Act  of  1916   308 

121.  Repeal  of  previous  regulations   305 


40  Article  1.  Neither  a  property  nor  a  legacy  tax.—- The  Federal  estate 
1        tax  is  imposed  upon  the  transfer  of  the  net  estate,  determined  in  the 

manner  prescribed,  of  every  person  dying  after  September  8,  1916. 
The  tax  is  not  laid  upon  the  property,  but  upon  its  transfer  from  the  decedent 
to  others.  The  subject  of  tax  is  the  transfer  of  the  entire  net  estate,  not 
any  particular  legacy,  devise,  or  distributive  share.  It  is  not  an  individual 
inheritance  tax.  The  value  of  the  separate  interests  and  the  relationship 
of  the  beneficiary  to  the  decedent  have  no  bearing  upon  the  question  of 
iability  or  the  extent  thereof.  The  transfer  of  property  is  taxable,  although 
t  escheats  to  the  State  for  lack  of  heirs. 

4 1  Art.  2.    Nature  of  transfer.— The  statute  embraces  transfers  by  will 
or  under  the  intestate  laws,  and  also  transfers  made  by  the  decedent 

in  his  lifetime,  when  made  in  contemplation  of  death  or  intended  to  take 
effect  in  possession  or  enjoyment  at  or  after  his  death.  The  statute  also 
enumerates  certain  special  cases  not  strictly  of  either  character  just  de- 
scribed. The  practical  test  of  the  existence  of  a  taxable  transfer  is  whether 
the  statute  directs  that  the  property  in  question  be  included  in  the  gross 
estate. 

42  Art.  3.   The  various  statutes.— The  estate  tax  was  first  imposed  by 
the  Act  of  September  8,  1916.    This  law  was  amended  by  the  Act 

of  March  3,  1917  (Title  III),  and  the  Act  of  October  3,  1917  (Title  IX). 
These  two  statutes  increased  the  rate  of  tax.  The  Revenue  Act  of  1918 
(Title  IV),  which  became  effective  on  February  25,  1919,  supplants  all 
prior  acts  as  to  the  estates  of  decedents  dying  on  or  after  that  date,  but 
continues  many  of  the  provisions  of  the  earlier  acts  with  reference  to  the 
estates  of  decedents  dying  before  that  date.  The  Revenue  Act  of  1918 
makes  extensive  changes  in  the  former  acts,  both  as  to  the  rate  of  tax  and 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         35  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


otherwise.  It  is  herein  referred  to  as  "the  statute."  References  to  other 
statutes  are  specific. 

ESTATES  SUBJECT  TO  TAX 

43  Art.  4.  Description  of  taxable  estates. — The  tax  is  imposed  in  the 
4         case  of  the  estate  of  "every  decedent,"  although,  by  reason  of  an 

exemption,  the  net  estate  of  a  resident  decedent,  in  order  to  be  tax- 
able, must  exceed  $50,000.  (See  Sec.  403  (a)  4  19].)  The  estate  of  a  non- 
resident decedent,  however,  is  taxable  if  any  part  of  it  is  situated  in  the 
United  States.  The  statute  takes  no  account  of  the  citizenship  of  the 
decedent,  but  prescribes  different  rules  according  to  whether  the  decedent 
was  a  "resident"  or  a  "nonresident"  of  the  United  States.  A  person  re- 
siding in  Italy  is  a  "nonresident,"  for  the  purpose  of  the  tax,  although  a 
citizen  of  the  United  States;  a  person  residing  in  the  United  States  is  a 
"resident,"  although  a  citizen  of  Italy.  A  "resident"  is  one  who  at  the 
time  of  his  death  resided  in  the  States,  the  Territories  of  Alaska  or  Hawaii, 
or  the  District  of  Columbia.  All  other  persons  are  "nonresidents."  Per- 
sons residing  in  Porto  Rico  or  the  Philippine  Islands  are  "nonresidents." 

44  Art.  5.  Definition  of  4 'resident." — A  person  is  a  "resident"  of  the 
13  United  States,  for  the  purposes  of  this  tax,  only  in  case  he  has  a 
20       domicile  therein  at  the  time  of  his  death.  A  person  acquires  a  domicile 

in  a  place  by  living  there,  for  even  a  brief  period  of  time,  with  no 
definite  present  intention  of  later  removing  therefrom.  Residence  without 
the  requisite  intention  to  remain  will  not  suffice  to  constitute  domicile,  nor 
will  intention  to  change  domicile  effect  such  a  change  unless  accompanied 
by  actual  removal.  A  decedent  who  died  while  abroad  will  be  presumed 
to  be  a  nonresident,  and  the  burden  of  proving  the  contrary  rests  upon  the 
executor. 


DETERMINATION  OF  TAX  LIABILITY 

45  Art.  6.    Manner  of  determining  liability. — The  first  step  in  the 
4         determination  of  tax  liability  is  to  ascertain  the  value  of  the  de- 
cedent's gross  estate  in  the  manner  prescribed  by  law.    (See  Arts. 

12  to  36.)  The  second  step  is  to  deduct  from  this  value  certain  amounts 
specified  by  law  in  order  to  arrive  at  the  value  of  the  net  estate.  (See  Arts. 
37  to  64.)  The  third  step  is  to  obtain  the  sum  of  certain  percentages  of  the 
value  of  successive  portions  of  the  net  estate, as  provided  by  the  applicable 
taxing  act.    (See  Arts.  7,8.) 

46  Art.  7.    Rates  of  tax. — The  amount  of  tax  is  obtained  by  finding 
the  sum  of  certain  percentages  of  the  value  of  the  net  estate  accord- 
ing to  the  provisions  of  the  applicable  taxing  act. 

47  There  are  four  rates  of  tax  imposed,  respectively,  by  the  Revenue 
Act  of  1916,  the  amendment  thereto  of  March  3,  1917,  the  Revenue 

Act  of  1917,  and  the  Revenue  Act  of  1918.  In  the  case  of  each  act  the  rates 
contained  therein  are  applicable  to  the  estates  of  decedents  who  died  on  or 
after  the  effective  date  of  the  act  and  prior  to  the  effective  date  of  the  next 
succeeding  act.   A  table  of  the  four  sets  of  rates  is  given  below: 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  36  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Rates  of  estate  tax. 


Blocks  of  net  estate. 

1 

* 

Act  of 

1916 
(effective 
Sept.  9, 
1916). 

Amend- 
ment of 
Mar.  3, 
1917 

(effective 
Mar.  3, 
1917). 

3 

Act  of 
1917 
(effective 
Oct.  4, 
1917). 

4 

Act  of 

1918 
(effective 
Feb.  25, 

1919), 

Exceeding 

Not  exceed- 
ing 

Amount  of 
block. 

Per  cent. 

Per  cent. 

Per  cent. 

Pe>  cent. 

$50,000 

$50,000 

1 

lli 

2 

1 

$50,000 

i  wi  nnn 

mo  nnn 

2 

3 

4 

2 

150,000 

250,000 

100,000 

3 

4^ 

6 

3 

250,000 

450,000 

200,000 

4 

6 

8 

i 

450  000 

750,000 

300,000 

5 

10 

750,000 

1,000,000 

250,000 

5 

9 

10 

8 

1,000,000 

1,500,000 

500,000 

6 

12 

10 

1,500,000 

2,000,000 

500,000 

6 

9 

12 

12 

2,000,000 

3,000,000 

1,000,000 

7 

WM 

14 

14 

3,000,000 

4,000,000 

1,000,000 

8 

12 

16 

16 

4,000,000 

5,000,000 

1.000,000 

9 

1334 

18 

18 

5,000,000 

6,000,000 

1,000,000 

10 

15 

20 

20 

6,000,000 

7,000,000 

1,000,000 

10 

15 

20 

20 

7,000,000 

8,000,000 

1,000,000 

10 

15 

20 

20 

8,000,000 

9,000,000 

1,000,000 

10 

15 

22 

22 

9,000,000 

10,000,000 

1,000,000 

10 

15 

22 

22 

10,000,000 

10 

15 

25 

25 

48        The  rates  given  by  the  different  acts,  as  set  forth  above,  apply  to 
the  estates  of  decedents  dying  within  the  following  dates: 

Column  1,  Revenue  Act  of  1916,  effective  Sept.  9,  1916,  to  Mar.  2,  1917,  inclusive. 
Column  2,  amendment  of  Mar.  3,  1917,  effective  Mar.  3,  1917,  to  Oct.  3,  1917,  inclusive. 
Column  3,  Revenue  Act  of  1917,  effective  Oct.  4,  1917,  to  Feb.  24,  1919,  inclusive. 
Column  4,  Revenue  Act  of  1918,  effective  after  6.55  P.  M.,  Feb.  24,  1919. 


49  and  50  Blank. 

51  Art.  8. — Computation  of  tax.— For  the  purpose  of  computing  the 
tax,  the  net  estate  is  divisible  into  blocks,  each  block  being  taxed  at 
a  different  and  increasing  rate.  The  preceding  table  gives  the  amount  at 
the  various  blocks  and  the  applicable  rate  of  tax  under  each  of  the  taxing 
acts.  For  example,  the  tax  upon  the  net  estate  of  $1,240,000  of  a  decedent 
dying  on  or  after  February  25,  1919,  would  be  computed  as  follows: 

Amount  of  first  block   $50,000  at  1  per  cent  $500 

Amount  of  second  block   100,000  at  2  per  cent  2,000 

Amount  of  third  block   100,000  at  3  per  cent  3,000 

Amount  of  fourth  block   200,000  at  4  per  cent  8,000 

Amount  of  fifth  block   300,000  at  6  per  cent  18,000 

Amount  of  sixth  block  !   250,000  at  8  per  cent  20,000 

Remainder   240,000  at  10  per  cent  24,000 

Total  net  estate  1,240,000  Total  tax. . .  .75,500 

62  There  is  subjoined  a  table  for  ascertaining  the  tax  without  the 
detailed  computation  given  above.  An  illustration  of  its  use  is  as 
follows:  The  net  estate  of  a  decenclent  dying  on  or  after  February  25, 
1919,  amounts  to  $1,240,000.  By  reference  to  the  table  it  will  be  seen  that 
the  last  complete  block  prior  to  this  amount  is  $1,000,000,  and  that  the 
total  tax  on  a  million  dollars  under  the  rates  in  force  amounts  to  $51,500. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         37  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


lipon  the  remainder  of  the  estate,  $240,000,  the  tax  is  computed  at  the  rate 
contained  in  the  following  line,  or  at  10  per  cent.  The  tax  on  this  amount 
is  consequently  $24,000.   The  following  result  is  thus  obtained: 

Total  tax  on   $1 ,000,000   $5  J  ,500 

Tax  on  240,000  24,000 

Total   1,240,000  75,500 


CopytigJit  1922,  by  The  Corporation  Trust  Con,f>any. 
WAR  TAX         38  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

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Copyright  1922,  by  The  Corporation   Trust  Company. 
WAR  TAX  39  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


MILITARY  EXEMPTION. 

[See  Tf423  for  retroactive  provision  in  the  1921  Act.j 

64  Art.  9.  Exempt  estates. — The  estates  of  persons  dying  while  actu- 
6  ally  serving  in  the  military  or  naval  forces  of  the  United  States  in 
the  present  war  with  Germany  are  exempt  from  tax.  The  date  of  the 
termination  of  the  war,  for  the  purpose  of  this  tax,  is  that  fixed  by  proclam- 
ation of  the  President.  An  estate  is  also  exempt  if  a  person  so  serving  dies 
after  leaving  the  service,  provided  his  death  is  directly  traceable  to  injuries 
received,  or  disease  contracted,  while  in  such  service.  The  term  "military 
or  naval  forces  of  the  United  States"  includes,  among  other  units,  the  Marine 
Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  Female,  and  the  Navy 
Nurse  Corps,  Female.  This  exemption  applies  to  any  estate  tax  imposed, 
whether  by  the  Revenue  Act  of  1916  or  subsequent  statutes.  If  the  tax 
has  been  collected,  the  executor  should  make  claim  for  refund.  For  pro- 
cedure in  the  case  of  claims  for  refunds,  see  Article  11. 

66  Art.  10.  Exemption  must  be  proved. — In  every  case  where  the  ex- 
emption is  claimed  the  right  must  be  proved  by  the  executor* 
Formal  claim  for  military  exemption  on  Form  793,  accompanied  by  support- 
ing evidence,  should  be  filecr  with  the  60-day  notice,  or  as  soon  there" 
after  as  the  necessary  evidence  may  be  secured,  and  in  any  case  not  later 
than  one  year  after  the  decedent's  death.  Where  the  decedent  died  while 
actually  serving  in  the  military  or  naval  forces  during  the  war  with  Germany, 
the  evidence  in  support  of  the  claim  should  consist  of  a  certificate  stating 
the  occurrence  of  death  under  those  circumstances,  issued,  in  the  case  of  a 
soldier,  by  The  Adjutant  General,  in  the  case  of  a  sailor  by  the  Surgeon 
General  of  the  Navy,  and  in  the  case  of  a  marine  by  the  Commandant. 

66  Where  the  decedent  died  while  serving  in  the  military  or  naval 
forces,  but  after  the  termination  of  the  war  with  Germany,  there 

should  be  submitted: 

(1)  Certificate  of  The  Adjutant  General,  Surgeon  General  of  the  Navy, 
or  commanding  officer  as  above,  stating  the  occurrence  of  death  while  in 
the  service,  and  the  cause  of  death. 

(2)  Affidavits  or  other  evidence  to  show  that  the  death  resulted  from 
injuries  received,  or  disease  contracted,  while  serving  in  the  military  or 
naval  forces  during  the  war  with  Germany. 

67  Where  the  decedent  died  after  discharge  from  the  military  or  naval 
forces  there  should  be  submitted: 

(1)  Certificate  of  discharge  from  the  service,  or  copy  of  such  certificate. 

(2)  Certified  copy  of  public  record  of  death,  showing  cause  of  death. 

(3)  Affidavit  of  physician  who  attended  decedent  during  last  illness, 
setting  forth  the  medical  history  of  the  decedent  while  under  his  treatment. 

(4)  Affidavits  or  other  evidence  to  show  that  the  death  resulted  from 
injuries  received,  or  disease  contracted,  while  serving  in  the  military  or 
naval  forces  during  the  war  with  Germany. 

68  If  it  is  determined  by  the  Commissioner  of  Internal  Revenue  that 
the  estate  is  entitled  to  the  exemption,  the  executor  will  be  notified 

to  that  effect,  and  his  duties  with  respect  to  the  tax  will  cease.  If  the 
evidence  submitted  in  support  of  the  claim  is  found  not  to  be  satisfactory, 
such  further  evidence  will  be  called  for,  or  such  investigation  instituted- 
as  the  Commissioner  may  direct.  If  it  is  determined  that  the  estate  is  not 
entitled  to  the  exemption,  the  executor  will  be  required  tolfile  return  and 
pay  tax  in  the  same  manner  as  executors  of  other  taxable  estates. 

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59  Art.  11.    Claims  for  refund. — Prior  to  the  passage  of  the  Revenue 
Act  of  1918  there  was  no  military  exemption  from  estate  tax  except 

with  respect  to  the  increase  of  rates  imposed  by  the  Revenue  Act  of  1917. 
The  provision  in  the  Revenue  Act  of  1918  granting  the  exemption  is  retro- 
active, and  authorizes  the  refund  of  all  estate  taxes  collected  under  the 
provisions  of  former  acts  from  estates  now  entitled  to  the  exemption. 
Where  such  taxes  have  been  collected,  the  executor  should  file  a  claim  for 
refund  on  Form  46,  accompanied  by  the  same  evidence  as  is  required  in 
support  of  a  claim  for  military  exemption. 

GROSS  ESTATE:  INDIVIDUAL  PROPERTY 

60  Art.  12.    Character  of  interests  included. — This  provision  is  designed 
8  to  include  all  property  interests  of  the  decedent,  of  whatever  charac- 
ter.   It  is  the  commonest  form  of  taxable  transfer.   As  a  basis  for 

tax,  there  must  be  an  actual,  beneficial  ownership  in  the  decedent,  not  a 
bare  legal  title,  or  one  held  in  trust.  Thus,  property  actually  devoted  to 
religious  or  charitable  purposes,  and  placed  in  the  name  of  an  individual 
solely  for  convenience  in  administration,  is  not  included  in  his  gross  estate. 
The  statute  also  includes  only  property  rights  existing  in  the  decedent  in 
his  lifetime  and  passing  to  his  estate.  It  consequently  does  not  include  a 
right  which  came  into  existence  only  after  the  decedent's  death,  such  as  a 
cause  of  action  by  statute  fo  causing  the  death.  The  proceeds  of  such  a 
cause  of  action  should  not  be  included  in  the  gross  estate,  whether  payable 
generally  to  the  estate  or  to  some  specified  class  of  persons,  such  as  the  widow 
or  children. 

61  The  value  of  a  vested  remainder  should  be  included  in  the  gross 
estate.    Nothing  should  be  included,  however,  on  account  of  a 

contingent  remainder  where  the  contingency  does  not  happen  in  the  life 
time  of  the  decedent,  and  the  interest  consequently  lapses  at  his  death. 
Nor  should  anything  be  included  on  account  of  a  life  estate  in  the  dece- 
dent. There  should  be  included,  however,  the  value  of  an  annuity  payable 
to  the  decedent  upon  the  life  of  a  third  person  who  survives  him,  and  the 
value  of  an  estate  for  the  life  of  a  person  other  than  the  decedent.  For 
rules  as  to  valuing  such  annuities  and  illustrations,  see  Article  20. 

62  Art.  13.    Specific  property  to  be  included. — Real  property  owned  by 
the  decedent,  when  situated  in  the  United  States,  should  be  included 

in  the  gross  estate,  whether  the  decedent  was  a  resident  or  a  nonresident, 
and  whether  the  property  came  into  the  possession  and  control  of  the 
executor  or  administrator  or  passed  directly  to  heirs  or  devisees.  Real 
property  not  situated  in  the  United  States  should  not  be  included,  whether 
the  decedent  was  a  resident  or  nonresident.  Where  the  decedent  was  a 
resident,  all  personal  property  owned  by  him  should  be  included,  wherever 
situated.  Where  decedent  was  a  nonresident,  so  much  of  his  personal 
property  as  was  actually  situated  in  the  United  States  at  the  time  of  his 
death  should  be  included.  For  further  discussion  of  the  rules  relating  to  the 
estates  of  nonresidents,  see  Article  60. 

63  A  cemetery  lot  owned  by  the  decedent  is  part  of  his  gross  estate, 
but  its  value  is  limited  to  the  salable  value  of  such  part  of  it  as  is 

not  designed  for  the  interment  of  the  decedent  or  members  of  his  family. 
Rent  which  had  accrued  upon  real  property  at  the  time  of  the  decedent's 

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death,  whether  then  payable  or  not,  is  included  in  the  gross  estate.  The 
amount  of  interest  accrued  upon  bonds  on  the  day  of  death,  whether  payable 
then  or  subsequently,  should  be  included.  All  matured  coupons,  whether 
presented  for  payment  or  not,  should  be  included.  The  value  of  notes  or 
other  claims  held  by  the  decedent  should  be  included,  though  they  are 
canceled  by  his  will  or  appear  to  be  barred  by  the  statute  of  limitations.  As 
to  the  valuation  of  notes  or  claims  apparently  barred,  see  Article  15. 
paragraph  3.  All  bonds,  whether  federal,  state,  or  municipal,  and  whether 
or  not  containing  a  tax-free  covenant,  should  be  included. 
64        Dividends,  whether  upon  preferred  or  common  stock,  should  not  be 

included  unless  actually  declared  prior  to  the  date  of  death.  The 
amount  of  dividends  upon  stock  which  have  been  declared,  but  not  paid, 
must  be  returned  where  the  value  of  the  stock  at  the  time  of  the  decedent's 
death  does  not  reflect  the  dividends;  that  is,  where  the  death  occurs  after 
the  closing  of  the  books  of  the  corporation  and  the  stock  consequently  sells 
"ex  dividend. "  Where  the  death  occurs  before  the  closing  of  the  books,  the 
value  of  the  stock  reflects  the  dividend,  and  it  should  not  be  included. 
85        Example:  A  5  per  cent  dividend  upon  stock  is  declared  March  1, 

payable  on  April  1  to  stockholders  of  record  on  March  15.  If  the 
death  occurred  on  March  10  and  the  market  price  on  that  day  w^as  90,  the 
value  to  be  returned  for  both  stock  and  dividend  is  90,  the  dividend  being 
reflected  in  the  quoted  price.  If  the  death  occurred  on  March  20,  the  books 
have  been  closed  and  the  dividend  is  not  reflected  in  the  selling  price.  Under 
these  circumstances  the  dividend  must  be  returned  in  addition  to  the  quoted 
price  of  the  stock;  and  the  proper  return  would  be  stock  90,  dividend  $5. 

66  Art.  14.    Value. — The  value  at  which  property  included  in  the  gross 
estate  is  to  be  returned  for  tax  purposes  is  the  value  at  the  time  of 

the  decedent's  death.  Neither  depreciation  nor  appreciation  in  value 
subsequent  to  the  date  of  death  is  considered.  The  value  to  be  ascertained 
is  the  market,  or  sale,  value  of  the  property.  The  highest  price  obtainable 
for  the  property  within  a  reasonable  period  of  the  decedent's  death  is  the 
value  to  be  included.  A  sale  of  the  property,  however,  in  order  to  be 
accepted  as  the  criterion  of  value,  must  be  made  in  such  manner  as  to  insure 
the  best  price  obtainable  under  existing  circumstances.  This  requires  (a) 
that  the  sale  be  made  as  a  matter  of  business,  and  not  merely  in  order  to 
establish  value;  (b)  that  it  be  made  in  absolute  good  faith,  with  a  view  to 
realizing  as  high  a  price  as  possible;  and  (c)  that  reasonable  care  and  skill  be 
exercised  to  obtain  such  price.  If  one  method  brings  better  results  than 
another,  the  better  method  must  be  employed. 

67  For  example,  if  individual  sales  of  property  are  better  adapted 
to  procure  a  good  price  than  auction  sales,  the  price  obtained  at  an 

auction  sale  will  be  accepted  only  after  reasonable  effort  to  find  individual 
purchasers  has  been  made.    See  further  on  this  point  Article  15. 

68  Great  care  must  be  exercised  by  the  executor  to  arrive  at  a  fair 
valuation  of  every  asset  of  the  gross  estate. 

69  Art.  15.    Rules  for  the  valuation  of  property. — (1)  Real  estate. — 
Where  real  property  has  been  sold,  the  amount  received  will  be 

taken  as  its  value  provided  the  sale  was  made  within  a  reasonable  period 
of  the  decedent's  death,  and  in  such  manner  as  to  insure  the  highest  possible 
price.   Where  no  sale  has  been  made,  the  criterion  of  value  is  the  best  price 

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Reg.  37,  Rev.  1921. 

ESTATE  T/  X  REGULATIONS.— 1918  LAW. 


which  could  have  been  obtained  within  a  reasonable  period  of  the  decedents' 
death.  The  amount  brought  at  an  auction  sale  should  be  considered,  but 
will  be  accepted  only  if  it  appears  that  there  was  no  available  method  of 
obtaining  a  higher  price.  The  assessed  valuation  of  the  property  should  be 
considered,  but  is  not  conclusive.  All  relevant  facts  and  all  elements  of 
value  should  be  considered  in  every  case.  See  further  the  general  rules  laid 
down  in  Article  14. 

70  (2)  Stocks  and  bonds. — The  value  of  stocks  and  bonds  listed  upon 
a  stock  exchange  should  be  obtained  by  taking  the  mean  between 

the  highest  and  the  lowest  sale  price  upon  the  day  of  death,  provided  the 
sales  were  made  in  the  regular  course  of  business,  and  not  for  the  special 
purpose  of  establishing  value.  If  there  were  no  sales  upon  the  date  of  death, 
the  price  nearest  to  that  date,  and  within  a  reasonable  period  thereof,  either 
before  or  after  death,  should  be  taken.  Such  sale  price  obtains  irrespective 
of  the  number  of  shares  held  by  the  estate.  If  the  security  was  listed  upon 
more  than  one  exchange,  the  records  of  the  exchange  where  the  security  is 
principally  dealt  in  should  be  employed.  If  the  decedent  died  on  Sunday  or 
a  legal  holiday,  the  business  of  the  previous  day  will  govern. 

71  If  the  stock  is  not  listed  upon  an  exchange,  but  is  dealt  in  actively 
by  brokers  or  has  other  active  market,  the  latest  sale  price  prior  to 

the  day  of  death  will  govern.  If  there  is  no  active  market  for  the  stock  and 
no  sales  of  it  have  been  made  within  a  reasonable  period  of  the  decedent's 
death,  and  in  particular  where  it  is  closely  held  (stock  of  a  "close  corpor- 
ation"), return  should  be  made  upon  the  basis  of  the  value  of  the  stock,  as 
evidenced  by  the  clear  value  of  the  excess  of  the  assets  of  the  corporation 
over  its  liabilities,  and  its  earning  capacity  for  the  five  years  preceding  the 
death  of  the  decedent.  Where  the  earnings  of  the  corporation  have  been 
greater  than  a  fair  return  on  its  invested  capital,  computed  according  to  the 
nature  of  the  business,  and  where  the  business  is  a  going  business,  there 
should  be  added  to  the  net  value  of  the  other  assets  of  the  business  the  value 
of  the  good  will,  computed  in  accordance  with  sound  accounting  principles. 
Where  the  earnings  of  the  corporation  have  been  less  than  a  fair  return  on 
the  invested  capital,  if  the  difference  is  material  and  the  decreased  earnings 
affect  value,  the  net  worth  of  the  corporation  as  disclosed  by  its  balance 
sheet  may  be  adjusted  on  a  reasonable  basis  to  allow  for  this  decreased  value. 
In  all  cases  where  stock  of  this  character  forms  a  principal  asset,  there  should 
be  submitted  with  the  return,  Form  706  [Page  11],  a  copy  of  the  balance 
sheets  for  the  five  preceding  years,  and  of  the  balance  sheet  on  the  day  of 
death  or  the  nearest  date  thereto,  together  with  a  statement  of  the  net 
earnings  of  the  invested  capital  for  the  preceding  five  years. 

72  The  full  value  of  securities  pledged  to  secure  a  loan  should  be 
included  in  the  gross  estate.    If  the  decedent  had  a  trading  account 

with  a  broker,  all  securities  belonging  to  the  decedent  held  by  the  broker  at 
the  date  of  death  must  be  included  at  their  market  value  on  that  date. 
Securities  purchased  on  margin  for  the  decedent's  account  and  held  by  the 
broker  should  also  be  returned  at  their  market  value  on  the  day  of  death. 
The  amount  of  the  decedent's  indebtedness  to  the  broker  will  be  allowed  as  a 
deduction  from  the  gross  estate.    (See  Art.  45.) 

73  (3)  Notes,  secured  and  unsecured. — Notes,  whether  secured  or  un- 
secured, will  be  presumed  to  be  worth  their  full  face  value,  plus  ac- 
crued interest  to  the  date  of  decedent's  death,  unless  the  executor  establishes 
the  right  to  return  them  at  a  lower  valuation.   Interest  should  be  computed 

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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


upon  the  basis  of  365  days  to  the  year.  In  the  case  of  an  unsecured  note  it 
must  be  shown  by  satisfactory  evidence,  in  order  to  justify  failure  to  include 
it,  that  the  note  is  uncollectible,  either  in  whole  or  in  part,  from  the  maker 
or  other  parties  to  the  note,  on  account  of  the  insolvency  of  the  parties 
thereto,  or  other  cause.  Where  the  note  is  secured  it  must  also  be  shown  that 
the  security  is  insufficient  to  satisfy  it.  Where  a  note  appears  to  be  barred  by 
the  statute  of  limitations  its  value  must  be  included  in  the  gross  estate  in 
the  absence  of  proof  that  the  liability  has  not  revived  by  promise  to  pay  or 
part  payment,  and  also  that  the  parties  liable  refuse  to  pay  the  debt  and 
intend  to  assert  the  defense. 

74  (4)  Cash  on  hand  or  on  deposit. — Bank  deposits  should  be  re- 
turned at  the  amount  for  which  the  bank  would  be  liable  if  the  de- 
posit were  withdrawn  upon  the  date  of  the  decedent's  death.  Interest 
which  the  bank  agreed  to  pay  upon  condition  that  the  money  remain  on 
deposit  after  the  death  should  not  be  included. 

75  (5)  Interest  in  business. — Care  should  be  taken  to  arrive  at  an 
accurate  valuation  of  any  business  in  which  the  decedent  was  inter- 
ested, whether  as  partner  or  proprietor.  A  fair  appraisal  as  of  the  date  of 
death  should  be  made  of  all  the  assets  of  the  business,  tangible  and  in- 
tangible, and  the  business  should  be  given  a  net  worth  equal  to  the  amount 
which  a  purchaser,  whether  an  individual  cr  corporation,  would  be  willing 
to  pay  therefor  at  a  normal  sale  in  view  of  the  net  value  of  the  assets  and 
the  demonstrated  earning  capacity.  Special  attention  should  be  given  to 
fixing  an  adequate  figure  for  the  value  of  the  good  will  of  the  business  in 
all  cases  where  the  decedent  has  not,  for  a  fair  consideration  in  money  or 
money's  worth,  agreed  that  his  interest  therein  shall  pass  at  his  death  to 
his  surviving  partner  or  partners. 

76  (6)  Patents,  trade-marks,  and  copyrights. — The  basis  for  valua- 
tion of  intangible  assets  of  this  character  is  the  present  worth  of  the 

estimated  future  earnings  of  the  exclusive  right  during  the  rest  of  its  exis- 
tence. The  return  received  by  the  decedent  should  be  considered  in  estimat- 
ing future  earnings. 

77  (7)  Accounts  receivable,  claims,  judgments,  etc. — A  fair  valuation 
for  assets  of  this  character  at  the  time  of  death  should  be  fixed  by 

the  executor  according  to  the  best  information  available  to  him  at  the  time 
of  making  return.  A  right  of  action  which  died  with  the  decedent  should 
not  be  included  in  the  gross  estate. 

78  (8)  Furniture,  personal  effects,  and  other ^  tangible  property. — For 
the  method  of  valuation  to  be  employed  in  the  case  of  household 

furniture  and  personal  effects  see  Articles  16  to  19.  With  respect  to  all 
other  tangible  property  the  executor  should  endeavor  to  arrive  at  the  sound 
and  actual  value  at  the  day  of  death.   Where  such  property  is  subsequently 


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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


sold  the  sale  price  must  be  returned  if  the  sale  was  a  bona  fide  sale  and  for  the 
best  price  obtainable.  In  the  case  of  growing  crops  the  executor  should 
ascertain  from  expert  opinion  what  the  value  of  the  growing  crop  was  on  the 
day  of  death,  as  evidenced  by  subsequent  yield  and  crop  prices.  Where  the 
crop  is  matured  the  value  is  the  value  of  the  crop  unit  on  the  day  of  death  for 
the  entire  yield,  less  the  cost  of  harvesting  and  marketing.  Where  the  crop 
is  not  matured  these  factors  should  be  considered;  and  the  opinion  of  those 
expert  in  such  matters  should  be  ascertained  as  to  what  the  crop  was  reason- 
ably worth  as  a  growing  crop  on  the  day  of  death. 

79  Art.  16.    Appraisal  of  household  and  personal  effects — General  pro- 
visions.— Executors  and  administrators  are  required  to  have  careful 

appraisal  made  of  all  household  and  personal  effects  of  the  decedent,  and 
to  furnish  in  duplicate  detailed  lists  and  affidavits  in  the  manner  directed 
below.  No  distribution  of  such  effects  may  be  made  until  the  lists  and 
affidavits  have  been  filed  with  the  collector,  and,  if  deemed  necessary, 
sufficient  time  afforded  the  Bureau  to  have  personal  inspection  made  by  an 
official  appraiser.  Where  it  is  desired  to  distribute  or  sell  all  the  property 
in  advance  of  the  filing  of  the  return,  the  lists  and  affidavits  should  be  filed 
with  the  collector,  together  with  a  letter  stating  when  it  is  desired  to  effect 
distribution.  If  personal  inspection  by  an  internal-revenue  officer  is  not 
deemed  necessary,  a  waiver  of  such  examination  will  be  sent  to  the  executor, 
who  may  thereupon  proceed  with  distribution. 

80  Art.  17.    Same — When  value  is  less  than  $2,000. — When  the  value 
of  the  personalty  involved  is  less  than  $2,000,  the  detailed  lists  may 

be  prepared  by  the  executor  personally.  A  room  by  room  appraisal  is  desir- 
able; and  all  the  articles  should  be  named  specifically,  except  those  of  small 
value,  such  as  common  bric-a-brac  or  cheap  books.  A  separate  value  should 
be  given  for  each  article  named,  except  that  the  values  of  a  number  of  articles 
contained  in  the  same  room  may  be  grouped.  The  value  of  an  article  worth 
more  than  $50  should  be  stated  separately.  Such  an  entry  as  the  following 
would  be  acceptable: 

81  Dining  room:  Table,  six  chairs,  three  pictures  (common  prints), 
value  $75;  sideboard,  $60;  total,  $135. 

82  If  there  should  be  included  in  the  lot,  however,  jewelry  or  silver- 
ware of  more  than  ordinary  value,  or  articles  having  a  marked 

artistic  value,  the  executor  must  furnish  an  appraisal  by  persons  thoroughly 
qualified  by  training  and  experience  to  judge  of  the  value  of  such  articles. 

83  In  the  case  of  effects  having  a  total  value  of  less  than  $2,000,  the 
executor  may  furnish  as  an  alternative  requirement  a  sworn  estimate 

in  duplicate  of  the  approximate  total  value  of  the  property  by  a  professional 
appraiser  of  recognized  standing  and  ability,  or  by  a  dealer  in  the  class  of 
personalty  involved. 

84  In  addition  to  the  lists  or  estimates  described  above,  the  executor 
must  furnish  in  duplicate  his  affidavit  as  to  the  completeness  of  the 

lists  and  the  qualification  of  the  appraiser. 

85  Art.  18.    Same — When  value  is  more  than  $2,000. — When  the  value 
of  the  effects  is  more  than  $2,000,  detailed  lists  must  be  furnished, 

prepared  by  professional  appraisers  of  recognized  competence,  or  by  dealers 
in  the  particular  classes  of  personalty  involved.    The  lists  must  be  prepared 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  45  SERVICE 


1-2-2?, 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — J 513  OOT. 


in  the  same  detail  as  that  indicated  above  for  the  executor's  list.  Where  the 
personalty  includes  jewelry,  silverware,  or  like  articles,  except  in  cases  where 
the  value  of  these  items  is  insignificant,  the  appraisal  of  a  reputable  dealer 
or  appraiser  of  jewelry  must  be  furnished. 

86  In  the  case  of  articles  having  marked  artistic  value,  such  as  paint- 
ings,  engravings,   etchings,   statuary,   vases,   oriental   rugs,  or 

antiques,  the  appraisals  of  experts  will  be  required.  The  description  of  such 
articles  should  be  fully  given.  Where  paintings  having  artistic  value  are 
listed,  the  size,  subject,  and  artist  should  be  named.  In  the  case  of  oriental 
rugs,  the  size,  make,  age,  etc.,  should  be  given.  The  weight  in  ounces  of 
each  article  of  silverware  should  be  stated.  With  the  duplicate  lists  there 
must  be  filed  the  executor's  affidavit  as  to  the  completeness  of  the  list  and 
the  qualifications  of  the  appraisers. 

87  Art.  19.    Same — Appraisers  and  basis  of  appraisals. — Wh°re  exp  ert 
appraisers  are  to  be  employed,  care  should  be  taken  to  see  that  they 

are  men  of  recognized  competence  with  respect  to  the  particular  class  of 
property  involved.  In  order  to  facilitate  the  acceptance  of  the  appraisal, 
appraisers  should  be  employed  whose  competence  is  well  established. 

88  The  basis  to  be  employed  in  appraising  articles  of  this  character  is 
what  they  would  bring  at  a  bona  fide  sale  to  individual  purchasers, 

to  dealers,  or  upon  a  well-advertised  auction  sale.  If  there  has  been  an 
actual  bona  fide  sale,  the  amount  received  may  be  returned  as  the  value  of 
the  property.  Where  property  is  valued  by  legatees  for  purposes  of  dis- 
tribution, such  value  will  not  necessarily  be  accepted.  The  original  cost  of 
the  articles  is  not  necessarily  a  proper  basis,  on  account  of  depreciation  or 
appreciation  in  value. 

89  Household  effects  and  like  personalty  used  by  husband  and  wife 
in  the  marriage  relation  are  presumed  to  be  the  property  of  the 

husband,  and,  in  the  absence  of  sufficient  evidence  to  rebut  this  presumption 
must  be  returned  as  a  portion  of  his  gross  estate. — In  reviewing  returns 
on  Form  706  in  this  office,  it  is  found  that  oftentimes  there  are  reported 
no  household  goods  or  other  miscellaneous  personalty  of  that  character. 
This  fact  is  brought  to  the  attention  of  the  examining  officer,  and  in  most 
cases  results  in  the  discovery  of  the  existence  of  such  property  belonging  to 
the  estate  of  the  decedent.  In  other  cases  the  examining  officers  have  been 
reporting  the  substance  of  the  following:  "Widow  of  deceased  claims  the 
household  effects,  etc.,  as  her  own  separate  property." 

90  Statements  to  the  above  effect,  unexplained,  are  not  sufficient  to 
relieve  the  estate  from  returning  and  paying  tax  upon  the  household 

furniture  used  by  the  decedent  in  the  household  occupied  by  himself  and  wife. 
Upon  the  decease  of  a  husband  the  household  goods  and  other  chattels 
used  by  husband  and  wife  in  the  marriage  relation  are  presumed  to  be  the 
property  of  the  husband.  If  the  wife  claims  the  same  as  her  separate  property, 
she  has  the  burden  of  establishing  that  claim. 

91  There  are  certain  situations  where  the  widow's  claim  will  not  be 
questioned  and  will  consequently  relieve  the  estate  from  returning 

the  household  goods  as  part  of  the  gross  estate  of  the  deceased  husband. 
All  that  is  required  in  such  cases  is  sufficient  evidence  of  the  existence  of  the 
facts  in  question.  Such  situations  are  as  follows:  (l)  Where  the  articles 
of  household  furniture  were  owned  by  the  wife  prior  to  marriage;  (2)  where 
t'ie  wife  has  purchased  the  household  effects  during-  coverture  with  her 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  46  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


separate  funds;  {3)  where  the  household  effects  represent  gifts  from  a  third 
person  to  the  wife  individually  during  coverture. 

92  It  is  not  at  all  uncommon,  however,  that  the  household  effects  have 
been  purchased  by  the  husband  since  the  marriage  and  at  his  death 

the  wife  claims  that  the  decedent  made  her  a  gift  of  the  various  articles 
during  the  marriage,  although  the  articles  have  never  left  the  possession  of 
the  husband — i.  e.,  they  remain  in  the  household  occupied  by  the  husband 
and  wife  and  are  used  by  them  jointly.  Such  property  is  presumed  to  be 
owned  by  the  husband,  and  if  the  wife,  or  any  other  person  for  that  matter, 
claims  the  household  effects  as  a  gift  from  the  deceased  the  burden  of  proving 
the  gift  rests  upon  the  person  asserting  it.  A  gift  from  husband  to  wife 
must  be  clearly  established.  There  must  be  clear  and  incontrovertible  evi- 
dence of  the  delivery  of  the  property  by  the  husband  with  the  intention 
of  divesting  himself  of  all  dominion  and  control  and  of  vesting  title  in  the 
wife.  The  requirements  necessary  to  a  valid  executed  gift  must  be  present. 
If  the  gift  be  in  contemplation  of  death,  of  course  another  question  would  arise. 

93  The  following  proposition  has  been  announced  by  the  courts  and 
is  believed  by  this  office  to  be  sound:  To  constitute  a  valid  gift 

there  must  be  an  absolute  transfer  of  the  property  from  donor  to  donee, 
taking  effect  immediately,  and  fully  executed  by  a  delivery  of  the  property 
by  the  donor,  and  the  acceptance  thereof  by  the  donee.  It  is  essential  that 
the  transaction  should  be  fully  executed  by  the  delivery  of  the  property 
to  the  donee,  or  to  some  person  for  him.  In  several  States  statutes  have  been 
enacted  providing  that  no  gift,  except  by  deed  or  will,  shall  be  valid  unless 
actual  possession  shall  come  to  and  remain  with  the  donee  or  his  agent, 
and  if  the  donor  and  donee  reside  together  at  the  time  of  the  gift,  possession 
by  the  donee  at  their  place  of  residence  is  not  a  sufficient  possession  within 
the  meaning  of  the  statute. 

94  The  foregoing  should  be  carefully  considered  when  examining  officers 
are  investigating  the  completeness  and  accuracy  of  estate  tax  returns. 

(T.  D.  2529,  Oct.  4,  1917.) 

95  Art.  20.    Valuation  of  annuities,  life,  and  remainder  interests. — 
Where  the  decedent  was  entitled  to  receive  an  annuity  of  a  definite 

amount  during  the  lifetime  of  another  person,  and  the  right  constitutes  an 
asset  of  his  estate,  the  present  worth  of  the  annuity  at  the  time  of  the 
decedents  death  must  be  computed  upon  the  basis  of  the  expectancy 
of  life  of  the  other  person.  The  table  marked  "A"  upon  page  19  105] 
should  be  used  for  this  computation.  The  amount  of  annual  income 
should  be  multiplied  by  the  figure  in  column  2  of  the  table  opposite  the 
number  of  years  in  column  1  nearest  to  the  actual  age  of  the  other  person. 

96  Example:  The  decedent  received  under  the  terms  of  his  father's 
will  an  annuity  of  $10,000  for  the  life  of  his  elder  brother.  The 

brother  at  the  decedent's  death  was  40  years  8  months  old.  By  reference 
to  the  table  the  figure  in  column  2  opposite  41  years,  the  number  nearest  to 
the  brother's  age,  is  found  to  be  14.86102.  The  present  worth  of  the 
annuity  is  therefore  $148,610.20. 

97  Where  the  decedent  was  entitled  to  receive  the  annuity  during  a 
specified  number  of  years,  the  table  marked  "B"  upon  page  20 

HI  106]  should  be  used. 

98  Example:  The  decedent  received  under  the  terms  of  his  father's 
will  an  annuity  of  $10,000  for  a  period  of  20  years,  15  of  which  had 

expired  at  the  decedent's  death     By  reference  to  the  table  it  is  found  that 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  47  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


the  figure  in  column  2  opposite  5  years,  the  unexpired  portion  of  the  20-year 
period,  is  4.45182.  The  present  worth  of  the  annuity  is,  therefore,  $44,- 
518.20  (4.45182  multiplied  by  10,000). 

99  Where  the  decedent  was  entitled  to  receive  the  entire  income  of 
certain  property  during  the  life  of  another  or  for  a  term  of  years, 

and  where  the  rate  of  income  is  fixed  by  the  instrument  creating  the  trust 
or  is  definitely  determinable  at  the  time  of  the  decedent's  death,  the  average 
annual  income  which  the  property  actually  yields  should  be  determined, 
and  its  present  worth  computed,  as  explained  above  in  the  case  of  annuities. 

1 00  Example:   The  decedent's  father  placed  $100,000  in  trust,  with 
directions  that  it  be  invested  in  state  and  municipal  bonds  and  the 

entire  income  paid  to  the  decedent  during  the  life  of  his  elder  brother,  who 
was  41  years  old  at  the  decedent's  death.  Before  the  decedent's  death  the 
money  was  invested  in  state  and  municipal  bonds,  and  actually  yielded  a 
net  return  of  $5,000  per  annum.  In  this  case  the  rate  of  income  is  definitely 
determinable.  By  reference  to  the  table  it  is  found  that  the  present  worth 
of  an  income  of  $5,000,  dependent  upon  the  life  of  a  person  41  years  of  age, 
is  $74,305.10  (14.86102  multiplied  by  5,000). 

101  Where  the  rate  of  annual  income  is  not  determinable,  or  where  the 
decedent  was  entitled  merely  to  the  personal  use  of  nonincome-bear- 

ing  property,  a  hypothetical  annuity  at  a  rate  of  4  per  cent  of  the  value  of 
the  property  should  be  made  the  basis  of  the  calculation. 

102  Example:  The  decedent  died  before  a  fund  of  $100,000,  of  which 
he  was  entitled  to  receive  the  income  during  the  life  of  a  person  41 

years  old,  had  been  invested  by  the  trustees.  The  value  of  a  hypothetical 
annuity  of  $4,000,  dependent  upon  the  life  of  such  a  person,  is  indicated  by 
the  table  to  be  $59,444.08. 

103  Where  the  decedent  possessed  a  remainder  interest  in  property  sub- 
ject to  the  life  estate  of  another,  and  such  interest  constituted  an 

asset  of  his  estate,  the  present  worth  of  the  remainder  interest  at  the  time  of 
death  should  be  obtained  by  multiplying  the  value  of  the  property  at  the 
time  of  death  by  the  figure  in  column  3  of  Table  A  [1f  105]  opposite  the  num- 
ber of  years  nearest  to  the  age  of  the  life  tenant.  Where  the  remainder 
interest  is  subject  to  an  estate  for  a  term  of  years  Table  B  106]  should  be 
used. 

104  Example:   The  decedent  was  entitled  to  receive  property  worth 
$50,000  upon  the  death  of  his  elder  brother,  to  whom  the  income  for 

life  had  been  bequeathed.  The  brother  at  the  time  of  the  decedent's  death 
was  31  years  old.  By  reference  to  the  table  it  is  found  that  the  figure  in 
column  3  opposite  31  years  is  0.31262.  The  present  worth  of  the  remainder 
interest  is,  therefore,  $15,631. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         48  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


105  TABLE  "A." 

Table,  single  life,  4  per  cent,  showing  the  present  worth  of  an  annuity,  or 
life  interest,  and  of  a  reversionary  interest. 


■ 

1  d->*9  io  fcmo 

! 

1 

2 

o 

•» 

2 

3 

Annuity,  or 

Reversion,  or 

Annuity,  or  Reversion,  or 

present  value 
oi  j>i  aue  ai 

present  value 
of  $1  due  at 

present  value  present  value 
of  SI  due  at  j  of  $1  due  at 

Age 

the  end  of 

the  end  of  the 

Age 

the  end  of 

the  end  of  the 

each  year 

year  of  death 

each  year 

jyear  of  death 

during  the 

of  a  person 

during  the 

I  of  a  person 

life  of  a 

of  specified 

life  of  a 

i  of  specified 

person  of 

age 

person  of 

age 

specified  age 

specified  age 

Reversion 

Annuity 

Reversion 

Annuity 

n 
u 

VIA  79Q9Q 
#14 .  i  &o&\) 

$u.oyou< 

oi 

$12.17919 

$0.49311 

i 
i 

1  7  QO.771 

9qcqa 

5.9 
OA 

11.88408 

.50446 

<) 

1  Q  AO.K7Q 

lo.oyo/o 

9A9/17 
.44Z4  / 

CO 

Oo 

11.58531 

.51595 

o 
o 

in  i  con.  1 

iy  .ioyui 

.ZZ400 

04 

11.28325 

.52757 

A 
4 

1  O  A  1 9QA 

iy  .4izzo 

91  AQ1 
•  Z14yi 

OO 

10.97789 

.53931 

e 
O 

iy .oooui 

.zuyou 

KR 
OO 

10.60982 

.55116 

ft 
D 

1 O  A1  7Q1 

iy  .01 1  oi 

K7 
OI 

10.35931 

.56310 

7 

Q 

iy  .ozoua 

in  A1HQ7 

iy  .oiuy / 

9H.A7Q 
.ZUOfO 

9f\797 
.ZU/Z< 

Oo 

oy 

10.04630 
9.73131 

.57514 
.58726 

o 

Q 

1  O  K.1A  1  Q 

iy  .ooiio 

9.41474 

.59943 

in 
in 

iy  .loooy 

<>1  QQO 

A1 

ol 

9.09765 

.61163 

1 1 
i  i 

in  ORQAt 

iy  .ooy4o 

.ZiOOO 

A9 

BBS 

8.78052 

.62382 

1  9 

iy  .zoio4 

CO 

OO 

8.46412 

.63600 

1  9. 
14 

in  1 onfi K 

iy  .iyuoo 

.ZZo44 

RA 

o4 

8.14888 

.64812 

1  A. 
14 

in  nncnft 

iy  .uyoyu 

0070.Q 

CE 

OO 

7.83552 

.66017 

1  c 
10 

1  Q  OQ7A/1 

io.yy/04 

oonoft 
.ZoUoo 

Aft 
OO 

7.52476 

.67212 

1  A 
10 

1  Q  QQCRQ 

lo.oyooy 

OQ/I7Q  1 

.Zo4/o 

o/ 

7.21699 

.68397 

17 
1  / 

i  c  7oni  n. 

OQQQ/I 

.Zooo4 

AC 
OS 

6.91298 

.69565 

1  8 
io 

i  c  AQn"7n 
le .ooU/U 

.24305 

AO 

oy 

6.61301 

.70719 

1Q 

iy 

1  O  :R7i;i 
lO.OO/OI 

.24740 

6.31716 

.71857 

lo.4oUoo 

OK101 

.zoiy  i 

71 

71 

6.02612 

.72976 

21 

18.32932 

.25656 

72 

5.74003 

.74077 

99 

1  Q  Ofl/t  1  A 

lo.ZU41o 

.zoloo 

71 

7o 

5.45928 

.75157 

9Q 

1  Q  CilA  71 

lo.U<4/l 

.ZOOOO 

*TA 

5.18402 

.76215 

9J. 

1  7  ("Mn.07 

.27150 

7K 
/O 

4.91463 

.77251 

1  7  C007/1 
1  I  .oUZ  <  4 

07AQ0 

7A 
/O 

4.65125 

.78264 

9fi 

1  7  AK.GQ/1 

OOOQ1 

.Zo-iol 

77 

4  39383 

79254 

97 

17  CI  OO/I 
I  /  .01.SZ4 

00700 

7Q 

4!  14286 

!80220 

no 

17  oen^O 

lv.ooybo 

onoQc 

.zyooo  | 

79 

3.89858 

.81159 

on 

1  7  OAOOC 

17  ./UZZD 

.29991 

80 

3.66071 

.82074 

30 

17.03961 

.30617 

81 

3.42900 

.82965 

31 

16.87176 

.31262 

82 

3.20258 

.83836 

32 

16.69846 

.31929 

83 

2.98024 

.84691 

33 

16.51964 

.32617 

84 

2.76106 

.85534 

34 

16.33503 

.33327 

85 

2.54366 

.86371 

35 

16.14437 

.34060 

86 

2.32795 

.87200 

36 

15.94755 

.34817 

87 

2.11384 

.88024 

37 

15.74427 

.35599 

88 

1.90115 

.88842 

38 

15.53421 

.36407 

89 

1.69107 

.89650 

39 

15.31722 

.37241 

90 

1.48540 

.90441 

40 

15.09295 

.38104 

91 

1.28432 

.91214 

41 

14.86102 

.38996 

92 

.1.09024 

.91961 

42 

14.62122 

.39918  1 

93 

.90647 

.92667 

43 

14.37356 

.40871 

94 

.73687 

.93320 

44 

14.11860 

.41852 

95 

.58435 

.93906 

45 

13.85713 

.42857 

96 

.46182 

.94378 

46 

13.58958 

.43886 

97 

.36698 

.94742 

47 

13.31698 

.44935 

98 

.24038 

.95229 

48 

13.03942 

.46002  | 

99 

.00000 

.96154 

49 

12.75716 

.47088 

50 

12.47032 

.48191  - 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         49  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


106 


TABLE  "B." 


ao  r 


Present  worth  of 
$1,  payable  at  the 
end  of  a  certain 
number  of  years 


i      r  ,  3 

!  Present  worth  of 

I  an  annuity  of       Present  worth  of 
Number  of     !  payable  at  the  [  SI,  payable  at  , 
years         |end  of  each  year,, the  end  of  a  cer- 
1    for  a  certain    I  tain  number  of 
nmuber  of  years  I  years 


Annuity 
$0.96154 
1 .88609 
2.77509 
3.62989 
4.45182 
5.24214 
6.00205 
6.73274 
7.43533 
8.11089 
8.76047 
9.38507 
9.98565 
10.56312 
11.11839 


Reversion 
$0.961538 
.924556 
.888996 
.854804 
.821927 
.790314 
.759918 
.730690 
.702587 
.675564 
.649581 
.624597 
.600574 
.577475 
.555265 


Number  of 
years 


I  Present  worth  of  j 

jan  annuity  of  $1, 
I  payable  at  the 
end  of  each  year,] 

for  a  certain 
! number  of  years 


Annuity 
$11.65229 
12.16667 
12.65929 
13.13394 
13.59032 
!  14.02916 
14.45111 
14.85684 
15.24696 
15.62208 
15.98277  I 
16.32958 
16.66306 
16.98371 
17.29203 


Reversiort 
$0.533908 
.513373 
.493628 
.474642 
.456387 
.438834 
.421955 
.405726 
.390121 
.375117 
.360689 
.346816 
.333477 
.320651 
.308319 


DOWER  AND  COURTESY 

107      Art.  21.    Dower  and  courtesy. — This  provision  includes  dower  and 

9  courtesy  and  all  interests  created  by  statute  in  lieu  thereof,  although 
the  estate  or  interest  so  created  is  different  in  character.    The  effect  of 

the  provision  is  to  require  the  inclusion  of  the  full  value  of  the  property,  with- 
out deduction  of  the  value  of  the  interest  of  the  surviving  husband  or  wife. 
This  rule  does  not  apply  to  the  estate  of  any  decedent  dying  after  September 
8,  1916,  and  prior  to  6:55  P.  M.  February  24,  1919  (the  effective  date  of 
Title  IV  of  the  Revenue  Act  of  1918),  unless  the  property  has  its  situs  in  a 
jurisdiction  wherein  dower,  courtesy,  or  the  statutory  interest  in  lieu  thereof, 
is  subject  to  the  payment  of  charges  against  the  estate,  the  expenses  of  its 
administration  and  is  subject  to  distribution  as  part  of  the  estate,  or  unless 
there  has  been  an  election  to  take  property  devised  or  bequeathed  in  lieu 
of  dower,  courtesy,  or  such  statutory  interest,  and  the  property  so  taken 
has  its  situs  in  a  jurisdiction  by  the  laws  of  which  it  is  subject  to  the  pay- 
ment of  such  charges  and  expenses,  and  to  distribution  as  a  part  of  the  estate. 
(As  amended  by  T.  D.  3165,  May  18,  1921.) 

TRANSFERS  BY  DECEDENT  IN  HIS  LIFETIME. 

1  08      Art.  22.    Nature  and  time  of  transfer. — A  transfer  made  by  the  de- 

10  cedent  in  his  lifetime,  if  made  by  way  of  gift,  is  taxable  when  made 
in  contemplation  of  death,  or  intended  to  take  effect  in  possession  or 

enjoyment  at  or  after  the  death  of  the  transferor.  No  distinction  is  made 
between  ordinary  transfers  and  transfers  involving  the  creation  of  a  trust. 
Where  a  transfer,  however,  constitutes  a  bona  fide  sale  for  a  fair  consideration 
in  money  or  money's  worth,  it  is  not  taxable.  In  order  to  constitute  such  a 
bona  fide  sale,  there  must  be  a  valuable  consideration,  as  distinguished  from 
love  and  affection.  A  sale  implies  the  receipt  of  a  price,  in  money  or  thing 
of  value.  The  release  of  an  existing  claim,  by  way  of  accord  and  satisfaction, 
is  not  sufficient.  The  price  must  also  be  a  fair  equivalent  for  the  property 
transferred.  Where  the  price  is  not  a  fair  one,  the  sale  will  not  be  considered 
to  have  been  made  bona  fide.  Such  transfers  are  taxable  whether  made 
before  or  after  September  8,  1916. 

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TRANSFERS  IN  CONTEMPLATION  OF  DEATH. 
109  Art.  23.  Nature  of  transfer. — The  words  "in  contemplation  of 
10  death"  do  not  refer  to  the  general  expectation  of  death  which  all 
persons  entertain.  A  transfer,  however,  is  made  in  contemplation 
of  death  wherever  the  person  making  it  is  influenced  to  do  so  by  such  an 
expectation  of  death,  arising  from  bodily  or  mental  conditions,  as  prompts 
persons  to  dispose  of  their  property  to  those  whom  they  deem  proper  objects 
of  their  bounty.  The  cause  which  induces  such  bodily  or  mental  conditions 
is  immaterial;  and  it  is  not  necessary  that  the  decedent  be  in  the  immediate 
expectation  of  death.  Such  a  transfer  is  taxable,  although  the  decedent 
parts  absolutely  and  immediately  with  his  title  to  and  possession  of  the 
property.  Transfers  made  within  two  years  of  a  decedent's  death  are  pre- 
sumed to  be  taxable  if  they  are  of  a  material  part  of  his  property  and  are  in 
the  nature  of  a  final  disposition  thereof.  Where  a  transfer  is  of  this  character, 
the  executor  must  disclose  the  transfer  in  the  return;  but  he  may  submit 
therewith  evidence  that  it  was  not  made  in  contemplation  of  death.  The 
executor  must  also  return  transfers  by  the  decedent  of  a  material  part  of  his 
property  to  relatives,  though  made  more  than  two  years  before  his  death; 
but  he  need  not  list  them  as  taxable  if  he  contends  otherwise.  All  facts 
relating  to  the  transfer  should  be  stated,  including  the  motive  therefor,  the 
decedent's  state  of  health,  and  his  anticipation  of  death.  The  presumption 
of  taxability  may  be  rebutted  by  proof  that  the  transfer  was  not  induced  by 
bodily  or  mental  conditions  leading  the  grantor  to  make  a  disposition  of 
property  testamentary  in  its  nature.  The  fact  that  a  gift  was  made  as  an 
advancement,  to  be  taken  into  account  upon  the  final  distribution  of  the 
decedent's  estate,  is  not  enough,  standing  alone,  to  establish  taxability; 
but  it  is  a  circumstance  to  be  considered  in  determining  whether  the  transfer 
was  made  in  contemplation  of  death. 


TRANSFERS  INTENDED  TO  TAKE  EFFECT  AT  OR  AFTER  DEATH. 

1 1 0  Art.  24.  Reservation  of  income. — A  transfer  is  taxable  where  the 
10  grantor  reserves  to  himself  during  life  the  income  of  the  property 
transferred.  In  such  a  case  the  transfer  of  the  principal  takes  effect 
in  possession  and  enjoyment  after  the  death  of  the  grantor,  and  the  value  of 
the  entire  property  should  be  included  in  the  gross  estate.  Where  the  grantor 
reserves  a  proportionate  part  of  the  income,  only  a  corresponding  proportion 
of  the  property  should  be  included  in  the  gross  estate,  unless  the  transfer 
was  made  in  contemplation  of  death.  If,  for  example,  he  reserves  one-half 
of  the  income,  the  value  of  one-half  of  the  property  transferred  should  be 
included  in  the  gross  estate.  If  he  reserves  an  annuity,  so  much  of  the 
property  as  is  necessary  to  produce  the  annuity  should  be  included  in  the 
gross  estate.  Where  the  property  does  not  produce  income,  its  value  as  of 
the  date  of  the  decedent's  death  should  be  ascertained,  and  so  much  of  this 
sum  as  is  necessary  to  produce  the  annuity  should  be  included  in  the  gross 
estate.  A  transfer  is  taxable  in  accordance  with  these  principles  whether  the 
grantor  makes  a  reservation  of  the  annuity  out  of  the  property  conveyed,  or 
exacts  from  the  grantee  an  agreement  to  pay  the  annuity.  A  gift  of  the 
principal  of  a  trust  fund  which  takes  effect  at  or  after  the  decedent's  death 
is  taxable,  although  the  income  during  the  decedent's  life  is  payable  to  some 
one  other  than  himself.  Example:  The  decedent  transfers  property  to  his 
son,  the  latter  agreeing  to  pay  the  income  to  his  mother  during  the  decedent's 
life.   The  transfer  to  the  son  is  taxable. 

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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


1 1 1  Art.  25.    Power  of  revocation  or  control. — Property  held  in  trust 
under  any  instrument  in  which  the  grantor  has  reserved  a  power  of 

revocation,  or  any  power  which  has  that  effect,  constitutes  a  part  of  the 
gross  estate  of  such  grantor  for  the  purposes  of  this  tax.  For  example, 
where  a  father  places  property  in  trust  for  the  present  benefit  of  his  son, 
but  reserves  power  to  revoke  the  trust  at  any  time  during  his  life,  the  value 
of  the  entire  property  transferred  should  be  included  in  the  gross  estate. 

1 1 2  Art.  26.    Valuation  of  property  transferred. — The  property  to  be 
valued  is  the  interest  owned  and  transferred  by  the  decedent;  but 

the  value  of  such  property  must  be  ascertained  as  of  the  date  of  the  deced- 
ent's death.  Where  the  transferee  makes  additions  to  the  property,  or 
betterments,  the  value  of  the  additions  or  betterments  at  the  time  of  death 
are  not  to  be  included.  For  example,  a  father  makes  a  transfer  to  a  son,  in 
contemplation  of  death,  of  unimproved  real  estate  valued  at  $20,000. 
The  son  erects  buildings  on  the  land  at  a  cost  of  $10,000.  The  amount 
to  be  included  in  the  gross  estate  of  the  father  is  the  value  of  the  entire 
property  at  the  time  of  his  death  less  the  value  of  the  buildings  on  that  date. 

PROPERTY  HELD  JOINTLY. 

1 1 3  Art.  27.    Property  held  jointly  or  as  tenants  in  the  entirety.  —The 
11       statute  provides  for  the  taxation  of  interests  held  jointly,  or  as 

tenants  in  the  entirety,  by  the  decedent  and  any  other  person  or 
persons.  This  class  of  property  includes  all  interests,  whether  in 
real  or  personal  property,  in  which  the  survivor  takes  the  entire  property 
by  right  of  survivorship,  and  it  consequently  does  not  form  part  of  the 
decedent's  estate  for  purposes  of  administration.  It  does  not  include 
interests  held  as  tenants  in  common,  where  the  interest  of  each  tenant 
passes  to  his  estate,  free  from  any  right  of  survivorship. 

114  The  following  are  examples  of  this  class  of  property:  Real  estate 
held  jointly;  real  estate  held  by  husband  and  wife  (known  as  an 

estate  in  the  entirety);  money  deposited  in  a  bank  or  trust  company  in 
the  joint  names  of  the  decedent  and  another  and  payable  to  either  or  the 
survivor;  joint  trading  accounts  with  brokers;  stocks  and  bonds  held  in  the 
joint  names  of  several  owners.    [See  1(356.] 

1 1 5  Art.  28.    Taxable  portion. — The  value  of  such  property  to  be  re- 
turned for  tax  is  the  value  of  the  entire  property,  unless  it  can  be 

shown  that  part  of  it  originally  belonged  to  the  other  joint  owner  and  never 
belonged  to  the  decedent.  In  order  to  exclude  any  part  of  such  property 
from  the  gross  estate  the  executor  must  show  an  original  contribution  of 
value  by  some  person  other  than  the  decedent.  If  such  a  contribution 
can  be  established,  the  proportion  thereof  to  the  entire  purchase  price 
represents  the  interest  in  the  property  which  should  be  excluded  from  the 
gross  estate.  Three  cases  may  arise:  (1)  The  decedent  may  have  paid  the 
entire  purchase  price,  in  which  case  the  entire  property  should  be  included; 

(2)  the  decedent  may  have  paid  only  a  portion  of  the  purchase  price,  in 
which  case  only  a  corresponding  portion  of  the  property  should  be  included; 

(3)  the  decedent  may  have  paid  no  part  of  the  purchase  price,  in  which 
case  no  part  of  the  property  should  be  included.    In  the  case  of  bank  de- 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


posits,  the  same  rule  applies;  that  is,  the  interest  of  the  decedent  in  the 
account  is  determined  by  the  amount  of  his  contribution.  For  example: 
An  account  of  $1,000  is  opened,  of  which  the  decedent  contributes  one-half. 
Interest  of  $40  has  accumulated  at  the  time  of  the  decedent's  death,  and 
nothing  has  been  withdrawn.  Under  these  facts  $520  should  be  included 
in  the  gross  estate. 

1 1 6  Art.  29.    Husband  and  wife.  —Property  owned  by  husband  and  wife 
as  tenants  in  the  entirety  is  governed  by  the  rule  given  above. 

The  whole  value  of  the  property  must  be  included,  in  the  absence  of  a 
showing  as  to  the  original  contributions.  An  exception  is  made,  however, 
where  property  is  conveyed  to  husband  and  wife  without  valuable  considera- 
tion, or  where  the  property  was  purchased  out  of  common  funds,  represent- 
ing the  savings  of  husband  and  wife,  or  was  the  fruit  of  joint  labor,  the 
proportion  of  the  several  contributions  having  been  lost  sight  of.  In  such 
cases  one-half  of  the  total  value  of  the  property  should  be  returned. 

PROPERTY  PASSING  UNDER  POWER  OF  APPOINTMENT. 

1 17  Art  30.    General  rules. — As  a  general  rule,  property  passing  under 
12        a  general  power  of  appointment  must  be  included  in  the  gross 

estate  of  the  person  exercising  the  power  (known  as  the  donee,  or 
appointor)  where  the  power  is  exercised  by  will,  or  by  deed  executed  in 
contemplation  of  death,  or  intended  to  take  effect  at  or  after  death.  This 
general  rule  applies  wherever  the  decedent  died  after  September  8,  1916, 
although  the  power  was  created  prior  to  that  date.  In  certain  cases,  how- 
ever, the  transfer  is  taxable  under  the  Revenue  Act  of  1918  when  it  would 
not  be  taxable  under  the  Revenue  Act  of  1916  (See  Art.  31). 

118  Only  property  passing  under  a  general  power  should  be  included. 
A  general  power  is  one  to  appoint  to  any  person  or  persons  in  the 

discretion  of  the  donee.  Where  the  donee  is  required  to  appoint  to  a 
specified  person  or  class  of  persons,  the  property  should  not  be  included 
in  his  gross  estate.  Property  appointed  under  a  general  power  should  be 
included  in  the  estate  of  the  appointor,  although  the  persons  to  whom  the 
appointment  was  made  would  have  taken  the  property  had  the  power  not 
been  exercised.  A  copy  of  the  instrument  granting  the  power  should  be 
filed  with  Form  706  in  all  cases  in  order  that  the  Bureau  may  determine 
whether  the  power  is  general  or  special. 

1 19  Example:  The  income  of  property  is  left  to  a  person  for  life,  with 
the  right  to  name  in  his  will  the  person  who  shall  receive  it  upon  his 

death.  He  exercises  this  power  in  his  will.  Upon  his  death,  if  occurring 
after  September  8,  1916,  the  property  so  appointed  should  be  included  in 
his  gross  estate.    [See  1f396.] 

120  Art.  31.    Special  rules— Powers  exercised  before  and  after  Feb- 
ruary 25,  1919. — The  Revenue  Act  of  1918  taxes  all  transfers  effected 

by  the  exercise  of  a  general  power  of  appointment,  provided  the  exercise 
was  by  will,  or  by  deed  made  in  contemplation  of  death,  or  intended  to 
take  effect  at  or  after  death.  It  follows  that  all  transfers  of  this  character, 
where  the  decedent  died  after  February  24,  1919,  are  taxable,  and  the 
property  must  be  included  in  the  gross  estate. 

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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


121  Where  the  decedent  died  between  September  8,  1916,  and  February 
25,  1919,  the  taxability  of  the  transfer  depends  upon  whether  the 

property  was  subject  to  the  claims  of  the  creditors  of  the  appointor,  in 
preference  to  the  person  or  persons  in  whose  favor  the  power  was  exercised. 
The  general  rule  is,  that  the  property  is  so  subject;  and  it  should  conse- 
quently be  included  in  the  gross  estate  unless  this  rule  has  been  abrogated 
in  the  State  whose  laws  determine  the  nature  and  effect  of  the  transfer. 
All  such  transfers  should  be  disclosed  to  the  Bureau  in  order  that  it  may 
pass  upon  the  question  of  taxability.    [See  T|396.] 

INSURANCE. 

122  Art.  32.    Taxable  insurance. — The  statute  provides  for  the  inclu- 
13        sion  in  the  gross  estate  of  certain  forms  of  insurance  taken  out  by 

the  decedent  upon  his  own  life.  Two  kinds  of  insurance  are  tax- 
able: (a)  all  insurance  payable  to  the  estate;  (b)  insurance  payable  to  indi- 
vidual beneficiaries  to  the  extent  that  it  exceeds  $40,000.  The  term  "in- 
surance" refers  to  life  insurance  of  every  description,  including  death 
benefits  paid  by  fraternal  beneficial  societies,  operating  under  the  lodge 
system.  Insurance  is  deemed  to  be  taken  out  by  the  decedent  in  all  cases 
where  he  pays  the  premiums,  either  directly  or  indirectly,  whether  or  not 
he  makes  the  application.  On  the  other  hand,  the  insurance  should  not 
be  included  in  the  gross  estate,  even  though  the  application  is  made  by  the 
decedent,  where  the  premiums  are  actually  paid  by  some  other  person  or 
corporation,  and  not  out  of  funds  belonging  to,  or  advanced  by,  the  de- 
cedent. Where  the  decedent  takes  out  insurance  in  favor  of  another  person 
or  corporation,  as  collateral  security  for  a  loan  or  other  accommodation, 
and  the  decedent,  either  directly  or  indirectly,  pays  the  premiums  thereon, 
the  insurance  must  be  considered  in  determining  whether  there  is  an  excess 
over  $40,000.  Where  the  decedent  assigns  a  policy,  and  retains  no  interest 
therein,  and  thereafter  pays  no  part  of  the  premiums,  the  insurance  will 
not  be  considered  in  determining  whether  there  is  such  a  taxable  excess. 

123  Art.  33.   Insurance  in  favor  of  the  estate. — The  provision  requiring 
the  inclusion  in  the  gross  estate  of  all  insurance  receivable  by  the 

executor,  without  any  deduction,  applies  to  policies  made  payable  to  the 
decedent's  estate  or  his  executor  or  administrator,  and  all  insurance,  re- 
gardless of  the  manner  of  execution,  which  is  in  fact  receivable  by  the 
estate,  or  which  must  be  used  to  pay  charges  against  the  estate  or  the 
expenses  of  administration.  This  provision  includes  insurance  taken  out 
to  provide  funds  to  meet  the  estate  tax,  state  inheritance  taxes,  or  any 
other  legal  charge  upon  the  estate,  The  manner  in  which  the  policy  is 
drawn  is  immaterial  so  long  as  there  is  an  obligation,  legally  binding  upon 
the  beneficiary,  to  use  the  proceeds  in  payment  of  the  charge. 

124  Art.  34.  Insurance  receivable  by  other  beneficiaries. — The  estate 
is  entitled  to  only  one  exemption  of  $40,000  upon  insurance  pay- 
able to  beneficiaries  other  than  the  executor.  For  example,  if  the  decedent 
left  life  insurance  payable  to  three  persons  in  amounts  of  $10,000,  $40,000, 
and  $50,000  (total  $100,000),  the  amount  of  $60,000  should  be  returned 
for  taxation,  which  is  the  excess  of  the  sum  of  the  three  policies  over  the 
exempted  amount.    The  word  "beneficiary,"  as  used  in  reference  to  the 


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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


$40,000  exemption,  means  a  person  entitled  to  the  actual  enjoyment  of 
the  insurance  money. 

125  Art.  35.    Effective  date  of  insurance  provisions. — Insurance  re- 
ceivable by  the  executor  must  be  included  in  the  gross  estate  of  al! 

decedents  who  died  after  September  8,  1916.  Insurance  payable  to  benefi- 
ciaries other  than  the  executor,  however,  need  not  be  included  in  the  gross 
estate  of  decedents  who  died  before  February  25,  1919,  the  effective  date 
of  the  Revenue  Act  of  1918,  unless  the  insurance  was  originally  payable 
to  the  estate,  and  was  transferred  by  the  decedent  to  specific  beneficiaries 
in  contemplation  of  death. 

126  Art.  36.    Valuation  of  insurance. — The  amount  to  be  returned  in 
the  case  of  any  policy  is  the  amount  actually  receivable  by  the 

executor  or  beneficiary.  In  cases  where  the  proceeds  of  a  policy  are  made 
payable  to  the  beneficiary  in  the  form  of  an  annuity  for  life  or  for  a  term  of 
years,  the  present  worth  of  the  annuity  at  the  time  of  death  should  be  in- 
cluded in  the  gross  estate.  For  the  method  of  computing  the  value  of 
such  an  annuity,  see  Article  20.  Where  the  insurance  contract  gives  an 
option  to  receive  a  fixed  sum  of  money  in  lieu  of  an  annuity,  this  sum.  if 
accepted,  represents  the  value  of  the  insurance  for  the  purpose  of  the  tax. 
If  such  sum  is  not  accepted  the  value  of  the  annuity  is  to  be  included  in  the 
gross  estate.  Where  there  is  more  than  one  option,  and  none  of  them  is 
convertible,  the  value  of  the  insurance  should  be  determined  in  accordance 
with  the  option  actually  exercised. 

DEDUCTIONS. 

21  Inijornx  zinJ  ttirll  dYte   b3'f{'3ndDDt)d  iftuoriiij  9ffj  oi  lruo^  ?\  grtoi??rfnrno#> 

1 27  Art.  37.    Deductions  in  the  case  of  resident  estates. — In  the  case  of 
16        the  estates  of  residents,  the  deductions  are  made  from  the  value  of 

the  entire  gross  estate,  wherever  situated.  The  deductions  specified 
in  the  above  provisions  [1[16],  contained  in  the  Revenue  Act  of  1918,  are 
proper  in  all  cases  where  the  decedent  died  on  or  after  February  25,  1919. 
Where  the  decedent  died  prior  to  February  25,  1919,  the  case  is  governed  by 
the  provisions  of  the  Revenue  Act  of  1916,  which  permits  the  following 
deductions: 

(1)  Funeral  expenses. 

(2)  Administration  expenses. 

(3)  Claims  against  the  estate. 

(4)  Unpaid  mortgages. 

(5)  Losses  from  casualty  or  theft. 

(6)  Support  of  decedent's  dependents. 

(7)  Other  charges  against  the  estate. 

(8)  Specific  exemption  of  $50,000. 

(9)  In  the  case  of  decedents  dying  after  December  31,  1917,  public,  religious,  charitable,  sci- 
entific, literary,  and  educational  bequests. 

128  The  provision  in  the  Revenue  Act  of  1916  for  the  deduction  of 
"such  other  charges''  than  those  previously  specified  as  may  be 

allowed  by  the  laws  of  the  jurisdiction  is  omitted  in  the  Revenue  Act  of 
1918.  Consequently,  in  the  case  of  estates  of  all  persons  dying  after  Febru- 
ary 24,  1919,  the  executor,  in  order  to  obtain  a  deduction,  must  bring  the 
item  within  one  of  the  classes  specifically  described. 

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ESTATE  TAX  REGULATIONS.— 1913  LAW. 


129  Art.  38.    General  provisions  relating  to  deductions. — In  order  to 
be  deductible,  the  item  must  be  of  the  character  described  in  the 

statute;  and  it  must  also  be  one  the  payment  of  which  out  of  the  estate 
is  allowed  by  the  law  of  the  jurisdiction  administering  it.  Where  the  item 
is  not  one  of  those  described,  it  is  not  deductible  merely  because  payment 
is  allowed  by  the  local  law.  On  the  other  hand,  no  item  is  deductible  unless 
its  payment  is  so  allowed.  It  must  appear  in  every  case  either  that  pay- 
ment of  the  item  has  been  made,  or  that  such  payment  is  clearly  contem- 
plated. Where  the  amount  which  may  be  expended  for  the  particular  pur- 
pose is  limited  by  the  local  lav/,  no  deduction  in  excess  of  such  limitation  is 
permissible.  Where  the  local  courts  have  approved  the  expenditure  it  will 
ordinarily  be  allowed  for  deduction.  (See  Art.  39.)  Where  the  disburse- 
ment has  not  been  made,  the  item  may  be  entered  for  deduction  where  the 
amount  is  certain,  and  it  appears  satisfactorily  that  it  will  be  paid.  No 
deduction  may  be  taken  upon  the  basis  of  a  vague  or  uncertain  estimate. 
Where  an  uncertain  or  contingent  liability,  not  allowed  as  a  deduction, 
becomes  fixed,  and  payment  is  made,  the  remedy  is  a  claim  for  a  refund 
of  the  excess  tax. 

130  Art.  39.    Effect  of  court  decree. — The  decision  of  a  local  court 
as  to  the  amount  of  a  claim  or  administration  expense  will  ordinarily 

be  accepted  where  the  court  passes  upon  the  fact  upon  which  deductibility 
depends.  Where  the  court  does  not  pass  upon  such  fact  its  decree  will, 
of  course,  not  be  followed.  For  example,  where  the  question  before  the 
court  is  whether  a  claim  should  be  allowed,  the  decree  allowing  it  will  ordi- 
narily be  accepted  as  establishing  that  the  claim  is  valid  and  the  amount 
of  it.  Where,  however,  a  legacy  is  left  to  an  executor  in  lieu  of  commissions, 
the  allowance  of  the  legacy  does  not  establish  that  the  executor's  claim  for 
commissions  is  equal  to  the  amount  bequeathed,  and  that  this  amount  is 
consequently  deductible.  (See  Art.  42.)  Nor  will  the  decree  necessarily 
be  accepted  even  where  it  purports  to  decide  the  fact  upon  which  deduct- 
ibility depends.  It  must  appear  that  the  court  actually  passed  upon  the 
merits  of  the  case.  This  will  be  presumed  in  all  cases  where  there  is  an 
active  and  genuine  contest.  Where  the  result  reached  appears  to  be  un- 
reasonable, this  is  some  evidence  that  there  was  not  such  a  contest,  but 
it  may  be  rebutted  by  proof  to  the  contrary.  Where  the  decree  was  ren- 
dered by  consent,  it  will  be  accepted,  provided  the  consent  was  a  bona  fide 
recognition  of  the  validity  of  the  claim — not  a  mere  cloak  for  a  gift — and 
was  accepted  by  the  court  as  satisfactory  evidence  upon  the  merits.  It 
will  be  presumed  that  the  consent  was  of  this  character,  and  was  so  accepted, 
where  it  is  made  by  all  parties  having  an  interest  adverse  to  the  claim,  when 
all  aspects  of  the  matter,  including  its  effect  upon  taxation,  are  considered. 
The  decree  will  not  be  accepted  where  it  appears  to  be  at  variance  with 
the  law  of  the  State;  as,  for  example,  if  an  allowance  is  made  to  an  executor 
in  excess  of  the  rate  prescribed  by  statute. 

131  Art.   40.    Funeral   expenses. — An   executor   may   deduct  such 
amounts  for  funeral  expenses  as  are  actually  expended  by  him, 

provided  expenditures  of  this  nature  are  a  liability  of  the  estate  under  the 
laws  of  the  local  jurisdiction.  A  reasonable  expenditure  by  the  executor 
for  a  tombstone,  monument  or  mausoleum,  or  for  a  burial  lot,  either  for 
the  decedent  or  his  family,  may  be  deducted  under  this  heading,  provided  such 

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ESTATE  TAX  REGULATIONS— 1913  LAW. 


an  expenditure  is  made  a  charge  upon  the  estate  by  the  local  law.  In- 
cluded in  funeral  expenses  is  the  transportation  of  the  person  bringing  the 
body  to  the  place  of  burial. 

132  Art.  41.    Administration  expenses. — The  amounts  deductible  from 
the  gross  estate  as  "administration  expenses,,  are  such  expenses  as 

are  actually  and  necessarily  incurred  in  the  administration  of  the  estate; 
that  is,  in  the  collection  of  assets,  payment  of  debts,  and  distribution 
among  the  persons  entitled.  The  expenses  contemplated  in  the  law  are 
such  only  as  attend  the  settlement  of  an  estate  by  the  legal  representative 
preliminary  to  the  transfer  of  the  property  to  individual  beneficiaries  or 
to  a  trustee,  whether  such  trustee  is  the  executor  or  some  other  person. 
Expenditures  not  essential  to  the  proper  settlement  of  the  estate,  but  in- 
curred for  the  individual  benefit  of  the  heirs,  legatees,  or  devisees,  may 
not  be  taken  as  deductions.  Administration  expenses  include  (1)  exe- 
cutor's commissions;  (2)  attorney's  fees;  (3)  miscellaneous  expenses.  Each 
of  these  classes  is  considered  separately.    (See  Arts.  42  to  44.) 

133  Art  42.    Executor's  commissions. — No  amount  may  be  deducted 
as  executor's  commissions  in  excess  of  that  actually  paid  or  to  be 

paid,  and  in  no  case  in  excess  of  the  amount  allowable  by  the  law  of  the 
jurisdiction  wherein  the  estate  is  being  administered.  If  at  the  time  of  filing 
the  return  the  commissions  of  the  executor  have  not  been  allowed  or  awarded 
by  the  court  or  tribunal  having  jurisdiction  in  the  premises,  the  commissions 
may  nevertheless  be  entered  on  the  return  and  claimed  as  a  deduction,  sub- 
ject to  future  allowance  or  disallowance  by  the  Commissioner,  provided: 

(1)  That  the  amount  entered  and  claimed  is  within  the  amount  allowable 
by  the  laws  of  the  jurisdiction  wherein  the  estate  is  being  administered; 

(2)  that  such  amount  is  in  accordance  with  the  usually  accepted  practice 
in  such  cases  within  said  jurisdiction;  and  (3)  that  it  may  reasonably  be 
expected  that  the  said  amount  will  be  paid  within  one  year  and  180  days 
after  the  decedent's  death.  Except  in  those  cases  in  which  the  commissions 
have  been  both  awarded  and  paid,  the  Commissioner  may  at  any  time 
require  the  executor  to  furnish  satisfactory  evidence  of  his  right  to  take  or 
claim  the  deduction.  Whenever  it  shall  appear  to  the  Commissioner  that 
the  commissions  claimed  but  not  awarded,  whether  paid  or  unpaid,  exceed 
the  amount  allowed  by  law  or  exceed  the  amount  usually  allowed  within  the 
commonly  accepted  practice  of  the  jurisdiction  wherein  the  estate  is  being 
administered,  or  where  in  any  case  the  Commissioner  finds  after  the  lapse 
of  1  year  and  180  days  after  the  decedent's  death  that  the  commissions 
have  not  been  paid,  the  deduction  will  be  disallowed,  subject  to  the  right 
of  the  executor  thereafter  in  a  proper  case  to  file  a  claim  for  abatement  or 
refund  as  he  may  be  advised,  when  the  commissions  shall  have  been  actually 
awarded  and  paid.  Where  the  executor  does  not  intend  to  make  any  charge 
upon  the  estate  for  his  services,  no  deduction  may  be  claimed. 

134  No  deduction  may  be  made  for  trustees'  commissions,  and  an  ex- 
ecutor who  acts  as  trustee  is  not  entitled  to  deduct  the  commission 

he  receives  for  his  services  in  the  latter  capacity.  The  executor's  duties  are 
complete  when  he  has  turned  over  the  estate  or  the  proceeds  to  the  persons 
entitled  thereto.  Such  persons  may  be  beneficiaries  entitled  to  receive 
the  property  in  their  own  right,  or  trustees  entitled  to  receive  it  in  the 
right  of  their  cestuis  que  trustent.  The  services  of  the  trustees  are  distinct  from, 
and  additional  to,  the  ordinary  duties  of  an  executor  in  the  settlement  of 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


estates;  and  commissions  for  such  trustees'  services  do  not  constitute  an 
expense  of  administration. 

1  35  Where  a  bequest  is  made  to  an  executor  in  lieu  of  commissions,  it 
138      may  be  deducted  as  an  administration  expense  only  to  an  amount 

137  thereof  not  in  excess  of  the  amount  allowable  as  commissions  by  the 
law  of  the  jurisdiction  wherein  the  estate  is  being  administered.  If 

the  legacy  is  in  excess  of  such  allowable  commissions,  the  excess  may  not  be 
deducted. 

138  Art.  43.   Attorney's  fee. — No  amount  may  be  deducted  in  any  case 

139  as  attorney's  fees  in  excess  of  that  actually  paid  or  to  be  paid.  If 
at  the  time  of  filing  the  return  the  attorney's  fees  have  not  been 

allowed  or  awarded  by  the  court  or  tribunal  having  jurisdiction  in  the 
premises,  they  may  nevertheless  be  entered  on  the  return  and  claimed  as  a 
deduction,  subject  to  future  allowance  or  disallowance  by  the  Commissioner, 
provided:  (1)  That  the  amount  so  entered  and  claimed  is  reasonable  in 
consideration  of  the  services  performed  and  the  value  of  the  estate;  and 
(2)  that  it  may  reasonably  be  expected  that  such  amount  will  be  paid  within 
1  year  and  180  days  after  the  decedent's  death.  Except  in  those  cases  in 
which  the  attorney's  fees  have  been  both  awarded  and  paid,  the  Commis- 
sioner may  at  any  time  require  the  executor  to  furnish  satisfactory  evidence 
of  his  right  to  take  or  claim  this  deduction.  Whenever  it  shall  appear  to 
the  Commissioner  that  the  fees  claimed  were  not  awarded,  and  whether 
paid  or  unpaid,  exceed  a  reasonable  amount  in  the  discretion  of  the  Com- 
missioner, or  where  in  any  case  the  Commissioner  finds  after  the  lapse  of  1 
year  and  180  days  after  the  decedent's  death  that  the  fees  have  not  been 
paid,  the  deduction  will  be  disallowed,  subject  to  the  right  of  the  executor 
thereafter,  in  a  proper  case  to  file  a  claim  for  abatement  or  refund  as  he  may 
be  advised,  when  the  fees  have  actually  been  awarded  and  paid.  The  cost 
of  litigation  instituted  by  the  beneficiaries  as  to  the  amount  of  their  respec- 
tive interests  may  not  be  deducted,  since  expenses  of  this  character  are 
properly  charges  against  the  beneficiaries  personally,  rather  than  against 
the  general  estate. 

140  Art.  44.  Miscellaneous  administration  expenses. — This  item  in- 
cludes expenses  incident  to  court  proceedings,  or  the  administra- 
tion of  the  estate,  such  as  court  costs,  surrogates'  fees,  accountants'  fees, 
appraisers'  fees,  clerk  hire,  etc.  Expenses  necessarily  incurred  in  dis- 
tributing the  estate  are  deductible.  This  includes  the  cost  of  storing  or 
maintaining  property  of  the  estate,  where  it  is  impossible  to  effect  imme- 
diate distribution  to  the  beneficiaries.  Expenses  for  preserving  and  caring 
for  the  property  may  be  deducted,  but  do  not  include  additions  or  improve- 
ments; nor  will  such  expenses  be  allowed  for  a  longer  period  than  the  exe- 
cutor is  required  to  retain  the  property.  A  brokerage  fee  for  selling  prop- 
erty of  the  estate  is  deductible  where  the  sale  is  necessary  in  order  to  pay 
the  decedent's  debts,  or  the  expenses  of  administration,  or  to  effect  dis- 
tribution. Other  expenses  attending  the  sale  are  deductible,  such  as  the 
fees  of  an  auctioneer,  where  it  is  reasonably  necessary  to  employ  one. 

141  Art.  45.    Claims  against  the  estate. — The  amounts  that  may  be 
deducted  under  this  heading  are  such  only  as  represent  personal 

obligations  of  the  decedent  existing  at  the  time  of  his  death,  whether  then 
matured  or  not.  Obligations  contracted  by  the  executor  are  not  deduct- 
ible. Only  such  claims  as  are  actually  enforcible  against  the  estate  may 
be  deducted. 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


142  Art.  46.    Taxes. — Taxes  upon  real  property  should  be  accrued  to 
the  date  of  death.    This  is  done  by  ascertaining  the  time  between 

the  first  day  of  the  taxable  period  wherein  the  death  occurs  and  the  date 
of  death,  and  computing  the  proportion  of  the  entire  tax  which  this  period 
bears  to  the  entire  taxable  period.  Such  proportion  of  the  tax  has  accrued 
upon  the  date  of  death,  and  is  deductible. 

143  Taxes  upon  personal  property  are  either  wholly  deductible,  or  are 
not  deductible  at  all,  depending  upon  whether  the  tax  did,  or  did 

not,  become  the  personal  obligation  of  the  taxpayer  in  his  lifetime.  If 
the  tax  became  his  personal  obligation  during  his  life,  the  whole  amount 
is  deductible  as  a  claim  against  his  estate.  If  it  did  not  become  such  per- 
sonal obligation  in  his  lifetime,  no  part  of  it  is  deductible.  The  question 
when  the  tax  became  the  personal  obligation  of  the  taxpayer  depends  upon 
the  law  of  the  jurisdiction  where  the  decedent  was  domiciled  at  the  time 
of  his  death.  Prima  facie,  the  date  when  the  tax  became  the  personal  obli- 
gation of  the  taxpayer  is  the  date  when  the  assessment  was  laid. 

144  In  the  case  of  federal  taxes  upon  income,  the  tax  upon  income 
received  or  accrued  during  the  decedent's  lifetime  constitutes  the 

personal  obligation  of  the  decedent,  and  is  deductible.  Taxes  upon  in- 
come received  after  the  decedent's  death  are  not  deductible.  No  estate, 
succession,  legacy,  or  inheritance  tax  is  deductible.    [See  H390.] 

145  Art.  47.    Unpaid  mortgages. — The  full  amount  of  unpaid  mort- 
gages on  property  included  in  the  gross  estate  should  be  deducted 

under  this  heading,  including  interest  which  had  accrued  at  the  time  of 
death,  whether  payable  at  that  time  or  not.  Interest  should  be  computed 
upon  the  basis  of  365  days  to  the  year.  The  full  value  of  the  real  estate, 
without  any  deduction  for  mortgages,  must  be  returned  as  part  of  the 
gross  estate.  As  real  property  situated  outside  of  the  United  States  is 
not  part  of  the  gross  estate,  the  amount  of  mortgages  upon  such  property 
should  be  deducted  only  where  the  decedent  was  personally  liable  for  the 
mortgage  debt. 

Sfi   D3m4JJ31  /BJSW,  3J&JjJ3  /lOVIG -<&ij~4   XHOll  iJ,3VI3D3l  ,Yj13QOTQ  (*flJ   j£fU  .  \!ry 

146  Art.  48.    Losses  from  casualty  or  theft. — There  may  be  deducted 
under  this  heading  losses  incurred  during  the  settlement  of  the 

estate  arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from 
theft,  when  such  losses  are  not  compensated  by  insurance  or  otherwise. 
If  the  loss  is  partly  compensated,  the  excess  of  the  loss  over  such  compensa- 
tion may  be  deducted.  Losses  not  of  the  nature  described  are  not  deduct- 
ible. Losses  sustained  by  reason  of  depreciation  in  the  value  of  the  assets 
of  the  estate  subsequent  to  the  decedent's  death  are  not  deductible.  The 
term  "casualty"  includes  only  losses  of  a  fortuitous  and  unusual  character, 
such  as  result  from  violence,  or  from  a  disaster  which  could  not  be  foreseen 
or  prevented  by  the  exercise  of  reasonable  care.  Losses  due  to  the  death 
of  animals  from  disease  are  deductible.  In  order  to  be  deductible  a  loss 
must  occur  during  the  settlement  of  the  estate.  Where  property  has  been 
delivered  to  the  beneficiary,  settlement  has  been  effected,  and  no  deduction 
may  be  had  for  loss  of  the  property. 

147  Art.  49.    Support  of  dependents. — The  support  during  the  settle- 
ment of  the  estate  of  dependents  of  the  decedent  should  be  de- 
ducted, but  pursuant  to  the  following  rules: 

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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


148  (1)  In  order  to  be  deductible,  the  allowance  must  be  authorized 
by  the  laws  of  the  jurisdiction  in  which  the  estate  is  being  admin- 
istered, and  not  in  excess  of  what  is  reasonably  required. 

149  (2)    The  allowance  for  which  deduction  may  be  made  is  limited  to 
support  during  the  settlement  of  the  estate.    Any  allowance  for  a 

more  extended  period  is  not  deductible. 

150  (3)    There  must  be  an  actual  disbursement  from  the  estate  to  the 
dependents,  but  after  payment  has  been  made  the  right  of  deduction 

is  not  affected  by  the  fact  that  the  dependents  do  not  expend  the  entire 
amount  for  their  support  during  the  settlement  of  the  estate, 


PROPERTY  PREVIOUSLY  TAXED. 

[See  l[434/or  retroactive  provision  in  the  1921  Act.} 

1 52  Art.  50.  Property  taxed  within  five  years. — There  may  be  deducted 
17      from  the  gross  estate  under  this  heading  an  amount  equal  to  the  value 

at  the  time  of  the  decedent's  death  of  any  property  which  can  be 
identified  as  having  been  received  by  him  as  a  share  in  the  estate  of  any 
person  who  died  within  five  years  prior  to  the  decedent's  death,  if  an  estate 
tax  under  the  Revenue  Act  of  1917  or  the  Revenue  Act  of  1918  was  collected 
from  such  estate.  There  may  also  be  deducted  an  amount  equal  to  the  value 
of  property  which  can  be  identified  as  having  been  acquired  by  the  decedent 
in  exchange  for  property  received  as  a  share  in  the  estate  of  such  a  prior 
decedent.  In  order  to  establish  the  right  to  this  deduction  it  must  be 
shown — 

(1)  That  the  two  deaths  occurred  within  five  years  of  each  other; 

(2)  That  the  first  decedent  died  after  October  3,  1917,  the  date  of  the  pas- 
sage of  the  Revenue  Act  of  1917,  and  that  the  second  decedent  died  after 
February  24,  1919,  the  date  of  the  passage  of  the  Revenue  Act  of  1918; 

(3)  That  an  estate  tax  has  actually  been  collected  from  the  estate  of  the 
prior  decedent  (the  mere  riling  of  a  return  for  such  an  estate  not  being  suffi- 
cient); and 

(4)  That  the  property  received  from  the  prior  estate  was  returned  as 
part  of  the  gross  estate  of  the  prior  decedent,  and  the  property  the  value 
of  which  is  sought  to  be  deducted,  or  property  taken  in  exchange  therefor, 
has  been  included  in  the  gross  estate  of  the  second  decedent. 

153  The  statute  limits  the  deduction  to  the  value  of  property  which 
can  be  identified  by  the  executor  as  having  been  received  or  acquired 

in  the  manner  described.  The  burden  rests  upon  the  executor  of  proving 
that  the  estate  is  entitled  to  this  deduction. 

154  Art.  51.    Property  originally  received. — If  the  property  originally 
received  from  the  prior  estate  is  included  in  the  decedent's  gross 

estate,  the  executor  must  describe  it  fully,  and  prove  its  identity  with  the 
property  received  from  the  prior  estate.  The  value  to  be  deducted  is  the 
value  at  the  time  of  the  second  decedent's  death. 

155  Art.  52.    Property  acquired  in  exchange. — The  deduction  for  sub- 
stituted property  is  limited  to  property  acquired  in  exchange  for  the 

identical  property  received  from  the  estate  of  the  prior  decedent.  Where 
there  is  a  subsequent  exchange,  the  right  to  deduction  is  lost.  Where, 

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1-2-22. 


Reg.  37,  Rev.  1921. 

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however,  property  is  sold,  and  the  proceeds  immediately  invested  in  other 
property,  the  property  purchased  is  deemed  to  be  taken  in  exchange,  and 
its  value  is  deductible. 

156  In  the  case  of  an  exchange  the  executor  must  describe  and  identify 
fully  both  the  property  originally  received  from  the  prior  estate  and 

the  property  acquired  in  exchange  therefor.  He  must  also  state  the  date 
and  nature  of  the  transaction  by  which  the  exchange  was  effected,  the  name 
and  address  of  the  transferee,  and  the  consideration,  if  any,  given  or  re- 
ceived by  the  decedent  in  addition  to  the  property  received  from  the  prior 
estate.  If  the  exchange  was  made  by  written  instrument  of  public  record, 
a  precise  reference  must  be  made  to  the  record  containing  the  instrument, 
and  if  by  instrument  not  of  record  a  copy  of  the  instrument  must  be  sup- 
plied. If  there  was  no  written  instrument,  an  affidavit  as  to  facts  of  the 
exchange  by  one  or  more  persons  having  personal  knowledge  of  the  matter 
must  be  furnished. 

157  If  at  the  time  of  exchange  the  decedent  gave  a  consideration  in 
addition  to  the  property  received  from  the  prior  estate,  and  acquired 

property  of  greater  value  than  the  property  so  received,  there  may  be  de- 
ducted the  proportion  of  the  value  of  the  property  received  in  exchange 
which  the  value  of  the  original  property  bears  thereto. 

CHARITABLE  AND  SIMILAR  BEQUESTS. 

[See  $435  for  retroactive  provision  in  the  1921  Act.] 

1 58  Art.  53.  Public,  charitable,  and  similar  bequests. — Bequests  to  relig- 
18     ious,  charitable,  scientific,  literary,  or  educational  corporations  are 

deductible  only  if  the  corporation  is  organized  or  operated  exclusively 
for  one  of  the  purposes  specified  (see  Art.  54).  Similarly,  in  the  case  of  a 
trust,  the  trust  must  be  exclusively  for  such  purposes.  It  does  not  prevent 
deduction,  however,  that  the  property  placed  in  trust  is  also  subject  to 
another  trust  for  a  private  purpose.  Thus,  where  money  or  property  is 
placed  in  trust  to  pay  the  income  to  an  individual  during  life,  and  then  to 
pay  or  deliver  the  same  to  a  charitable  corporation,  or  apply  the  principal 
to  a  charitable  purpose,  the  charitable  bequest  or  devise  forms  the  basis  for 
a  deduction.  The  amount  of  the  deduction,  in  such  case,  is  the  value,  at  the 
date  of  the  decedent's  death,  of  the  remainder  interest  in  the  money  or 
property  which  is  devised  or  bequeathed  to  charity.  For  the  manner  of 
determining  the  value  of  such  remainder  interest,  see  Article  20.  Gifts 
made  in  the  decedent's  lifetime  are  deductible  only  if  made  in  contemplation 
of  death,  or  intended  to  take  effect  at  or  after  death,  and  the  property  is 
consequently  included  in  the  gross  estate.  Gifts  made  in  satisfaction  of  a 
legacy  are  also  deductible.  The  deduction  is  not  limited  in  the  case  of  the 
estates  of  residents  to  bequests  to  domestic  corporations  or  to  trustees  for 
use  within  the  United  States. 

159  Art.  54.   Religious,  charitable,  scientific,  and  educational  corpora- 
tions.— In  order  to  be  exempt  the  corporation  or  association  must 

meet  three  tests:  (1)  it  must  be  organized  and  operated  for  one  or  more  of 
the  specified  purposes;  (2)  it  must  be  organized  and  operated  exclusively 
for  such  purposes;  and  (3)  no  part  of  its  income  must  inure  to  the  benefit  of 
private  stockholders  or  individuals. 

160  (1)  Charitable  corporations  include  an  association  for  the  relief  of 
the  families  of  clergymen,  even  though  the  latter  make  a  contribu- 

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tion  to  the  fund  established  for  this  purpose;  or  for  furnishing  the  services  of 
trained  nurses  to  persons  unable  to  pay  for  them;  or  for  aiding  the  general 
body  of  litigants  by  improving  the  efficient  administration  of  justice. 
Educational  corporations  include  an  association  whose  sole  purpose  is  the 
instruction  of  the  public,  even  if  it  merely  disseminates  propaganda  on  a 
single  question.  Thus  an  association  inculcating  prohibition  or  protectionist 
principles  is  exempt.  The  same  is  true  of  an  association  to  promote  ac- 
quaintance with  the  Spanish  language  and  literature,  although  it  has  in- 
cidental amusement  features;  of  an  association  to  increase  knowledge  of  the 
civilization  of  another  country;  and  of  a  Chautauqua  association  whose 
primary  purpose  is  to  give  lectures  on  subjects  useful  to  the  individual  and 
beneficial  to  the  community,  and  whose  amusement  features  are  incidental 
to  this  purpose.  Societies  designed  to  encourage  the  performance  of  first- 
class  orchestral  music  are  not  exempt,  the  purpose  being  merely  to  provide 
a  high  grade  of  entertainment.  Scientific  corporations  include  an  associa- 
tion for  the  scientific  study  of  law,  to  the  end  of  improvement  in  its  ad- 
ministration. 

161  (2)  Where  a  religious  corporation  owns  a  large  quantity  of  farm 
land  and  works  it,  and  also  manufactures  and  sells  clothing  and  other 

articles  for  profit,  it  is  not  operated  exclusively  for  religious  purposes  and 
is  not  exempt,  even  though  its  property  is  held  in  common  and  its  profits 
do  not  inure  to  the  benefit  of  individual  members  of  the  society. 

162  (3)  It  does  not  prevent  exemption  that  private  individuals,  for 
whose  benefit  a  charity  is  organized,  receive  the  income  of  the  cor- 
poration or  association.  The  statute  refers  to  individuals  having  a  personal 
and  private  interest  in  the  activities  of  the  corporation,  such  as  stockholders. 
If,  however,  a  corporation  issues  "voting  shares,"  which  entitle  the  holders 
upon  the  dissolution  of  the  corporation  to  receive  the  proceeds  of  its  prop- 
erty, including  accumulated  income,  the  right  to  exemption  does  not  exist, 
even  though  the  by-laws  provide  that  the  shareholders  shall  not  receive  any 
dividend  or  other  return  upon  their  shares. 

163  Art.  55.    Proof  of  exemption. — In  order  to  prove  his  right  to  this 
deduction  the  executor  must  submit: 

(1)  Certified  copy  of  the  will  of  the  decedent,  or  the  instrument  of  gift 
in  the  case  of  a  transfer  of  property  in  contemplation  of  death. 

(2)  A  receipt,  statement,  or  other  documentary  evidence  to  show  the 
beneficiary's  receipt  of,  or  intention  to  accept,  the  legacy,  devise,  or  gift. 

(3)  Affidavit  of  the  executor  stating  whether  any  action  has  been  in- 
stituted to  contest  the  will,  or  whether,  according  to  his  information  and 
belief,  any  such  action  is  contemplated. 

(4)  Such  other  document  or  evidence  as  may  be  specified  by  the  Bureau. 

164  Art.  56.  Conditional  bequests. — Where  the  bequest,  legacy,  devise, 
or  gift  is  dependent  upon  the  performance  of  some  act,  or  the  happen- 
ing of  some  event,  in  order  to  become  effective  it  is  necessary  that  the  per- 
formance of  the  act  or  the  occurrence  of  the  event  shall  have  taken  place 
before  the  deduction  can  be  allowed.  Where  the  legatee,  devisee,  donee,  or 
trustee  is  empowered  to  divert  the  property  or  fund,  in  whole  or  in  part,  to  a 
use  or  purpose  which  would  have  rendered  it,  to  the  extent  that  it  is  subject 
to  such  power,  not  deductible  had  it  been  directly  so  bequeathed,  devised,  or 
given  by  the  decedent,  deduction  will  be  limited  to  that  portion,  if  any,  of 
the  property  or  fund  which  is  exempt  from  an  exercise  of  such  power.  (As 
amended  by  T.  D.  3241,  Nov.  1,  1921.) 

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165  Art.  57.    Effective  date. — The  deduction  may  be  claimed  by  the 
estates  of  all  decedents  dying  after  December  31,  1917.  Where  the  tax 

has  been  paid  without  taking  the  deduction  a  claim  for  refund  may  be 
made,  as  provided  by  Article  110. 

SPECIFIC  EXEMPTION. 

1 66  Art.  58.  Specific  exemption. — There  may  be  deducted  from  the  gross 
19     estate  of  all  resident  decedents  a  specific  exemption  of  $50,000.  No 

part  of  this  exemption  is  allowed  in  the  case  of  nonresident  decedents. 
(See  Art.  59.)  If  more  than  one  return  is  made  for  purposes  of  the  tax,  the 
exemption  may  be  taken  only  once. 

DEDUCTIONS  IN  THE  CASE  OF  NONRESIDENT  ESTATES. 

1 67  Art.  59.   Manner  of  making  deduction. — The  gross  estate  of  a  resi- 
21     dent  and  of  a  nonresident  are  made  up  in  the  same  way.    In  ascer- 
taining the  net  estate,  however,  which  is  subject  to  tax,  there  is  a 

radical  difference  between  the  two  cases.  Whereas  the  net  estate  in  the 
case  of  a  resident  is  determined  by  making  the  specified  deductions  from 
the  entire  gross  estate,  the  net  estate  in  the  case  of  a  non-resident  is  de- 
termined by  making  the  deductions  from  the  value  of  so  much  of  the  gross 
estate  as  is  situated  in  the  United  States.  Thus,  in  substance,  the  statute 
attempts  to  tax  only  the  transfer  of  so  much  of  the  estate  of  a  nonresident 
as  is  situated  in  the  United  States.  On  the  other  hand,  nonresident  estates 
are  not  entitled  to  the  specific  exemption  of  $50,000. 

168  Art.  60.    Situs  of  property. — The  situs  of  property,  both  real  and 
personal,  for  the  purpose  of  the  tax  is  its  actual  situs.    Stock  in  a 

domestic  corporation,  and  insurance  payable  by  a  domestic  insurance  com- 
pany, constitute  property  situated  in  the  United  States,  although  owned  by, 
or  payable  to,  a  nonresident.  A  domestic  corporation  or  insurance  com- 
pany is  one  created  or  organized  in  the  Umted  States.  Bonds  actually 
situated  in  the  United  States,  moneys  on  deposit  with  domestic  banks  and 
moneys  due  on  open  accounts  by  domestic  debtors  constitute  property  sub- 
ject to  tax. 

169  Where  insurance  is  payable  to  the  estate,  all  insurance  in  domestic 
companies  should  be  included  in  the  gross  estate.  Where  insurance 

is  payable  to  individuals  other  than  the  executor,  there  should  be  included  in 
the  gross  estate  only  the  excess  of  domestic  insurance  over  the  sum  of  $40,- 
000.    Foreign  insurance  is  not  considered. 

170  Example:    The  testator  leaves  $30,000  of  insurance  in  domestic 
companies  and  $30,000  of  insurance  in  foreign  companies,  payable  in 

each  case  to  individual  beneficiaries.  As  the  domestic  insurance  does  not 
exceed  $40,000,  there  is  nothing  to  be  included  in  the  gross  estate. 

171  Example;    The  testator  leaves  $50,000  of  insurance  in  domestic 
companies  and  $50,000  of  insurance  in  foreign  companies,  payable  in 

each  case  to  individual  beneficiaries.  There  should  be  included  in  the  gross 
estate  $10,000  being  the  excess  of  the  domestic  insurance  over  $40,000. 

172  Any  property  of  which  the  decedent  has  made  a  transfer,  or  with 
respect  to  which  he  has  created  a  trust,  in  contemplation  of,  or  to 

take  effect  at  or  after,  death,  is  deemed  to  be  situated  in  the  United  States 

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if  so  situated  either  at  the  time  of  the  transfer  or  the  creation  of  the  trust, 
or  at  the  time  of  the  decedent's  death. 


173     The  value  of  United  States  Bonds  can  not  be  excluded  from  the 
Gross  or  Net  Estate  in  determining  Estate  Tax  due. — The  following 
opinion  of  the  Solicitor  of  Internal  Revenue,  rendered  February  13,  1917, 
is  published  for  the  information  of  all  concerned: 
Sir:  , 

Answering  the  question  presented  by  under  date  of  the 

10th  instant,  relative  to  the  liability  of  estates  to  taxation  under  the  recent 
Federal  Estate  Tax  Act,  it  is  manifest  from  the  following  decisions  of  the  U.  S. 
Supreme  Court  that  U.  S.  Government  bonds  must  be  added  to  the  value 
of  estates  for  the  purpose  of  taxation  under  said  Act. 

The  U.  S.  Supreme  Court  in  Plummer  v.  Coler,  (178  U.  S.  134),  consider- 
ing the  question  whether,  under  the  inheritance  tax  laws  of  a  state,  a  tax 
might  be  validly  imposed  upon  a  legacy  consisting  of  United  States  bonds 
issued  under  a  statute  declaring  them  exempt  from  state  taxation  in  any 
form,  said: 

"We  think  the  conclusion,  fairly  to  be  drawn  from  the  state  and 
Federal  cases,  is,  that  the  right  to  take  property  by  will  or  descent 
is  derived  from  and  regulated  by  municipal  law;  that,  in  assessing 
a  tax  upon  such  right  or  privilege,  the  State  may  lawfully  measure 
or  fix  the  amount  of  the  tax  by  referring  to  the  value  of  the  property 
passing;  and  that  the  incidental  fact  that  such  property  is  com- 
posed wholly  or  in  part  of  Federal  securities,  does  not  invalidate  the 
tax  or  the  law  under  which  is  is  imposed." 
And  dealing  directly  with  the  power  of  the  Federal  Government  under 
the  Inheritance  Tax  Act  of  1898,  to  impose  legacy  taxes  upon  the  trans- 
mission of  an  estate  consisting  of  "free-tax"  Government  bonds,  the  Court 
in  Murdock  v.  Ward,  (178  U.  S.  147),  referring  to  the  discussion  and  decision 
in  the  Plummer  case,  held'. 

"If  a  state  inheritance  law  can  validly  impose  a  tax  measured 
by  the  amount  or  value  of  the  legacy,  even  if  that  amount  includes 
United  States  bonds,  the  reasoning  that  justifies  such  a  conclusion 
must,  when  applied  to  the  case  of  a  Federal  inheritance  law  taxing 
the  very  same  legacy,  bring  us  to  the  same  conclusion.    We  must 
therefore,  hold  that  if,  as  held  in  Knowlton  v.  Moore,  the  tax 
imposed  under  the  Act  of  June  13,  1898,  is  not  invalid  as  a  direct 
unapportioned  tax,  nor  for  want  of  uniformity,  nor  as  an  infringe- 
ment upon  the  laws  of  the  states  regulating  wills  and  descents, 
then  the  tax  upon  legacies  or  bequests,  descendible  under  and 
regulated  by  state  laws,  is  valid  even  if  such  legacies  incidentally  are 
composed  of  Federal  bonds." 
And  further,  in  Sherman  v.  United  States  (178  U.  S.  151),  the  Court  said: 
The  proposition  that  bonds  of  the  United  States  and  the  income 
therefrom  are  not  lawfully  taxable  under  an  inheritance  tax  law 
of  the  United  States,  because  exempted  by  contract  from  such  tax 
has  just  been  decided  not  to  be  well  founded." 
This  is  clearly  conclusive  of  the  whole  question.    (T.  D.  2449,  Feb.  13, 
1917.)    [For  exception  see  ^[174  below.] 


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174  U.  S.  Bonds  owned  by  non-resident  alien  decedent. — Please  wire 
our  expense  whether  United  States  bonds  held  in  trust  for  non- 
resident alien  individual  but  situated  in  United  States  are  included  in  gross 
estate  for  purposes  of  estate  tax.  Has  ruling  published  Corporation  Trust 
Company  War  Tax  Service  nineteen  twenty  paragraph  one-seventy-three, 
denying  exemption,  been  modified?  (Answer.)  United  States  bonds  situated 
in  the  United  States  owned  by  non-resident  alien  decedent  form  no  part 
of  gross  estate  of  such  decedent  situated  in  the  United  States  for  purposes 
of  federal  estate  tax.  (Telegram  of  inquiry  from  Herrick,  Smith,  Donald 
&  Farley,  Boston,  Mass.,  and  the  answer  thereto  signed  by  Deputy  Com- 
missioner James  Hagerman,  Jr.,  and  dated  Aug.  6,  1920.) 

175  [Letter  supplementing  the  telegram  above.]     Referring  to  your 
letter  dated  May  26,  1920,  relative  to  the  taxability  of  bonds,  notes 

and  certificates  of  indebtedness  of  the  United  States  and  bonds  of  the  War 
Finance  Corporation  owned  by  or  held  in  trust  for  a  nonresident  alien  at 
the  time  of  his  death,  you  are  advised  that  bonds  of  the  United  States, 
beneficially  owned  by  a  nonresident  alien,  should  not  be  included  as  a  part  of 
the  gross  estate  in  the  United  States  for  the  purpose  of  the  estate  tax  (Revenue 
Act  of  1916,  Sec.  202  (a);  Revenue  Act  of  1918,  Sec.  402  (a);  Victory  Liberty 
Loan  Act,  Act  of  March  3,  1919,  Sec.  4  [1fl76]  amending  Fourth  Liberty 
Bond  Act,  Act  of  July  9,  1918,  Sec.  3).  This  ruling  is  not  in  conflict  with 
Treasury  Decision  No.  2530  [If  177],  and  applies  only  to  bonds  enumerated 
in  the  above-mentioned  Acts.  (Letter  to  Herrick,  Smith,  Donald  &  Farley, 
Boston,  Mass.,  signed  by  Deputy  Commissioner  James  Hagerman,  Jr.,  and 
dated  August  21,  1920.) 

176  Sec.  4  [of  the  Victory  Liberty  Loan  Act]. — That  section  3  of  the 
Fourth  Liberty  Bond  Act  is  hereby  amended  to  read  as  follows: 
"Section  3.    That,  notwithstanding  the  provisions  of  the  Second 

Liberty  Bond  Act  or  of  the  War  Finance  Corporation  Act  or  of  any  other  Act, 
bonds,  notes,  and  certificates  of  indebtedness  of  the  United  States  and  bonds 
of  the  War  Finance  Corporation  shall,  while  beneficially  owned  by  a  non- 
resident alien  individual,  or  a  foreign  corporation,  partnership,  or  association, 
not  engaged  in  business  in  the  United  States,  be  exempt  both  as  to  principal 
and  interest  from  any  and  all  taxation  now  or  hereafter  imposed  by  the 
United  States,  any  State,  or  any  of  the  possessions  of  the  United  States  or  by 
any  local  taxing  authority."  (Section  4  of  "An  Act  to  amend  the  Liberty 
Bond  Acts  and  the  War  Finance  Corporation  Act,  and  for  other  purposes," 
known  as  the  "Victory  Liberty  Loan  Act,"  approved  by  the  President, 
March  3,  1919.) 

177  Bonds  of  domestic  corporations  owned  by  nonresident  decedents, 
such  bonds  being  physically  situated  outside  of  the  United  States, 

are  not  returnable  as  a  portion  of  the  gross  estate  of  said  decedent. — Section 
202  of  the  revenue  act  of  September  8,  1916,  in  defining  the  gross  estate, 
provides  that  stock  in  a  domestic  corporation  owned  and  held  by  a  non- 
resident decedent  shall  be  deemed  property  within  the  United  States.  The 
holding  of  this  office  has  been  that  bonds  of  a  domestic  corporation  owned  and 
held  by  a  nonresident  decedent  were  likewise  deemed  property  within  the 
United  States  and  taxable  as  a  portion  of  the  gross  estate  of  the  decedent. 

178  This  question  has  had  careful  reconsideration,  and  it  is  the  opinion 
of  this  office  that  the  language  of  the  section  of  the  act  above  referred 

to  does  not  evidence  the  intention  of  Congress  to  impose  a  tax  upon  bonds 
of  a  domestic  corporation  owned  and  held  by  a  nonresident  decedent,  when 

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such  bonds  are  physically  situate  outside  of  the  United  States,  Hawaii  cr 
Alaska  at  the  time  of  the  death  of  the  nonresident  owner. 

179  It  is  clear,  however,  that  Congress  has  the  power  and  evidenced  an 
intention  in  the  act  above  referred  to  to  impose  a  tax  upon  bonds 

both  foreign  and  domestic,  owned  by  a  nonresident  decedent,  which 
bonds  are  physically  situate  in  the  United  States,  Hawaii  or  Alaska, 
at  the  time  of  the  owner's  death,  and  such  bonds  must  be  returned  as  a  portion 
of  his  gross  estate. 

1 80  It  is  of  course  clear  that  bonds,  both  foreign  and  domestic,  owned  by 
resident  are  taxable,  regardless  of  where  such  bonds  are  situated 

at  the  time  of  the  owner's  death. 

181  Rulings  of  this  office  announced  in  Regulations  and  Treasury  De- 
cisions, inconsistent  with  and  contrary  to  the  above,  are  hereby 

revoked.    (T.  D.  2530,  Oct.  8,  1917.) 


182  Art.  61.   Deduction  for  claims  and  expenses. — The  character  of  the 
deduction  is  the  same  as  in  the  case  of  resident  estates  (see  Arts.  37  to 

49).  It  is  immaterial  whether  the  expenditures  are  incurred  or  paid  in 
this  country  or  elsewhere.  The  deduction,  however,  is  subject  to  limitations 
which  do  not  apply  in  the  case  of  a  resident  estate.  Only  that  proportion 
of  the  claims  and  expenses  is  deductible  which  the  value  of  the  property 
situated  in  the  United  States  bears  to  the  value  of  the  entire  gross  estate, 
wherever  situated;  and  in  no  event  may  a  sum  be  deducted  in  excess  of  10 
per  cent  of  the  value  of  the  property  situated  in  the  United  States.  This 
10  per  cent  limitation  does  not  apply  to  the  deductions  subsequently  consi- 
dered.   (See  Arts.  62,  63.) 

183  Art.  62.   Property  previously  taxed.— The  value  of  property  owned 

22  by  a  nonresident  person  dying  after  October  3,  1917,  or  forming  part 
of  the  gross  estate  of  the  decedent,  may  be  deducted  within  the  limi- 
tations prescribed  with  reference  to  resident  estates  (see  Art.  50),  and  subject 
to  the  further  condition  that  the  property  shall  have  been  situated  in  the 
United  States  at  the  time  of  the  death  of  the  second  decedent.  The  detailed 
rules  for  deductions  in  the  case  of  nonresident  estates  are  consequently  as 
follows:    [See  1f439  for  retroactive  provision  of  the  1921  Act.] 

(1)  That  the  two  deaths  occurred  within  five  years  of  each  other. 

(2)  That  the  first  decedent  died  after  October  3,  1917,  and  that  the 
second  decedent  died  after  February  24,  1919. 

(3)  That  an  estate  tax  has  actually  been  collected  from  the  estate  of  the 
first  decedent  (the  mere  filing  of  a  return  not  being  sufficient). 

(4)  That  the  property  originally  received  from  the  prior  estate  has  been 
returned  as  part  of  the  gross  estate  of  the  prior  decedent,  and  that  the 
property  sought  to  be  deducted  is  either  the  identical  property  so  returned 
or  was  taken  in  exchange  for  such  property;  and 

(5)  That  the  property  sought  to  be  deducted  shall  have  been  situated 
in  the  United  States  at  the  time  of  the  death  of  the  present  decedent. 

184  For  the  rules  for  determining  when  property  is  acquired  in  exchange, 
within  the  meaning  of  the  statute,  see  Article  52. 

185  Art.  63.   Public,  charitable,  or  similar  gifts.— Where  the  bequest  is 

23  to  a  corporation,  it  is  limited  to  a  domestic  corporation;  that  is,  one 
created  or  organized  in  the  United  States.   Where  the  bequest  is  to 

a  trustee,  it  must  be  for  use  exclusively  within  the  United  States,  j  The 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


requirements  are  different  and  should  not  be  confused.  The  first  relates  to 
the  character  of  the  donee;  the  second  to  the  character  of  the  use  of  the 
gift.  With  these  exceptions  the  rules  for  deduction  are  the  same  as  in  the 
case  of  resident  estates  (see  Arts.  53,  54). 

186  This  deduction  applies  to  the  estates  of  all  decedents  dying  aftei 
December  31,  1917.  In  the  case  of  any  estate  entitled  to  the  de- 
duction which  paid  the  tax  without  receiving  the  benefit  of  the  right,  the 
excess  tax  will  be  refunded  upon  filing  of  claim  for  refund.  [See  ^[440  for 
retroactive  provision  in  the  1921  Act.] 

187  Art.  64.    Determination  of  net  estate. — The  following  example  will 
show  the  manner  of  determining  the  net  estate,  subject  to  tax,  of  a 

nonresident  decedent.  The  gross  estate  of  the  decedent,  wherever  situated, 
amounts  to  $1,000,000,  of  which  the  property  in  the  United  States,  Hawaii, 
and  Alaska  amounts  to  $200,000.  The  total  legal  deduction  for  claims  and 
expenses  (see  Art.  61)  amounts  to  $75,000;  and  there  are  charitable  bequests, 
for  use  within  the  United  States,  amounting  to  $25,000.  Inasmuch  as  the 
property  in  the  United  States,  Hawaii,  and  Alaska  constitutes  20  per  cent 
of  the  entire  gross  estate,  one-fifth  of  the  total  deductions  for  claims  and 
expenses  is  the  proportionate  share  corresponding  to  this  property.  This 
proportion  amounts  to  $15,000;  and  as  this  amount  does  not  exceed  ten 
per  cent  of  the  property  situated  in  the  United  States,  Hawaii,  and  Alaska, 
the  entire  amount  is  deductible.    The  following  result  is  accordingly 


obtained: 

Gross  estate  within  the  United  States   $200,000 

Proportion  of  deductions  for  claims  and  expenses  under 

subdivision  1   $15,000 

Charitable  bequests  in  United  States   25,000  40,000 


Net  estate  subject  to  tax   160,000 


188  The  tax  on  this  amount  should  be  computed  in  the  manner  previ- 
ously provided  for  estates  of  residents.    (See  Art.  8.) 

189  In  the  example  given,  if  the  total  legal  deductions  for  claims  and 
expenses  had  amounted  to  $150,000,  the  proportionate  amount  of 

deductions,  $30,000,  would  not  have  been  deductible,  inasmuch  as  this 
would  have  exceeded  ten  per  cent  of  the  property  in  the  United  States, 
Hawaii,  and  Alaska.  In  such  case  the  total  amount  of  the  deductions 
allowable  for  claims  and  expenses  would  have  been  ten  per  cent  of  the  gross 
estate  within  the  United  States,  or  $20,000,  making,  with  the  charitable 
bequests  of  $25,000,  a  total  deduction  of  $45,000.  The  net  estate  subject 
to  tax  would  accordingly  have  been  $155,000,  instead  of  the  amount  given 
in  the  example. 

190  Art.  65.    Payment  of  tax. — The  regulations  with  reference  to  rates 
of  tax  and  payment  are  the  same  in  the  case  of  estates  of  nonresidents 

as  of  residents.  The  statute  provides  that  the  executor  shall  pay  the  tax. 
If  no  executor  or  administrator  has  been  appointed  in  the  United  States, 
every  person  in  the  United  States  in  possession  of  any  part  of  the  decedent's 
gross  estate  is  constituted  an  executor  for  the  purpose  of  tax  payment,  and 
is  liable  for  the  tax  upon  the  transfer  of  the  portion  of  the  gross  estate  in 
his  possession.  All  checks,  drafts,  or  money  orders  should  be  made  payable 
to  the  order  of  Collector  of  Internal  Revenue.  Payment  so  made  of  an 
amount  indicated  to  be  due  upon  the  return  discharges  the  tax  only  in  case 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


subsequent  investigation  and  audit  disclose  that  the  correct  amount  has  been 
paid.    (See  Art.  90.) 

SIXTY-DAY  NOTICE— RESIDENT  ESTATES. 

1 9 1  Art.  66.    When  notice  required. — A  preliminary  notice,  called  the  60- 
27    day  notice,  is  required  to  be  filed  in  the  case  of  every  resident  dece- 
dent who  died  on  or  after  February  25,  1919,  the  gross  amount  of 

whose  extate  exceeds  $50,000.  This  notice  must  be  filed  in  duplicate  with 
the  collector  in  whose  district  the  decedent  had  his  domicile  at  the  time  of 
death.  Where  there  is  doubt  as  to  whether  the  gross  estate  exceeds  $50,000, 
the  notice  should  be  filed,  as  matter  of  precaution,  in  order  to  avoid  penalties. 

192  Prior  to  February  25,  1919,  the  notice  was  required  if  the  gross 
estate  exceeded  $60,000,  or  if  there  was  any  net  estate  after  the 

deductions  allowed  by  law,  including  the  $50,000  exemption,  had  been 
taken.  These  provisions  are  not  now  in  effect  except  to  determine  delin- 
quency under  previous  acts. 

193  In  the  case  of  the  estates  of  nonresident  decedents,  notice  is  re- 
quired if  there  is  any  property  situated  in  the  United  States,  without 

reference  to  its  value. 

1 94  Art.  67.    Notice  by  executor  or  administrator.— The  executor  or  ad- 
ministrator of  an  estate  is  required  to  file  notice  on  Form  704  within 

60  days  of  his  appointment  by  the  court,  or  of  coming  into  possession  of 
any  property  of  the  estate,  whichever  event  occurs  first.  The  primary 
purpose  of  the  notice  is  to  advise  the  Government  of  the  existence  of  taxable 
estates,  and  filing  should  not  be  delayed  beyond  the  60-day  period  because 
of  uncertainty  as  to  the  exact  value  of  the  assets.  Since  the  filing  of  the 
notice  within  the  prescribed  period  is  mandatory,  the  estimate  of  the  gross 
estate  called  for  by  the  notice  is  merely  the  best  approximation  of  value 
which  can  be  made  within  the  time  allowed.  The  instructions  upon  the 
back  of  the  form  should  be  read  carefully  before  executing  the  notice.  The 
signature  of  one  executor  or  administrator  upon  Form  704  is  sufficient.  For 
penalties  for  delinquency  in  filing  notice,  or  filing  of  false  or  fraudulent 
notice,  see  Articles  103  and  104. 

195  Art.  68.    Notice  by  others  than  the  executor  or  administrator.  —The 
notice  upon  Form  704  must  be  filed  by  others  than  the  executor  or 

administrator  if  either  of  the  following  situations  exists: 

(1)  No  executor  or  administrator  has  been  appointed. 

(2)  There  is  property  included  in  the  gross  estate,  as  defined  by  statute, 
which  has  not,  and  will  not,  come  into  the  custody  and  control  of  the 
executor. 

19S      In  these  cases,  the  persons  in  possession  of  the  property  included 
in  the  gross  estate  are  executors,  within  the  meaning  of  the  statute, 
for  the  purpose  of  filing  the  notice. 

1 97  Art.  69.  Notice  when  no  executor  appointed. — Where  no  executor  or 
or  administrator  has  been  appointed,  the  person  taking  possession  of 
property  at  the  time  of  death  is  required  to  file  notice  within  60  days  of  the 
date  of  death.  The  notice  must  be  filed  whether  possession  of  the  property 
was  held  at  the  date  of  death,  or  was  acquired  thereafter.  The  notice  on 
Form  704  [Page  27]  must  be  filed  by  such  persons  in  any  case  where  an 

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1-2-22.  Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


executor  or  administrator  has  not  been  appointed  within  60  days  of  the 
decedent's  death,  although  one  is  appointed  subsequently.  Where  an 
executor  or  administrator  is  appointed  within  the  60-day  period,  the  duty 
of  filing  the  notice  devolves  upon  him;  and  all  other  persons  are  relieved 
from  liability  to  file  with  respect  to  property  coming  into  the  custody  and 
control  of  the  executor  or  administrator.* 


*The  subjoined  extract  from  an  opinion  of  the  Solicitor  of  Internal  Revenue 
dated  September  23,  1916,  is  published  for  the  information  of  those  concerned 

"The  said  law,  the  Revenue  Act  of  September  8,  1916,  section 
200,  defines  the  term  'executor'  as  meaning,  'the  executor  or  admin- 
istrator, of  the  decedent,  or,  if  there  is  no  executor  or  administrator 
any  person  who  takes  possession  of  any  property  of  the  decedent.' 

"Section  205  requires  'that  the  executor,  within  30  days  after 
qualifying  as  such,  or  after  coming  into  possession  of  any  property 
of  the  decedent,  whichever  event  first  occurs,  shall  give  written 
lotice  thereof  to  the  collector;'  and  that  'the  executor  shall  also, 
at  such  times  and  in  such  manner  as  may  be  required  by  the  regula- 
tions made  under  this  title,  file  with  the  collector  a  return  under 
oath  in  duplicate,  setting  forth  the  value  of  the  gross  estate,'  etc. 

"Manifestly  the  purpose  of  the  law  is  to  secure  such  information 
and  returns  as  will  enable  the  Government  to  properly  execute  the 
the  law  and  collect  such  taxes  as  may  be  thereby  imposed. 

"In  view  of  this  uniform  interpretation  as  to  the  requirement 
of  notice  and  returns  in  all  matters  of  revenue  taxation,  as  well 
as  the  specific  language  of  the  law,  I  am  of  the  opinion  that  you 
are  justified  in  the  preparation  of  regulations  requiring  persons 
who  come  into  possession  of  the  property  of  a  decedent,  or  any 
part  thereof,  prior  to  the  appointment  of  executors  or  adminis- 
trators, to  give  due  notice  to  the  Collector  of  that  fact.  When 
executors  or  administrators  are  appointed,  they,  of  course,  super- 
sede all  other  persons  in  the  control  of  the  propoerty  whether  such 
persons  are  in  possession  or  not,  and  the  duty  of  giving  notice  and 
making  returns  for  the  entire  estate  immediately  devolves  upon  such 
executors  or  administrators."  (T.  D.  2372,  Sept.  25,  1916.) 

198  Art.  70.   Notice  where  property  not  within  executor's  control. — 

Where  there  is  property  that  will  not  come  into  the  custody  and 
control  of  the  executor,  but  which  is  included  in  the  gross  estate  as  defined  by 
the  statute,  the  notice  on  Form  704  [Page  27]  must  be  filed  within  60  days  of 
the  date  of  death  by  the  person  in  possession  or  control  of  the  property  at 
the  time  of  death. 

199  The  persons  required  to  file  Form  704,  in  compliance  with  this 
requirement,  include  the  following: 

(1)  The  surviving  husband  or  wife  in  the  case  of  property  owned  as 
tenants  in  the  entirety. 

(2)  Donees  who  have  received  within  two  years  prior  to  the  decedent's 
death  any  gift  of  material  value  from  the  decedent,  or  who  have  received 
at  any  time  whatever  gifts  made  by  the  decedent  in  contemplation  of  death 
or  intended  to  take  effect  at  or  after  death. 

(3)  Trustees  holding  property  conveyed  during  lifetime  by  decedent  in 
contemplation  of  death,  or  with  intent  to  provide  for  others  at  or  after  the 
decedent's  death,  regardless  of  the  date  of  execution  of  the  instrument 
making  the  conveyance. 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


(4)  Fiduciaries  holding  property  of  any  kind  jointly  for  the  decedent 
and  another  or  others.  Example:  A  savings  bank  holding  a  joint  account 
in  the  name  of  the  decedent  and  another,  payable  to  either  or  to  the  survivor, 
must  file  Form  704  for  the  full  amount  of  the  account. 

(5)  Trustees  having  in  charge  property  over  which  the  decedent  exercised 
a  general  power  of  appointment,  and  which  will  not  come  into  the  possession 
and  control  of  the  executor  or  administrator. 

(6)  Beneficiaries  other  than  the  executor  who  receive  insurance  upon  the 
decedent's  life,  provided  the  total  amount  of  the  insurance  receivable  by  all 
such  beneficiaries  exceeds  $40,000. 

200  The  primary  duty  of  filing  notice  with  respect  to  property  which 
will  not  come  into  the  executor's  control  rests  upon  the  person  ac- 
tually in  possession  at  the  time  of  death.  It  is  the  duty  of  the  succeeding 
owner,  however,  where  property  of  this  character  is  held  at  the  time  of 
death  by  an  agent  or  fiduciary,  to  give  notice  within  60  days  of  the  date  of 
taking  possession,  unless  he  finds  that  notice  has  already  been  filed.  For 
example,  the  appointee  of  property,  under  a  general  power  of  appointment 
exercised  by  the  decedent,  should  file  notice  within  60  days  of  receiving 
possession,  unless  the  notice  has  already  been  filed. 

201  Art.  71.    Insurance  companies'  60-day  notice. — Sixty-day  notice 
upon  Form  787  must  be  filed  by  every  insurance  company  which  pays 

insurance  upon  the  life  of  a  resident  decedent  to  beneficiaries  other  than 
the  executor  or  administrator  in  amounts  aggregating  more  than  $40,000, 
or  which  has  knowledge  of  insurance  payable  to  such  beneficiaries  by  other 
insurance  companies,  aggregating,  with  amounts  payable  by  the  company 
itself,  more  than  $40,000.  If  the  proceeds  of  any  policy  are  payable  in  the 
form  of  an  annuity,  the  present  worth  of  such  annuity,  for  the  purpose  of 
deducting  the  $40,000  exemption,  should  be  computed  in  accordance  with 
the  provision  of  Article  20.  Notice  should  be  filed  with  the  collector  of  the 
district  in  which  the  decedent  had  his  domicile  within  60  days  of  receipt  by 
the  company  of  notification  of  death.  If  the  insurance  company  is  in  doubt 
as  to  its  liability  to  give  notice,  the  notice  should  be  filed.    [See  1|313.] 

202  Where  insurance  is  taken  out  with  a  foreign  branch  of  a  domestic 
insurance  company,  the  notice  should  be  given  by  the  home  office  of 

the  company  within  60  days  of  the  receipt  by  the  foreign  branch  of  informa- 
tion of  the  decedent's  death. 

a 03    Art.  72.    Where  military  exemption  claimed  60-day  notice  required. 

— The  executors  of  estates  exempted  from  the  tax  (see  Art.  9)  are 
required  to  file  the  60-day  notice  with  the  proper  collector  in  the  same 
manner  as  the  executors  of  taxable  estates.  The  executor  should,  in 
addition,  write  across  the  face  of  the  form  the  words  "Military  exemption 
claimed." 

SIXTY-DAY  NOTICE— NONRESIDENT  ESTATES. 

204  Art.  73.  Nonresident  60-day  notice. — A  60-day  notice  on  Form  705 
27  [Page  29]  should  be  filed  with  the  Commissioner  of  Internal  Revenue, 
Washington,  D.  C,  by  every  executor  or  administrator  appointed 
in  the  United  States.  The  notice  is  necessary  if  any  part  of  the  decedent's 
gross  ertate  was  situated  in  the  United  States  at  the  time  of  death,  regardless 
of  the  value  of  that  part  or  of  the  entire  gross  estate.  If  no  executor  of 
administrator  has  been  appointed  in  this  country,  notice  must  be  filed  within 

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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


60  days  of  the  date  of  death  by  every  person  in  possession  of  any  part  of  the 
gross  estate  in  the  United  States.  If  such  person  has  no  knowledge  of  the 
decedent's  death  within  60  days  of  its  occurrence,  he  should  file  this  notice 
immediately  upon  obtaining  such  knowledge.  The  filing  of  notice  by  a 
foreign  executor  or  administrator  does  not  relieve  persons  in  possession  from 
the  duty  of  filing  notice.  If  there  is  a  delay  in  the  appointment  of  a  local 
executor  or  administrator  of  more  than  60  days  after  the  death,  persons  in 
possession  should  file  notice.  The  term  "person  in  possession  of  property 
of  the  decedent"  includes  the  decedent's  agents  or  representatives;  donees 
and  transferees  or  trustees  of  property  transferred  in  contemplation  of 
death;  the  surviving  owner  of  property  held  jointly;  safe-deposit  companies, 
warehouse  companies,  and  similar  custodians  of  property  in  this  country  of  a 
nonresident  decedent;  brokers  holding  as  collateral  securities  belonging  to 
the  decedent  or  investment  funds  owned  by  the  decedent;  banking  institu- 
tions holding  money  on  deposit  or  for  any  specific  purpose,  such  as  purchase 
of  goods,  if  the  title  rests  in  the  decedent;  and  debtors  of  the  decedent  in  this 
country. 

205  Art.  74.    Transfer  agents'  60-day  notice. — A  60-day  notice  upon 
Form  714  is  required  to  be  filed  whenever  a  corporation,  its  transfer 

agent,  register,  or  paying  agent,  is  called  upon  to  make  a  transfer  of  stocks 
or  bonds,  or  to  pay  interest  or  dividends,  to  any  successor  in  interest  of 
any  nonresident  stockholder  or  bondholder  who  died  after  September  8, 
1916,  unless  the  transfer  is  made  upon  the  order  of  an  executor  or  adminis- 
trator appointed  in  the  United  States.  The  notice  is  required  for  dividends 
declared  prior  to  the  day  of  death,  and  for  interest  which  had  accrued  on 
bonds  prior  to  the  death  of  the  decedent  although  payable  thereafter.  Notice 
should  be  filed  with  the  Commissioner  of  Internal  Revenue  at  Washington, 
D.  C,  within  60  days  of  the  date  of  death,  or  immediately  upon  receipt  of 
the  order  of  transfer  or  payment.  A  transfer  agent  should  be  vigilant  to 
report  all  cases  in  which  the  fact  of  the  death  of  a  nonresident  appears.  Where 
the  securities  are  received  without  the  personal  assignment  of  the  de- 
cedent, but  with  the  transfer  order  of  the  foreign  executor,  it  is  clear  that 
the  case  should  be  reported.  Where  the  securities  bear  the  personal  assign- 
ment of  the  decedent,  the  transfer  should  be  reported  if  made  upon  the  order 
of  a  foreign  executor,  or  if  information  is  received  in  any  other  manner  that 
the  record  owner  has  died  a  non-resident  of  the  United  States. 

206  Art.  75.    Importance  of  requirement.— In  order  to  prevent  loss  of 
the  tax  upon  nonresident  estates,  it  is  essential  that  transfer  agents 

should  exercise  great  care  in  reporting  all  transfers  of  the  kind  described. 
Their  records  will  be  examined  from  time  to  time  by  internal-revenue 
officers  to  determine  whether  this  regulation  is  being  strictly  complied  with 
Failure  to  file  notice  in  the  manner  prescribed  will  render  the  transfer  agent 
liable  to  a  fine. 

206a    Art.  75-A.    Transfer  of  stock  of  nonresident  decedent,  how  made. — 

Wherever  a  transfer  agent  is  required  to  file  60-day  notice  as  provided 
in  Article  74,  he  shall  not  make  transfer  of  the  stock  standing  in  the  name  of 
the  decedent  until  there  has  been  delivered  to  such  collector  of  internal  rev- 
enue as  may  be  designated  by  the  Commissioner  the  bond  of  the  party  to 
whom  the  stock  is  to  be  transferred  with  corporate  surety  in  an  amount  to 
be  fixed  by  the  Commissioner,  conditioned  for  the  payment  of  the  tax  upon 
the  transfer  of  the  decedent's  estate,  not.  exceeding  in  amount  the  value  of 

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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


the  stock  to  be  transferred.  Upon  receipt  of  the  60-day  notice  the  Commis- 
sioner will  at  once,  upon  request,  fix  the  amount  for  which  the  bond  is  to 
be  given.  In  lieu  of  the  bond  a  deposit  of  the  amount  so  fixed  may  be  made 
with  such  collector  of  internal  revenue  as  the  Commissioner  may  designate. 
Where  a  sum  of  money  is  deposited  in  lieu  of  the  bond,  and  it  exceeds  the 
amount  of  the  tax  as  finally  determined,  the  excess  will  be  refunded  to  the 
person  making  deposit.  In  lieu  of  the  provisions  and  restrictions  herein- 
before set  forth,  transfer  agents  are  authorized  to  make  a  transfer  of  stock 
standing  in  the  name  of  a  nonresident  decedent  to  the  duly  qualified  ancillary 
executor  or  administrator  within  the  United  States,  who  shall  make  a  return 
on  Form  706,  as  any  other  executor  is  required  by  law  to  do,  provided  that 
such  transfer  agent  at  the  time  of  making  such  transfer  gives  notice  thereof 
in  writing  to  the  Commissioner  of  Internal  Revenue. 

207    Art.  76.    Insurance  companies'  60-day  notice. — The  60-day  notice 

upon  Form  788  must  be  filed  by  every  domestic  insurance  company 
which  pays  insurance  upon  the  life  of  the  nonresident  decedent  in  any 
amount  either  to  a  foreign  executor  or  administrator,  or  to  individual 
beneficiaries.  The  notice  should  be  filed  with  the  Commissioner  of  Internal 
Revenue,  Washington,  D.  C,  within  60  days  of  receipt  of  proof  of  claim. 
No  notice  is  required  to  be  filed,  if  the  only  insurance  paid  is  receivable 
by  an  executor  appointed  in  the  United  States.  If,  however,  the  company 
is  liable  to  give  notice,  it  is  required  to  report  insurance  of  all  classes  in 
order  that  its  statement  may  be  complete.  [See  1f313.] 
207a  Art.  76-A.  Payment  of  policy  of  life  insurance  taken  out  by  resident 
and  nonresident  decedents,  how  made. — Wherever  an  insurance 
company  is  required  to  file  a  60-day  notice,  as  provided  in  Article  76,  where 
the  insured  was  a  nonresident  it  shall  not  make  payment  of  any  policy  or 
policies  to  a  foreign  executor  or  administrator,  or  to  an  individual  beneficiary, 
until  there  has  been  delivered  to  such  collector  of  internal  revenue  as  may  be 
designated  by  the  Commissioner  the  bond  of  the  party  to  whom  the  insurance 
is  to  be  paid,  with  corporate  surety  in  an  amount  to  be  fixed  by  the  Commis- 
sioner, conditioned  for  the  payment  of  the  tax  upon  the  transfer  of  the  de- 
cedent's estate,  not  exceeding  the  amount  of  insurance  payable  under  such 
policy  to  the  executor,  and  the  excess  over  $40,000  of  the  aggregate  insurance 
payable  to  specific  beneficiaries  other  than  the  executor  or  the  estate  of  the 
decedent.  Upon  receipt  of  the  60-day  notice  the  Commissioner  will  at  once, 
upon  request,  fix  the  amount  of  the  bond  to  be  given.  In  lieu  of  such  bond 
a  deposit  of  the  amount  fixed  may  be  made  with  such  collector  of  internal 
revenue  as  the  Commissioner  may  designate.  If  in  lieu  of  the  bond  a  sum 
of  money  is  deposited,  and  such  sum  exceeds  the  amount  of  tax  as  finally 
determined,  the  excess  will  be  refunded  to  the  person  making  the  deposit. 
In  lieu  of  the  bond  or  a  deposit  of  money,  where  insurance  is  payable  to  a 
foreign  executor  or  administrator,  the  insurance  may  be  paid  to  ancillary 
executor  or  administrator  appointed  within  the  United  States,  provided  that 
such  ancillary  executor  or  administrator  shall  have  given  bond  with  corporate 
surety  in  an  amount  sufficient,  in  the  opinion  of  the  Commissioner,  to  dis- 
charge the  tax  liability  of  the  estate,  not  exceeding  the  amount  of  insurance 
subject  to  be  included  within  the  gross  estate  of  the  decedent.  [See  ,T313.] 
207b  Wherever  insurance  companies  are  required  to  file  a  60-day  notice, 
as  provided  in  Article  71,  where  the  decedent  is  a  resident  and  there 
is  subject  to  be  included  within  the  decedent's  gross  estate  any  excess  over 
$40,000  in  the  aggregate  of  insurance  payable  to  specific  beneficiaries  other 
than  the  executor  or  the  estate  of  the  decedent,  the  same  provisions  and 

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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


restrictions  in  regard  to  payment  of  insurance  shall  apply  and  govern  insurance 
companies  as  are  set  forth  in  this  article  in  the  case  of  nonresidents. 
207c  Where  insurance  companies  are  required  to  file  a  60-day  notice,  as 
provided  in  Article  71  or  in  Article  76,  if  the  decedent  is  a  resident 
or  nonresident,  and  there  is  an  excess  over  $40,000  in  the  aggregate  of  all 
insurance  payable  to  specific  beneficiaries  other  than  the  executor  or  the 
estate  of  the  decedent,  insurance  companies  are  authorized,  in  lieu  of  the 
provisions  and  restrictions  hereinbefore  set  forth,  upon  consent  of  the  bene- 
ficiaries to  make  payment  of  such  insurance  to  such  beneficiaries  through  the 
duly  qualified  executor  or  administrator  within  the  United  States  or  through 
the  duly  qualified  ancillary  executor  or  administrator  in  the  United  States, 
who  shall  make  return  on  Form  706  of  the  excess  over  $40,000  of  such  insur- 
ance, if  the  estate  be  that  of  a  nonresident,  or  that  of  a  resident  if  there  be 
a  net  estate  subject  to  tax. 

THE  RETURN— RESIDENT  ESTATES. 

208  Art.  77.  When  return  required — Date  of  filing. — A  return  on  Form 

27  706  [Page  11]  is  required  in  the  case  of  every  resident  decedent  who 

28  died  on  or  after  February  25,  1919,  leaving  a  gross  estate  exceeding 
$50,000  in  value.    This  return  must  be  filed  with  the  collector  in 

whose  district  the  decedent  resided.  It  must  be  filed  within  one  year  after 
the  date  of  death,  unless  an  extension  is  granted,  and  must  be  in  duplicate. 
In  the  case  of  decedents  who  died  before  February  25,  1919,  the  effective 
date  of  the  Revenue  Act  of  1918,  the  return  is  required  if  the  gross  estate 
exceeds  $60,000,  or  if  there  is  any  net  estate  after  the  legal  deductions, 
including  the  $50,000  exemption,  have  been  taken.  In  the  case  of  estates 
of  non-residents  return  is  required  if  the  decedent  owned  any  property  in 
the  United  States  regardless  of  value.    (See  Art.  88.) 

209  Art.  78.   Procedure  where  no  return  has  been  made. — The  statute 

29  provides  that  if  no  return  is  filed  for  the  estate  of  a  decedent,  or  if  a 
return   contains  a  false  or  incorrect  statement  of  a  material  fact, 

the  collector  or  deputy  collector  shall  make  a  return.  The  Commissioner  may 
amend  this  return  from  such  knowledge  or  information  as  he  can  obtain, 
through  testimony  or  otherwise.  A  return  so  made  by  the  Commissioner, 
or  made  by  the  collector  and  approved  by  the  Commissioner,  is  a  sufficient 
basis  for  assessing  the  tax.  Where  a  tax  is  found  to  be  due  upon  such  a  return, 
the  estate  will  be  liable  for  penalties  as  well  as  for  the  tax. 

210  Art.  79.    Investigation  where  return  has  been  filed. — An  investiga- 
tion of  every  return  for  estate  tax  will  be  conducted  to  verify  the 

accuracy  of  the  return.  The  investigation  will  be  made  by  special  officers 
of  the  Bureau.  The  fact  that  an  investigation  is  made  does  not  reflect 
upon  the  competence  or  good  faith  of  the  executor,  since  investigations  are 
required  in  all  cases  as  a  matter  of  administrative  procedure.  The  executor 
should  cooperate  with  the  examining  officer  in  order  that  the  full  tax  liability 
may  be  definitely  determined  and  the  case  closed.  During  the  course  of 
the  investigation  the  examining  officer  will  inspect  the  books  and  records  of 
the  estate,  interview  the  executor  and  other  persons  having  knowledge  of  the 
decedent's  affairs,  verify  the  value  of  the  assets  and  the  amounts  of  debts 
and  administration  expenses,  and  take  such  other  steps  as  may  be  necessary 
to  determine  the  correct  tax. 

211  It  is  the  purpose  of  the  Bureau  to  make  these  investigations  as  soon 
as  practicable  after  the  filing  of  the  return.    Whenever  there  are 

special  and  urgent  reasons  for  an  early  investigation,  the  collector  should  be 
notified  in  order  that  the  case  may  be  given  special  attention.  Upon 

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ESTATE  TAX  REGULATIONS.— 1913  LAW. 


completion  of  the  investigation  the  executor  will  be  apprised  by  the  examin- 
ing officer  of  his  findings,  and  will  be  given  an  opportunity  to  discuss  the 
case  and  present  such  data  as  he  may  desire,  to  be  considered  by  the  Bureau 
in  connection  with  the  examining  officer's  report.  Upon  the  completion 
of  the  review  and  audit  by  the  Bureau  of  the  return  and  examining  officer's 
report,  the  executor  will  be  informed  by  letter  from  the  Commissioner  of  the  , 
result  of  the  audit.  If  the  letter  contains  notification  of  an  unpaid  balance 
of  tax,  the  executor  should  make  payment  to  the  collector.  After  the 
expiration  of  30  days  from  receipt  of  the  notification  interest  will  accrue  upon 
the  excess  tax  at  the  rate  of  ten  per  centum  per  annum.  If  the  executor 
wishes  to  file  claim  for  abatement  of  any  part  of  the  excess  tax,  such  claim 
must  be  filed  within  30  days  of  receipt  of  notification,  or  he  may  pay  the 
tax  in  order  to  prevent  the  running  of  interest,  and  submit  claim  for  refund. 

212  Art.  80.   Persons  liable  for  return. — The  statute  provides  that  the 

27  executor  or  administrator  shall  file  the  return.    If  there  is  more  than 

28  one  executor  or  administrator,  the  return  must  be  made  jointly  by 
all.   Where  no  executor  or  administrator  has  been  appointed,  every 

person  in  possession  of  any  part  of  the  gross  estate  is  considered  to  be  an 
executor  for  the  purposes  of  the  tax,  and  is  liable  for  a  return  as  to  the  property 
in  his  possession.  The  executor  or  administrator  is  required  to  make  a  return 
of  the  entire  gross  estate  of  the  decedent,  including  property  which  will  not 
come  into  his  possession,  such  as  property  transferred  by  the  decedent  before 
death,  and  property  owned  by  tenants  in  the  entirety.  If  the  executor  is 
unable  to  make  a  complete  return  as  to  any  part  of  the  gross  estate,  he  is 
required  to  give  all  the  information  he  has  as  to  such  property,  including  a 
full  description,  and  the  name  of  every  person  holding  a  legal  or  beneficial 
interest  in  the  property.  Where  the  executor  is  unable  to  make  a  return 
as  to  any  property,  the  statute  requires  every  person  holding  a  legal  or 
beneficial  interest  therein,  upon  notice  from  the  collector,  to  make  return 
as  to  such  part  of  the  gross  estate.  For  penalties  for  delinquency  in  filing 
return,  or  filing  of  false  or  fraudulent  return,  see  Articles  103  and  104. 

213  Art.  81.    Extension  of  time  for  filing  return. — If  it  is  impossible  for 
the  executor  to  file  a  complete  return  within  a  year  from  the  date  of 

death,  he  may  make  application  to  the  collector  for  an  extension  of  time 
for  filing  the  return,  stating  in  detail  in  his  application  the  circumstances 
which  prevent  the  filing  of  the  return  by  the  due  date  and  setting  forth  briefly 
but  fully  a  statement  of  what  the  gross  estate  consists,  together  with  a  state- 
ment of  the  amount  of  deductions  claimed,  provided  that  in  the  first  instance 
the  application  be  made  at  least  30  days  prior  to  the  due  date  of  the  return. 
If  the  collector  is  satisfied  that  a  complete  return  can  not  be  made  he  may 
grant  extensions  of  time  not  to  exceed  180  days  from  the  due  date,  no  single 
extension  exceeding  60  days.  At  the  expiration  of  the  last  extension  period 
granted  a  return  must  be  filed.  If  at  that  time  it  is  still  impossible  to  file 
a  complete  and  accurate  return,  on  account  of  the  unsettled  condition  of 
the  affairs  of  the  estate,  the  return  filed  by  the  executor  must  be  as  complete 
as  possible,  and  must  set  forth  all  the  facts  in  his  possession  as  to  the  gross 
and  net  estate.  Such  a  return  will  be  accepted  by  the  collector;  but  the 
executor  must  file  an  amended  return  as  soon  as  the  condition  of  the  estate 
permits.  The  granting  of  an  extension  of  time  for  filing  a  return  does  not 
operate  to  extend  the  time  for  the  payment  of  the  tax,  which  is  due  one  year 
after  decedent's  death  unless  the  time  for  payment  thereof  be  extended  by 
the  Commissioner,  as  provided  in  Article  93.    Where  application  has  been 

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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


made  for  an  extension  of  time  to  file  a  return,  but  no  extension  of  time  for  the 
payment  of  the  tax  has  been  granted,  the  executor  will  be  required  to  pay  on 
the  due  date  a  sum  of  money  sufficient,  in  the  opinion  of  the  collector,  to 
discharge  the  tax,  even  though  an  extension  of  time  to  file  the  return  has  been 
or  may  be  granted.  The  statements  accompanying  the  application  will  be 
subject  to  investigation  and  verification  in  acting  upon  the  application  for 
extension  and  in  fixing  the  amount  which  the  executor  will  be  required  to 
pay  on  the  due  date  of  the  tax  as  sufficient  in  the  opinion  of  the  collector 
to  discharge  the  tax. 

214  Art.  82.  Execution  of  return. — The  return  must  be  made  on  Form 
706,  copies  of  which  will  be  supplied  by  the  collector.  It  must  con- 
tain an  itemized  inventory,  by  schedule,  of  the  property  constituting  the 
gross  estate,  together  with  a  full  statement  of  deductions  claimed,  as  therein 
provided.  The  instructions  printed  on  the  form  should  be  carefully  fol- 
lowed. All  documents  and  vouchers  used  in  preparing  the  return  should  be 
retained  by  the  executor,  so  as  to  be  available  for  inspection  whenever 
required.  Certified  copies  of  the  will,  if  any,  must  be  submitted  with  the 
return,  together  with  duplicate  copies  of  the  other  documents  required  by 
the  instructions  printed  on  the  form,  or  any  documents  which  the  executor 
may  desire  to  submit  with  the  return  in  explanation  thereof. 

215  Art.  83.  Supplemental  data. — The  statute  provides  that  the  execu- 
tor, in  addition  to  filing  notice  and  return,  shall  furnish  such  supple- 
mental data  as  may  be  necessary  to  establish  the  correct  tax.  It  is  there- 
fore the  duty  of  the  executor  to  furnish  upon  request  copies  of  any  docu- 
ments in  his  possession  relating  to  the  estate,  or  on  file  in  any  court  having 
jurisdiction  over  the  estate,  appraisal  lists  of  any  items  included  in  the  gross 
estate,  copies  of  balance  sheets  or  other  financial  statements  relating  to  the 
value  of  stock,  and  any  other  information  obtainable  by  him  that  may  be 
found  necessary  in  the  determination  of  the  tax.  Failure  to  comply  with 
such  a  request  will  render  the  executor  liable  to  a  fine  not  to  exceed  $500, 
and  proceedings  may  be  instituted  in  the  proper  United  States  court  _to 
secure  compliance  with  the  requirement. 

216  Art.  84.    Same — Nonresident  estates. — Pursuant  to  this  provision 
the  executor  of  a  nonresident  decedent  is  required  to  file  with  the 

return: 

(1)  Certified  copy  of  will,  or,  if  the  decedent  left  several  wills,  to  govern 
in  different  jurisdictions,  certified  copy  of  each  will. 

(2)  Certified  copy  of  inventory  of  foreign  property  filed  under  a  foreign 
estate,  succession  or  death-duty  act;  or,  if  no  such  inventory  was  filed,  copy 
of  inventory  filed  with  the  foreign  court  of  probate  jurisdiction. 

(3)  Certified  copy  of  schedule  of  claims  filed  under  a  foreign  taxing  act 
in  cases  where  such  claims  are  presented  for  deduction.  If  any  item  of 
deduction  is  not  included  in  the  schedule,  the  affidavit  of  the  foreign  executor 
or  administrator  with  reference  thereto  should  be  submitted. 

217  The  specified  information  is  required  whether  or  not  the  executor 
wishes  to  claim  deduction,  and  is  subject  to  the  provision  of  the 

statute  (see  Sec.  403)  [1[20]  requiring  him  to  include  in  his  return  the  value 
of  the  gross  estate  situated  in  the  United  States. 

j 

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Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


PRIVILEGED  CHARACTER  OF  RETURNS. 

2 1 8  Art.  85.    Returns  confidential. — All  estate  tax  returns  and  notices  are 
treated  as  privileged  communications  and  may  not  be  exhibited  to 

any  person  other  than  the  executor  or  his  duly  authorized  attorney,  except 
as  stated  in  Article  86.  This  requirement  of  secrecy  will  be  rigidly  enforced, 
and  extends  to  information  of  a  private  nature  submitted  or  obtained  in 
connection  with  a  return  or  notice.  The  requirement  does  not  operate  to 
prevent  internal  revenue  officers  from  disclosing  the  returned  value  of 
any  item  or  the  amount  of  any  specific  deduction  where  such  disclosure  is 
necessary  in  order  to  arrive  at  a  correct  determination  of  the  tax.  This 
right  of  disclosure,  however,  does  not  extend  to  such  information  as  the 
amount  of  the  estate,  the  amount  of  tax,  or  other  general  data.  Nor  are  the 
records  in  possession  of  the  Bureau,  whether  on  file  with  the  Commissioner 
or  the  collector,  open  to  inspection,  except  as  provided  herein. 

219  Art.  86.   Disclosure  to  persons  having  material  personal  interest. — 

Where  any  person  other  than  the  executor  has  a  material  interest  in 
ascertaining  any  fact  disclosed  by  the  return,  or  in  obtaining  information 
as  to  the  payment  of  the  tax,  he  shall  make  a  written  application  to  the 
Commissioner  of  Internal  Revenue  for  such  information,  setting  forth  the 
nature  of  his  interest  and  the  purpose  of  the  application.  The  Commissioner 
will  review  the  application,  and,  if  it  is  approved,  give  written  instruction 
to  the  collector  to  exhibit  the  return  to  the  applicant,  or  give  him  such 
information  as  is  specified.  Under  no  circumstances  shall  the  collector 
give  information  to  persons  other  than  the  executor  except  upon  the  written 
order  of  the  Commissioner,  and  to  the  extent  authorized  by  such  order. 

220  Art.  87.    Attorneys  must  have  authorization. — In  all  cases  where 
information  is  sought  regarding  an  estate,  or  an  interview  asked, 

by  an  attorney  whose  name  does  not  appear  on  form  of  706  [Page  11]  as  the 
attorney  for  the  estate,  the  information  or  interview  will  be  denied  unless 
the  attorney  presents  a  signed  statement  from  the  executor,  authorizing  him 
to  appear  in  his  behalf.  The  limitation  does  not  apply  where  an  attorney 
asks  a  general  ruling  on  a  question  relating  to  a  specific  estate,  or  where  he 
asks  information  of  the  procedure  to  be  followed  in  regard  to  filing  notice  or 
making  payment.  Where  an  attorney  asks  information,  or  an  interview, 
and  his  name  appears  on  the  return  as  attorney  for  the  estate,  the  informa- 
tion or  interview  will  be  granted  if  his  identity  is  established. 

THE  RETURN— NONRESIDENT  ESTATES. 

221  Art.  88.    Return  of  nonresident  estates. — A  return  on  Form  706 
[Page  11]  must  be  filed  in  duplicate  with  the  Commissioner  of  Internal 

Revenue,  Washington,  D.  C,  or  with  such  collector  of  internal  revenue  as 
the  Commissioner  may  designate,  within  a  year  from  the  date  of  death  of 
every  nonresident  decedent,  if  any  part  of  the  gross  estate  of  such  decedent 
was  situated  in  the  United  States  at  the  time  of  his  death.  It  is  the  duty  of 
any  executor  or  administrator  appointed  in  the  United  States  to  file  a  return 
for  the  whole  of  that  part  of  the  gross  estate  situated  in  the  United  States, 
whatever  its  value.  If  there  is  no  such  executor  or  administrator,  every 
person  in  possession  of  any  part  of  the  gross  estate  in  the  United  States  may 
be  required  to  file  a  return  for  such  part.  Except  as  otherwise  specifically 
provided  by  these  Regulations,  notice  will  be  given  to  such  persons,  however, 

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where  a  return  is  required;  and  they  are  relieved  of  the  duty  of  filing  returns 
by  the  appointment  of  an  executor  or  administrator  in  the  United  States, 
but  not,  however,  by  the  appointment  of  a  foreign  executor  or  administrator. 
If,  however,  a  complete  return  is  actually  filed  by  the  foreign  executor  of 
property  in  the  United  States,  the  person  in  possession  need  not  file  a  return, 
except  as  otherwise  specifically  required  by  these  Regulations.  (See  Arts. 
75-A  and  76-A.) 

RETURN  BY  COLLECTOR. 

222  Art.  89.    Return  by  collector. — Where  the  executor  fails  to  file  a 

29  return,  or  files  an  inaccurate  one,  the  collector  or  deputy  collector  is 
required  to  make  a  return  from  such  information  as  he  possesses  or 

is  able  to  obtain.  In  such  cases  the  Commissioner  assesses  the  tax  in  the 
same  manner  as  though  the  return  had  been  filed  by  the  estate. 

PAYMENT  OF  TAX. 

223  Art.  90.    Payment. — The  tax  is  due  and  payable  one  year  from  the 

30  date  of  death.    No  discount  will  be  allowed  for  payment  in  advance  of 
the  due  date.    The  collector  will  grant  to  the  person  paying  the  tax 

duplicate  receipts,  either  of  which  will  be  sufficient  evidence  of  such  pay- 
ment, and  entitle  the  executor  to  be  credited  with  the  amount  by  any  court 
having  jurisdiction  to  audit  or  settle  his  accounts.    [See  ^[3 15.] 

224  Payment  will  not  be  accepted  before  a  return  in  proper  form  has 
been  filed,  except  in  cases  where  an  extension  of  time  to  file  a  return 

has  been  granted  but  no  extension  of  time  has  been  granted  within  which 
to  pay  the  tax,  and  the  executor  desires  to  make  payment  under  section  407 
of  the  act  of  an  amount  sufficient  in  the  opinion  of  the  collector  to  discharge 
the  tax.  Payment  of  the  amount  of  tax  shown  to  be  due  by  a  return  accepted 
by  the  collector,  executed  in  good  faith  and  accurate  so  far  as  the  executor 
could  ascertain  from  his  own  knowledge  and  in  the  exercise  of  diligence,  will 
be  considered  payment  of  the  tax  in  full  under  section  407  of  the  act,  sub- 
ject to  adjustment  resulting  from  investigation,  except  as  to  any  item  which 
should  have  been  but  was  not  embodied  in  the  return.  If  at  the  time  pay- 
ment is  made  the  exact  amount  of  the  tax  can  not  be  determined,  the  pay- 
ment of  a  sum  of  money  sufficient,  in  the  opinion  of  the  collector,  to  dis- 
charge the  tax  will  be  considered  payment  in  full,  except  as  the  tax  is  ad- 
justed after  investigation.  (See  Arts.  78,  95.)  If  the  return  filed  contains 
a  gross  or  fraudulent  misstatement  of  fact,  the  payment  of  the  amount  of 
tax  shown  to  be  due  thereby  will  not  be  deemed  to  be  payment  in  full  of  the 
tax,  since  the  collector's  decision  is  based  upon  the  assumption  that  the 
return  is  made  in  good  faith. 

225  Tax  payment  may  be  enforced  any  time  after  expiration  of  one  year 
30  period,  in  absence  of  extension,  without  regard  to  ISO  day  interest 
33       provision. — Reference  is  made  to  the  memorandum  dated  June  19, 

1920,  transmitted  by  your  Mr.  Akers,  who  has  requested  to  be  advised 
whether  the  Bureau  of  Internal  Revenue  intends  to  require  payment 
of  Federal  estate  taxes  within  one  year  after  the  date  of  death  of  decedents 
whose  estates  are  liable  for  the  payment  of  such  taxes.    [See  1|307a  and 
1f309.] 

226  You  are  advised  that  the  Bureau  of  Internal  Revenue  has  ruled 
in  specific  cases,  and  it  is  its  present  ruling,  that  Federal  estate 

taxes  are  due  and  payable  one  year  after  the  death  of  a  decedent  whose 

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estate  is  liable  for  the  payment  of  such  taxes.  Section  406  of  the  Revenue 
Act  of  1918  contemplates  that  the  Federal  estate  tax  shall  be  paid  one  year 
after  decedent's  death  in  every  case  except  where  the  Commissioner  of 
Internal  Revenue  finds  that  payment  of  the  tax  within  one  year  after  the 
decedent's  death  would  impose  undue  hardship  upon  the  estate  and  for 
that  reason  has  granted  an  extension  of  time  for  the  payment  thereof. 
Article  90  of  Regulations  37,  Revised,  1919,  relating  to  estate  tax,  requires 
payment  of  the  tax  at  the  expiration  of  one  year  from  the  date  of  the  deced- 
ent's death. 

227  There  is  nothing  contained  in  Section  408  of  the  Revenue  Act  of  1918 
which  fixes  a  different  due  date  for  the  payment  of  the  tax  than 

that  specifically  set  forth  in  Section  406  thereof,  nor  is  there  anything  con- 
tained therein  which  prohibits  the  collection  of  the  tax  at  any  time  after 
it  is  due.  There  is  a  provision  in  Section  408  [1f33],  which  will  not  permit 
a  collector  in  any  case  to  withhold  proceedings  for  the  collection  of  the  tax 
longer  than  one  hundred  and  eighty  days  after  it  is  due  unless  there  be 
reasonable  cause  for  the  delay. 

228  In  view  of  the  foregoing,  you  are  advised  that  payment  of  Federal 
estate  taxes  at  the  expiration  of  one  year  after  the  death  of  a  decedent 

may  be  required  in  all  cases  except  where  the  Commissioner  finds  that  pay- 
ment thereof  within  one  year  after  decedent's  death  would  impose  undue 
hardship  upon  the  estate.  Payment  of  estate  taxes,  therefore,  may  not  be 
withheld  for  a  period  of  one  year  and  one  hundred  and  eighty  days  after 
decedent's  death  by  those  liable  therefor.  In  all  cases,  however,  no  interest 
may  be  added  to  the  tax  unless  one  year  and  one  hundred  and  eighty  days 
have  expired  without  payment  having  been  made,  except  in  a  case  where 
one  year  and  ninety  days  since  decedent's  death  hadexp  ired  prior  to  February 
25,  1919,  and  payment  had  not  been  made. 

229  There  is  returned  herewith  the  memorandum  which  you  transmitted 
to  the  Bureau.    (Letter  to  The  Corporation  Trust  Company,  signed 

by  Deputy  Commissioner  James  Hagerman,  Jr.,  and  dated  June  24,  1920.) 
[See  Court  Decision  at  H315.J 

230  Art.  91.    Payment  by  bonds. — Payment  of  the  estate  tax  may  be 
made  by  the  delivery  of  Liberty  Bonds  or  other  bonds  of  the  United 

States  Dearing  interest  at  a  higher  rate  than  4  per  cent  per  annum,  provided 
they  were  owned  by  the  decedent  for  at  least  six  months  prior  to  the  date  of 
his  death.  Such  bonds  are  received  in  payment  to  the  amount  of  par  and 
interest  accrued  at  the  time  of  the  payment. 

[For  the  other  paragraph  of  Art.  91,  see  ^[266.] 

231  United  States  bonds  bearing  interest  at  a  higher  rate  than  four 
per  centum  to  be  accepted  at  par  and  accrued  interest  in  payment 
of  estate  tax. — Section  14  [6]  of  the  Act  of  April  4,  1918  (Public- 
No.  120 — 65th  Congress),  provided  in  part: 

"That  any  bonds  of  the  United  States  bearing  interest  at  a  higher  rate 
than  four  per  centum  (whether  issued  unded  section  one  of  this  Act  or  upon 
conversion  of  bonds  issued  under  this  Act  or  under  said  Act  approved  April 
twenty-fourth,  nineteen  hundred  and  seventeen),  which  have  been  owned 
by  any  person  continuously  for  at  least  six  months  prior  to  the  date  of  his 
death,  and  which  upon  such  date  constitute  part  of  his  estate,  shall,  under 
rules  and  regulations  prescribed  by  the  Secretary  of  the  Treasury,  be  receiv- 
able by  the  United  States  at  par  and  accrued  interest  in  payment  of  any 
estate  or  inheritance  taxes  imposed  by  the  United  States,  under  or  by  virtue 

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of  any  present  or  future  law  upon  such  estate  or  the  inheritance  thereof." 

232  Bonds  of  the  United  States  falling  within  the  classification  specified 
will  be  accepted  in  payment  of  estate  tax  at  par  and  accrued  interest. 

Bonds  so  receivable  must  (1)  bear  a  higher  rate  of  interest  than  four  per 
centum  per  annum,  and  (2)  have  been  owned  by  the  decedent  continuously 
or  at  least  six  months  prior  to  the  date  of  his  death,  and  upon  such  date 
constitute  a  part  of  the  estate  of  the  decedent.  The  reckoning  of  the  required 
period  of  ownership  may  begin  on  the  date  when  the  decedent  acquired  bonds 
bearing  interest  at  a  higher  rate  than  four  per  centum,  by  purchase,  by 
conversion  of  other  bonds,  or  otherwise. 

233  The  entire  estate  tax  may  be  paid  in  bonds,  or  the  tax  may  be  paid 
partially  in  bonds  and  partially  by  cash  or-  check.   Collectors  may  not, 

however,  accept  bonds  the  par  value  and  accrued  interest  on  which  aggregate 
a  greater  amount  than  the  tax.    (T.  D.  2705,  April  23,  1918.) 


(T.  D.  3227.) 
{Decision. — Act  oj  April  4,  1918.) 
Receipt  of  Liberty  Bonds  for  Estate  Taxes. 

234  1.  Four  per  cent  bonds  converted — Computation  of  time. — Where  a  dece- 
dent converted  second  Liberty  4%  Bonds  into  third  Liberty  4j^% 

Bonds  three  weeks  prior  to  his  death,  the  latter  bonds  are  not  receivable 
for  estate  or  inheritance  taxes  under  the  provisions  of  Section  14,  Act  of 
April  4,  1918  [^231  herein]  (40  Stat.  503,  505),  as  they  were  not  held  by 
him  for  at  least  six  months  prior  to  his  death,  and  as  the  time  that  the 
four  per  cent  bonds  were  held  can  not  be  tacked  onto  the  period  of  holding 
the  434%  bonds.  • 

235  2.  Constitutionality  oj  Act. — Section  14,  so  construed,  does  not  work 
such  unwarranted  discrimination  against  that  class  of  holders  whose 

death  occurred  within  the  six  months'  period  after  the  issue  of  the 
bonds,  as  to  render  unconstitutional  so  much  of  Section  14  as  makes  possible 
such  result,  as  the  classification  is  reasonable  and  proper,  and  treats  all  persons 
alike. 

(The  decision  [syllabus  only,  as  shown  above]  of  the  United  States  Circuit 
Court  of  Appeals  for  the  Seventh  Circuit,  rendered  at  the  April  session, 
1921,  in  the  case  of  Julius  S.  Smietanka,  Collector,  v.  Charlotte  T.  P.  Ullman, 
reversing  the  decision  of  the  District  Court  of  the  United  States  for  the 
Northern  District  of  Illinois,  Eastern  Division  is  published  not  as  a  ruling 
of  the  Treasury  Department,  but  for  the  information  of  Internal  Revenue 
officers  and  others  concerned.) 


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RECEIPT  OF  LIBERTY  BONDS  AND  VICTORY  NOTES  FOR  ESTATE 
OR  INHERITANCE  TAXES. 

Department  Circular  No.  225. 

236  1.  The  following  regulations  are  prescribed  pursuant  to  section  14 
of  the  Second  Liberty  Bond  Act,  approved  September  24,  1917, 

as  amended  by  Third  Liberty  Bond  Act,  approved  April  4,  1918,  which 
section  is  as  follows: 

Sec.  14.  That  any  bonds  of  the  United  States  bearing  interest  at 
a  higher  rate  than  four  per  centum  per  annum  (whether  issued 
under  section  one  of  this  Act  or  upon  conversion  of  bonds  issued 
under  this  Act  or  under  said  Act  approved  April  twenty-fourth, 
nineteen  hundred  and  seventeen),  which  have  been  owned  by  any  per- 
son continuously  for  at  least  six  months  prior  to  the  date  of  his 
death,  and  which  upon  such  date  constitute  part  of  his  estate,  shall, 
under  rules  and  regulations  prescribed  by  the  Secretary  of  the 
Treasury,  be  receivable  by  the  United  States  at  par  and  accrued 
interest  in  payment  of  any  estate  or  inheritance  taxes  imposed  by  the 
United  States,  under  or  by  virtue  of  any  present  or  future  law  upon 
such  estate  or  the  inheritance  thereof. 
Pursuant  to  section  18(d)  of  the  Second  Liberty  Bond  Act,  approved  Septem- 
ber 24,  1917,  as  amended  by  the  Victory  Liberty  Loan  Act,  approved  March 
3,  1919,  the  word  "bonds"  where  it  appears  in  the  above  section  shall  be 
deemed  to  include  notes  issued  under  said  section  18.   This  circular  super- 
sedes Treasury  Department  Circulars  No.  132,  dated  January  30,  1919, 
and  No.  151,  dated  June  24,  1919. 

237  2.  The  bonds  and  notes  coming  within  the  provisions  of  said  sec- 
tion at  present  issued  and  outstanding  are — 


Official  title. 

Date  of  issue. 

Short  title.* 

(a)  First  Liberty  Loan  Converted       per  cent  bonds  of  1932-47. . . 
(6)  First  Liberty  Loan  Second  Converted  434  per  cent  bonds  of 
1932-47  

May    9,  1918 

Oct.  24,  1918 
May  9,  1918 
May  9,  1918 
Oct.  24,  1918 

May  20,  1919 

First  4M's. 

First  Second  4M's. 
Second  4  J4's. 
Third  4M's. 
Fourth  4M's. 

Victory  4%'s. 

(c)  Second  Liberty  Loan  Converted  4J4  per  cent  bonds  of  1927-42 

(/)  Victory  Liberty  Loan  4%  per  cent  convertible  gold  notes  of 
1922-23  

1  Use  short  titles. 

238  The  words  "bonds  or  notes"  where  they  appear  in  this  circular 
shall  be  deemed  to  refer,  respectively,  to  the  six  issues  of  Liberty 

bonds  and  Victory  notes  above  described.  The  First  Liberty  Loan  3}^ 
per  cent  bonds  of  1932-1947,  the  First  Liberty  Loan  Converted  4  per  cent 
bonds  of  1932-1947,  the  Second  Liberty  Loan  4  per  cent  bonds  of  1927-1942, 
and  the  3J4  per  cent  Victory  Liberty  Loan  notes  of  1922-23  are  not  accept- 
able in  payment  of  Federal  estate  or  inheritance  taxes  and  are  not  "bonds 
or  notes"  within  the  meaning  of  these  regulations. 

General  Provisions. 

239  3.  Bonds  or  notes  of  the  issues  above  specified  are  receivable  for 
such  taxes  only  in  case  such  bonds  or  notes  have  been  owned  by  the 

decedent  continuously  for  at  least  six  months  prior  to  the  date  of  his  death 
and  upon  such  date  constitute  part  of  his  estate.  The  reckoning  of  the 
required  period  of  ownership  will  begin  on  the  date  when  the  decedent 
acquired  such  bonds  or  notes  by  original  subscription,  by  purchase,  by  con- 
version of  bonds  or  notes  of  other  issues,  or  otherwise.  For  the  purpose  of 
reckoning  the  required  period  of  ownership  a  fraction  of  a  day  shall  be  con- 

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sidered  a  whole  day.  In  the  case  of  acquisition  of  bonds  or  notes  by  original 
subscription,  the  date  of  original  subscription,  or  the  date  of  issue  of  the  bonds 
or  notes,  whichever  shall  be  later  in  time,  shall  be  deemed  to  be  the  date  of 
acquisition,  provided  that  payment  in  full  on  the  subscription  shall  have  been 
completed  and  the  bonds  or  notes  delivered  thereon.  In  the  case  of  acquisi- 
tion of  bonds  or  notes  by  purchase,  if  registered  bonds  or  notes  of  one  of  the 
issues  above  enumerated  as  acceptable  in  payment  of  Federal  estate  or 
inheritance  taxes  have  been  duly  assigned  in  blank  or  for  exchange  or  transfer, 
and  delivered  to  the  decedent  assignee  pursuant  to  such  assignment, 
the  date  of  such  delivery  will  be  deemed  the  date  of  acquisition,  although 
such  bonds  or  notes  may  not  have  been  presented  to  the  Treasury  Depart- 
ment or  to  a  Federal  Reserve  bank  for  transfer  or  exchange  until  a  later 
date.  In  the  case  of  acquisition  of  bonds  or  notes  by  conversion  of  bonds 
or  notes  of  other  issues  previously  owned,  the  date  of  presentation  for  con- 
version to  the  Treasury  Department  or  a  Federal  Reserve  bank  will  be  deemed 
the  date  of  acquisition:  Provided,  however,  That  (a)  per  cent  bonds  of 
the  First  Liberty  Loan  Converted  and  of  the  Second  Liberty  Loan  Converted 
issued  on  conversion  of  4  per  cent  bonds  presented  after  July  1,  1918,  and 
on  or  before  November  9,  1918,  pursuant  to  the  provisions  of  Treasury 
Department  Circular  No.  114,  dated  May  9,  1918,  shall,  for  the  purpose  of 
reckoning  the  required  period  of  ownership,  be  deemed  to  have  been  acquired 
on  June  15,  1918,  in  the  case  of  bonds  of  the  First  Liberty  Loan  Converted, 
and  on  May  15,  1918,  in  the  case  of  bonds  of  the  Second  Liberty  Loan  Con- 
verted; and  (b)  4  per  cent  bonds  of  the  First  Liberty  Loan  Converted  and 
of  the  Second  Liberty  Loan  presented  for  conversion  into  4j^  per  cent  bonds 
on  or  after  March  7,  1919,  pursuant  to  the  extension  of  the  conversion 
privilege  under  Treasury  Department  Circular  No.  137,  as  amended  and 
supplemented,  shall  be  deemed  to  be  converted  as  of  the  interest  payment 
date  next  succeeding  the  date  of  presentation  for  conversion,  and  such 
next  succeeding  interest  payment  date,  and  not  the  date  of  presentation 
for  conversion,  will  be  deemed  to  be  the  date  of  acquisition  of  such  bonds 
for  the  purpose  of  reckoning  the  required  period  of  ownership.  Exchange 
of  coupon  for  registered  bonds  or  notes,  or  of  registered  for  coupon  bonds 
or  notes,  or  of  bonds  or  notes  of  one  denomination  for  bonds  or  notes  of 
other  denominations  of  the  same  issue,  or  of  temporary  coupon  bonds  for 
permanent  bonds,  whether  before  or  after  the  death  of  the  decedent,  will 
not  prevent  the  receipt  of  the  bonds  or  notes  issued  upon  such  exchange 
for  estate  or  inheritance  taxes,  provided  that  no  change  of  ownership  takes 
place. 

240  4.  Bonds  or  notes  tendered  in  payment  of  taxes  pursuant  to  these 
regulations  must  be  accompanied  by  an  affidavit  of  one  or  more  of 
the  legal  representatives  of  the  estate  on  Form  760  Revised  (Exhibit  A), 
hereto  attached,  and  the  collector  is  authorized  to  require  such  further 
evidence  as  may  be  necessary  to  enable  him  to  determine  that  the  bonds 
or  notes  are  properly  receivable  in  payment  of  estate  or  inheritance  taxes 
pursuant  to  law  and  these  regulations.  The  term  "legal  representative" 
where  it  appears  in  this  circular  means  the  executor  or  administrator  of  the 
decedent's  estate  or,  if  there  be  no  executor  or  administrator,  such  other 
person  or  persons  as  may  be  recognized  as  such  under  the  Estate  Tax  Law 
and  regulations  and  entitled  to  assign  any  registered  bonds  or  notes  owned 
by  the  decedent  under  the  regulations  of  the  Treasury  Department  with 
regard  to  United  States  bonds  and  notes. 

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241  5.  On  receipt  of  such  bonds  or  notes,  and  on  making  such  determina- 
tion, and  provided  that  the  bonds  or  notes  tendered  conform  to  the 

other  provisions  of  these  regulations,  the  collector  shall  stamp  or  plainly 
write  upon  the  face  of  each  bond  or  note,  over  his  signature,  the  following 
legend  in  indelible  ink: 

 This  bond/note  has  this  day  been  received  in 

(Date) 

payment  of  estate  (or  inheritance)  taxes  on  the  estate  of  

(Name  of  decedent.) 

under  authority  of  law,  and  will  not  be  redeemed  by  the  United 

States  except  for  credit  of  the  undersigned  J 

Collector  of  Internal  Revenue  for  the  District  of  

242  Coupons,  if  any,  attached  to  each  bond  or  note,  shall  be  indelibly 
stamped  or  marked  "canceled"  on  the  face  of  each  coupon  in  letters 

of  sufficient  size  to  be  plainly  legible. 

243  6.  Where  bonds  or  notes  are  owned  by  a  partnership  of  which  the 
decedent  was  a  member  for  the  six  months  prior  to  his  death,  and 

have  been  continuously  so  owned  for  at  least  the  six  months  prior  to  his 
death,  a  fractional  part  of  such  bonds  or  notes  proportionate  to  the  deceased 
partner's  share  in  the  capital  of  the  partnership  will,  for  the  purposes  of  these 
regulations,  be  deemed  to  have  been  owned  by  him  to  the  extent  that  such 
fractional  part  is  actually  distributed  to  his  estate  upon  liquidation:  Provided, 
however,  That  nothing  herein  contained  shall  be  deemed  to  make  bonds 
or  notes  acceptable  in  amounts  less  than  some  authorized  denomination 
thereof.  In  addition  to  the  affidavit  on  Form  760  Revised,  proof  satisfactory 
to  the  Secretary  of  the  Treasury  must  be  presented  as  to  the  ownership  of 
the  bonds  or  notes  by  the  partnership  and  the  decedent's  interest  in  the 
partnership;  such  proof  in  general  should  include  affidavits  of  the  surviving 
partners  and  of  the  legal  representative  of  the  decedent's  estate  showing 
(1)  the  character  and  extent  of  the  interest  of  the  decedent  in  the  capital 
of  the  partnership,  (2)  any  special  interest  of  the  decedent  in  the  bonds 
or  notes,  (3)  the  period  of  ownership  of  the  bonds  or  notes  by  the  partnership 
and  the  period  of  the  dedecent's  membership  in  the  partnership,  and  (4)  the 
distribution  of  the  bonds  or  notes  to  the  decedent's  estate  on  account  of 
his  distributive  share  in  the  partnership. 

244  7.  Where  bonds  or  notes  are  held  in  trust  for  or  otherwise  beneficially 
owned  by  any  person  on  terms  which  entitle  him  unconditionally  to 

demand  and  receive  the  legal  title  or  a  divided  share  thereof  at  any  time, 
he  will,  for  the  purposes  of  these  regulations,  be  deemed  the  owner  of  such 
bonds  or  notes  or  such  divided  share  thereof:  Provided,  however,  That  nothing 
herein  contained  shall  be  deemed  to  make  bonds  or  notes  acceptable  in 
amounts  less  than  some  authorized  denomination  thereof.  In  addition 
to  the  affidavit  on  Form  760  Revised,  proof  satisfactory  to  the  Secretary 
of  the  Treasury  must  be  presented  as  to  the  ownership  of  the  bonds  or  notes 
by  the  trust  and  the  decedent's  interest  therein;  such  proof  in  general  should 
include  affidavits  by  the  trustee  and  the  legal  representative  of  the  decedent's 
estate  showing  (1)  the  creation  of  the  trust,  the  terms  and  duration  thereof, 
and  the  interest  of  the  decedent  therein;  (2)  the  property  included  under 
the  trust,  and  particularly  the  period  of  ownership  of  the  bonds  or  notes 
by  the  trust;  and  (3)  the  distribution  of  the  bonds  or  notes  to  the  decedent's 
estate  on  account  of  his  share  in  the  trust  estate,  and  the  liability  to  Federal 
estate  (or  inheritance)  tax  in  respect  to  such  bonds  or  notes. 

245  8.  The  entire  tax  may  be  paid  in  bonds  or  notes,  or  the  tax  may  be 
paid  partly  in  bonds  or  notes  and  partly  by  any  other  form  of  pay- 

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ment  permitted  by  law  or  regulations  duly  in  force.  Collectors  may  not, 
however,  receive  bonds  or  notes  the  par  value  and  accrued  interest  of  which, 
computed  in  accordance  with  these  regulations,  aggregate  a  greater  amount 
than  the  tax  in  payment  of  which  the  bonds  or  notes  are  tendered.  After 
bonds  or  notes,  or  cash,  have  been  tendered  and  duly  received  in  payment 
of  the  tax,  an  election  as  to  the  method  of  payment  will  be  deemed  to  have 
been  made  by  the  taxpayer,  and  thereafter  requests  for  the  return  of  such 
bonds  or  notes,  or  cash,  and  the  acceptance  of  payment  in  the  alternative 
form  will  be  refused. 

Coupon  Bonds  or  Notes. 

246  9.  Coupon  bonds  or  notes  received  for  estate  (or  inheritance)  taxes 
must  be  delivered  to  the  collector  with  all  unmatured  coupons 

attached  and  with  all  matured  coupons  detached.  Detached  matured 
coupons  will  not  be  receivable  in  payment  of  such  taxes.  The  portion  of 
the  face  amount  of  the  current  coupon  which  represents  accrued  interest 
to  date  of  receipt  for  taxes  will  be  determined  in  the  manner  prescribed 
by  the  interest  tables  (Exhibits  B  and  C)  hereto  attached,  and  such  accrued 
interest  will  be  receivable  for  estate  or  inheritance  taxes. 

247  10.  Temporary  coupon  bonds,  all  coupons  originally  attached  to 
which  have  matured  and  been  detached,  will  not  be  accepted  in 

payment  of  estate  or  inheritance  taxes  pursuant  to  the  provisions  of  this 
circular,  but  must  first  be  exchanged  for  permanent  bonds,  pursuant  to  the 
provisions  of  Treasury  Department  Circular  No.  164,  dated  December  15, 
1919,  as  amended  and  supplemented:  Provided,  however,  That  Fourth 
Liberty  Loan  per  cent  bonds  of  1933-1938,  in  temporary  form,  will  be 
acceptable  until  April  15,  1921,  and  First  Liberty  Loan  Second  Converted 
per  cent  bonds  of  1932-1947,  in  temporary  form,  will  be  acceptable  until 
June  15,  1921,  in  payment  of  such  taxes,  accrued  interest  on  such  bonds 
to  date  of  receipt  of  taxes  being  covered  for  the  current  interest  period 
by  the  temporary  coupon  bond;  but  after  such  dates,  respectively,  such 
temporary  bonds  must  be  exchanged  for  permanent  bonds  before  presenta- 
tion. 

248  11.  Coupon  bonds  or  notes,  after  being  received,  and  reception  in- 
dorsed on  the  bonds  or  notes  as  above  required,  will  be  deposited 

by  the  collector  in  the  Federal  Reserve  Bank  of  the  district  in  which  his  office 
is  located  (or  Federal  Reserve  branch  bank,  as  hereinafter  provided)  as  a 
deposit  of  the  par  value  with  accrued  interest,  determined  as  above  required. 
Such  bonds  or  notes,  unless  delivered  direct  to  the  Federal  Reserve  bank  or 
branch  when  located  in  the  same  city,  must  be  transmitted  by  registered 
mail  but  will  not  be  insured.  The  collector  will  transmit  with  the  bonds 
or  notes  an  accurate  schedule  on  Form  761  Revised  (Exhibit  D)  hereto 
attached,  showing  the  serial  number  and  denomination  of  each  bond  or  note 
transmitted,  the  issue,  the  date  of  receipt  for  taxes,  the  amount  of  accrued 
interest,  and  the  amount  for  which  credited  against  estate  or  inheritance 
taxes.  Such  schedule  shall  be  made  in  quadruplicate,  the  original  to  accom- 
pany the  bonds  or  notes  deposited  with  the  Federal  Reserve  bank,  the 
duplicate  to  be  transmitted  to  such  Federal  Reserve  bank  under  separate 
cover,  the  triplicate  to  be  transmitted  to  the  Secretary  of  the  Treasury, 
Division  of  Loans  and  Currency,  Washington,  and  the  remaining  copy 
to  be  retained  by  the  collector.  Collectors  located  in  Federal  Reserve  bank 
branch  cities  will  deposit  coupon  bonds  or  notes  received  by  them  hereunder 
with  such  branches  in  accordance  with  the  provisions  hereof,  and  the  term 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  83  SERVICE 


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"Federal  Reserve  bank,"  where  it  appears  herein,  includes  such  branches 
unless  otherwise  indicated  by  the  context. 

249  12.  The  Federal  Reserve  bank  on  receipt  and  examination  of  such 
bonds  or  notes  will  charge  the  Treasurer's  account  with  par  and 

accrued  interest  to  date  of  receipt  for  taxes  as  reported  by  the  collector, 
give  credit  in  the  Treasurer's  account  to  the  collector  for  like  amount,  and 
issue  a  certificate  of  deposit  in  triplicate  on  National  Bank  Form  15,  trans- 
mitting the  original  to  the  Secretary  of  the  Treasury  through  the  Treasurer 
of  the  United  States  with  its  transcript,  and  the  duplicate  and  triplicate 
to  the  collector,  who  will  forward  the  duplicate  to  the  Commissioner  of 
Internal  Revenue.  Such  Federal  Reserve  bank  will  then  physically  cancel 
the  bonds  or  notes  nnd  coupons  attached,  and  transmit  the  same  to  the 
Treasurer  of  the  United  States  with  the  original  or  duplicate  of  the  collector's 
schedule  (Form  761  Revised),  to  which  shall  be  added  the  Federal  Reserve 
bank's  certificate  as  shown  thereon. 

250  13.  In  the  event  that  bonds  or  notes  in  coupon  form  are  tendered 
to  a  collector  of  internal  revenue  in  payment  of  Federal  estate  or 

inheritance  taxes  hereunder,  and  after  having  been  received  by  the  collector 
and  stamped  or  otherwise  indorsed  by  him  as  provided  herein,  are  found 
to  be  not  acceptable  in  payment  of  such  taxes,  Federal  Reserve  banks  will 
issue  clean  bonds  or  notes  in  exchange  for  such  erroneously  stamped  or 
indorsed  coupon  bonds  or  notes  through  the  denominational  exchange 
account:  Provided,  however,  That  the  bonds  or  notes  erroneously  stamped 
or  endorsed  and  presented  for  such  exchange  must  be  accompanied  by  an 
official  certificate  on  Form  834  (Exhibit  E)  attached  hereto,  signed  by  the 
collector  of  internal  revenue  concerned,  to  the  effect  that  the  stamp  or 
indorsement  was  affixed  in  error  and  that  the  bonds  or  notes  (which  must 
be  specifically  described)  were  not  in  fact  accepted  in  payment  of  estate 
or  inheritance  taxes.  Such  exchanges  need  not  be  reported  specifically  to 
the  Department,  but  the  bonds  or  notes  so  stamped  or  indorsed  and  replaced 
must  be  accompanied  by  the  certificate  above  described  when  forwarded 
by  the  Federal  Reserve  bank  to  the  Department  for  credit.  In  case  any 
such  bonds  or  notes  have  been  deposited  with  a  Federal  Reserve  bank  and 
charged  to  the  Treasurer's  account  and  credit  therein  given  to  the  collector 
therefor,  pursuant  to  paragraph  12  hereof,  the  Federal  Reserve  bank  will 
issue  new  bonds  or  notes  therefor  as  herein  provided  through  its  denomina- 
tional exchange  account,  taking  the  receipt  of  the  collector  for  such  bonds 
or  notes  on  Form  N-2  (Exhibit  G)  attached  hereto,  and  charging  the  collector 
in  the  Treasurer's  account  with  the  amount  previously  credited  therein  on 
account  of  such  bonds  or  notes,  supporting  the  entry  with  the  receipt  on 
Form  N-2. 

Registered  Bonds  or  Notes. 

251  14.  Registered  bonds  or  notes  are  also  receivable  for  estate  or  in- 
heritance taxes  in  accordance  with  these  regulations.    In  addition 

to  requiring  the  affidavit  (Form  760  Revised)  the  collector  shall  determine 
that  the  registered  owner  whose  name  is  inscribed  on  the  bond  or  note  is 
the  decedent  whose  estate  is  liable  to  estate  (or  inheritance)  taxes  and  that 
the  bond  or  note  is  presented  from  the  custody  or  control  of  the  legal  repre- 
sentative or  representatives  of  such  estate.  Such  bond  or  note  shall  be 
assigned  to  "the  Secretary  of  the  Treasury  for  redemption  in  payment 
of  estate  (or  inheritance)  taxes"  by  the  authorized  legal  representative 
or  representatives  of  the  deceased  registered  owner.    If  an  executor  or 

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WAR  TAX  84  SERVICE 


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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


administrator  of  the  decedent's  estate  has  been  appointed,  such  representa- 
tive or  representatives  must  furnish  to  the  collector  a  certificate  under  the 
seal  of  the  court  in  which  the  estate  is  being  administered  or  a  duly  certified 
copy  of  the  letters  testamentary  or  of  administration,  showing  the  appoint- 
ment of  such  representative  or  representatives,  the  date  thereof,  and  that  the 
appointment  is  still  in  force.  Such  certificate  or  certification  of  the  copy 
must  be  dated  not  more  than  thirty  days  prior  to  its  presentation  to  the  col- 
lector. All  such  documents  of  authority  will  be  attached  to  the  bond  or 
note  and  forwarded  therewith  by  the  collector  as  hereinafter  provided, 
where  there  are  two  or  more  legal  representatives,  all  must  unite  in  the 
assignment,  unless  by  decree  of  court  or  testamentary  provision  some  one 
or  more  of  them  is  designated  or  empowered  to  dispose  of  the  bonds  or  notes. 
If  no  executor  or  administrator  has  been  appointed,  the  assignment  must 
be  made  by  the  person  or  persons  entitled  to  assign  the  bonds  or  notes  under 
the  regulations  of  the  Treasury  Department  as  to  transfers  without  adminis- 
tration, and  the  bonds  or  notes  will  be  accepted  subject  to  submission  to  the 
Secretary  of  the  Treasury,  Division  of  Loans  and  Currency,  for  specific 
approval  of  the  transfer.  The  form  printed  on  the  back  of  the  bond  or  note 
must  be  used  for  assignment,  and  the  assignment  must  be  dated  and  properly 
acknowledged  as  prescribed  in  the  note  printed  on  the  back  of  the  bond  or 
note.  Officers  authorized  to  take  acknowledgements  of  assignments  of 
registered  bonds  or  notes  in  addition  to  those  mentioned  on  the  back  of  the 
bond  are  designated  in  paragraph  16  of  Treasury  Department  Circular 
No.  141,  dated  September  15,  1919,  and  in  the  general  regulations  of  the 
Treasury  Department  with  regard  to  United  States  bonds  and  notes.  The 
collector  will  satisfy  himself  that  the  above-mentioned  documents  of  authority 
and  the  requisite  signatures  and  acknowledgements  are  in  hand  before 
noting  on  the  bond  or  note  its  reception  for  taxes,  as  provided  in  paragraph  5 
hereof,  but  the  final  determination  of  the  correctness  or  validity  of  the  assign- 
ment will  be  made  by  the  Secretary  of  the  Treasury,  Division  of  Loans  and 
Currency,  at  Washington,  on  receipt  of  all  such  bonds  or  notes  and  docu- 
ments, when  transmitted  as  hereinafter  provided. 

252  15.  By  reason  of  the  periodical  closing  of  the  transfer  books  of  the 
Treasury  Department  for  the  payment  of  interest  on  registered  bonds 

and  notes,  and  the  impossibility  of  stopping  payment  of  interest  to  the  regis- 
tered holder  during  the  period  of  such  closing,  registered  bonds  and  notes  will 
not  be  receivable  in  payment  of  estate  or  inheritance  taxes  during  the  period  of 
closing  of  the  books  of  the  issue  in  question  unless  an  adjustment  of  interest 
is  made  with  the  collector  as  prescribed  by  paragraph  17  hereof.  The  books 
are  closed  with  respect  to  each  issue  for  one  month  prior  to  each  interest 
date.  The  closed  periods  with  respect  to  each  bond  or  note  may  therefore 
be  determined  by  inspection  of  the  bond  or  note  itself,  being  one  month 
prior  to  each  interest  payment  date  named  thereon,  and  until  the  day  follow- 
ing such  interest  payment  date.  The  closed  periods  for  each  issue  of  bonds 
or  notes  receivable  for  estate  or  inheritance  taxes  are  also  stated  in  the 
table  (Exhibit  H  [1f264])  hereto  attached. 

253  16.  Collectors  will  examine  each  registered  bond  or  note  tendered 
for  estate  or  inheritance  taxes  to  determine  whether  the  transfer 

books  of  the  issue  in  question  are  then  opened  or  closed.  If  the  books  are 
then  open  but  are  due  to  close  on  a  date  too  early  to  permit  the  bond  or  note 
to  be  transmitted  to  the  Secretary  of  the  Treasury,  Division  of  Loans  and 
Currency,  and  to  be  received  by  such  division  prior  to  the  closing  date, 
the  collector  will  advise  the  Secretary  of  the  Treasury,  Division  of  Loans 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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and  Currency,  by  telegraph  at  the  time  of  receipt  of  the  bond  or  note,  using 
form  (Exhibit  I)  hereto  attached,  and  will  immediately  confirm  the  same  by 
mail.  The  Division  of  Loans  and  Currency  will  thereupon  stop  interest 
payment  on  such  bond  or  note.  The  Secretary  reserves  the  right  to  require 
an  adjustment  of  the  interest  on  any  registered  bond  or  note  tendered  to  the 
collector  during  an  open  period  but  received  at  the  Division  of  Loans  and  Cur- 
rency during  a  closed  period  of  the  transfer  books  of  the  issue  in  question. 
Executors  and  other  legal  representatives  are  urged  to  tender  registered  bonds 
or  notes  at  a  time  when  the  transfer  books  of  such  bonds  or  notes  are  open, 
or  to  exchange  such  bonds  or  notes  for  coupon  bonds  or  notes  before  the 
transfer  books  of  such  bonds  or  notes  close  in  order  to  avoid  the  necessity 
for  interest  adjustments. 

254  17.  Registered  bonds  or  notes  tendered  pursuant  to  these  regulations 
will  be  received  at  par  and  accrued  interest  computed  in  accordance 

with  tables  (Exhibits  B  and  C),  hereto  attached.  If  such  bonds  or  notes 
are  tendered  while  the  transfer  books  are  6pen,  the  interest  will  be  computed 
from  the  last  preceding  interest  date  as  shown  thereon  to  the  date  of  receipt. 
If  they  are  tendered  while  the  transfer  books  are  closed,  since  it  is  impossible 
to  stop  the  mailing  of  the  next  interest  check,  they  may  be  received  at  par, 
with  a  deduction  for  the  interest  from  the  date  of  receipt  to  such  next  following 
interest  date,  computed  in  accordance  with  said  tables. 

255  18.  Registered  bonds  or  notes  received  pursuant  to  these  regulations, 
and  bearing  the  stamp  or  writing  required  by  paragraph  5  hereof, 

will  be  transmitted  with  all  accompanying  documents  of  authority  to  the 
Secretary  of  the  Treasury,  Division  of  Loans  and  Currency,  Washington, 
by  registered  mail,  but  not  insured.  The  collector  will  make  an  accurate 
schedule  on  Form  762  Revised  (Exhibit  J),  hereto  attached,  in  triplicate, 
showing  the  date  of  death  of  the  decedent,  the  serial  number  and  denomina- 
tion of  each  bond  or  note,  the  issue,  accrued  interest,  the  date  of  receipt 
for  taxes,  and  the  amount  for  which  credited  against  estate  or  inheritance 
taxes.  The  original  of  this  schedule  must  accompany  the  bonds  or  notes 
sent  to  the  Secretary  of  the  Treasury,  Division  of  Loans  and  Currency; 
the  duplicate  shall  be  transmitted  to  the  Secretary  of  the  Treasury,  Division 
of  Loans  and  Currency,  under  separate  cover;  and  the  triplicate  shall  be 
retained  by  the  collector. 

256  19.  On  receipt  of  such  bonds  or  notes,  the  Division  of  Loans  and  Cur- 
rency will  determine  whether  the  assignment  is  sufficient  and  has 

been  properly  executed,  whether  the  bonds  or  notes  are  of  an  issue  receivable 
for  estate  or  inheritance  taxes  hereunder,  whether  the  Department's  record 
of  registration  is  consistent  with  the  affidavit  of  ownership  (Form  760  Revised), 
and  the  amount  at  which  such  bonds  or  notes  are  receivable  for  estate  or 
inheritance  taxes,  and  will,  if  it  finds  the  bonds  or  notes  in  order,  transmit 
them  with  its  advice  on  Form  L.  &  C.  122  (Exhibit  K),  hereto  attached, 
to  the  Treasurer  of  the  United  States  for  redemption.  The  Treasurer  will 
thereupon  cancel  the  bonds  or  notes  and  issue  a  certificate  of  deposit  in  the 
name  of  the  collector,  in  triplicate,  and  will  forward  the  original  to  the 
office  of  the  Secretary  of  the  Treasury,  Division  of  Bookkeeping  and  War- 
rants, and  transmit  the  duplicate  and  triplicate  of  such  certificate  to  the 
Commissioner  of  Internal  Revenue,  Accounts  Division,  who  will  forward 
the  triplicate  to  the  collector. 

257  20.  In  the  event  that  bonds  or  notes  in  registered  form  are  tendered 
to  a  collector  of  internal  revenue  in  payment  of  Federal  estate  or 

inheritance  taxes,  pursuant  hereto,  and  after  having  been  assigned  to  the 
Secretary  of  the  Treasury  for  redemption  in  payment  of  such  taxes  and  re- 

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ceived  and  stamped  or  otherwise  indorsed  by  the  collector  as  provided  herein, 
are  found  to  be  not  acceptable  in  payment  of  such  taxes,  the  Secretary  of  the 
Treasury,  or  the  Federal  Reserve  banks,  will  either  (1)  accept  such  registered 
bonds  or  notes  for  exchange  for  new  registered  bonds  or  notes  registered 
in  the  same  name,  or  (2)  accept  such  registered  bonds  or  notes,  notwithstand- 
ing the  assignment  to  the  Secretary  of  the  Treasury  and  the  collector's 
stamp  or  indorsement  thereon,  for  transfer  or  exchange  pursuant  to  such 
subsequent  assignments  as  may  appear  on  such  bonds  or  notes:  Provided, 
however,  in  either  case,  that  such  registered  bonds  or  notes  are  accompanied 
by  an  official  certificate  on  Form  835  (Exhibit  F),  attached  hereto,  signed 
by  the  collector  of  internal  revenue  concerned,  to  the  same  effect  as  the 
certificate  prescribed  in  paragraph  13  hereof,  with  reference  to  coupon  bonds 
or  notes.  Registered  bonds  or  notes  so  tendered  in  payment  of  Federal  estate 
or  inheritance  taxes  and  erroneously  assigned  and  stamped  or  indorsed 
must  be  forwarded  by  the  Federal  Reserve  bank  to  the  Treasury  Department, 
Division  of  Loans  and  Currency,  in  regular  course,  and  when  forwarded  must 
be  accompanied  by  the  official  certificate  of  the  collector. 

General. 

258  21.  Until  certificates  of  deposit  are  received  by  the  collector,  the 
amounts  of  bonds  or  notes  deposited  must  be  carried  as  "Cash  on 

hand,"  and  not  credited  as  "Collections,"  as  the  dates  of  the  certificates 
of  deposit  determine  the  dates  of  collections. 

259  22.  The  Secretary  of  the  Treasury  may  amend  or  withdraw  the  fore- 
going regulations  in  whole  or  in  part  at  any  time.  (Department 

Circular  No.  225,  signed  by  D.  F.  Houston,  Secretary  of  the  Treasury,  and 
dated  January  31,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         87  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW 


260  Exhibit  A. 

AFFIDAVIT  OF  OWNERSHIP  OF  BONDS/NOTES. 

Treasury  Department 

internal  revenue. 

Form  760  (Revised). 

State  of  County  of  ss: 

We  (I),  ,  the  undersigned  execut.  .  .  .,  administrat. . .  .,  beneficiar.  .  .  ., 

legal  representative  of  the  estate  of  ,  deceased,  who  died  on  , 

19....,  do  severally  swear  that  the  bond.  ./note.  .  described  below  bearing  interest  at 
a  higher  rate  than  4  per  centum  per  annum  was  (or  were)  each  owned  by  the  decedent 
continuously  for  at  least  six  months  prior  to  the  date  of  his  (or  her)  death  and  upon  such 
date  constituted  part  of  his  (or  her)  estate,  and  that  the  following  statements  with  respect 
to  each  such  bond/note  are  true  to  the  knowledge  of  deponent,  to  wit: 


Description  of  issue  (use 
short  titles  of  loans). 

Coupon  or 
registered. 

Name  of  registered  holder  (in 
the  case  of  registered  bonds 
or  notes). 

Date  of 
acquisition  by 
decedent.* 

Serial 
number. 

Face  value. 



(Each  bond  or  note  must  be  entered  separately.) 
(Signature.) 
(Address  for  mail.) 


(Signature.) 
(Address  for  mail.) 


Subscribed  and  sworn  to  before  me  at  this  day  of  ,  19.  . 

[seal.]   

Notary  Public,  Dtputy  Collector. 

♦See  paragraph  3  of  Department  Circular  No.  225,  dated  Jan.  31,  1921.  Where  date  of  acquisition 
is  unknown,  supplemental  affidavit  should  be  attached  stating  all  facts  and  circumstances  from  which  date 
of  acquisition  may  be  inferred.  Statements  not  within  the  knowledge  of  deponent  will  be  disregarded  unless 
sources  of  information  and  grounds  of  belief  are  given  in  full. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  88  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


261  EXHIBIT  B. 

LIBERTY  LOAN 
INTEREST  TABLE  FOR  4V4  PER  CENT  BONDS. 


Interest  at  $100       per  cent  per  annum,  payable  semi-annually  2lA  per 

cent  per  half  year), 

(Tables  prepared  by  Government  Actuary.) 

NOTE. — Interest  on  United  States  bonds  is  computed  on  actual  days  basis  within 
the  interest  period.  For  any  given  interest  computation  the  appropriate  columnHo  be 
used  may  be  determined  from  the  following: 

NUMBER  OF  DAYS  IN  EACH  HALF  YEAR. 

Half  year  ending  the  15th  day  of — 

Regular  years —                            Days.  Leap  years —  Days. 

March,  May,  July,  August   181       March,  May,  July,  August   182 

April,  June                                 182  April,  June,  October,  December. .  183 

October,  December                      183  January,  February,  September, 

January.  February  September  November   184 

November   184 


Days. 

Half  year  of  181 
days. 

Half  year  of  182 
days. 

Half  year  of  183 
days. 

Half 

year  of  184 
days 

1 

$0.01174033 

$0.01167582 

$0.01161202 

$0. 

01154891 

2 

.02348066 

.02335165 

.02322404 

02309783 

3 

.03522099 

03502747 

.03483607 

03464674 

4 

.04696133 

04670330 

.04644809 

04619565 

5 

.05870166 

05837912 

.05806011 

05774457 

6 

.07044199 

07005495 

.06967213 

06929348 

7 

.08218232 

08173077 

.08128415 

08084239 

8 

.09392265 

09340659 

.09289617 

09239130 

9 

. 10566298 

10508242 

. 10450820 

10394022 

10 

.11740331 

11675824 

.11612022 

11548913 

11 

.12914365 

12843407 

.12773224 

12703804 

12 

. 14088398 

14010989 

. 13934426 

. 13858696 

13 

.15262431 

15178571 

. 15095628 

15013587 

14 

. 16436464 

16346154 

.16256831 

16168478 

15 

. 17610497 

17513736 

.17418033 

17323370 

16 

. 18784530 

18681319 

.18579235 

18478261 

17 

. 19958564 

. 19848901 

. 19740437 

.19633152 

18 

.21132597 

.21016484 

.20901639 

. 20788043 

19 

.22306630 

.22184066 

.22062842 

.21942935 

20 

.23480663 

.23351648 

.23224044 

23097826 

21 

.24654696 

.24519231 

.24385246 

.24252717 

22 

.25828729 

.25686813 

. 25546448 

.25407609 

23 

.27002762 

.26854396 

.26707650 

.26562500 

24 

.28176796 

.28021978 

.27868852 

.27717391 

25 

.29350829 

.29189560 

. 29030055 

.28872283 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  89  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Days. 

Half  year  of  181 

Half  year  of  182 

Half  year  of  183 

Half  year  of  184 



26 

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Copyright  1922,  by  The  Corporation  Trust  Company. 


WAR  TAX  90  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAY/. 


Days. 

Half 

year  of  181 
days. 

Half  year  of  182 
days. 

Half  year  of  183 
days. 

Half 

year  of  184 
days. 

81 

si;o 

95096685 

$0 

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$0.94057377 

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Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         91  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS.— 1918  LAW. 


Days 

Half  year  of  181 

Half  year  of  182 

Half 

year  of  183 

Half  year  of  184 

days. 

days. 

days. 

days. 

136 

$1.59668508 

$1.58791209 

u. 

57923497 

$1. 

57065217 

137 

1.60842541 

1.59958791 

1. 

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1. 

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142 

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1.65796703 

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144 

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1.68131868 

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145 

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74388587 

152 

1.78453039 

1.77472527 

1. 

76502732 

1 

755434/8 

153 

1.79627072 

1.78640110 

1. 

77663934 

1 

76698370 

154 

1.80801105 

1 . 79807692 

1. 

78825137 

1 

77853261 

155 

1.81975138 

1.80975275 

1. 

79986339 

1 

79008152 

156 

1.83149171 

1.82142857 

1. 

81147541 

1 

80163043 

157 

1 . 84323204 

1.83310440 

1. 

82308743 

1 

81317935 

158 

1.85497238 

1.84478022 

1. 

83469945 

1 

8z4/z8/6 

159 

1.86671271 

1.85645604 

1. 

84631148 

1 

83627717 

160 

1.87845304 

1.86813187 

1. 

85792350 

1 

84782609 

161 

1.89019337 

1.87980769 

1. 

86953552 

1 

85937500 

162 

1.90193370 

1.89148352 

1. 

88114754 

1 

87092391 

163 

1.91367403 

1.90315934 

1. 

89275956 

1. 

OOI  A  TOO'? 

88247283 

164 

1.92541436 

1.91483517 

1. 

90437158 

1. 

89402174 

165 

1.93715470 

1.92651099 

1. 

91598361 

1. 

90557065 

166 

1 . 94889503 

1.93818681 

1. 

92759563 

1. 

f\  4  *7  4  4  f\C  *7 

91711957 

167 

1.96063536 

1.94986264 

1. 

93920765 

1 . 

92866848 

168 

1.97237569 

1.96153846 

1. 

95081967 

1 . 

94021739 

169 

1.98411602 

1.97321429 

1. 

96243169 

1. 

95176630 

170 

1.99585635 

1.98489011 

1. 

97404372 

1. 

96331522 

171 

2.00759669 

1.99656593 

1. 

98565574 

1 . 

97486413 

172 

2.01933702 

2.00824176 

1. 

99726776 

1 . 

r\o  H  A  4  1  (~\  A 

98641304 

173 

2.03107735 

2  01991758 

2. 

00887978 

1  . 

99796196 

174 

2.04281768 

2.03159341 

2. 

02049180 

2. 

00951087 

175 

2.05455801 

2.04326923 

2. 

03210383 

2. 

02105978 

176 

2.06629834 

2.05494505 

2. 

04371585 

2. 

03260870 

177 

2.07803867 

2.06662088 

2 

05532787 

2. 

04415761 

178 

2 ! 08977901 

2.07829670 

2. 

06693989 

2 

05570652 

179 

2. 10151934 

2.08997253 

2. 

0785^191 

2 

06725543 

180 

2. 11325967 

2.10164835 

2. 

09016393 

2 

07880435 

181 

2.12500000 

2.11332418 

2. 

10177596 

2 

09035326 

182 

2.12500000 

2. 

11338798 

2. 

10190217 

183 

2. 

12500000 

2. 

11345109 

184 

o 

i  o  =; 00000 

Copyright  1922,  by  The  Corporation  Trust  Company. 


WAR  TAX  92  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Example. 

262      $10,850  Third  4j^s  tendered  in  payment  of  estate  taxes  January  5, 
1921. 

Interest  payment  dates  on  Third  4j^s  are  shown  on  the  face  thereof  to 
be  March  15  and  September  15  in  each  year. 

Current  half  year  interest  period  therefore  ends  March  15,  1921. 

The  year  1921  being  a  "regular"  (not  a  "leap")  year,  find  "March"  in 
the  list  at  head  of  table  under  "Regular  years."  This  list  shows  that  the 
half  year  ending  March  15  in  a  regular  year  has  181  days. 

Compute  number  of  days  since  the  beginning  of  such  half  year  that  have 
expired  to  date  of  tender  of  bonds,  thus: 


1920.  Days. 

Sept.  15  to  Sept.  30   15 

October..   31 

November   30 

December   31 

1921. 

January   5 


Total   112 


Enter  table  headed  "Half  year  of  181  days"  (second  column)  and  seek 
in  that  column  the  amount  of  interest  on  $100  for  112  days.  This  will  be 
found  opposite  the  figure  "112"  (days)  in  first  column,  and  proves  to  be 
$1.31491713,  which  is  the  decimal  for  $100  for  112  days. 

The  amount  of  bonds  presented  being  $10,850,  the  decimal  above  stated 
must  be  multiplied  by  108.5;  the  result  is  $142.6685,  which  is  the  amount 
of  accrued  interest  due  on  January  5,  1921,  on  $10,850  Third  4j^s;  accordingly 
the  bonds  are  worth  for  estate  taxes  $10,992.67. 

Fractions  of  cents  if  less  than  3^2  cent,  will  be  disregarded;  if  3^2  cent  or 
more,  will  be  counted  as  1  cent. 

Exhibit  C. 


263 


VICTORY  LIBERTY  LOAN 


Form  L.  &  C.  226 


Interest  Table  for  4%%  Per  Cent  Victory  Notes  Received  for  Estate 
or  Inheritance  Taxes. 
(Prepared  by  Government  actuary) 

Note.— Interest  on  Victory  notes  is  computed  on  actual  day's  basis 
within  the  interest  period.  For  any  given  interest  computation,  the  ap- 
propriate column  to  be  used  may  be  determined  from  the  following. 

Number  of  Days  in  Each  Half  Year 

Half  year  ending  the  15th  day  of  


Regular  years  Days 

June  182 

December  183 


Leap  years 


Days 


7i 

June  183 

December  183 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  93  SERVICE 


1-2-21. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Interest  on  $100  at  k%  Ver  cen^  Ver  annum,  payablesemi-annually 
'per  cent  per  half  year). 


Days 

Half  vf*ar  nf 

i  a  tii  k  y\^cLX  yji 

Half  vpar  nf 

Days 

Half  vpar  nf 

H  a  1  t  v^ar  nf 

182  Havs 

183  davs 

182  davs 

183  davs 

x  {jyj  w  ay  3 

1 

$0.0130495 

$0.0129781 

51 

$.6655220 

$.6618852 

2 

0260989 

0259563 

52 

6785714 

6748634 

3 

.0391484 

.0389344 

53 

.6916209 

.6878415 

4 

.0521978 

!0519126 

54 

.7046703 

.7008197 

5 

.0652473 

.0648907 

55 

.7177198 

.7137978 

6 

.0782967 

.0778689 

56 

7307692 

.7267760 

7 

.0913462 

.0908470 

57 

7438187 

.7397541 

8 

.1043956 

.1038251 

58 

7568681 

.7527322 

9 

!l 174451 

'.  1168033 

59 

.7699176 

.7657104 

10 

.1304945 

.1297814 

60 

.7829670 

.7786885 

11 

.1435440 

.1427596 

61 

.7960165 

.7916667 

12 

.1565934 

J557377 

62 

.8090659 

.8046448 

13 

.1696429 

.1687158 

63 

.8221154 

.8176230 

14 

A  826923 

.1816940 

64 

8351648 

.8306011 

15 

!l957418 

.1946721 

65 

.8482143 

.8435792 

16 

.2087912 

2076503 

17 

.2218407 

.2206284 

66 

.8612637 

.8565574 

18 

.2348901 

.2336066 

67 

.8743132 

.8695355 

19 

.2479396 

.2465847 

68 

.8873626 

.8825137 

20 

2609890 

2595628 

69 

.9004121 

.8954918 

70 

.9134615 

.9084699 

21 

.2740385 

.2725410 

22 

]2870879 

.2855191 

71 

.9265110 

.9214481 

23 

3001374 

*sJ\J\J  X\J  1  X 

.2984973 

72 

.9395604 

.9344262 

24 

3131868 

'.3114754 

73 

9526099 

.9474044 

25 

3262363 

3244536 

74 

9656593 

.9603825 

Q787088 

•  7 / O / vOO 

9733607 

26 

3392857 

3374317 

27 

3523352 

•  sJ  *J     \J  %J \J  £d 

3504098 

76 

.9917582 

.9863388 

28 

3653846 

•  \J \J \J  sJ  C_9Tt  \J 

3633880 

77 

1  0048077 

.9993169 

29 

3784341 

3763661 

78 

1  0178571 

1.0122951 

30 

.3914835 

.3893443 

79 

1.0309066 

L0252732 

31 

4045330 

.4023224 

80 

1  0439560 

X  •  V/x\J  j  \J  \J\J 

1.0382514 

32 

.4175824 

41 53005 

33 

4306319 

.4282787 

81 

1.0570055 

1.0512295 

443681 3 

•ttJUO 1J 

4412568 

82 

1  0700549 

1.0642077 

4567308 

4542350 

•  tt  <J  rr  £  O  v> \J 

83 

1  0831044 

1.0771858 

84 

1  0961538 

1.0901639 

36 

46Q7809 

46791 31 

85 

1  1031421 

x*  1  v  j  n*  x 

37 

4898997 

4801913 

38 

.4958791 

.4931694 

86 

1.1222527 

1.1161202 

39 

5089786 

5061475 

87 
0/ 

1  1353022 

1.1290984 

4ft 

591Q780 

5101957 

88 
00 

1  1483516 

1.1420765 

89 

1.1614011 

1.1550546 

41 

.5350275 

.5321038 

90 

1.1744505 

1.1680328 

42 

.5480769 

.5450820 

43 

.5611264 

.5580601 

91 

1.1875000 

1.1810109 

44 

.5741758 

.5710383 

92 

1.2005495 

1.1939891 

45 

.5872253 

.5840164 

93 

1.2135989 

1.2069672 

94 

1.2266484 

1.2199454 

46 

.6002747 

.5969945 

95 

1.2396978 

1.2329235 

47 

.6133242 

.6099727 

48 

.6263736 

.6229508 

96 

1.2527473 

1.2459016 

49 

.6394231 

.6359290 

97 

1.2657967 

1.2588798 

50 

.6524725 

.6489071 

98 

1.2788462 

1.2718579 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  94  SERVICE 


1-2-22 

ESTATE  TAX  REGULATIONS.— 1918  LAW. 


99 

$1.2918956 

$1.2848361 

141 

$1.8399725 

$1.8299180 

100 

1.3049451 

1.2978142 

142 

1.8530220 

1.8428962 

143 

1.8660714 

1.8558743 

101 

1.3179945 

1.3107923 

144 

1.8791209 

1.8688525 

102 

1.3310440 

1.3237705 

145 

1.8921703 

1.8818306 

103 

1.3440934 

1.3367486 

104 

1.3571429 

1.3497268 

146 

1.9052198 

1.8948087 

105 

1.3701923 

1.3627049 

147 

1.9182692 

1.9077869 

1  148 

1.9313187 

1.9207650 

106 

1.3832418 

.3756831 

149 

1.9443681 

1.9337432 

107 

1.3962912 

1.3886612 

150 

1.9574176 

1.9467213 

108 

1.4093407 

1.4016393 

109 

1.4223901 

1.4146175 

151 

1.9704670 

1.9596995 

1  1  A 
1  10 

1.4354396 

1.4275956 

152 

LVooj loo 

1  Q77A77A 

i.y  /  zo/  /o 

153 

1.9965659 

1.9856557 

111 

1.4484890 

1 

.4405738 

154 

2.0096154 

1.9986339 

112 

1.4615385 

1 

.4535519 

155 

2.0226648 

2.0116120 

113 

1,4745879 

1 

.4665301 

114 

1.4876374 

1.4795082 

156 

2.0357143 

2.0245902 

115 

1.5006868 

1.4924863 

157 

2.0487637 

2.0375683 

158 

2.0618132 

2.0505464 

116 

1.5137363 

1.5054645 

159 

2.0748626 

2.0635246 

117 

1.5267857 

.5184426 

160 

2.0879121 

2.0765027 

118 

1.5398352 

1.5314208 

119 

1.5528846 

1.5443989 

161 

2.1009615 

2.0894809 

120 

1.5659341 

1.557377C 

162 

2.1140110 

2.1024590 

163 

2.1270604 

2.1154372 

121 

1.5789835 

1.5703552 

164 

2.1401099 

2.1284153 

122 

1.5920330 

1.5833333 

165 

2.1531593 

2.1413934 

123 

1.6050824 

1.5963115 

124 

1.6181319 

1.6092896 

166 

2.1662088 

2.1543716 

125 

1.6311813 

1.6222678 

167 

2.1792582 

2.1673497 

168 

2.1923077 

2.1803279 

126 

1.6442308 

1.6352459 

169 

2.2053571 

2.1933060 

127 

1.6572802 

1.6482240 

170 

2.2184066 

2.2062842 

128 

1.6703297 

1.6612022 

129 

1.6833791 

1.6741803 

171 

2.2314560 

2.2192623 

130 

1.6964286 

1.6871585 

172 

2.2445055 

2.2322404 

173 

2.2575549 

2.2452186 

131 

1.7094780 

1.7001366 

174 

2.2706044 

2.2581967 

132 

1.7225275 

1.7131148 

175 

2.2836538 

2.2711749 

133 

1.7355769 

1.7260929 

134 

1.7486264 

1.7390710 

176 

2.2967033 

2.2841530 

135 

1.7616758 

.7420492 

177 

2.3097527 

2.2971311 

178 

2.3228022 

2.3101093 

136 

1.7747253 

1.7650273 

179 

2.3358516 

2.3230874 

137 

1.7877747 

1.7780055 

180 

2.3489011 

2.3360656 

138 

1.8008242 

1.7909836 

139 

1.8138736 

1.5039617 

181 

2.3619505 

2.3490437 

140 

1.8269231 

.5169399 

182 

2.3750000 

2.3620219 

183 

2.3750000 

Example. 

$-11,350  per  cent  Victory  notes  tendered  in  payment  of  estate  taxes, 
January  5,  1921. 

Interest  payment  dates  on  Victory  notes  are  shown  on  the^face  thereof 
to  be  June  15  and  December  15  in  each  year,  and  at  maturity. 

Current  half-year  interest  period  therefore  ends  June  i5,  1921. 

The  year  1921  being  a  regular  year,  find  "June"  in  the  list  at  head  of 
table  under  "Regular  year."  This  list  shows  that  the  half4year  ending 
June  15,  in  a  regular  year,  has  182  days. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  95  SERVICE 


1-2-22. 


ESTATE  TAX  REGULATIONS. — 1918  LAW. 


Compute  number  of  days  since  the  beginning  of  such  half  year  that  have 
expired  to  date  of  tender  of  note,  thus : 

1920.  Days. 

December  15  to  December  31   16 

1921. 


January. 


Total   21 

Enter  table  headed  "Half  year  of  182  days"  (second  column)  and  seek 
in  that  column  the  amount  of  interest  on  $100  for  21  days.  This  will  be 
found  opposite  the  figure  "21"  (days)  in  the  first  column,  and  proves  to  be 
$0.2740385,  which  is  the  decimal  for  $100  for  21  days. 

The  amount  of  notes  presented  being  $11,350,  the  decimal  above  stated 
must  be  multiplied  by  113.5;  the  result  is  $31.1034,  which  is  the  amount 
of  accrued  interest  due  on  January  5,  1921,  on  $11,350  Victory  4^s — 
accordingly,  the  notes  are  worth  for  estate  taxes,  $11,381.10. 

Fractions  of  cents,  if  less  than  Y%  cent,  will  be  disregarded;  if  cent  or 
more,  will  be  counted  as  1  cent. 


Exhibit  H. 

264  Periods  During  Which  Transfer  Books  are  Closed  for  the  Various 
Issues  of  Liberty  Bonds  and  Victory  Notes  Receivable  for  Estate 
or  Inheritance  Taxes. 


Title  of  bonds/ notes. 


Short  title. 


Closed  periods. 


From 
close  of 
business. 


First  Liberty  Loan  converted  434  per  cent  bonds  of  1932-47.. .  . 
First  Liberty  Loan  second  converted  434  per  cent  bonds  of 

1932-47  

Second  Liberty  Loan  converted  434  per  cent  bonds  of  1927-42 .  . 

Third  Liberty  Loan  434  per  cent  bonds  of  1928  

Fourth  Liberty  Loan  434  per  cent  bonds  of  1933-38  


Victory  Liberty  Loan  4%  per  cent  convertible  gold  notes  of 
1922-23  


First  434's 

First  Second  434's 
Second  434's 

Third  4J4's 

Fourth  434's 


Victory  4%'s 


May  15 

Nov.  15 
Apr.  15 
Oct.  15 
Feb.  15 
Aug.  15 
Mar.  15 
Sept.  15 
May  15 
Nov.  15 
and 
from 
close  of 
business 
Apr.  20, 
1923. 


NOTE. — If  the  closing  date  falls  on  a  Sunday  or  a  legal  holiday  the  transfer  books  will  close  on  the 
preceding  day;  if  the  opening  date  falls  on  Sunday  or  legal  holiday  the  books  will  open  on  the  following 
day. 

(Exhibits  A,  B,  C,  and  H,  above,  from  Department  Circular  No.  225, 
signed  by  D.  F.  Houston,  Secretary  of  the  Treasury,  and  dated  January  31, 
1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  96  SERVICE 


1-2-22. 


Reg.  37,  Rev.  1921. 

ESTATE  TAX  REGULATIONS. — 1918  LAW. 


(T.  D.  3144.) 

265  Receipt  of  Liberty  bonds  for  Victory  notes  for  estate  and  inheritance 
taxes. — The  appended   [foregoing]  Department  circular  No.  225 

[beginning  at  If 234],  issued  under  date  of  January  31,  1921,  with  reference  to 
receipt  of  Liberty  bonds  and  Victory  notes  in  payment  of  estate  and  in- 
heritance taxes,  is  published  for  the  information  of  internal-revenue  officers 
and  others  concerned.  This  circular  supersedes  Department  circulars  No. 
132,  dated  January  30,  1919  (T.  D.  2802),  and  No.  151,  dated  June  24,  1919 
(T.  D.  2905).  (T.  D.  3144,  signed  by  Acting  Commissioner  Paul  F.  Myers, 
and  dated  March  3,  1921.) 

266  Art.  91.  Payment  by  uncertified  check. — [For  first  paragraph  of 
Art.  91,  see  1f230.]  Collectors  may  accept  uncertified  checks  in  pay- 
ment of  the  estate  tax  provided  such  checks  are  collectible  at  par — that 
is,  for  their  full  amount,  without  any  deduction  for  exchange  or  other 
charges.  If  the  bank  on  which  any  such  check  is  drawn  should  refuse  to 
pay  it  at  par,  the  check  should  be  returned  through  the  depositary  bank, 
and  be  treated  in  the  same  manner  as  a  bad  check.  All  expenses  incident 
to  the  attempt  to  collect  such  a  check  and  the  return  of  it  through  the  deposi- 
tary bank  must  be  paid  by  the  drawer  of  the  check  to  the  bank  on  which  it  is 
drawn,  since  no  deduction  can  be  made  from  amounts  received  in  payment 
of  taxes.    (See  Revised  Statutes,  Sec.  3210.) 

267  Art.  92.  The  executor  shall  pay  the  tax. — The  statute  provides  that 
31       the  executor  shall  pay  the  tax.  This  duty  applies  to  the  tax  upon  the 

transfer  of  the  entire  estate,  including  property  which  will  not  come 
into  the  possession  of  the  executor  or  administrator.  As  to  the  personal 
liability  of  the  executor,  see  Article  113. 

268  Art.  93.    Extension  of  time  for  payment. — In  any  case  where  the 
30       Commissioner  finds  that  payment  of  the  tax  within  one  year  after 

the  decedent's  death  would  impose  undue  hardship  upon  the  estate, 
extensions  of  time  will  be  granted  for  the  payment  of  the  tax  for  a  period  not 
to  exceed  in  all  three  years  from  the  due  date.  Extensions  of  time  for  tax 
payment  will  be  granted  only  in  exceptional  cases,  where  it  is  evident  that 
the  payment  of  the  tax  within  the  statutory  period  would  cause  the  estate 
serious  financial  loss.  No  extension  shall  be  for  more  than  one  year,  and  a 
substantial  payment  shall  be  made  before  each  extension.  Application  for 
extension  of  time  for  payment  should  be  filed  with  the  collector,  and  should 
contain  a  full  statement  of  the  facts  upon  which  the  application  is  based. 
The  collector  will  refer  the  application  to  the  Commissioner,  with  suitable 
recommendations.    [See  1f309.] 

269  The  extension  of  time  for  the  payment  of  the  tax  should  not  be 
confused  with  extension  of  time  for  filing  the  return.    An  extension 

of  time  to  pay  the  tax  does  not  relieve  from  the  duty  of  filing  the  return 
within  one  year  from  the  date  of  death.  An  extension  of  time  for  tax 
payment  will  not  operate  to  prevent  the  accrual  of  interest  upon  the  tax. 

270  Art.  94.   Interest  on  unpaid  tax. — The  statute  provides  that,  if  the 
30      tax  is  not  paid  within  one  year  and  180  days  after  the  decedent's 

death,  interest  at  six  per  centum  per  annum  from  the  expiration  of 
one  year  after  the  decedent's  death  shall  be  added  as  part  of  the  tax.  This 
provision  applies  to  the  original  amount  of  tax  shown  to  be  due  by  the 
return  accepted  by  the  collector.  It  applies  in  all  cases  in  which  penalties 
have  not  accrued  under  the  Revenue  Act  of  1916.  (See  Art.  120.)  [See 
H310.] 

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ESTATE  TAX  REGULATIONS.— 1918  LAW. 


ADJUSTMENT  OF  TAX— INTEREST. 

27 1  Art.  95.    Adjustment  of  tax  after  investigation. — An  investigation  of 
31     every  return  for  estate  tax  will  be  made  by  an  internal-revenue  officer, 

and  the  tax  liability  of  the  estate  will  be  finally  determined  by  the 
Commissioner  upon  the  basis  of  such  investigation.  If  at  the  time  the 
Commissioner's  determination  is  made  the  tax  has  been  paid  upon  the 
basis  of  the  return,  an  adjustment  will  be  made  of  the  amount  of  tax.  If 
the  amount  of  tax  already  paid  exceeds  the  amount  of  tax  as  finally  deter- 
mined, the  Commissioner  will  refund  such  excess  payment  to  the  collector. 
If  the  amount  of  tax  as  finally  determined  exceeds  the  amount  of  tax  already 
paid,  the  collector  will  notify  the  executor  of  the  amount  of  the  unpaid 
balance  of  the  tax  and  will  demand  payment  thereof.  Payment  should  be 
made  by  the  executor  immediately  upon  the  receipt  of  such  notification. 
Where  the  investigation  of  the  return  shows  that  no  further  tax  is  due,  the 
executor  will  be  notified  to  this  effect.  Until  the  receipt  of  such  notifica- 
tion, he  should  reserve  a  sufficient  portion  of  the  estate  to  satisfy  any  excess 
tax. 

272  Art.  96.    Interest  on  additional  tax. — If  an  unpaid  balance  of  tax 
is  found  to  be  due  by  the  Commissioner  after  investigation,  the 

statute  provides  that  interest  shall  be  added  to  the  amount  of  such  excess 
part  of  the  tax  at  the  rate  of  ten  per  centum  from  the  expiration  of  30  days 
after  notification  to  the  executor,  provided  the  tax  is  not  paid  within  such 
30-day  period.  This  interest  will  not  begin  to  accrue,  however,  until  the  ex- 
piration of  one  year  and  180  days  after  the  decedent's  death.  (See  Art. 
94.) 

273  If  a  return  is  filed  containing  a  gross  or  fraudulent  misstatement 
of  fact,  and  payment  made  of  the  tax  shown  to  be  due  thereby,  such 

payment  will  not  be  considered  payment  in  full  within  the  meaning  of  the 
statute.  (See  Art.  90.)  Consequently,  in  such  a  case,  interest  upon  the 
unpaid  balance  of  tax,  determined  after  investigation,  will  be  added  at  the 
rate  of  six  per  centum  per  annum  from  the  expiration  of  one  year  after  the 
decedent's  death. 

COLLECTION  OF  TAX. 

274  Art.  97.    Remedy  not  exclusive. — The  remedy  by  action,  here  pro- 

33  vided  for,  is  not  exclusive.    For  other  available  remedies  for  the 
collection  of  the  tax,  see  Article  116. 

REIMBURSEMENT. 

275  Art.  98.    Right  to  reimbursement  not  enforcible  by  bureau. — Two 

34  rights  are  here  given.    Persons  in  possession  of  property,  and  paying 
the  tax,  are  entitled  to  reimbursement,  either  out  of  the  undistributed 

estate  or  by  contribution  from  other  beneficiaries,  of  any  excess  of  the 
amount  paid  over  the  amount  of  the  tax  upon  the  particular  property  in 
their  possession.  The  executor  is  also  entitled  to  require  beneficiaries  under 
insurance  policies  to  bear  their  proportion  of  the  tax.  These  provisions, 
however,  are  not  designed  to  curtail  the  right  of  the  Bureau  to  collect  the 
tax  from  any  person,  or  out  of  any  property,  liable  therefor.  The  Bureau 
may  not  be  required  to  apportion  the  tax  among  the  persons  liable.  For 
example,  where  a  transfer  has  been  made  in  contemplation  of  death,  the 
Bureau  may  hold  both  the  executor  and  the  transferee  liable  with  respect  to 
the  tax  upon  the  property  transferred.  In  such  case,  if  the  tax  is  paid  by  the 
executor,  he  may  not  look  to  the  Bureau  for  relief  by  refund  of  part  of  the 
tax. 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


LIEN. 

276  Art.  99.    Property  subject  to  lien. — This  lien  attaches  to  every  part 
35     of  the  gross  estate,  whether  or  not  the  property  comes  into  the  cus- 
tody or  control  of  the  executor.    The  only  property  divested  of  the 

lien  is  such  part  as  is  used  to  pay  charges  against  the  estate  and  administra- 
tion expenses  allowed  by  the  court  which  administers  the  estate.  With  this 
exception,  the  lien  can  only  be  divested  by  payment.  It  attaches  to  the 
extent  both  of  the  original  tax  shown  to  be  due  by  the  return  and  of  any 
additional  tax  found  to  be  due  upon  investigation.  Payment  of  the  entire 
tax  is  necessary  in  order  to  destroy  the  lien. 

277  Art.  100.    Release  of  lien. — The  statute  provides  that,  if  the  Com- 
missioner is  satisfied  that  the  tax  liability  of  an  estate  has  been  fully 

discharged  or  provided  for,  he  may  issue  his  certificate  releasing  any  or  all 
property  of  the  estate  from  the  lien.  The  issuance  of  certificates  is  a 
matter  resting  within  the  discretion  of  the  Commissioner,  and  certificates 
will  be  issued  only  in  case  there  is  actual  need  therefor.  In  most  cases  the 
receipts  issued  by  the  collector  constitute  sufficient  acquittance. 
273  The  tax  will  be  considered  fully  discharged  for  the  purpose  of  the 
issuance  of  a  certificate  only  when  investigation  has  been  completed, 
and  payment  of  the  excess  tax  determined  to  be  due,  if  any,  has  been  made. 
A  certificate  of  release  of  lien  may  be  issued  by  the  Commissioner  under  these 
circumstances  upon  any  or  all  property  of  the  estate,  upon  the  filing  by  the 
executor  of  an  application  in  duplicate  on  Form  791.  The  form  must  be  con- 
tain all  the  information  called  for. 

279  Where  the  tax  liability  has  not  been  fully  discharged,  as  provided 
above,  no  general  certificate  of  release  will  be  granted,  but  releases  of 

lien  upon  particular  items  of  property  will  be  issued  upon  the  filing  with  the 
Commissioner  of  such  security,  if  any,  as  he  may  require.  Where  security  is 
required,  a  corporate  indemnity  bond  must  be  furnished,  or  Liberty  Bonds, 
or  other  bonds  of  the  United  States,  must  be  deposited  with  the  collector. 
In  lieu  of  such  security,  the  Commissioner  may  in  any  case  issue  the  release 
upon  payment  of  the  estimated  tax  upon  the  transfer  of  the  property 
released,  computed  at  the  highest  rate  applicable  to  the  estate.  If,  upon 
consideration  of  the  application,  the  Commissioner  finds  the  issuance  of  the 
certificate  to  be  warranted,  the  collector  will  notify  the  executor  of  the 
amount  of  the  bond,  as  fixed  by  the  Commissioner. 

280  Transfer  of  stock:  lien  on  stock  and  release  of  lien. — Reference 
35       is  made  to  your  letter  of  June  16.    You  are  advised  that  in  all  cases 

where  the  estate  of  a  deceased  person  is  liable  for  the  payment  of 
Federal  estate  tax  under  the  Revenue  Act  of  1918,  the  entire  gross  estate, 
as  that  term  is  defined  in  Section  402  of  the  said  Act,  is  impressed  with  a  lien 
to  the  extent  of  the  tax  liability  of  the  said  estate  for  a  period  of  ten  years 
from  the  date  of  the  decedent's  death,  except  as  provided  in  Section  409. 
It  is  the  ruling  of  this  Bureau  that  under  Section  409  only  the  following  parts 
of  a  decedent's  gross  estate  are  divested  of  the  lien.  Such  part  of  the  gross 
estate  as  is  used  for  the  payment  of  charges  against  the  estate  and  expenses 
of  its  administration,  allowed  by  any  court  having  jurisdiction  thereof; 
and  the  value  of  any  property  included  in  the  gross  estate  which  was  trans- 
ferred, or  with  respect  to  which  a  trust  was  created  by  the  decedent,  in 
contemplation  of  or  intended  to  take  effect  in  possession  or  enjoyment  at 
or  after  his  death  (except  where  the  making  of  such  transfer  or  the  creating 

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of  such  trust  by  the  decedent  constituted  a  bona  fide  sale  for  a  fair  con- 
sideration in  money  or  money's  worth),  where  the  transferee  or  trustee 
has  sold  such  property  to  a  bona  fide  purchaser  for  a  fair  consideration  in 
money  or  money's  worth.  No  other  part  of  the  gross  estate  is  divested 
of  the  lien  by  virtue  of  Section  409  of  the  said  Act,  nor  may  it  be  divested 
of  such  lien  except  by  discharge  of  the  tax  liability  of  the  estate  or  by  a 
certificate  issued  by  the  Commissioner  of  Internal  Revenue  releasing  it  from 
the  lien. 

281  It  will  be  seen  from  the  foregoing,  therefore,  that  any  stock  of  a 
corporation  which  was  owned  by  a  decedent  on  the  date  of  his 

death  is  not  divested  of  the  lien  by  virtue  of  anything  contained  in  Section 
409  of  the  Revenue  Act  of  1918. 

282  This  Bureau  is  at  all  times  willing  in  any  proper  case  to  issue  a 
release  of  lien  with  respect  to  any  part  of  the  gross  estate  where 

the  tax  liability  of  the  estate  has  been  discharged  or  provided  for  to  the 
satisfaction  of  the  Commissioner.  Any  transfer  made  by  an  executor  of 
property  forming  a  part  of  the  gross  estate  of  a  decedent  whose  estate  is 
liable  for  the  payment  of  Federal  estate  tax,  or  the  transfer  by  any  person 
having  in  his  possession  property  forming  a  part  of  such  gross  estate,  except 
as  provided  in  Section  409  aforesaid,  will  not  operate  to  divest  such  property 
of  the  lien.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Deputy 
Commissioner  James  Hagerman,  Jr.,  and  dated  June  26,  1920.) 

REMEDY  AGAINST  TRANSFEREE  AND  INSURANCE  BENEFICIARY. 

283  Art.  101.   Remedy  in  case  of  property  transferred  by  decedent,  or  of 

36  individual  insurance. — The  amounts  of  the  lien  and  of  the  personal 
liability  of  the  transferee,  trustee,  or  insurance  beneficiary  are  limited 

to  the  amount  of  the  tax  upon  the  transfer  of  the  particular  property  in 
the  possession  of  the  person  liable.  Where  the  transferee  or  trustee  sells 
the  property  to  a  bona  fide  purchaser  for  a  fair  consideration  in  money  or 
money's  worth,  the  lien  upon  such  property  is  divested;  but  there  is  sub- 
stituted a  lien  upon  all  of  the  property  of  the  transferee  or  trustee,  except 
such  part  as  may  be  sold  to  a  bona  fide  purchaser  for  a  valuable  considera- 
tion. 

PENALTIES. 

284  Art.  102.    Nature  of  penalties.— Two  kinds  of  penalties  are  provided 

37  for  delinquency  with  respect  to  the  duties  imposed  by  the  estate  tax 
8071  law: 

(1)  A  specific  penalty,  to  be  recovered  by  suit,  unless  adjusted  by  an 
offer  in  compromise;  and 

(2)  A  penalty  of  a  certain  percentage  of  the  tax,  to  be  added  to  the  tax 
and  collected  in  the  same  manner  as  the  tax. 

In  any  case  of  delinquency  for  which  more  than  one  penalty  is  provided 
the  Government  may  impose  either  or  both  penalties. 

285  Art  103.    Penalties  for  false  and  fraudulent  notice  or  return. — Where 
statements  in  the  60-day  notice  or  in  the  return  are  knowingly  and 

willfully  false,  the  person  making  them  is  subject  to  a  penalty  of  $5,000,  or 
imprisonment  for  one  year,  or  both;  and,  for  the  false  return,  50  per  cent 
may  be  added  to  the  amount  of  the  tax. 

286  Art.  104.    Penalty  for  failure  to  file  notice  or  return.    For  failure  to 

file  the  60-day  notice  or  the  return  within  the  time  prescribed,  the 

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person  in  default  is  subject  to  a  penalty  not  to  exceed  $500;  and,  for  the 
failure  to  file  the  return,  25  per  cent  may  be  added  to  the  amount  of  the 
tax.  Where  it  appears,  however,  that  the  failure  to  file  the  return  was  due 
to  a  reasonable  cause  and  not  to  willful  neglect,  no  addition  is  made  to  the 
tax. 

287  Art.  105.    Penalty  for  failure  to  exhibit  records  or  property. — Where  a 
person  in  possession  or  control  of  any  record,  file,  or  paper,  supposed 

to  contain  information  relating  to  the  estate,  fails  to  exhibit  the  same,  upon 
the  request  of  the  Commissioner  or  any  collector,  he  is  liable  to  a  penalty 
not  to  exceed  $500,  to  be  recovered  by  civil  action.  He  must  comply  with 
such  a  request  whether  or  not  he  believes  that  the  documents  contain 
information  relating  to  the  estate.  A  person  in  possession  of  property 
forming  part  of  the  gross  estate,  and  refusing  to  exhibit  the  same  upon  the 
request  of  the  Commissioner  or  a  collector,  is  subject  to  a  similar  penalty. 

CLAIMS  FOR  ABATEMENT  AND  REFUND. 

288  Art.  106.  General  provisions. — Under  these  provisions  of  law 
8021  [Rev.  Stats.  Sec.  3220,  If 8023,  and  Sec.  3225,  If 8047]  two  forms  of 
8047     relief  are  afforded  the  executor  in  cases  where  he  believes  that  an 

excessive  amount  of  tax  has  been  assessed  against  or  paid  by  him, 
either  upon  the  basis  of  the  return  or  of  the  investigation  conducted  by  the 
Bureau.    The  two  forms  of  relief  are: 

(1)  Claim  for  abatement  on  Form  47  [Page  1611]  where  the  tax  has  been 
assessed  but  not  paid. 

(2)  Claim  for  refund  on  Form  46  [Page  1609]  where  the  tax  has  been  paid. 

28S  Art.  107.  Claim  for  abatement. —  Claims  for  the  abatement  of  taxes  or 
penalties  illegally  assessed  must  be  made  upon  Form  47  [Page  1611], 
and  must  be  sustained  by  the  affidavits  of  the  parties  against  whom  the  taxes 
were  assessed  or  of  other  parties  cognizant  of  the  facts.  When  a  tax  has 
been  assessed,  the  presumption  is  that  the  assessment  is  correct;  and  the 
burden  of  showing  that  it  was  improperly  or  illegally  assessed  rests  upon  the 
applicant  for  abatement.  The  affidavit  must  therefore  contain  a  full  and 
explicit  statement  of  all  the  material  facts  relating  to  the  claim  in  support 
of  which  they  are  offered  and  which  are  essential  to  proper  consideration. 
Nothing  should  be  left  to  inference,  but  all  the  facts  relied  upon  should 
appear  upon  the  papers  themselves.  The  filing  of  a  claim  for  the  abatement 
of  a  tax  alleged  to  have  been  erroneously  assessed  does  not  necessarily 
operate  as  a  suspension  of  the  collection  of  the  tax.  The  collector  may  col- 
lect the  tax  if  he  thinks  it  necessary,  and  leave  the  taxpayer  to  his  remedy  of 
a  claim  for  refund. 

290  Art.  108.    Accrual  of  interest  as  affected  by  abatement  claim.— 

Where  a  claim  for  abatement  is  rejected,  the  making  of  the  application 
does  not  affect  the  running  of  interest.  The  allowance  of  the  claim,  how- 
ever, in  whole  or  part,  discharges  all  interest  obligations  upon  the  portion 
of  the  claim  allowed.  The  same  rules  apply  where,  upon  the  request  of  the 
executor,  a  reinvestigation  is  made  of  the  amount  of  an  additional  tax. 

291  Art.  109.   Limitation  of  time  to  file  claim  for  abatement  of  excess 
'  tax. — If  it  is  desired  to  file  claim  for  abatement  of  the  excess  amount  of 

tax  disclosed  upon  investigation,  such  claim  should  be  filed  with  the  col- 

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lector  within  30  days  of  receipt  of  the  Commissioner's  letter  of  notification. 
After  that  period  the  claim  will  not  be  considered,  but  the  tax  must  be 
paid,  and  adjustment  made  by  claim  for  refund. 

292  Art.  110.  Claim  for  refund. — Claims  for  refund  of  assessed  taxes  and 
penalties  must  be  made  on  Form  46  [Page  1609].    In  this  case,  as  in 

the  case  of  claims  for  abatement,  the  burden  of  proof  rests  upon  the  claimant. 
All  the  facts  relied  upon  in  support  of  the  claim  should  be  clearly  set  forth 
under  oath.   With  the  claim  should  be  presented,  in  addition  to  the  evidence: 

(1)  Collector's  receipt  evidencing  payment  of  tax. 

(2)  Where  the  claim  is  made  by  the  executor  or  administrator,  a  certified 
copy  of  letters  testamentary  or  of  administration,  and  a  certificate  that  the 
appointment  remains  in  full  force  and  effect. 

(3)  Where  the  executor  or  administrator  has  been  discharged,  a  certified 
copy  of  the  decree  discharging  him,  and  evidence  as  to  the  persons  entitled 
to  receive  the  refund,  setting  forth  their  names.  Where  the  claim  is  made  on 
behalf  of  a  number  of  persons,  there  should  be  furnished  a  power  of  attorney 
duly  executed  by  all  the  beneficiaries  showing  the  claimant's  authority  to 
act  in  their  behalf. 

293  Art.  111.   Payment  of  claims. — Warrants  in  payment  of  claims  al- 
lowed will  be  drawn  in  the  names  of  the  parties  entitled  to  the  money, 

and  will,  unless  otherwise  directed,  be  sent  by  the  Treasurer  of  the  United 
States  directly  to  the  proper  parties,  or  their  duly  authorized  attorneys  or 
agents;  but  if  the  claimants  are  indebted  to  the  United  States  for  taxes  such 
taxes  must  be  paid  before  the  warrants  are  delivered. 

POWER  TO  COMPROMISE  OR  REMIT  PENALTIES. 

294  Art.  112.  Power  to  compromise  or  remit. — The  Commissioner,  with 
8059      the  advice  and  consent  of  the  Secretary  of  the  Treasury,  may  com- 

8061  promise  any  civil  or  criminal  case  arising  under  the  internal-revenue 

8062  laws  instead  of  commencing  suit  thereon,  and  with  the  advice  and 
consent  of  the  Secretary,  and  upon  the  recommendation  of  the 

Attorney  General,  may  compromise  any  such  case  after  suit  thereon  has 
been  commenced  by  the  United  States.  Accordingly,  the  power  to  comp- 
romise extends  to  (a)  both  civil  and  criminal  cases;  (b)  cases  whether  before 
or  after  suit;  and  (c)  both  taxes  and  penalties.  Refunds  can  not  be  made 
of  accepted  offers  in  compromise  in  cases  where  it  is  subsequently  ascertained 
that  no  violation  of  law  was  involved.  No  power  exists,  however,  to  comp- 
romise a  tax  where  its  existence  and  amount  are  not  disputed  in  good  faith, 
and  the  taxpayer  is  solvent.  Where  a  fine,  penalty,  or  forfeiture,  not  exceeding 
$1,000,  is  incurred  without  willful  negligence  or  fraud,  it  may  be  remitted 
by  the  Secretary  of  the  Treasury;  and  he  may  remit  other  fines,  penalties 
forfeitures,  and  disabilities  where  the  court  has  inquired  into  the  matter  and 
made  findings  [see  1f806l  and  H8062  for  provisions  of  Revised  Statutes]. 

PERSONAL  LIABILITY  OF  EXECUTOR. 

295  Art.  113.  Extent  of  liability. — The  executor  is  personally  liable  for 
8052      the  payment  of  the  estate  tax  to  the  amount  of  the  full  value  of  the 

assets  of  the  estate  which  have  at  any  time  come  into  his  hands.  (See 
also  Revenue  Act  of  1918,  Sec.  407  [1131].)  Where  no  executor  or  adminis- 
trator has  been  .-appointed,  every  person  in  possession  of  any  part  of  the 
gross  estate  is  liable  for  the  tax  as  an  executor. 

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EXAMINATION  OF  RECORDS  AND  TAKING  OF  TESTIMONY. 

296  Art.  114.    Securing  evidence — Taking  of  testimony. — In  order  to 

8002  ascertain  the  correctness  of  a  return,  or  to  make  a  return  where 

8003  none  has  been  made,  the  Commissioner  has  power  to  require  the 
attendance,  and  to  take  the  testimony,  of  the  person  rendering  the 

return,  or  any  officer  or  employee  of  such  person,  or  any  other  person  having 
knowledge  in  the  premises.  Such  person  may  be  required  to  produce  any 
relevant  book,  paper  or  other  record.  This  power  may  be  exercised  by  any 
revenue  agent  or  inspector  designated  for  the  purpose. 

297  Art.  115.    Power  to  compel  compliance. — Where  any  person  is 
summoned  to  appear  and  testify,  or  to  produce  books,  papers,  or  other 

data,  the  District  Court  of  the  United  States  for  the  district  in  which  such 
person  resides  has  power  to  compel  the  giving  of  the  testimony,  or  the  pro- 
duction of  the  books,  papers,  or  data,  and  to  issue  any  appropriate  process, 
writ,  or  order. 

REMEDIES  FOR  COLLECTION. 

298  Art.  116.    Remedies  for  collection  of  tax.— -The  provision  of  the 
8000      statute  quoted  above  applies  to  the  estate  tax  law;  and  three  reme- 
dies are  thus  provided  for  the  collection  of  the  tax: 

299  (1)  Collection  by  distraint. — The  collector  may  issue  warrant  of 
distraint  authorizing  the  seizure  and  sale  of  any  or  all  of  the  assets 
of  the  estate.   (See  R.  S.,  Sees.  3187  et  seq.;  Comp.  Sts.,  1916,  Sec. 

5909  et  seq.) 

300  (2)  Collection  by  suit  to  subject  the  property  to  sale. — The  collector 
may  commence  in  any  court  of  the  United  States  appropriate  pro- 
ceedings, in  the  name  of  the  United  States,  to  subject  the  property  of  the 
decedent  to  sale  under  the  judgment  or  decree  of  the  court.  (See  Sec. 
408  [1f33];  Art.  97.) 

301  (3)  Collection  by  suit  for  personal  liability .  —The  personal  liability 
of  the  executor,  of  the  transferee  or  trustee  of  property  transferred 

in  contemplation  of  death,  and  of  the  beneficiary  of  taxable  life  insurance 
(See  Art.  101)  may  be  enforced  by  any  appropriate  action. 

302  Art.  117.  Executor's  duty  to  keep  records. — It  is  the  duty  of  the  ex- 
ecutor to   keep  such  records  as  the  Commissioner  may  require. 

Executors  are  required  to  keep  complete  and  detailed  records  of  the  affairs 
of  the  estate,  sufficient  to  enable  the  Bureau  to  determine  accurately  the 
amount  of  the  tax  liability. 

303  Art.  118.  Executor's  duty  to  render  statements.— It  is  also  the  duty 
of  the  executor  not  only  to  make  the  formal  return,  but  also  to  ren- 
der any  other  sworn  statement  which  the  Commissioner  may  require  for 
the  purpose  of  determining  whether  a  tax  liability  exists. 

SCOPE  OF  REPEAL. 

304  Art.  119.    Scope  of  repeal. — The  Revenue  Act  of  1918  retains  in 
39     force  all  taxes  or  penalties  which  had  accrued  prior  to  February  25, 

1919.  The  procedure,  however,  with  reference  to  the  assessment  and 
collection  of  all  taxes,  whenever  they  accrued,  is  governed  by  the  statute 
from  the  time  when  it  went  into  effect  on  February  25,  1919.  . 

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ESTATE  TAX  REGULATIONS. — 1918  LAW. 


305  Art.  120.    Interest  under  Revenue  Act  of  1916.— The  Revenue  Act  of 
1916  provides  that,  where  the  tax  is  not  paid  within  one  year  and  90 

days  from  the  date  of  the  decedent's  death,  interest  shall  be  added  at  the 
rate  of  ten  per  centum  per  annum  from  the  date  of  death.  Where  the  speci- 
fied period  had  elapsed  prior  to  February  25,  1919,  this  penalty  has  been 
incurred,  and  is  not  affected  by  the  passage  of  the  Revenue  Act  of  1918. 
Where,  however,  the  period  of  one  year  and  90  days  had  not  elapsed  prior 
to  February  25,  1919,  the  Revenue  Act  of  1918  extends  the  time  of  payment 
to  one  year  and  180  days  from  the  date  of  death.  These  rules  operate  as 
follows: 

306  Example:  The  year  and  90  days,  in  a  given  case,  expired  on  February 
15,  1919,  or  ten  days  before  the  effective  date  of  the  Revenue  Act 

of  1918.  In  this  case  interest  at  the  rate  of  ten  per  centum  per  annum  should 
be  computed  for  the  period  of  one  year  and  100  days  from  the  date  of  death, 
or  until  the  Revenue  Act  of  1918  took  effect.  If  the  tax  is  thereafter  paid 
within  the  time  prescribed  by  the  new  act  (which  allows  an  additional  80 
days),  no  further  interest  accrues.  If  it  is  not  paid  within  that  period, 
additional  interest  accrues  at  the  rate  of  six  per  cent  from  February  25,  1919, 
when  the  Revenue  Act  of  1918  took  effect. 

307  Example:  On  February  25,  1919,  in  a  given  case,  only  one  year  and 
80  days  from  the  date  of  the  decedent's  death  had  elapsed.  No 

penalty  having  been  incurred,  the  estate  has  100  additional  days  in  which  to 
make  payment,  viz.,  the  year  and  180  days  prescribed  by  the  Revenue  Act 
of  1918.  If,  however,  the  tax  is  not  paid  within  this  period,  interest  accrues 
at  the  rate  of  six  per  cent  from  the  expiration  of  one  year  from  the  decedent's 
death,  as  provided  by  the  Revenue  Act  of  1918  (see  Art.  94). 
307a  While  no  interest  may  be  added  to  the  tax  unless  payment  thereof 
has  not  been  made  within  one  year  and  180  days  after  decedent's 
death,  the  tax  itself  is  due  and  must  be  paid  within  one  year  after  the 
decedent's  death  unless  an  extension  of  time  for  the  payment  thereof  has 
been  granted  by  the  Commissioner.    [See  1[225.] 

308  Art.  121.    Repeal  of  previous  regulations. — The  foregoing  regula- 
tions are  prescribed  in  pursuance  of  the  authority  conferred  by  the 

statute,  and  all  rulings  inconsistent  with  them  are  hereby  revoked. 

WM.  M.  WILLIAMS, 
Commissioner  of  Internal  Revenue. 
[Released  for  publication  February  16,  1921.] 

Approved  January  31,  1921. 
D.  F.  HOUSTON, 

Secretary  of  the  Treasury. 


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309  "Substantial  payment"  as  a  prerequisite  to  granting  of  extension  of 
225      time  for  payment  of  estate  tax. — Article  93  [11268]  of  the  regulations 
268      provides  that  no  extension  of  time  shall  be  granted  without  a  sub- 
stantial payment.    This  provision  of  the  regulations  has  been  uni- 
formly interpreted  to  require  the  payment  of  at  least  25  per  cent,  of  the  tax. 

310  Interest  on  unpaid  tax— Articles  90  [1223],  94  [^270],^ and  96  fl[272] 
270      of  the  Estate  Tax  Regulations  deal  with  the  application  of  interest 

under  the  sections  of  the  law  mentioned.  Under  the  terms  of  Section 
406  [1f30]  of  the  Act  the  tax  is  subject  to  interest  at  the  rate  of  six  per  cent 
per  annum  from  the  due  date,  if  it  is  not  paid  within  one  year  and  180  days 
after  the  decedent's  death. 

311  It  is,  therefore,  the  ruling  of  the  Bureau  that  such  part  of  an  estate 
tax,  assessed  against  an  estate  where  the  decedent  died  after  the 

passage  of  the  Revenue  Act  of  1918,  as  is  paid  within  one  year  and  180  days 
of  the  decedent's  death,  is  not  subject  to  the  interest  provisions  of  Section 
406  [1f30].  Where,  however,  the  entire  tax  indicated  by  a  return,  filed  in 
good  faith,  is  not  paid  within  one  year  and  180  days  after  decedent's  death, 
or  where  an  amount  sufficient  in  the  opinion  of  the  Collector  to  discharge 
the  tax  within  the  meaning  of  Section  407  [1J31]  of  the  Act  is  not  paid  within 
one  year  and  180  days  after  decedent's  death,  the  Bureau  determines  the 
tax  liability  of  the  estate  and  assesses  interest  thereon  at  the  rate  of  six  per 
cent  per  annum  from  the  due  date,  unless,  however,  a  part  payment  of  the 
tax  was  made  before  the  expiration  of  one  year  and  180  days  from  the  date 
of  the  decedent's  death,  in  which  event,  interest  would  not  be  applied  to  the 
portion  of  the  tax  paid  before  the  expiration  of  such  period  of  time.  In 
other  words,  the  Bureau  holds  that  any  part  of  an  estate  tax  paid  within 
one  year  and  180  days  from  the  date  of  decedent's  death,  where  such  death 
occurred  after  February  24,  1919,  is  not  subject  to  the  interest  provisions  of 
Section  406. 

312  Extensions  of  time  for  paying  the  estate  tax,  as  authorized  by  Section 
406  of  the  Act  and  Article  93  tf[269]  of  the  Estate  Tax  Regulations 

have  no  bearing  whatever  upon  the  question  of  the  application  of  interest. 
The  interest  provisions  of  the  law,  so  far  as  estate  tax  is  concerned,  are  con- 
tained in  Sections  406  and  407  [1f30,  31]  of  the  Revenue  Act  of  1918  and 
these  sections  must  be  looked  to  entirely  for  guidance  in  the  application 
of  interest  to  the  federal  estate  tax.  (Letter  to  The  Corporation  Trust  Com- 
pany signed  by  Dep.  Com.  F.  G.  Matson,  and  dated  August  25,  1921.) 

313  60-day  notice  and  payment  of  insurance  by  insurance  companies, 
201  the  insurance  not  being  part  of  the  decedent's  gross  estate.  —Receipt  . 
207  is  acknowledged  of  your  letter  dated  the  5th  instant,  requesting  to 
207a  be  advised  whether  insurance  companies  are  chargeable  with  the 

notice  required  by  Articles  71  and  76A  in  cases  where  such  insurance 
may  not  be  regarded  as  taxable. 

3 1 4  The  question  of  whether  life  insurance  is  taxable,  under  the  provisions 
of  Section  402  (f)  of  the  Revenue  Act  of  1918,  and  Articles  32,  33 

and  34  [beginning  at  U"122]  of  Regulations  37,  Revised  January,  1921,  has 
no  bearing  upon  the  question  of  the  liability  of  insurance  companies  to 
give  the  notices  required  by  Articles  71,  76  and  76A.  If,  therefore,  the 
insurance  is  of  the  character  described  in  Articles  71,  76  and  76A,  the  notices 
prescribed  by  these  articles  must  be  filed  notwithstanding  the  fact  that  a 
part,^  or  all,  of  such  life  insurance  may,  or  may  not,  be  taxable  under  the 
provisions  of  the  law.  (Letter  to  The  Corporation  Trust  Company,  signed 
by  Deputy  Commissioner  James  Hagerman,  Jr.,  and  dated  March  12,  1921.) 

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{Decision.) 
November  17,  1921. 

Tax  is  not  due  and  payable  until  one  year  and  180  days  after  decedent's 
death  and  hence  the  right  to  collect  by  distraint  within  that  period  is  denied. 
The  statutory  inhibition  against  suit  for  restraining  the  collection  of  a  tax 
has  no  application  in  the  case  of  a  tax  not  yet  due  and  payable. 

United  States  District  Court 
District  of  Rhode  Island 

Frank  L.  Polk  and  the  United  States  Trust  Company  of  New  York,  as  execu- 
tors of  the  last  will  and  testament  of  Josephine  Brooks,  desceased, 

vs. 

Frank  A.  Page,  individually  and  as  Collector  of  Internal  Revenue  for  the 

District  of  Rhode  Island. 

315  Brown,  J. — The  plaintiffs  seek  an  injunction  against  the  defendant 
223  individually  and  as  collector  of  Internal  Revenue  for  this  District, 
225       restraining  him  from  proceeding  by  distraint  for  the  collection  of  an 

estate  tax  before  the  time  fixed  by  Sec.  408  of  the  Revenue  Act  of 
February  24,  1919,  40  Stats.  1057  fl[33  herein]. 

316  The  plaintiffs,  as  executors  of  the  will  of  Josephine  Brooks,  late  of 
Newport,  Rhode  Island,  who  died  August  17,  1920,  allege  that  an 

estate  tax  of  $245,787.67  was  duly  assessed  by  the  Commissioner  of  Internal 
Revenue,  and  that  the  period  of  one  year  and  one  hundred  and  eighty  days 
from  the  death  of  said  Josephine  Brooks  will  not  expire  until  the  expiration 
of  the  thirteenth  day  of  February,  1922. 

317  The  bill  alleges  that  despite  the  provisions  of  Sections  406  fl[30], 
408  [1f33],  and  1307  and  1400  tff39]  of  the  United  States  Revenue 

Act,  (Title  IV,  Act  of  February  24,  1912,  40  Stats.  1057),  the  defendant 
collector  threatened  immediately  to  distrain  the  assets  of  the  estate  for  the 
payment  of  this  tax  unless  plaintiffs  paid  the  same  in  full  to  the  collector 
for  the  Rhode  Island  District  before  the  eighth  day  of  October,  1921.  They 
seek  to  enjoin  the  defendant  from  making  any  seizure,  distress  or  distraint 
under  pretense  of  collecting  said  tax  or  any  part  thereof,  until  the  expiration 
of  the  13th  day  of  February,  1922,  but  no  longer,  and  for  general  relief. 

318  The  plaintiffs  insist  that  the  sole  right  to  distrain  is  conferred  upon 
the  Collector  by  Section  408: 

Sec.  408.  That  if  the  tax  herein  imposed  is  not  paid  within  180  days  after 
it  is  due,  the  collector  shall,  unless  there  is  reasonable  cause  for  further  delay, 
proceed  to  collect  the  tax  under  the  provisions  of  general  law,  or  commence 
appropriate  proceedings  in  any  court  of  the  United  States  to  subject  the 
property  of  the  decedent  to  be  sold  under  the  judgment  or  decree  of  the  court. 
From  the  proceeds  of  such  sale  the  amount  of  the  tax,  together  with  the  costs 
and  expenses  of  every  description  to  be  allowed  by  the  court,  shall  be  first 
paid,  and  the  balance  shall  be  deposited  according  to  the  order  of  the  court, 
to  be  paid  under  its  direction  to  the  person  entitled  thereto. 

319  It  is  the  contention  of  the  collector  that  he  is  entitled  to  distrain 
under  Revised  Statutes  Section  3187,  C.  Stats.  Sec.  5909;  the  perti- 
nent part  of  which  is  as  follows: 

"If  any  person  liable  to  pay  any  taxes  neglects  or  refuses  to  pay  the  same 
within  ten  days  after  notice  and  demand,  it  shall  be  lawful  for  the  collector 
or  his  deputy  to  collect  the  said  taxes,  with  five  per  centum  additional  thereto, 
and  interest  as  aforesaid,  by  distraint  and  sale,  in  the  manner  hereafter 

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provided,  of  the  goods,  chattels,  or  effects,  including  stocks,  securities  and 
evidences  of  debt,  of  the  person  delinquent  as  aforesaid:  Provided,"  etc. 

320  It  will  be  observed  that  under  this  section  the  collector  is  to  proceed 
to  collect  not  only  the  tax,  but  five  per  centum  additional;  further, 

it  provides  for  "interest  as  aforesaid"  at  the  rate  of  one  per  centum  a  month; 
see  R.  S.  sees.  3184  and  3185. 

321  The  collector  contends  that  Sec.  408  above  quoted  must  be  read  in 
connection  with  Sec.  406  [1f30]: 

Sec.  406.  That  the  tax  shall  be  due  one  year  after  the  decedent's  death; 
but  in  any  case  where  the  Commissioner  finds  that  payment  of  the  tax  within 
one  year  would  impose  undue  hardship  upon  the  estate,  he  may  grant  an 
extension  of  time  for  the  payment  of  the  tax  for  a  period  not  to  exceed  three 
years  from  the  due  date.  If  the  tax  is  not  paid  within  one  year  and  180  days 
after  the  decedent's  death,  interest  at  the  rate  of  6  per  centum  per  annum 
from  the  expiration  of  one  year  after  the  decedent's  death  shall  be  added  as 
part  of  the  tax. 

322  The  inconsistency  of  the  provisions  of  R.  S.  Sec.  3187  and  of  Sec. 
406  and  408  concerning  interest  and  the  amount  collectible  is  apparent. 

323  The  collector's  contention  amounts  to  this:    That  by  Sec.  3187,  a 
general  provision,  he  is  authorized  to  nullify  the  specific  provisions 

of  Sec.  406  relating  to  the  amount  to  be  collected,  as  well  as  the  specific 
provision  of  Sec.  408  as  to  the  time  at  which  payment  may  be  enforced  under 
the  provisions  of  general  law  or  by  suit. 

324  He  contends  that  Sec.  408  is  applicable  only  after  one  year  and  180 
days,  and  that  the  provisions  of  general  law  Sec.  3187,  are  applicable 

before.  But  clearly  both  are  not  applicable,  since  if  Sec.  3187  is  enforced 
nothing  remains  to  be  done  according  to  the  provisions  of  Sec.  406  and  408. 

325  This  is  clearly  a  case  where  the  general  and  special  provisions  of  law 
cannot  be  applied  so  as  to  give  effect  to  both,  and  where  the  special 

provisions  render  inapplicable  the  general  provisions  of  law  until  the  time 
fixed  by  Sec.  408  for  enforcement. 

326  The  contention  of  the  collector  seems  to  be  based  upon  the  provision 
of  Sec.  406  of  the  Revenue  Act;  "that  the  tax  shall  be  due  one  year 

after  the  decedent's  death."  It  does  not  follow,  however,  that  because  the 
tax  accrued  or  became  due  at  this  date,  it  was  immediately  enforceable  by 
distraint.  It  is  common  in  tax  legislation  to  fix  a  date  at  which  the  tax  ac- 
crues, a  later  date  up  to  which  it  may  be  paid  without  interest,  and  a  further 
date  at  which  proceedings  for  its  enforcement  may  be  begun. 

327  Because  the  statute  fixes  a  date  at  which  a  tax  becomes  due,  and 
because  it  is  payable  at  any  time  after  that  date,  it  by  no  means  fol- 
lows that  it  must  be  immediately  collectible  by  the  process  of  distraint. 
United  States  vs.  The  State  Bank  of  North  Carolina,  6  Peters  29,  36,  shows 
that  the  word  "due"  is  sometimes  used  to  express  the  mere  statement  of 
indebtment,  and  then  is  an  equivalent  of  "owe"  or  "owing."  See  also  the 
decision  of  this  court  In  re  B.  H.  Gladding  Co.,  120  Fed.  809;  In  re  West 
Norfolk  Lumber  Co.,  112  Fed.  759,  767;  Wiggin  vs.  Knights  of  Pythias,  31 
Fed.  122,  125. 

328  The  collector  relies  also  upon  the  provisions  of  Sec.  406: 

"But  in  any  case  where  the  Commissioner  finds  that  payment  of  the 
tax  within  one  year  would  impose  undue  hardship  upon  the  state,  he  may 
grant  an  extension  of  time  for  the  payment  of  the  tax  for  a  period  not  to 
exceed  three  years  from  the  due  date." 

329  The  provision  is  peculiar  in  that  the  power  of  the  Commissioner  to 
extend  the  time  of  payment  is  based  upon  the  finding  of  hardship 

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in  paying  before  the  due  date;  but  the  grant  of  power  to  the  Commissioner  to 
extend  the  time  of  payment  for  a  period  not  to  exceed  three  years  from  the 
due  date  does  not  conflict  with  the  section  which  imposes  a  statutory  duty 
upon  the  collector  in  the  absence  of  any  extension  of  time  by  the  Commissioner 
under  Sec.  406,  as  in  this  case.  Can  it  be  said  that  the  provision  for  an  exten- 
sion of  the  time  of  payment  by  the  Commissioner  implies  an  authority  of  the 
collector,  in  the  absence  of  such  extension,  to  proceed  at  once  under  Sec. 
3187,  despite  the  specific  provision  of  Sec.  406  that  interest  at  six  per  cent 
from  one  year  after  the  decedent's  death  is  to  be  added  if  the  tax  is  not  paid 
within  one  year  and  180  days  after  the  decedent's  death,  and  of  the  statutory 
direction  to  the  collector  as  a  ministerial  officer  contained  in  Sec.  408:  "That 
if  the  tax  herein  imposed  is  not  paid  within  180  days  after  it  is  due,  the  collector 
shall,  unless  there  is  reasonable  cause  for  further  delay,  proceed  to  collect  the 
tax  under  the  provisions  of  general  law,"  etc. 

330  The  plaintiffs  urge  that  the  statute,  by  providing  a  180  days  period 
after  the  due  date  for  payment  without  interest,  and  by  providing 

for  action  by  the  collector  after  the  expiration  of  that  period,  has  given  a 
substantial  right  to  the  executors  of  a  decedent's  estate  in  recognition  of  the 
difficulty  of  converting  assets  into  cash  for  immediate  payments  of  large  sums 
for  estate  taxes.  The  time  is  given  that  loss,  through  immediate  conversion 
of  assets  into  cash,  may  be  avoided. 

331  The  provision  of  the  180  days  period  is  significant,  in  view  of  the  fact 
that  under  Sec.  208  of  the  Revenue  Act  of  1916  the  period  of  but  60 

days  was  provided.  It  would  hardly  be  contended  that  this  period  of  60  days 
could  be  cut  off  by  resort  to  Sec.  3187. 

332  It  is  also  significant  that  under  the  Income  Tax  provisions  of  the  Act 
of  February  24,  1919,  Sec.  250  (e)  expressly  excepts  the  estates  of 

deceased  persons  from  the  provision  that  if  any  tax  remains  unpaid  after 
the  date  when  it  is  due,  and  for  ten  days  after  notice  and  demand  by  the 
collector,  there  shall  be  added  as  part  of  the  tax  5  per  centum,  plus  interest 
at  the  rate  of  1  per  centum  per  month. 

333  A  construction  of  Title  IV  which  imposes  upon  the  estate  payments 
from  which  the  income  of  an  estate  is  relieved  by  the  provisions  of 

the  same  Revenue  Act  is  to  be  avoided. 

334  In  the  district  of  Rhode  Island  the  difficulty  of  immediately  con- 
verting estates  of  decedents  into  cash  for  payment  of  large  estate 

taxes,  and  the  danger  of  great  loss  to  the  principal  of  estates,  were  so  serious 
that  legislative  relief  was  sought  and  was  granted  by  the  Rhode  Island 
Legislature,  by  empowering  executors  and  administrators  to  raise  funds  by 
mortgaging  or  pledging  the  personal  estate  of  decedents  in  their  hands. 
Public  Laws  of  Rhode  Island,  January  Session  1921,  Chap.  2030. 

335  The  intent  of  Congress  to  give  to  the  estates  of  decedents  a  substantial 
benefit  from  the  180  days  provision  is  manifest,  and  the  judgment  of 

Congress  that  a  period  of  180  days  without  interest  and  without  distraint 
was  proper  in  respect  to  the  collection  of  estate  taxes,  cannot  be  questioned; 
nor  can  it  be  assumed  from  the  length  of  this  period  (180  days)  that  it  was 
intended  that  this  period  fixed  by  Congress  in  legislative  enactment  should 
be  shortened  either  by  regulation  or  by  act  of  the  collector. 

336  I  am  of  the  opinion  that  the  plaintiffs'  contention  that  Sees.  406 
and  408  and  1307  of  the  Revenue  Act  are  exclusive  of  the  present 

application  of  the  provisions  of  Sec.  3187  is  sound,  and  that  the  threatened 
distraint  is  without  statutory  authorization.  If  this  is  correct  it  does  not 
matter  that  there  are  regulations  which  direct  or  pretend  to  authorize  this, 
since  express  provisions  of  the  Revenue  Act  cannot  be  repealed  by  regulation. 

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337  The  collector  objects  to  jurisdiction,  relying  upon  R.  S.  3224: 
"No  suit  for  the  purpose  of  restraining  the  assessment  or  collection 

of  any  tax  shall  be  maintained  in  any  court." 

338  As  we  have  said,  the  validity  of  the  tax,  the  obligation  of  the  plaintiffs 
to  pay,  and  the  right  of  the  United  States  to  collect  in  accordance 

with  the  statute,  are  not  contested.  A  restraint,  however,  is  sought  upon 
action  which  is  not  authorized  by  statute. 

339  There  appears  to  be  here  no  element  of  interference  with  the  discre- 
tion of  the  Commissioner  of  Internal  Revenue  in  making  an  assess- 
ment, and  the  case  does  not  involve  interference  with  any  quasi-judicial 
function;  it  seems  to  be  merely  a  question  of  the  statutory  right  of  the  col- 
lector,— a  ministerial  officer. 

340  Sec.  3224  was  before  the  court  in  Dodge  vs.  Osborn,  240  U.  S.  118 
and  in  Dodge  vs.  Brady,  240  U.  S.  122.    In  Dodge  vs.  Osborn  it 

was  said — 

"*  *  *  *  it  declares,  by  Sec.  3224,  that  its  officers  shall  not  be  enjoined 
from  collecting  a  tax  claimed  to  have  been  unjustly  assessed,  when  those 
officers,  in  the  course  of  general  jurisdiction  over  the  subject-matter  in  ques- 
tion, have  made  the  assignment  (assessment)  and  claim  that  it  is  valid." 

341  No  question  of  that  character  is  before  us.  The  collector's  authority 
to  distrain  is  statutory;  his  duty  purely  ministerial.    The  plaintiffs 

acknowledge  the  validity  of  the  law  and  of  the  assessment,  and  the  right  of 
the  collector,  while  pursuing  the  provisions  of  the  statute.  Does  the  provision 
of  Sec.  3224,  that  no  court  shall  restrain  the  collection  of  a  tax,  prohibit  a 
suit  in  which  the  plaintiff  seeks  to  restrain  a  collector  from  proceeding  pre- 
maturely and  otherwise  than  in  accordance  with  the  statute  that  provides 
the  method  of  collection? 

342  This  case  must  be  distinguished  from  cases  in  which  the  right  to 
collect  is  denied  because  of  the  asserted  invalidity  of  the  law  or  of 

the  assessment.  To  restrain  a  premature  enforcement,  at  a  date  earlier  than 
that  fixed  by  statute,  protects  the  rights  of  the  tax  payer  without  impeding 
the  execution  of  the  law. 

343  The  system  of  "stringent  measures,  not  judicial,  to  collect  them 
[both  customs  duties  and  internal  revenue  taxes],  with  appeals  to 

specified  tribunals,  and  suits  to  recover  back  moneys  illegally  exacted  was  a 
system  of  corrective  justice  intended  to  be  complete;"  (Dodge  vs.  Osborn, 
240  U.  S.  121);  but  it  seems  inapplicable  when  the  only  wrong  complained 
of  is  a  violation  of  the  statute  by  premature  action  of  a  ministerial  officer 
whose  power  is  defined  by  statute. 

344  The  term  "collection  of  a  tax"  implies  a  statutory  procedure. 

345  Does  Sec.  3224  require  that  the  executors  of  an  estate  must  comply 
with  a  demand  which  destroys  the  right  to  180  days  for  the  conversion 

of  the  estate  into  cash? 

346  Dodge  vs.  Osborn  recognizes  that  there  may  be  exceptional  cases  to 
which  the  provisions  of  Sec.  3224  are  inapplicable.  The  circumstances 

of  an  estate  tax  are  so  unusual  as  to  lead  Congress  to  make  a  special  provision; 
a  most  unusual  provision  of  180  days.  This  is  Congressional  recognition  of 
the  unusual  situation,  demanding  unusual  delay. 

347  It  may  be  said  that  plaintiffs  seek  only  protection  against  action 
which  is  not  a  collection  of  a  tax  in  the  sense  of  the  statute,  Sec. 

3224,  but,  on  the  contrary,  a  violation  of  a  statute,  Sec.  408.  There  is  no 
legal  remedy  for  the  loss  of  that  time  which  Congress  thought  necessary. 

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They  cannot  recover  if  they  pay  the  tax,  in  any  event  more  than  interest, 
and  it  is  doubtful  if  they  may  recover  that. 

348  We  may  look  into  the  statute  sufficiently  to  determine  whether  the 
act  complained  of  is  "the  collection  of  a  tax"  or  a  merely  illegal  and 

unauthorized  act  of  a  person  without  statutory  authority. 

349  If,  as  stated  by  Bouvier,  p.  1569,  "the  writ  of  injunction  may  be 
regarded  as  the  correlation  of  the  writ  of  mandamus,"  etc.,  we  should 

now  observe  the  distinction  between  controlling  the  purely  ministerial  act 
of  an  officer  directed  by  a  statute,  which  leaves  him  no  discretion,  and  the 
acts  of  officers  having  judicial  or  quasi-judicial  functions  to  perform  in  the 
assessment  of  taxes. 

350  The  question  of  the  power  of  a  collector  to  distrain  before  the  time 
fixed  by  the  statute  from  which  his  power  is  derived,  is  a  judicial 

question.  Acting  without  statutory  authority  the  distraint  would  be  merely 
an  unlawful  seizure  of  property. 

351  The  loss  of  that  substantial  period  of  time, — 180  days, — expressly 
granted  by  Congress  for  the  conversion  of  assets,  may  be  regarded 

as  an  irreparable  injury;  for  which  the  statutes  providing  for  recovery  of 
taxes  illegally  assessed  or  collected  afford  no  remedy.  If  the  plaintiffs  pay 
now  they  lose  all  benefit  of  the  provision  of  the  180  days  period,  and  suffer 
any  loss  from  compulsory  shortening  of  that  period.  As  the  payment,  if  made 
within  180  days  after  the  due  date  is  without  interest,  the  estate  will  lose 
upwards  of  $5,000  by  enforced  payment  at  the  earlier  date,  under  Sec.  3187. 

352  As  the  tax  is  payable  at  the  due  date  it  is  doubtful  if  interest,  in  any 
event,  could  be  recoverable;  but  assuming  that  such  recovery  is 

possible,  there  remains  irreparable  damage  in  the  loss  of  the  benefit  that 
Congress  extended  to  estates  of  decedents  by  fixing  the  time  of  distraint  at 
180  days  after  the  due  date. 

353  The  plaintiffs,  in  my  opinion,  make  a  case  justifying  the  interposition 
of  a  court  of  equity,  in  order  to  prevent  irreparable  injury  from  an 

unlawful  act.  Furthermore,  I  am  of  the  opinion  that  Sec.  3224  R.  S.  does 
not  forbid  an  injunction  against  a  ministerial  officer  proceeding  without 
authority  and  in  violation  of  the  controlling  statute,  since  by  the  term  "col- 
lection of  a  tax"  is  meant  a  proceeding  in  accordance  with  law,  and  not  a 
merely  unlawful  and  unauthorized  act. 

354  Defendant's  motions  to  dismiss  are  denied. 

355  A  draft  decree  for  an  injunction  against  procedure  otherwise  than  as 
authorized  by  Sec.  408  may  be  presented  by  the  plaintiffs. 

[Comment:  The  Revenue  Act  of  1921,  provides  in  Title  IV,  Estate 
Tax,  Sec.  406  [1[449]  that  the  tax  shall  be  due  and  payable  one  year  from 
decedent's  death. — The  Corporation  Trust  Company.] 


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(T.  D.  3138.) 

Community  Property. 

1.  Income  taxes — Husband  and  wife — Community  property. 
*********** 

356  2.  Estate  tax — Husband  and  wife — Community  property. 

11       In  Washington,  Arizona,  Idaho,  New  Mexico,  Louisiana  and  Nevada 
113      there  should  be  included  in  gross  estate,  in  computing  the  estate 
tax  of  a  deceased  spouse,  one-half  only  of  the  community  property 
of  husband  and  wife  domiciled  therein;  this  is  not  based  upon  any  statute 
enacted  subsequent  to  March  1,  1913,  and  applies  under  estate  tax  acts 
prior  to  the  Revenue  Act  of  1918.    [Captions  to  T.  D.  3138,  1f357,  below.] 

357  There  is  given  below  in  full  for  your  information  and  guidance  an 
opinion  rendered  by  the  Attorney  General  under  date  of  February  26, 

1921,  dealing  with  the  right  of  husband  and  wife  domiciled  in  certain  states 
having  so-called  "community  property"  laws  to  divide  certain  of  their 
income  for  the  purpose  of  the  income  tax,  and  as  to  the  inclusion  of  community 
property  in  the  gross  estate  of  a  deceased  spouse.  See,  in  this  connection. 
Treasury  Decision  No.  3071  [see  H378].  (T.  D.  3138,  signed  by  Commissioner 
Wm.  M.  Williams,  and  dated  March  3,  1921.) 

358  Dear  Mr.  Secretary:  My  opinion  has  been  requested  upon  the  fol- 
lowing questions: 

359  1*  *  *  *  *  *  *  **** 

360  2.  In  which  of  the  states  in  which  the  community  property  system 
exists  should  there  be  included  in  gross  estate,  in  computing  the  estate 

tax  of  the  estate  of  a  deceased  spouse,  one-half  and  only  one-half  of  the 
community  property  of  husband  and  wife  domiciled  therein?  [See  answer  at 
H387.] 

361  3.  If  your  answers  to  questions  1  and  2,  as  to  any  state  are  based 
upon  a  statute  enacted  subsequent  to  March  1,  1913,  please  give 

the  rule  as  to  such  state  existing  from  March  1,  1913  to  the  passage  of  such 
statute,  for  my  guidance  in  allowing  claims  for  refund.  [See  answer  at  ^[388.] 

362  4.  Do  your  answers  to  questions  1  and  2  apply  under  income  and 
estate  tax  acts  prior  to  the  Revenue  Act  of  1918?    [See  answer  at 

1F389J 

363  The  community  property  system  prevails  in  Arizona,  California, 
Idaho,  Louisiana,  Nevada,  New  Mexico,  Texas  and  Washington. 

The  application  of  the  income  tax  act  to  the  income  from  community  property 

belonging  to  husband  and  wife  domiciled  in  Texas  was  disposed  of  in  my 

opinion  of  September  10,  1920.    [See  1)378]. 

*********** 

364  While  the  statutes  of  California  are  in  some  respects  similar  to  the 
community  property  laws  of  the  other  community  property  states, 

the  rule  established  by  the  highest  courts  of  that  state  is  that  during  coverture 
the  wife  has  no  vested  interest  in  the  community  property,  her  interest 
therein  being  a  mere  expectancy. 

365  In  Spreckles  v.  Spreckles,  116  Cal.  339  (1897),  the  Supreme  Court  of 
that  state  held  that  prior  to  the  amendment  of  1891  to  Sec.  172  of 

the  Civil  Code,  forbidding  the  husband  to  give  away  community  property 
without  consent  of  the  wife  in  writing,  the  code  vested  in  the  husband  all 
the  elements  of  absolute  ownership  of  the  community  property;  that  the 
wife's  interest  was  a  mere  expectancy,  and  as  to  all  the  wo'rld  except  the 
wife,  there  was,  prior  to  that  amendment,  no  distinction  between  the  com- 

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munity  estate  and  the  separate  estate  of  the  husband;  and  that  the  amend- 
ment could  not  be  construed  retroactively  so  as  to  deprive  the  husband  of 
his  vested  right  to  dispose  by  gift  of  community  property  acquired  prior.to 
the  amendment,  without  the  consent  of  the  wife. 

366  In  1905  California  passed  an  inheritance  tax  law,  and  subsequently 
the  question  was  raised  whether  a  widow  should  be  compelled  to 

pay  such  tax  on  that  one-half  of  the  community  property  that  she  took 
on  the  death  of  her  husband.  In  the  Estate  of  Moffitt,  153  Cal.  359  (1908), 
the  Supreme  Court  of  California  held  that  she  did,  since  she  had  no  vested 
interest  in  the  community  estate  and  took  her  one-half  on  the  death  of  her 
husband  as  his  heir. 

367  This  case  was  taken  to  the  Supreme  Court  of  the  United  States 
(Moffitt  v.  Kelly,  218  U.  S.  400)  where  the  judgment  of  the  lower 

court  was  affirmed,  the  court  laying  down  the  rule  that  the  nature  and 
character  of  the  right  of  the  wife  in  community  property  for  the  purpose  of 
taxation  is  a  peculiarly  local  question,  and  the  determination  of  the  state 
court  in  regard  thereto  is  not  reviewable  by  the  Supreme  Court;  and,  further, 
that  the  law  of  California  of  1905,  taxing  all  property  passing  by  will  or 
intestacy,  having  been  construed  by  the  highest  court  of  that  state  as  applying 
to  the  wife's  share  of  the  community  property,  such  tax  is  not  in  conflict 
with  the  contract,  due  process,  or  equal  protection  clauses  of  the  Constitution. 

368  Subsequently  the  inheritance  tax  law  of  California  was  amended  tc 
provide  "that  for  the  purpose  of  this  act"  the  one-half  of  the  com- 
munity property  which  goes  to  the  surviving  wife  on  the  death  of  her  husband, 
under  the  provisions  of  Sec.  1402  of  the  Civil  Code  "shall  not  be  deemed  to 
pass  to  her  as  heir  to  her  husband,  but  shall,  for  the  purpose  of  this  act,  be 
deemed  to  go,  pass,  or  be  transferred,  to  her  for  valuable  and  adequate 
consideration." 

369  It  is  obvious  that  this  language  does  not  change  the  rule  of  community 
property  in  the  state  nor  vest  in  the  wife  any  interest  thereto  prior 

to  the  dissolution  of  the  community;  rather  it  emphasizes  the  existing  rule 
that  the  wife  has  no  vested  interest  in  community  property. 

370  As  to  the  effect  of  Sec.  172a  of  the  Civil  Code,  enacted  in  1917,  it 
is  not  to  be  presumed  that  the  legislature  intended,  by  the  enact- 
ment of  same  to  make  so  revolutionary  a  change  in  the  existing  rule  of  prop- 
erty in  California  as  to  devest  the  husband  of  his  ownership  in  the  community 
property.  As  was  said  in  Spreckles  v.  Spreckles,  supra,  "If  a  husband  cannot 
make  a  valid  transfer  of  the  property  for  the  purpose  of  depriving  his  wife 
of  it,  that  does  not  show  a  vested  right  in  her;"  and  giving  the  fullest  possible 
effect  to  the  language,  unless  the  wife  had  a  vested  interest  by  virtue  of  the 
law  as  it  theretofore  existed,  which  it  must  be  conceded  she  did  not,  the 
operation  of  the  amendment  would  necessarily  be  confined  to  community 
property  acquired  after  May  23,  1917. 

SUMMARY. 

371  Summarizing,  it  appears  that  in  all  of  the  community  property  states 
except  California  their  own  courts  have  held  that  the  wife  has,  during 

the  existence  of  the  marriage  relation,  a  vested  interest  in  one-half  of  the 
community  property.  Her  rights  in  the  property  of  the  community  are 
perhaps  most  fully  recognized  in  the  state  of  Washington,  where  both  spouses 
have  testamentary  disposition  over  one-half  of  the  community  property, 
and  where  in  the  absence  of  such  disposition  it  descends  to  their  issue,  or, 
in  the  absence  of  issue,  to  the  survivor;  while  the  husband  is  manager  of 
the  community  estate  in  Washington  he  may  not  sell,  convey,  or  encumber 

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real  estate  unless  the  wife  join  with  him  in  the  conveyance;  and  as  was  held 
in  Huyvaerts  v.  Roedtz,  ante,  and  Schramm  v.  Steele,  ante,  the  separate 
debt  of  the  husband  cannot  be  satisfied  out  of  community  property  where 
it  is  not  incurred  in  connection  with  the  community  business,  nor  for  the 
benefit  of  the  community. 

372  In  Idaho  it  is  seen  that  the  limitation  upon  the  alienation  of  the 
community  real  property  is  the  same  as  in  Washington.   But  while 

the  wife's  earnings  and  the  rents  and  profits  of  her  separate  estate  are  com- 
munity property  she  is  given  the  management  and  control  of  same.  The  Idaho 
rule  governing  the  disposition  of  community  property  on  the  death  of  either 
spouse  is,  with  minor  variations,  the  same  as  that  of  Washington.  In  neither 
state  is  an  inheritance  tax  payable  on  the  one-half  of  the  community  that 
goes  to  the  one  spouse  on  the  death  of  the  other. 

373  In  Arizona  the  husband  only  may  dispose  of  community  personal 
property,  but  the  wife  must  join  him  in  deeds  or  mortgages  affecting 

real  estate,  except  unpatented  mining  claims.  One-half  of  the  community 
property  is  subject  to  the  testamentary  disposition  of  either  spouse,  and  in 
absence  of  such  disposition  goes  to  his  or  her  descendants;  where  there  is 
neither  testamentary  disposition  nor  descendants,  it  is  subject  to  distribution 
in  the  same  manner  as  the  separate  property  of  the  husband.  On  decree  of 
divorce  the  Court  may  divide  the  property  as  he  sees  fit,  but  in  the  absence 
of  provision  for  the  community  property  the  parties  from  the  date  of  the 
decree  holds  as  tenants  in  common.  The  courts  of  Arizona  hold  that 
the  wife  is  equal  owner  with  her  husband. 

374  In  Nevada  the  husband  has  the  entire  management  and  control 
of  the  community  property,  except  that  the  wife  has  entire  control 

of  her  earnings  when  living  separate  from  her  husband.  Upon  her  death 
the  husband  takes  the  whole  community  estate,  except  that  where  he  has 
abandoned  her  without  good  cause  she  may  by  will  dispose  of  half  and  in 
absence  of  such  disposition  it  goes  to  her  heirs,  exclusive  of  her  husband. 
On  the  death  of  the  husband  the  wife  takes  half  and  the  husband  may  dis- 
pose of  the  other  half  by  will,  or  it  goes  to  his  surviving  children;  if  there  is 
no  will  and  no  children  survive,  the  whole  goes  to  the  wife  without  admin- 
istration, subject  to  certain  provisos.  On  dissolution  of  community  by 
divorce  for  any  other  ground  than  adultery  or  extreme  cruelty,  the  com- 
munity property  must  be  equally  divided  between  the  parties.  The  wife 
pays  no  inheritance  tax  under  the  inheritance  tax  law  of  Nevada  on  her 
interest  in  community  property  the  courts  holding  that  she  takes  not  as  heir 
but  by  a  right  vested  in  her  at  all  times  during  marriage.  It  is  to  be  noted 
that  the  Constitution  of  Nevada  recognizes  the  wife's  interest  in  community 
property. 

375  In  New  Mexico  while  the  husband  is  manager  of  the  community 
estate,  he  may  not  transfer  real  property  without  a  valuable  considera- 
tion without  the  written  consent  of  his  wife;  and  under  certain  circumstances 
the  wife  may  be  substituted  as  manager;  prior  to  1915  he  could  not  transfer 
community  personal  property  except  for  a  valuable  consideration  without 
her  written  consent;  on  dissolution  of  the  community  by  the  death  of  the 
wife  the  husband  takes  all  except  such  portion  as  may  have  been  set  aside 
to  the  wife  by  judicial  decree,  which  portion  goes  to  her  heirs  unless  she 
has  disposed  of  same  by  will;  on  death  of  the  husband  one-half  goes  to  the 
wife  and  the  other  half  is  subject  to  testamentary  disposition  by  the  husband. 
If  he  makes  no  will  one-fourth  of  his  one-half  goes  to  the  wife  and  the  re- 
mainder to  the  children.    On  separation  either  may  petition  for  division  of 

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community  property  and  after  divorce  continue  to  hold  as  tenants  in  common 
where  no  disposition  has  been  made  in  the  divorce  decree.  New  Mexico 
has  no  state  inheritance  tax  act. 

376  In  Louisiana  the  community  property  comprehends  all  property 
acquired  during  the  marriage  by  either  husband  or  wife  except  that 

acquired  with  separate  funds  or  by  inheritance  or  particular  donation,  and 
excepting  the  earnings  of  the  wife  when  she  is  living  separate  from  her  hus- 
band; the  husband  is  manager  of  the  community  but  he  may  not  convey 
community  immovables  by  gratuitous  title,  and  cannot  dispose  of  moveables 
in  fraud  of  the  wife;  either  spouse  may  dispose  of  one-half  the  community 
property  by  will  and  the  laws  governing  the  descent  of  such  property  in  the 
absence  of  testamentary  disposition  apply  equally  to  both  spouses,  the  sur- 
vivor taking  the  deceased  spouse's  half  by  inheritance  when  there  is  no  will, 
and  neither  father,  mother  or  descendants.  As  heretofore  stated  the  survivor 
pays  no  inheritance  tax  on  his  or  her  one-half  of  the  community  property 
but  does  pay  on  that  part  inherited  from  the  deceased  spouse. 

377  In  California  the  wife  has  no  power  of  testamentary  disposition  of 
community  property  except  of  such  as  may  have  been  set  aside  to 

her  by  judicial  decree;  she  takes  one-half  as  heir  on  the  death  of  the  husband; 
but  on  the  death  of  the  wife  the  entire  community  property  belongs  to  the 
husband  without  administration.  The  California  courts  have  held  that 
under  the  law  as  it  stood  prior  to  1917  the  wife  had  no  vested  interest  in 
community  property  prior  to  the  dissolution  of  the  marriage;  the  amendment 
to  the  inheritance  tax  act  being  limited  to  the  purposes  of  that  act  could  not 
have  had  the  effect  of  vesting  an  interest  in  her,  and  had  the  addition  of 
Sec.  172a  had  that  effect  any  amendment  of  the  inheritance  tax  act  would 
have  been  unnecessary  to  exempt  her  one-half  from  taxation  thereunder. 
In  the  case  of  Blum  v.  Wardell,  now  pending  before  the  Circuit  Court  of 
Appeals  of  the  Ninth  Circuit,  on  appeal  from  the  District  Court  of  the 
Northern  District  of  California,  the  application  of  the  Federal  estate  tax 
act  of  1916  is  under  consideration. 

378  As  appears  from  my  opinion  of  September  10,  1920,  in  Texas  the  con- 
trol of  community  property  is  divided  between  the  husband  and  wife; 

in  that  state  on  the  death  of  either  spouse  without  issue  the  survivor  takes 
the  whole  and  where  there  is  issue,  takes  one-half,  the  other  half  going  to 
said  issue  or  their  descendants.  Under  the  state  inheritance  tax  law  the 
wife  pays  no  tax  on  her  half  of  the  community  property. 


379  In  Warburton  v.  White,  176  U.  S.  484,  496,  the  principle  was  enun- 
ciated that  where  state  decisions  have  interpreted  state  laws  govern- 
ing property  or  controlling  relations  that  are  essentially  of  a  domestic  and 
state  nature  the.  United  States  Supreme  Court  will  follow  the  state  decisions 
if  possible  to  do  so,  in  the  discharge  of  its  duties.  Also  in  De  Vaughn  v. 
Hutchinson,  165  U.  S.  566,  570,  it  was  held  that  to  the  law  of  the  state  in 
which  property  is  situated  we  must  look  for  the  rules  which  govern  its  descent, 
alienation  and  transfer,  and  for  the  effect  and  construction  of  wills  and  other 
conveyances.  In  United  States  v.  Crosby,  7  Cranch  115,  it  was  held  that  the 
title  to  land  can  be  acquired  and  lost  only  in  the  manner  prescribed  by  the 
law  of  the  place  where  same  is  situated. 

380  In  arriving  at  an  answer  to  the  questions  propounded  by  you  we  are 
called  upon  to  determine  the  rules  of  property  in  the  community 

property  states;  we  have,  therefore,  pursuant  to  the  rules  of  the  above 
cases,  adopted  the  rules  laid  down  by  the  highest  courts  of  the  various  states. 

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There  remains  to  be  determined  the  application  thereto,  of  the  income  and 
estate  tax  provisions  of  Federal  statutes.  In  my  previous  opinion  it  was 
stated  that  since  in  Texas  the  ownership  in  one-half  of  all  community  property 
vests  in  each  spouse,  whatever  is  income  to  the  community  is  income  to  both. 
This  conclusion  applies,  therefore,  to  all  states  in  which  community  property 
is  held  to  be  vested  equally  in  both  spouses. 

381  Section  201  of  the  Revenue  Act  of  1916  and  Sec.  401  of  that  of  1918 
impose  a  tax  "upon  the  transfer  of  the  net  estate  of  every  decedent" 

dying  after  the  passage  thereof,  to  be  determined  as  is  set  forth  in  the  sec- 
tions following,  which  are: 
Revenue  Act  of  1918. 

Sec.  402.  That  the  value  of  the  gross  estate  of  the  decedent  shall 
be  determined  by  including  the  value  at  the  time  of  his  death  of  all 
property,  real  or  personal,  tangible  or  intangible,  wherever  situated  — 

(a)  To  the  extent  of  the  interest  therein  of  the  decedent  at  the  time 

of  his  death  which  after  his  death  is  subject  to  the  payment  of  the 

charges  against  his  estate  and  the  expenses  of  its  administration  and  is 

subject  to  distribution  as  part  of  his  estate; 

*********** 

(d)  To  the  extent  of  the  interest  therein  held  jointly  or  as  tenants 
in  the  entirety  by  the  decedent  and  any  other  person,  or  desposited  in 
banks  or  other  institutions  in  their  joint  names  and  payable  to  either  or 
the  survivor,  except  such  part  thereof  as  may  be  shown  to  have  originally 
belonged  to  such  other  person  and  never  to  have  belonged  to  the  de- 
cedent. 

382  Subdivisions  (a)  and  (c)  of  Section  202  of  the  Revenue  Act  of  1916 
are  identical  with  subdivisions  (a)  and  (d)  of  Section  402  of  the 

Revenue  Act  of  1918,  quoted  above. 

383  While  the  community  estate  of  husband  and  wife  has  not  in  the 
strictest  sense  all  the  incidents  of  a  joint  estate  or  an  estate  in  the 

entirety  as  they  were  known  at  common  law,  I  am  convinced  that  the  com- 
munity estate  is  for  all  practical  purposes  within  the  language  of  subdivision 
(d)  of  Sec.  402,  there  being  deductible  therefrom,  in  arriving  at  the  net  estate 
of  decedent,  the  one-half  interest  of  the  surviving  spouse,  which  may  be 
shown  to  have  originally  belonged  to  such  person,  and  never  to  have  belonged 
to  the  decedent. 

384  And  even  though  it  should  be  held  that  the  community  estate  is  not 
a  "joint  estate"  or  an  "estate  in  the  entirety"  within  the  meaning 

of  the  revenue  acts,  the  one-half  interest  of  the  deceased  spouse  in  community 
property  would  still  be  subject  to  tax  under  the  language  of  subdivision  (a) 
above. 

385  My  answers  to  your  questions  are  therefore: 

386  (1)  That  in  Washington,  Arizona,  Idaho,  New  Mexico,  Louisiana 
and  Nevada  the  husband  and  wife  domiciled  therein,  in  rendering 

separate  income  tax  returns,  may  each  report  as  gross  income,  one-half 
of  the  income  which  under  the  laws  of  the  respective  states  becomes,  simul- 
taneously with  its  receipt,  community  property. 

387  (2)  In  the  states  mentioned  in  answer  to  question  one  there  should  be 
included  in  gross  estate,  in  computing  the  estate  tax  of  a  deceased 

spouse,  one-half  only  of  the  community  property  of  husband  and  wife 
domiciled  therein. 

388  (3)  Neither  of  the  above  answers  is  based  upon  a  statute  enacted 
subsequent  to  March  1,  1913. 

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389      (4)  My  answers  to  these  questions  apply  under  income  and  estate 
tax  acts  prior  to  the  Revenue  Act  of  1918. 
(Summary  of  opinion  by  Attorney  General  A.  Mitchell  Palmer,  dated 
February  26,  1921,  appended  to  and  made  a  part  of  T.  D.  3138,  ^[357. ) 


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(Decision.) 

Revenue  Act  of  1916. 

Inheritance,  legacy,  succession,  or  transfer  taxes  are  not  deductible  in  the 
determination  of  the  net  estate  subject  to  the  Federal  estate  tax. 

Supreme  Court  of  the  United  States. 


New  York  Trust  Company  and  Albert  W. 
Pross,  as  Executors  of  the  Will  of  J. 
Harsen  Purdy,  Plaintiffs  in  Error, 
vs. 

Mark  Eisner. 


In  Error  to  the  District  Court  of 
the  United  States  for  the 
Southern  District  of  New  York. 


[May  16,  1921.] 
Mr.  Justice  Holmes  delivered  the  opinion  of  the  Court. 

390  This  is  a  suit  brought  by  the  executors  of  one  Purdy  to  recover  an 
144       estate  tax  levied  under  the  Act  of  Congress  of  September  8,  1916, 

c.  463,  Title  II,  §  201,  39  Stat.  736,  777,  and  paid  under  duress  on 
December  14,  1917.  According  to  the  complaint  Purdy  died  leav- 
ing a  will  and  codicil  directing  that  all  succession,  inheritance  and 
transfer  taxes  should  be  paid  out  of  the  residuary  estate,  which  was  be- 
queathed to  the  descendants  of  his  brother.  The  value  of  the  residuary  estate 
was  $427,414.96,  subject  to  some  administration  expenses.  The  executors  had 
been  required  to  pay  and  had  paid  inheritance  and  succession  taxes  to  New 
York  ($32,988.97)  and  other  States  ($4,780.91)  amounting  in  all  to  $37,- 
769.88.  The  gross  estate  as  defined  in  §  202  of  the  Act  of  Congress  was 
$769,799.39;  funeral  expenses  and  expenses  of  administration,  except  the 
above  taxes,  $61,322.08;  leaving  a  net  value  for  the  payment  of  legacies, 
except  as  reduced  by  the  taxes  of  the  United  States,  of  $670,707.43.  The 
plaintiffs  were  compelled  to  pay  $23,910.77  to  the  United  States,  no  deduc- 
tion of  any  part  of  the  above  mentioned  $37,769.88  being  allowed.  They 
allege  that  the  Act  of  Congress  is  unconstitutional,  and  also  that  it  was  mis- 
construed in  not  allowing  a  deduction  of  state  inheritance  and  succession 
taxes  as  charges  within  the  meaning  of  §  203.  On  demurrer  the  District 
Court  dismissed  the  suit. 

391  By  §  201  of  the  Act,  "a  tax    *    *    *    equal  to  the  following. per- 
centage of  the  value  of  the  net  estate,  to  be  determined  as  provided 

in  section  two  hundred  and  three,  is  hereby  imposed  upon  the  transfer  of 
the  net  estate  of  every  decedent  dying  after  the  passage  of  this  Act."  *  *  * 
with  percentages  rising  from  one  per  centum  of  the  amount  of  the  net  estate 
not  in  excess  of  $50,000  to  ten  per  centum  of  the  amount  in  excess  of  $5,000,- 
000.  Section  202  gives  the  mode  of  determining  the  value  of  the  gross  estate. 
Then,  by  §  203  it  is  enacted  "That  for  the  purpose  of  the  tax  the  value  of 
the  net  estate  shall  be  determined — (a)  In  the  case  of  a  resident,  by  deduct- 
ing from  the  value  of  the  gross  estate — (1)  Such  amounts  for  funeral  ex- 
penses, administration  expenses,  claims  against  the  estate,  unpaid  mort- 
gages, losses  incurred  during  the  settlement  of  the  estate  arising  from  fires, 
storms,  shipwreck,  or  other  casualty,  and  from  theft,  when  such  losses  are 
not  compensated  for  by  insurance  or  otherwise,  support  during  the  settle- 

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ment  of  the  estate  of  those  dependent  upon  the  decedent,  and  such  other 
charges  against  the  estate,  as  are  allowed  by  the  laws  of  the  jurisdiction, 
whether  within  or  without  the  United  States,  under  which  the  estate  is  being 
administered;  and  (2)  an  exemption  of  $50,000."  The  tax  is  to  be  due  in 
one  year  after  the  decedent's  death.  §  204.  Within  thirty  days  after  quali- 
fying the  executor  is  to  give  written  notice  to  the  collector  and  later  to  make 
return  of  the  gross  estate,  deductions  allowed,  net  estate  and  the  tax  payable 
thereon.  §  205.  The  executor  is  to  pay  the  tax.  §  207.  The  tax  is  a  lien 
for  two  years  on  the  gross  estate  except  such  part  as  is  paid  out  for  allowed 
charges,  §  209,  and  if  not  paid  within  sixty  days  after  it  is  due  is  to  be  col- 
lected by  a  suit  to  subject  the  decedent's  property  to  be  sold.  §  208.  In 
case  of  collection  from  some  person  other  than  the  executor,  the  same  section 
provides  for  contribution  from  or  marshalling  of  persons  subject  to  equal  or 
prior  liability  "it  being  the  purpose  and  intent  of  this  title  that  so  far  as  is 
practicable  and  unless  otherwise  directed  by  the  will  of  the  decedent  the  tax 
shall  be  paid  out  of  the  estate  before  its  distribution."  These  provisions  are 
assailed  by  the  plaintiffs  in  error  as  an  unconstitutional  interference  with 
the  rights  of  the  States  to  regulate  descent  and  distribution,  as  unequal  and 
as  a  direct  tax  not  apportioned  as  the  Constitution  requires. 

392  The  statement  of  the  constitutional  objections  urged  imports  on  its 
face  a  distinction  that,  if  correct,  evidently  hitherto  has  escaped  this 

Court.  See  United  States  v.  Field,  [^[396  herein].  It  is  admitted,  as  since 
Knowlton  v.  Moore,  178  U.  S.  41,  it  has  to  be,  that  the  United  States  has 
power  to  tax  legacies,  but  it  is  said  that  this  tax  is  cast  upon  a  transfer  while 
it  is  being  effectuated  by  the  State  itself  and  therefore  is  an  intrusion  upon 
its  processes,  whereas  a  legacy  tax  is  not  imposed  until  the  process  is  com- 
plete. An  analogy  is  sought  in  the  difference  between  the  attempt  of  a  State 
to  tax  commerce  among  the  States  and  its  right  after  the  goods  have  become 
mingled  with  the  general  stock  in  the  State.  A  consideration  of  the  paral- 
lel is  enough  to  detect  the  fallacy.  A  tax  that  was  directed  solely  against 
goods  imported  into  the  State  and  that  was  determined  by  the  fact  of  im- 
portation would  be  no  better  after  the  goods  were  at  rest  in  the  State  than 
before.  It  would  be  as  much  an  interference  with  commerce  in  one  case 
as  in  the  other.  /.  M.  Darnell  &  Son  Co.  v.  Memphis,  208  U.  S.  113.  Welton 
v.  Missouri,  91  U.  S.  275.  Conversely  if  a  tax  on  the  property  distributed 
by  the  laws  of  a  State,  determined  by  the  fact  that  distribution  has  been 
accomplished,  is  valid,  a  tax  determined  by  the  fact  that  distribution  is 
about  to  begin  is  no  greater  interference  and  is  equally  good. 

393  Knowlton  v.  Moore,  178  U.  S.  41,  dealt,  it  is  true,  with  a  legacy  tax. 
But  the  tax  was  met  with  the  same  objection;  that  it  usurped  or 

interfered  with  the  exercise  of  state  powers,  and  the  answer  to  the  objection 
was  based  upon  general  considerations  and  treated  the  'power  to  transmit 
or  the  transmission  or  receipt  of  property  by  death'  as  all  standing  on  the 
same  footing.  178  U.  S.  57,  59.  After  the  elaborate  discussion  that  the  sub- 
ject received  in  that  case  we  think  it  unnecessary  to  dwell  upon  matters 
that  in  principle  were  disposed  of  there.  The  same  may  be  said  of  the  argu- 
ment that  the  tax  is  direct  and  therefore  is  void  for  want  of  apportionment. 
It  is  argued  that  when  the  tax  is  on  the  privilege  of  receiving,  the  tax  is  in- 
direct because  it  may  be  avoided,  whereas  here  the  tax  is  inevitable  and 
therefore  direct.  But  that  matter  also  is  disposed  of  by  Knozvhon  v.  Moore. 
not  by  an  attempt  to  make  some  scientific  distinction,  which  would  be  at 
least  difficult,  but  on  an  interpretation  of  language  by  its  traditional  use  — 
on  the  practical  and  historical  ground  that  this  kind  of  tax  always  ha?  bePfl 

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regarded  as  the  antithesis  of  a  direct  tax;  'has  ever  been  treated  as  a  duty 
or  excise,  because  of  the  particular  occasion  which  gives  rise  to  its  levy., 
178  U.  S.  81-83.  Upon  this  point  a  page  of  history  is  worth  a  volume  of  logic. 

394  The  inequalities  charged  upon  the  statute,  if  there  is  an  intestacy, 
are  all  inequalities  in  the  amounts  that  beneficiaries  might  receive 

in  case  of  estates  of  different  values,  of  different  proportions  between  real 
and  personal  estate,  and  of  different  numbers  of  recipients;  or  if  there  is  a 
will  affect  legatees.  As  to  the  inequalities  in  case  of  a  will  they  must  be  taken 
to  be  contemplated  by  the  testator.  He  knows  the  law  and  the  consequences 
of  the  disposition  that  he  makes.  As  to  intestate  successors  the  tax  is  not 
imposed  upon  them  but  precedes  them  and  the  fact  that  they  may  receive 
less  or  different  sums  because  of  the  statute  does  not  concern  the  United 
States. 

395  There  remains  only  the  construction  of  the  Act.  The  argument 
against  its  constitutionality  is  based  upon  a  premise  that  is  unfavor- 
able to  the  contention  of  the  plaintiffs  in  error  upon  this  point.  For  if  the 
tax  attaches  to  the  estate  before  distribution — if  it  is  a  tax  on  the  right  to 
transmit,  or  on  the  transmission  at  its  beginning,  obviously  it  attaches  to 
the  whole  estate  except  so  far  as  the  statute  sets  a  limit.  'Charges  against 
the  estate'  as  pointed  out  by  the  Court  below  are  only  charges  that  affect 
the  estate  as  a  whole,  and  therefore  do  not  include  taxes  on  the  right  of  indi- 
vidual beneficiaries.  This  reasoning  excludes  not  only  the  New  York  suc- 
cession tax  but  those  paid  to  other  States,  which  can  stand  no  better  than 
that  paid  in  New  York.  What  amount  New  York  may  take  as  the  basis  of 
taxation  and  questions  of  priority  between  the  United  States  and  the  State 
are  not  open  in  this  case. 

Decree  affirmed. 

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{Decision.) 

Gross  estate  does  not  include  an  interest  passing  under  testamentary  execu 
tion  of  a  general  power  of  appointment. 

{Act  of  Sept.  8,  1916,  as  amended  by  the  Act  of  March  3,  1917.) 

Supreme  Court  of  the  United  States. 


(255  U.  S.  257) 


The  United  States,  Appellant, 
vs. 

Stanley  Field,  as  Executor  of  the  Estate 
of  Kate  Field,  deceased. 

[February  28,  1921.] 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

396  This  is  an  appeal  from  a  judgment  of  the  Court  of  Claims  sustaining 
119  a  claim  for  refund  of  an  estate  tax  exacted  under  Title  II  of  the 
121       Revenue  Act  of  September  8,  1916,  as  amended  by  Act  of  March  3, 

1917  (Ch.  463,  39  Stat.  756,  777;  Ch.  159,  39  Stat.  1000,  1002).  It 
presents  the  question  whether  the  Act  taxed  a  certain  interest  that  passed 
under  testamentary  execution  of  a  general  power  of  appointment  created  prior 
but  executed  subsequent  to  its  passage. 

397  The  facts  are  as  follows:  Joseph  N.  Field,  a  citizen  and  resident  of 
Illinois,  died  April  29,  1914,  leaving  a  will  which  was  duly  admitted 

to  probate  in  that  State,  and  by  which  he  gave  the  residue  of  his  estate,  after 
payment  of  certain  legacies,  to  trustees,  with  provision  that  one-third  of  it 
should  be  set  apart  and  held  as  a  separate  trust  fund  for  the  benefit  of  his 
wife,  Kate  Field,  the  net  income  to  be  paid  to  her  during  life,  and  from  and 
after  her  death  the  net  income  of  one-half  of  said  share  of  the  trust  estate  to 
be  paid  to  such  persons  and  in  such  shares  as  she  should  appoint  by  last  will 
and  testament.  The  trust  was  to  continue  until  the  death  of  the  last  sur- 
viving grandchild  of  the  testator  who  was  living  at  the  time  of  his  death,  and 
at  its  termination  the  undistributed  estate  was  to  be  divided  among  named 
beneficiaries  or  their  issue,  per  stirpes,  in  proportions  specified.  Kate  Field 
died  April  29,  1917,  a  resident  of  Illinois,  leaving  a  will  which  was  duly  pro- 
bated in  that  State,  by  which  she  executed  the  power  of  appointment,  direct- 
ing that  the  income  to  which  the  power  related  should  be  paid  in  equal  shares 
to  her  children  surviving  at  the  date  of  the  respective  payments,  the  issue  of 
any  deceased  child  to  stand  in  the  place  of  such  deceased  child.  The  collector 
of  internal  revenue,  assuming  to  act  under  the  Revenue  Act  of  1916,  as 
amended,  and  Regulations  issued  by  the  Commissioner  of  Internal  Revenue, 
included  as  a  part  of  the  gross  estate  of  Kate  Field  the  appointed  estate 
passing  under  her  execution  of  the  power;  and  proceeded  to  assess  and  collect 
an  estate  tax  based  upon  the  net  value  thereof,  and  amounting  to  $121,059.60. 
Her  executor,  having  paid  the  tax  under  protest,  and  having  made  a  claim 
for  refund  which  was  considered  and  rejected  by  the  Commissioner  of  Internal 
Revenue,  brought  this  suit  and  recovered  judgment,  from  which  the  United 
States  appeals. 

398  The  Revenue  Act  of  1916,  in  sec.  201  (39  Stat.  777)  imposes  a  tax- 
equal  to  specified  percentages  of  the  value  of  the  net  estate  "upon  * 

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the  transfer  of  the  net  estate  of  every  decedent  dying  after  the  passage  of 
this  Act."  By  sec.  203  (p.  778)  the  value  of  the  net  estate  is  to  be  determined 
by  subtracting  from  the  value  of  the  gross  estate  certain  specified  deductions. 
The  gross  estate  is  to  be  valued  as  follows: 

"Sec.  202.  That  the  value  of  the  gross  estate  of  the  decedent  shall  be 
determined  by  including  the  value  at  the  time  of  his  death  of  all  property, 
real  or  personal,  tangible  or  intangible,  wherever  situated: 

"(a)  To  the  extent  of  the  interest  therein  of  the  decedent  at  the  time 
of  his  death  which  after  his  death  is  subject  to  the  payment  of  the  charges 
against  his  estate  and  the  expenses  of  its  administration  and  is  subject  to 
distribution  as  part  of  his  estate. 

"(b)  To  the  extent  of  any  interest  therein  of  which  the  decedent  has  at 
any  time  made  a  transfer,  or  with  respect  to  which  he  has  created  a  trust,  in 
contemplation  of  or  intended  to  take  effect  in  possession  or  enjoyment  at  or 
after  his  death,  except  in  case  of  a  bona  fide  sale  for  a  fair  consideration  in 
money  or  money's  worth.  Any  transfer  of  a  material  part  of  his  property  in 
the  nature  of  a  final  disposition  or  distribution  thereof,  made  by  the  decedent 
within  two  years  prior  to  his  death  without  such  a  consideration,  shall,  unless 
shown  to  the  contrary,  be  deemed  to  have  been  made  in  contemplation  of 
death  within  the  meaning  of  this  title;  ..." 

399  The  amendment  of  March  3,  1917,  (39  Stat.  1002),  pertains  merely  to 
the  rates,  and  need  not  be  further  considered.* 

400  The  provision  quoted  from  sec.  202  was  construed  by  the  Treasury 
Department,  in  U.  S.  Internal  Revenue  Regulations  No.  37,  relating 

to  Estate  Taxes,  revised  May,  1917,  Art.  XI,  as  follows:  "Property  passing 
under  a  general  power  of  appointment  is  to  be  included  as  a  portion  of  the 
gross  estate  of  a  decedent  appointor." 

401  No  question  being  suggested  as  to  the  power  of  Congress  to  impose  a 
tax  upon  the  passing  of  property  under  testamentary  execution  of  a  pow- 
er of  appointment  created  before  but  executed  after  the  passage  of  the  taxing  act 
(See  Chandler  v.  Kelsey,  205  U.  S.  466,  473,  478-479;  Knowlton  v.  Moore, 
178  U.  S.  41,  56-61),  the  case  involves  merely  a  question  of  the  construction 
of  the  Act.  Applying  the  accepted  canon  that  the  provisions  of  such  acts 
are  not  to  be  extended  by  implication  {Gould  v.  Gould,  245  U.  S.  151,  153), 
we  are  constrained  to  the  view — notwithstanding  the  administrative  construc- 
tion adopted  by  the  Treasury  Department — that  the  Revenue  Act  of  1916 
did  not  impose  an  estate  tax  upon  property  passing  under  a  testamentary 
execution  of  a  general  power  of  appointment. 

402  The  Government  seeks  to  sustain  the  tax  under  both  clauses  above 
quoted  from  sec.  202. 

403  The  conditions  expressed  in  clause  (a)  are  to  the  effect  that  the  taxable 
estate  must  be  (1)  an  interest  of  the  decedent  at  the  time  of  his  death,  (2) 

which  after  his  death  is  subject  to  the  payment  of  the  charges  against  his 
estate  and  the  expenses  of  its  administration,  and  (3)  is  subject  to  distribu- 
tion as  part  of  his  estate.  These  conditions  are  expressed  conjunctively; 
and  it  would  be  inadmissible,  in  construing  a  taxing  act,  to  read  them  as  if 
prescribed  disjunctively.  Hence,  unless  the  appointed  interest  fulfilled  all 
three  conditions,  it  was  not  taxable  under  this  clause. 

404  The  chief  reliance  of  the  Government  is  upon  the  rule,  well  established 
in  England  and  followed  generally,  but  not  universally,  in  this 


♦The  Act  was  further  amended  October  3,  1917,  (Ch.  63,  40  S.tat.  300,  324);  super- 
seded and  repealed  by  Act  of  February  24,  1919  (Ch.  18,  40  Stat.  1057,  1096,  1149). 

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country,  that  where  one  has  a  general  power  of  appointment  either  by  deed  or 
by  will,  and  executes  the  power,  equity  will  regard  the  property  appointed  as 
part  of  his  assets  for  the  payment  of  his  creditors  in  preference  to  the  claims 
of  his  voluntary  appointees.    See  Brandies  v.  Cochrane,  112  U.  S.  344,  352. 

405  The  English  cases  are  fully  reviewed  by  the  House  of  Lords  in  O'Gradv 
v.  Wilmot  (1916)  2  A.  C.  231,  246,  et  seq.    Illustrative  cases  in  the 

American  courts  are  Johnson  v.  Cushing,  15  N.  H.  298,  307;  Rogers  v.  Hinton. 
62  N.  C.  101,  105;  Clapp  v.  Ingraham,  126  Mass.  200,  202;  Knowles  v.  Dodge, 
1  Mack.  (D.  C.)  66,  72;  Freeman  v.  Butters,  94  Va.  406,  411;  Tallmadge 
v.  Sill,  21  Barb.  34,  51,  et  seq.;  contra  per  Gibson,  C.  J.,  in  Commonwealth 
v.  Duf field,  12  Pa.  277,  279-281;  Pearce  v.  Lederer,  262  Fed.  Rep.  993; 
affirmed,  Lederer  v.  Pearce,  266  Fed.  Rep.  497. 

406  It  is  tacitly  admitted  that  the  rule  obtains  in  Illinois,  and  we  shall 
so  assume. 

407  But  the  existence  of  the  power  does  not  of  itself  vest  any  estate 
in  the  donee.    Collins  v.  Wickwire,  162  Mass.  143,  144;  Keays  v. 

Blinn,  234  111.  121,  124;  Walker  v.  Treasurer,  221  Mass.  600,  602-603: 
Shattuck  v.  Burrage,  229  Mass.  448,  451.    See  Carver  v.  Jackson,  4  Pet.  1,  93. 

408  Where  the  donee  dies  indebted,  having  executed  the  power  in  favor 
of  volunteers,  the  appointed  property  is  treated  as  equitable,  not 

legal,  assets  of  his  estate;  Clapp  v.  Ingraham,  126  Mass,  200,  203;  Patter sori 
Co.  v.  Lawrence,  83  Ga.  703,  707;  and  (in  the  absence  of  statute),  if  it  passes 
to  the  executor  at  all,  it  does  so  not  by  virtue  of  his  office  but  as  a  matter  of 
convenience  and  because  he  represents  the  rights  of  creditors.  CGrady  v. 
Wilmot  (1916)  2  A.  C.  231,  248-257;  Smith  v.  Garey,  2  Dev.  &  Bat.  Eq.  (N.C.) 
42,  49;  Olney  v.  Balch,  154  Mass.  318,  322;  Emmons  v.  Shaw,  171  Mass. 
410,  411;  Hill  v.  Treasurer,  229  Mass.  474,  477. 

409  Where  the  power  is  executed,  creditors  of  the  donee  can  lay  claim 
to  the  appointed  estate  only  to  the  extent  that  the  donee's  own  estate  is 

insufficient  to  satisfy  their  demands.  Patterson  Co.  v.  Lawrence,  83  Ga. 
703,  708;  Walker  v.  Treasurer,  221  Mass.  600,  602-603;  Shattuck  v.  Burrage. 
229  Mass.  448,  452. 

410  It  is  settled  that  (in  the  absence  of  statute)  creditors  have  no  redress 
in  case  of  a  failure  to  execute  the  power.    Holmes  v.  Coghill,  7  Ves. 

499,  507,  affirmed,  12  Ves.  206,  214-215;  Gilman  v.  Bell,  99  111.  144,  150: 
Duncanson  v.  Manson,  3  App.  D.  C.  260,  273. 

41  1  And,  whether  the  power  be  or  be  not  exercised,  the  property  that 
was  subject  to  appointment  is  not  subject  to  distribution  as  part 
of  the  estate  of  the  donee.  If  there  be  no  appointment,  it  goes  according 
to  the  disposition  of  the  donor.  If  there  be  an  appointment  to  volunteers, 
then,  subject  to  whatever  charge  creditors  may  have  against  it,  it  goes  not 
to  the  next  of  kin  or  the  legatees  of  the  donee,  but  to  his  appointees  under 
the  power. 

412  -It  follows  that  the  interest  in  question,  not  having  been  property 
of  Mrs.  Field  at  the  time  of  her  death,  nor  subject  to  distribution  as 

part  of  her  estate,  was  not  taxable  under  clause  (a). 

413  We  deem  it  equally  clear  that  it  was  not  within  clause  (b).  That 
clause  is  the  complement  of  (a),  and  is  aptly  descriptive  of  a  transfer 

of  an  interest  in  decedent's  own  property  in  his  life  time,  intended  to  take 
effect  at  or  after  his  death.  It  cannot,  without  undue  laxity  of  construction, 
be  made  to  cover  a  transfer  resulting  from  a  testamentary  execution  by 
decedent  of  a  power  of  appointment  over  property  not  his  own. 


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414  It  would  have  been  easy  for  Congress  to  express  a  purpose  to  tax 
property  passing  under  a  general  power  of  appointment  exercised 
by  a  decedent  had  such  a  purpose  existed;  and  none  was  expressed  in  the 
Act  under  consideration.  In  that  of  February  24,  1919,  which  took  its  place, 
the  section  providing  how  the  value  of  the  gross  estate  of  the  decedent  shall 
be  determined  contains  a  clause  precisely  to  the  point  (sec.  402  (e),  40  Stat. 
1097);  "To  the  extent  of  any  property  passing  under  a  general  power  of 
appointment  exercised  by  the  decedent  (1)  by  will,  or  (2)  by  deed  executed 
in  contemplation  of,  or  intended  to  take  effect  in  possession  or  enjoyment 
at  or  after,  his  death,  except",  etc.  Its  insertion  indicates  that  Congress 
at  least  was  doubtful  whether  the  previous  Act  included  property  passing 
by  appointment.  See  Matter  of  Miller,  1 10  N.  Y.  216,  222;  Matter  of  Harbeck, 
161  N.  Y.  211,  217-218;  United  States  v.  Bashaw,  50  Fed.  Rep.  749,  754. 
The  Government  contends  that  the  amendment  was  made  for  the  purpose 
of  clarifying  rather  than  extending  the  law  as  it  stood,  and  cites  a  statement 
to  that  effect  in  the  Report  of  the  House  Committee  on  Ways  and  Means 
(House  Doc.  No.  1267,  p.  101,  65th  Cong.  2d  Sess.).  It  is  evident,  however, 
that  this  statement  was  based  upon  the  interpretation  of  the  Act  of  1916 
adopted  by  the  Treasury  Department;  the  same  report  proceeded  to  declare 
(p.  102)  that  "The  absence  of  a  provision  including  property  transferred  by 
power  of  appointment  makes  it  possible,  by  resorting  to  the  creation  of  such 
a  power,  to  effect  two  transfers  of  an  estate  with  the  payment  of  only  one 
tax;"  and  this,  together  with  the  fact  that  the  committee  proposed  that  the 
law  be  amended,  shows  that  the  Treasury  construction  was  not  treated  as  a 
safe  reliance. 

4 1  5      The  tax  in  question  being  unsupported  by  the  taxing  act,  the  Court 
of  Claims  was  right  in  awarding  reimbursement. 

Judgment  affirmed. 


416      For  % 4 16  see  page  125. 


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ESTATE  TAX  INDEX. — 1918  ACT. 

The  references  are  to  paragraph  numbers. 

Abatement,  claim  for: 

Limitation  of  time  to  file.  .291 

Proof  in  support  of.  .  289 

When  may  be  made.  .288 
Accord  and  satisfaction  of  past  claim — -not  sufficient  consideration  to  constitute  transfer 

a  "sale".  .  108 
Accountants,  fees  of — deductibility.  .  140 
Accounts,  valuation  of.  .  69 
Administration  expenses,  definition  of.  .  132 
Advancements,  not  necessarily  taxable.  .  109 
Annuity: 

Included  in  gross  estate.  .61 
Tables.  .  105,  106 
Valuation  of.  .  95^ 
Annuity  insurance,  valuation  of.  .  126 
Appointment,  property  passing  under  power  of: 

General  rules.  .117 

Rules  where  death  occurred  after  February  25,  1919.  .  120 

Rules  where  death  occurred  prior  to  February  25,  1919.  .  121,  396 
Appraisal  of  household  and  personal  effects.  .  79-88 
Appraisers: 

Experts  required.  .  87 

Fees  of — deductibility.  .  140 
Attorneys'  fees,  when  deductible.  .  138 
Attorneys,  necessary  authorization.  .  220 
Auction  sales,  how  far  accepted.  .  69 
Auctioneers,  fees  of — deductibility.  .  140 
Bank  deposits,  amount  included  in  gross  estate.  .74 
Bare  legal  title,  not  included  in  gross  estate.  .60 
Beneficiary,  under  insurance  policies: 

Who  is.  .  124 

When  to  give  60-day  notice.  .  199 
Bequests: 

Conditional — when  deductible.  .  164 

Public  or  charitable — -deductibility.  .  158 

Public  or  charitable — estates  which  may  deduct.  .  165 

Public  or  charitable — proof  required.  .  163 

To  executors — not  a  basis  for  deduction.  .  135 
Bond  interest,  inclusion  in  gross  estate.  .  63 
Bonds,  situs  of.  .  168,  174,  177 
Bonds,  U.  S.    (See  "United  States  Bonds.") 
Brokers,  fees  of — deductibility.  .  140 
Burial  expenses,  deductibility  of.  .  131 
Burial  lot,  deductibility  of  charge  for.  .  131 
BusinesSj  valuation  of  interest  in.  .  75 
Casualty,  meaning  of.  .  146 
Cemetery  lot,  inclusion  in  gross  estate.  .  63 
Charitable  corporations,  what  are.  .  159 
Checks,  uncertified — effect  of  failure  to  pay.  .  266 
Citizenship  not  test  of  residence.  .44 
Claims,  valuation  of.  .  77 
Claims  against  estate: 

Decedent's  personal  obligations  deductible.  .  141 

Obligations  contracted  by  executor  not  deductible.  .  141 
Clerk  hire,  deductibility.  .  140 
Close  corporation,  valuation  of  stock.  .71 
Commissions  of  executors,  rules  for  deduction.  .  133 
Commissions  of  trustees,  not  deductible.  .  134 
Community  property.  .356 
Computation  of -tax,  how  made.  .45,  46,  51,  53 
Compromise — power  of  Commissioner: 

Extends  to  any  civil  or  criminal  case.  .  294 

Limitation  of.  .  294 

Requires  advice  and  consent  of  Secretary.  .  294 

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The  references  are  to  paragraph  numbers. 
Consent  decrees,  effect  of.  .  130 

Contemplation  of  death,  transfers  made  in — nature  of.  .  109 

Copyrights,  valuation  of.  .  76 

Coupons,  interest,  inclusion  in  gross  estate.  .  63 

Court  decision*.    (See  Table  of  Cases  in  "Forms-Finder"  division.) 

Court  costs,  deductibility.  .  140 

Courtesy,  included  in  gross  estate.  .  107 

Crops,  valuation  of.  .  78 

Death,  cause  of  action  for — not  included  in  gross  estate.  .  60 

Death  benefits,  taxable  as  insurance.  .  122 

Deductions: 

Effect  of  decision  of  local  court.  .  130 

General  provisions.  .  129 

Taxes.  .  144,  390 
Dependent,  of  decedent — who  is.  .  150 

Dependents,  support  of — rules  governing  deductibility.  .  147 
Depreciation,  in  value  of  assets  after  death — not  deductible.  .  66 
Disease,  loss  from  death  of  animals — deductible.  .  146 
Distraint,  collection  of  tax  by.  .  299 
Dividends: 

Not  included  in  gross  estate  unless  declared  prior  to  death.  .64 

When  to  be  included  in  value  of  stock.  .  64 
Domestic  corporations,  stock  in  part  of  estate  of  nonresident.  .  168 
Domestic  insurance  company,  insurance  in  part  of  estate  of  nonresident.  .  168 
Domicile,  definition  of.  .  44 
Donees,  when  to  give  60-day  notice.  .  199,  204 
Dower,  included  in  gross  estate.  .  107 
Educational  corporations,  what  are.  .  159 
Effective  date  of  Act.  .  48 

Entirety,  estates  by — inclusion  in  gross  estate.  .113 
Escheated  property,  transfer  taxable.  .40 
Estate  tax,  character  of — not  a  property  or  legacy  tax.  .  40 
Excess  tax: 

Executor  to  be  notified  of.  .  271 

How  determined.  .271 
Executor: 

Commission.  .  133 

Duty  to  file  return.  .212 

Duty  to  furnish  supplemental  data.  .215 

Duty  to  keep  records.  .  302 

Duty  to  produce  records  and  papers.  .  287 

Personal  liability  of.  .  295 

Required  to  pay  tax.  .  295 

Term  includes  administrator.  .2 
Exemption,  specific — in  case  of  resident  estates.  .  166 
Extension,  of  time  to  pay  tax — when  granted.  .  268 
Fiduciaries,  when  to  give  60-day  notice.  .  199 
Field,  U.  S.  vs.  .  396 
Fires,  loss  from  deductible.  .  146 

Forms.    (See  Estate  Tax  Fore-page,  or  "Forms-Finder"  division.) 

Fraud,  in  return — effect  of.  .  224 

Funeral  expenses,  deductibility.  .  131 

Furniture,  valuation  of.  .  78 

Good  faith — payment  in,  suspends  interest.  .  224 

Good  will,  valuation  of.  .  76 

Gross  estate: 

Includes  only  actual,  beneficial  interests.  .60 

Real  property  included  only  when  situated  in  United  States.  .62 

Household  goods,  appraisal  of.  .  79,  80,  85,  89 

Husband  or  wife,  when  to  give  60-day  notice.  .  199 

Individual  insurance,  not  taxable  where  death  occurred  prior  to  Feb.  25,  1919.  .  125 


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The  references  are  to  paragraph  numbers. 

Insurance: 

Assignment  by  decedent — not  taxable  where  he  ceases  to  pay  premiums.  .  122 
Foreign  companies — not  considered  in  determining  gross  estates  of  nonresident.  .  169 
Payable  to  estate — character  of.  .  123 

Payable  to  estate — the  whole  included  in  gross  estate.  .  122 

Payable  to  individuals — amount  in  excess  of  $40,000  included  in  gross  estate.  .  122 

Taken  out  as  security — taxable  where  decedent  pays  premiums.  .  122 
Insurance  companies: 

Must  furnish  bond  in  certain  cases  before  paying  policy  to  beneficiary.  .207a,  313 

When  to  give  60-day  notice.  .201,  207,  313 
Insurance  premiums,  payment  of  by  decedent  test  of  taxability.  .  122 
Interest: 

On  bonds  and  notes — inclusion  in  gross  estate.  .63 

On  notes — how  computed.  .  73 

On  unpaid  tax — 

Not  affected  by  claim  for  abatement.  .  290 

On  excess  tax.  .  272 

On  original  tax.  .270,  310 

Suspended  by  payment  in  good  faith.  .  224 

U.  S.  Bonds.    (See  "United  States  bonds.") 

Where  liability  accrued  under  prior  statutes.  .305 
Inventory,  of  nonresident  estate — power  to  require.  .216 
Investigation  of  estates.  .210 
Jewelry,  appraisal  of.  .  85 
Joint  interests: 

Character  of.  .  113,  356 

What  interest  included  in.  .  115 
Judgments: 

Of  local  court — effect  on  deductions.  .  130 

Valuation  of.  .  77 
Law  provisions: 

1918  Act.  .1 

1921  Act.  .416 
Lien: 

For  excess  tax.  .  276 

General  provisions.  .276 

Release  of.  .  277 

Stock  transfers;  lien  in  relation  to.  .  280 
When  divested  by  sale.  .283 
Life  estate: 

For  life  of  decedent — not  included  in  gross  estate.  .61 
For  life  of  third  person — included  in  gross  estate.  .61 
Valuation  of.  .  95 
Life  interest  table.  .  105 

Limitations,  statute  of — inclusion  of  notes  barred  by.  .  63 

Losses,  when  deductible.  .  146 

Mausoleum,  deductibility  of  charge  for.  .  131 

Military  exemption: 

Proof  of.  .  55 

When  granted.  .  54 
Monument,  deductibility  of  charge  for.  .  131 
Mortgages: 

On  property  situated  in  United  States — deductible.  .  145 
On  property  not  situated  in  United  States — when  deductible.  .145 
Net  estate: 

Deductions  prior  to  Revenue  Act  of  1918.  .  127 
Deductions  under  Revenue  Act  of  1918.  .  128 
New  York  Trust  Co.  and  Albert  W  Pross  as  Executors  of  the  will'of  J.  Harsen  Purdy  vs. 

Eisner.  .  390 
Nonresident,  definition  of.  .  43 
Nonresident  estates: 

Bonds  situated  in  United  States  part  of  gross  estate.  .  168 
United  States  bonds.  .  174 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Estate  T&*-^Im!*x  Pag«  3,i 


1-2-22. 


ESTATE  TAX  INDEX.— 1918  ACT. 


The  references  are  to  paragraph  numbers. 
Nonresident  estates:  (concluded): 
Deductions: 

Claim  for  expenses — not  to  exceed  10  per  cent  of  value  of  property  in  United 
States.  .182 

Claim  for  expenses — immaterial  where  incurred.  .  182 
-    Property  previously  taxed — rules  for  deduction.  .183 
Property  previously  taxed — full  amount  deductible.  .  182 
Public  or  charitable  gifts — full  amount  deductible.  .182 

Public  or  charitable  gifts — must  be  to  domestic  corporation  or  for  domestic 
_  use.  .185  "  '  • 

Determination  of  net  estate.  .  187 

Insurance  in  domestic  company — part  of  gross  estate.  169 
Liberty  bonds  beneficially  owned  by.  .  174 
Lien  upon  gross  estate.  .276 

Moneys  due  by  domestic  creditors — part  of  gross  estate.  .  168 

Moneys  on  deposit  with  domestic  banks — part  of  gross  estate.  .  16H 

Net  estate — how  determined.  .  167 

No  specific  exemption.  .  166 

Part  of  gross  estate  not  subject  to  tax.  .  167 

Payment  of  tax.  .  190,  233,  307a,  315 

Property  included  in  gross  estate.  .  167 

Requirement  of  information  concerning.  .  216 

Return  by.  .221 

Situs  of  property — how  determined.  .  168 

Situs  of  property  transferred  by  decedent — how  determined.  .  172 
Stock  in  domestic  corporations — part  of  gross  estate.  .  168 
Tax  confined  to  property  situated  in  United  States.  .  167 
United  States  bonds.  .  173,  174 

When  may  deduct  public  or  charitable  bequests.  .185 

When  personal  property  included  in  gross  estate.  .  168 
Notes,  valuation  of.  .  73 
Notice,  60-days: 

By  transfer  agents.  .  205 

Executor  to  file.  .  194 

In  case  of  nonresident  estates.  .204 

Should  be  given  though  military  exemption  claimed.  .  203 

Time  for  filing.  .  194,  204 

To  be  filed  in  duplicate.  .  191 
Patents,  valuation  of.  .  76 
Payment  of  claim  allowed,  how  made.  .293 
Payment  of  tax: 

By  Liberty  bonds.  .  230,  236 

By  uncertified  check.  .266 

Enforcible  any  time  after  expiration  of  one  year.  .  225,  309,  315 

Extension  of  time  for.  .  268 

Nonresidents.  .  190,  223,  307a,  315 

Proceedings  to  enforce.  .  298 

Receipt  for.  .223 

Return  must  be  filed.  .224 

Shown  due  by  return — effect  of.  .  224 

Time  of.  .223,  315 
Penalties: 

For  failure  to  exhibit  property.  .  287 

For  failure  to  exhibit  records.  .  287 

For  failure  to  file  notice  or  return.  .  286 

For  false  or  fraudulent  return  or  notice.  .  285 

Nature  of.  .  284 
Personal  effects: 

Appraisal  of.  .  79,  80,  85 

Valuation  of.  .  78 
Personal  liability: 

Of  executor.  .  295 

Of  insurance  beneficiary.  .  283 

Of  transferee  or  trustee.  .  283 

Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX  SERVICE 
Estate  Tax— lodex  Page  4. 


1-2-22- 


ESTATE  TAX  INDEX. — 1918  ACT. 


The  references  are  to  paragraph  numbers. 

Personal  property: 

Estate  of  resident — all  included  in  gross  estate.  .  62 

Estate  of  nonresident — included  in  gross  estate  only  when  situated  in  United  States.  .  62 
Persons  in  possession  of  property,  when  to  file  60-day  notice.  .  195-197,  204 
Polk  vs.  Page.  .315 

Power  of  appointment,  property  passing  under: 
General  rule.  .117 

Rule  where  death  occurred  prior  to  February  25,  1919.  .  12.1,  396 
Privilege: 

Disclosure  of  information  to  persons  having  interest.  .219 

Returns  and  other  records  confidential.  .218 
Property  previously  taxed,  rules  for  deductibility.  .  152,  183 
Property  transferred  by  decedent: 

Date  of  transfer  determines  subject  of  valuation.  .112 

To  be  valued  as  of  date  of  death.  .112 
Rates  of  Tax.  .  5,  47,  53 

Real  property,  situated  outside  United  States — not  included  in  gross  estate.  .62 
Records,  power  to  compel  production.  .  287 
Refund,  claim  for:^ 

In  case  of  military  exemption.  .  59 

Proof  in  support  of.  .  292 
Regulations  37,  Act  of  1918.  .page  33 
Reimbursement: 

For  tax  payment — right  to.  .275 

Not  enforcible  by  bureau.  .  275 
Relatives,  transfers  to — must  be  returned.  .  109 
Religious  corporations,  what  are.  .  159 
Remainders: 

Contingent — when  not  included  in  gross  estate.  .61 
Valuation  of.  .  103 

Vested — included  in  gross  estate.  .61 
Remit,  power  of  commissioner.  .  295 
Rent,  inclusion.,  in  gross  estate.  ,63 
Resident,  test  of  is  domicile.  .44 
Return: 

By  whom  required.  .212,  221 

Executor  to  file.  .212 

Extension  of  time  to  file.  .213 

Form  of.  .214 

Forms.    (See  Estate  Tax  Fore-page,  or  "Forms-Finder"  division.) 

Time  for  filing.  .208,  221 

When  required.  .  208 
Reversionary  interest  table.  .  105 
Sales: 

Character  of,  necessary  consideration.  .  108 

Not  taxable.  .  108 
Savings  banks,  when  to  give  60-day  notice.  .  199 
Scientific  corporations,  what  are.  .  160 

Scope  of  tax,  imposed  upon  both  residents  and  nonresidents.  .43 

Security,  upon  release  of  lien.  .  277 

Shipwreck,  loss  from — deductible.  .  146 

Silverware,  appraisal  of.  .  85 

Statutes,  imposing  estate  tax — enumeration.  .42 

Stock  transfers;  lien  on  stock;  release  of  lien.  .  280 

Stocks  and  bonds,  valuation  of.  .70 

Storage,  deductibility  of  charge  for.  .  140 

Storms,  loss  from — deductible.  .  146 

"Substantial  payment".  .  309 

Suit: 

To  enforce  personable  liability — collection  of  tax  by.  .301 

To  subject  property — collection  of  tax  by  suit.  .300,  315 
Supplemental  data,  duty  of  executor  to  furnish.  .215 
Support  of  dependents — rules  governing  deductibility.  .  147 
Surrogate's  fees,  deductibility.  .  140 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Estate  Tax— Index  Page  5. 


1-2-22. 


ESTATE  TAX  INDEX. — 1918  ACT. 


The  references- are  to  paragraph  numbers. 

Tables: 

Annuity.  .  105,  106, 
Computation  of  Estate  Tax.  .  53 

Court  cases.    (See  Table  of  Cases  in  "Forms-Finder"  division.) 

Interest,  for  bonds.  .261 

Interest,  for  4%%  notes.  .263 

Life  interest.  .  105 

Rates  of  estate  tax.  .47 

Reversionary  interest.  .  105 
Tax  liability,  manner  of  determining.  .  45 
Taxes: 

Computation  of  estate  tax.  .45,  46,  51,  53 
Rates.  .  5,  47,  53 

Succession,  legacy  or  inheritance — not  deductible.  .  144,  390 
Upon  income  accruing  after  decedent's  death — not  deductible.  .  144 
Upon  income  accruing  in  decedent's  lifetime — deductible.  .  144 
Upon  personal  property — when  deductible.  .  143 
Upon  real  property — to  be  apportioned.  .  142 
Testimony: 

May  be  taken  by  revenue  agent  or  inspector.  .  296 

Power  of  Commissioner  to  take.  .  296 

Requirement  by  subpoena.  .297 
Thefts,  loss  from — deductible.  .  146 
Tombstone,  deductibility  of  charge  for.  .  131 
Trade-marks,  valuation  of.  .  76 
Transfer,  when  taxable.  .41 
Transfer  agents: 

Must  furnish  bond  for  payment  of  tax  in  certain  cases.  .  206a 

When  to  give  60-day  notice — importance  of.  .  205,  206 
Transfers  in  lifetime  of  decedent: 

In  contemplation  of  death — 
Nature  of.  .  109 

Transfers  within  two  years  of  death — presumptively  taxable.  .  109 
intended  to  take  effect  at  or  after  death —  pag 

Contract  by  grantee  to  pay  annuity.  .  110 

Payment  of  income  to  third  person.  .  110 

Reservation  of  annuity.  .  110 

Reservation  of  income  to  grantor.  .  1 10 

Reservation  of  portion  of  income.  .  110 

Reservation  of  power  of  management  of  property.  .111 
When  taxable.  .  108 
Trust: 

Property  held  in — not  included  in  gross  estate.  .  60 
Transfer  by  way  of — taxable.  .  108 
United  States  bonds  as  part  of  gross  and  net  estate.  .  173 
Beneficially  owned  by  nonresident  alien  decedent.  .  174 
Interest  tables.  .261,  263 

Liberty  bonds  and  Victory  notes  in  payment  of  taxes.  .  230,  236 

Transfer  books,  closed  periods  for.  .  264 
Trustees: 

Commissions  of — deductibility.  .  134 

Duty  to  give  60-day  notice.  .  199 
Ullman,  Smietanka  vs.  .  234 
Valuation  of  property,  rules  for.  .  69 
Value: 

General  rules  for  determining.  .  66 
Insurance — actual  proceeds.  .  126 


Copyright  1922,  by  Tht  Corporation  Trust  ComPmmy. 
WAR  TAX  SERVICE 
Estate  Tax. — Index  Page  6. 


i-2-22.  (2)  8-4-22. 


1921  ESTATE  TAX  LAW. 


BEING  TITLE  IV  OF  THE  REVENUE  ACT  OF  1921. 
In  effect  after  3:55  P.  M.  November  23,  1921. 
{For  Estate  Tax  Law,  Revenue  Act  of  1918,  see  1fl  herein.) 


CALENDAR. 


2-month  notice 

Resident  decedent. ..  . 
Non-resident  decedent 


1f712  et  seq. 
11716  et  seq. 


Return  (within  one  year  after  death) 

Resident  decedent  

Non-resident  decedent  


11721 
1[729 


Tax  (due  and  payable  one  year  from  death) 
Non-resident  


 H736 

1T711;  1f736 


Title  IV.— Estate  Tax. 


416  Sec.  400.    That  when  used  in  this  title — 

417  The  term  "executor"  means  the  executor  or  administrator  of  the 
decedent,  or,  if  there  is  no  executor  or  administrator,  any  person 

in  actual  or  constructive  possession  of  any  property  of  the  decedent; 

418  The  term  "net  estate"  means  the  net  estate  as  determined  under 
the  provisions  of  section  403; 

419  The  term  "month"  means  calendar  month;  and 

420  The  term  "collector"  means  the  collector  of  internal  revenue  of  the 
district  in  which  was  the  domicile  of  the  decedent  at  the  time  of 

his  death,  or,  if  there  was  no  such  domicile  in  the  United  States,  then  the 
collector  of  the  district  in  which  is  situated  the  part  of  the  gross  estate  of 
the  decedent  in  the  United  States,  or,  if  such  part  of  the  gross  estate  is  sit- 
uated in  more  than  one  district,  then  the  collector  of  internal  revenue  of 
such  district  as  may  be  designated  by  the  Commissioner. 


42 1  Sec.  401.    That,  in  lieu  of  the  tax  imposed  by  Title  IV  of  the  Revenue 
Act  of  1918,  a  tax  equal  to  the  sum  of  the  following  percentages  of 

the  value  of  the  net  estate  (determined  as  provided  in  section  403)  is  hereby 
imposed  upon  the  transfer  of  the  net  estate  of  every  decedent  dying  after 
the  passage  of  this  Act,  whether  a  resident  or  nonresident  of  the  United  States : 

422  1  per  centum  of  the  amount  of  the  net  estate  not  in  excess  of  $50,000; 
2  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $50,000 

and  does  not  exceed  $150,000; 

3  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $150,000 
and  does  not  exceed  $250,000; 

4  per  centum  of  the  amount  by  which  the  net' estate  exceeds  $250,000 
and  does  not  exceed  $450,000; 

6  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $450,000 
and  does  not  exceed  $750,000; 


[Rates.] 


Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX  125  SERVICE 


1-2-22.    (2)  8-4-22. 


1921  ESTATE  TAX  LAW. 


8  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $750,000 
and  does  not  exceed  $1,000,000; 

10  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $1,000,000 
and  does  not  exceed  $1,500,000; 

12  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $1,500,000 
and  does  not  exceed  $2,000,000; 

14  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $2,000,000 
and  does  not  exceed  $3,000,000; 

16  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $3,000,000 
and  does  not  exceed  $4,000,000; 

18  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $4,000,000 
and  does  not  exceed  $5,000,000; 

20  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $5,000,000 
and  does  not  exceed  $8,000,000; 

22  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $8,000,000 
and  does  not  exceed  $10,000,000;  and 

25  per  centum  of  the  amount  by  which  the  net  estate  exceeds  $10,000,000. 

423  The  taxes  imposed  by  this  title  or  by  Title  II  of  the  Revenue  Act 
of  1916  (as  amended  by  the  Act  entitled  "An  Act  to  provide  increased 

revenue  to  defray  the  expenses  of  the  increased  appropriations  for  the  army 
and  navy  and  the  extensions  of  fortifications,  and  for  other  purposes,"  ap- 
proved March  3,  1917)  or  by  Title  IX  of  the  Revenue  Act  of  1917,  or  by 
Title  IV  of  the  Revenue  Act  of  1918,  shall  not  apply  to  the  transfer  of  the 
net  estate  of  any  decedent  who  has  died  or  may  die  from  injuries  received 
or  disease  contracted  in  line  of  duty  while  serving  in  the  military  or  naval 
forces  of  the  United  States  in  the  war  against  the  German  Government,  or 
to  the  transfer  of  the  net  estate  of  any  citizen  of  the  United  States  who  has 
died  or  may  die  from  injuries  received  or  disease  contracted  in  line  of  duty 
while  serving  in  the  military  or  naval  forces  of  any  country  while  associated 
with  the  United  States  in  the  prosecution  of  such  war,  or  prior  to  the  entrance 
therein  of  the  United  States,  and  any  tax  collected  upon  such  transfer  shall 
be  refunded  to  the  estate  of  such  decedent. 

[Determination  of  value  of  gross  estate.] 

424  Sec.  402.    That  the  value  of  the  gross  estate  of  the  decedent  shall 
be  determined  by  including  the  value  at  the  time  of  his  death  of  all 

property,  real  or  personal,  tangible  or  intangible,  wherever  situated — 

425  (a)    To  the  extent  of  the  interest  therein  of  the  decedent  at  the  time 
of  his  death  which  after  his  death  is  subject  to  the  payment  of  the 

charges  against  his  estate  and  the  expenses  of  its  administration  and  is  sub- 
ject to-  distribution  as  part  of  his  estate; 

426  (b)    To  the  extent  of  any  interest  therein  of  the  surviving  spouse, 
existing  at  the  time  of  the  decedent's  death  as  dower,  curtesy,  or 

by  virtue  of  a  statute  creating  an  estate  in  lieu  of  dower  or  curtesy; 

427  (c)    To  the  extent  of  any  interest  therein  of  which  the  decedent 
has  at  any  time  made  a  transfer,  or  with  respect  to  which  he  has 

at  any  time  created  a  trust,  in  contemplation  of  or  intended  to  take  effect 
in  possession  or  enjoyment  at  or  after  his  death  (whether  such  transfer  or 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  126  SERVICE 


1-2-22. 


1921  ESTATE  TAX  LAW. 


trust  is  made  or  created  before  or  after  the  passage  of  this  Act),  except  in 
case  of  a  bona  fide  sale  for  a  fair  consideration  in  money  or  money's  worth. 
Any  transfer  of  a  material  part  of  his  property  in  the  nature  of  a  final  dis- 
position or  distribution  thereof,  made  by  the  decedent  within  two  years 
prior  to  his  death  without  such  a  consideration,  shall,  unless  shown  to  the 
contrary,  be  deemed  to  have  been  made  in  contemplation  of  death  within 
the  meaning  of  this  title; 

3ieq  £  ^nirmoi  vttaqoiq  yjib  \o  suIbv  arb  oJ  kups  inuornfi  nA    (?)  *ej> 

428  (d)    To  the  extent  of  the  interest  therein  held  jointly  or  as  tenants 
in  the  entirety  by  the  decedent  and  any  other  person,  or  deposited 

in  banks  or  other  institutions  in  their  joint  names  and  payable  to  either 
or  the  survivor,  except  such  part  thereof  as  may  be  shown  to  have  originally 
belonged  to  such  other  person  and  never  to  have  been  received  or  acquired 
by  the  latter  from  the  decedent  for  less  than  a  fair  consideration  in  money 
or  money's  worth:  Provided,  That  where  such  property  or  any  part  thereof, 
or  part  of  the  consideration  with  which  such  property  was  acquired,  is  shown 
to  have  been  at  any  time  acquired  by  such  other  person  from  the  decedent 
for  less  than  a  fair  consideration  in  money  or  money's  worth,  there  shall  be 
excepted  only  such  part  of  the  value  of  such  property  as  is  proportionate 
to  the  consideration  furnished  by  such  other  person:  Provided  further,  That 
where  any  property  has  been  acquired  by  gift,  bequest,  devise,  or  inheri- 
tance, as  a  tenancy  in  the  entirety  by  the  decedent  and  spouse,  or  where 
so  acquired  by  the  decedent  and  any  other  person  as  joint  tenants  and  their 
interests  are  not  otherwise  specified  or  fixed  by  law,  then  to  the  extent  of 
one-half  of  the  value  thereof; 

429  (e)    To  the  extent  of  any  property  passing  under  a  general  power 
of  appointment  exercised  by  the  decedent  (1)  by  will,  or  (2)  by  deed 

executed  in  contemplation  of,  or  intended  to  take  effect  in  possession  or 
enjoyment  at  or  after,  his  death,  except  in  case  of  a  bona  fide  sale  for  a  fair 
consideration  in  money  or  money's  worth;  and 

430  (f)    To  the  extent  of  the  amount  receivable  by  the  executor  as  insur- 
ance under  policies  taken  out  by  the  decedent  upon  his  own  life; 

and  to  the  extent  of  the  excess  over  $40,000  of  the  amount  receivable  by  all 
other  beneficiaries  as  insurance  under  policies  taken  out  by  the  decedent 
upon  his  own  life. 

[Determination  of  value  of  net  estate.] 

baJfiiHie  ei  rlte^b  sin  to  smu  on.3  Jr;  rfoirlw  ^3R3^^  ssois  airf  \o  Jisq  3bAi 

43 1  Sec.  403.    That  for  the  purpose  of  the  tax  the  value  of  the  net  estate 
shall  be  determined — 

to  (I)  nqiri^BTftq  m  bsrtiDsq?  znoiJoubsb  sds  \o  rrobioqoiq  JbHT    (I)  8£* 

432  (a)    In  the  case  of  a  resident,  by  deducting  from  the  value  of  the 
gross  estate — 

Ji^q  JBffj  To  3uTbv  3fh  to  mutnao  iaq  01  faD»z5 bsJoub^b  oz  Snuoms  odi  llsdz 

433  (1)  Such  amounts  for  funeral  expenses,  administration  expenses, 
claims  against  the  estate,  unpaid  mortgages  upon,  or  any  indebted- 
ness in  respect  to,  property  (except,  in  the  case  of  a  resident  decedent,  where 
such  property  is  not  situated  in  the  United  States),  losses  incurred  during 
the  settlement  of  the  estate  arising  from  fires,  storms,  shipwreck,  or  other 
casualty,  or  from  theft,  when  such  losses  are  not  compensated  for  by  insur- 
ance or  otherwise,  and  such  amounts  reasonably  required  and"  actually  ex- 

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pended  for  the  support  during  the  settlement  of  the  estate  of  those  de- 
pendent upon  the  decedent,  as  are  allowed  by  the  laws  of  the  jurisdiction, 
whether  within  or  without  the  United  States,  under  which  the  estate  is 
being  administered,  but  not  including  any  income  taxes  upon  income  received 
after  the  death  of  the  decedent,  or  any  estate,  succession,  legacy,  or  inheri- 
tance taxes; 

434  (2)    An  amount  equal  to  the  value  of  any  property  forming  a  part 
of  the  gross  estate  situated  in  the  United  States  of  any  person  who 

died  within  five  years  prior  to  the  death  of  the  decedent  where  such  property 
can  be  identified  as  having  been  received  by  the  decedent  from  such  prior 
decedent  by  gift,  bequest,  devise,  or  inheritance,  or  which  can  be  identified 
as  having  been  acquired  in  exchange  for  property  so  received:  Provided, 
That  this  deduction  shall  be  allowed  only  where  an  estate  tax  under  this  or 
any  prior  Act  of  Congress  was  paid  by  or  on  behalf  of  the  estate  of  such 
prior  decedent,  and  only  in  the  amount  of  the  value  placed  by  the  Commis- 
sioner on  such  property  in  determining  the  value  of  the  gross  estate  of  such 
prior  decedent,  and  only  to  the  extent  that  the  value  of  such  property  i  s 
included  in  the  decedent's  gross  estate  and  not  deducted  under  paragraphs 
(1)  or  (3)  of  subdivision  (a)  of  this  section.  This  deduction  shall  be  made 
in  case  of  the  estates  of  all  decedents  who  have  died  since  September  8,  1916; 

435  (3)    The  amount  of  all  bequests,  legacies,  devises,  or  transfers, 
except  bona  fide  sales  for  a  fair  consideration  in  money  or  money's 

worth,  in  contemplation  of  or  intended  to  take  effect  in  possession  or  enjoy- 
ment at  or  after  the  decedent's  death,  to  or  for  the  use  of  the  United  States, 
any  State,  Territory,  any  political  subdivision  thereof,  or  the  District  of 
Columbia,  for  exclusively  public  purposes,  or  to  or  for  the  use  of  any  cor- 
poration organized  and  operated  exclusively  for  religious,  charitable,  scientific, 
literary,  or  educational  purposes,  including  the  encouragement  of  art  and  the 
prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  individual,  or  to  a 
trustee  or  trustees  exclusively  for  such  religious,  charitable,  scientific,  literary, 
or  educational  purposes.  This  deduction  shall  be  made  in  case  of  the  estates 
of  all  decedents  who  have  died  since  December  31,  1917;  and 

436  (4)    An  exemption  of  $50,000; 

437  (b)    In  the  case  of  a  nonresident,  by  deducting  from  the  value  of 
that  part  of  his  gross  estate  which  at  the  time  of  his  death  is  situated 

in  the  United  States — 

438  (1)    That  proportion  of  the  deductions  specified  in  paragraph  (1)  of 
subdivision  (a)  of  this  section  which  the  value  of  such  part  bears 

to  the  value  of  his  entire  gross  estate,  wherever  situated,  but  in  no  case 
shall  the  amount  so  deducted  exceed  10  per  centum  of  the  value  of  that  part 
of  his  gross  estate  which  at  the  time  of  his  death  is  situated  in  the  United 
States; 

439  (2)    An  amount  equal  to  the  value  of  any  property  forming  a  part 
of  the  gross  estate  situated  in  the  United  States  of  any  person  who 

died  within  five  years  prior  to  the  death  of  the  decedent  where  such  property- 
can  be  identified  as  having  been  received  by  the  decedent  from  such  prior 

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decedent  by  gift,  bequest,  devise,  or  inheritance,  or  which  can  be  identified 
as  having  been  acquired  in  exchange  for  property  so  received:  Provided, 
That  this  deduction  shall  be  allowed  only  where  an  estate  tax  under  this  or 
any  prior  Act  of  Congress  was  paid  by  or  on  behalf  of  the  estate  of  such 
prior  decedent,  and  only  in  the  amount  of  the  value  placed  by  the  Commis- 
sioner on  such  property  in  determining  the  value  of  the  gross  estate  of  such 
prior  decedent,  and  only  to  the  extent  that  the  value  of  such  property  is 
included  in  that  part  of  the  decedent's  gross  estate  which  at  the  time  of  his 
death  is  situated  in  the  United  States  and  not  deducted  under  paragraphs 
(1)  or  (3)  of  subdivision  (b)  of  this  section.  This  deduction  shall  be  made 
in  case  of  the  estates  of  all  decedents  who  have  died  since  September  8,  1916; 
and 

440  (3)    The  amount  of  all  bequests,  legacies,  devises,  or  transfers,  except 
bona  fide  sales  for  a  fair  consideration,  in  money,  or  money's  worth, 

in  contemplation  of  or  intended  to  take  effect  in  possession  or  enjoyment 
at  or  after  the  decedent's  death,  to  or  for  the  use  of  the  United  States,  any 
State,  Territory,  any  political  subdivision  thereof,  or  the  District  of  Colum- 
bia, for  exclusively  public  purposes,  or  to  or  for  the  use  of  any  domestic 
corporation  organized  and  operated  exclusively  for  religious,  charitable, 
scientific,  literary,  or  educational  purposes,  including  the  encouragement  of 
art  and  the  prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net 
earnings  of  which  inures  to  the  benefit  of  any  private  stockholder  or  indi- 
vidual, or  to  a  trustee  or  trustees  exclusively  for  such  religious,  charitable, 
scientific,  literary,  or  educational  purposes  within  the  United  States.  This 
deduction  shall  be  made  in  case  of  the  estates  of  all  decedents  who  have  died 
since  December  31,  1917. 

441  No  deduction  shall  be  allowed  in  the  case  of  a  nonresident  unless  the 
executor  includes  in  the  return  required  to  be  filed  under  section 

404  the  value  at  the  time  of  his  death  of  that  part  of  the  gross  estate  of  the 
nonresident  not  situated  in  the  United  States. 

442  For  the  purpose  of  this  title  stock  in  a  domestic  corporation  owned 
and  held  by  a  nonresident  decedent  shall  be  deemed  property  within 

the  United  States,  and  any  property  of  which  the  decedent  has  made  a  trans- 
fer or  with  respect  to  which  he  has  created  a  trust,  within  the  meaning  of 
subdivision  (c)  of  section  402,  shall  be  deemed  to  be  situated  in  the  United 
States,  if  so  situated  either  at  the  time  of  the  transfer  or  the  creation  of  the 
trust,  or  at  the  time  of  the  decedent's  death. 

443  The  amount  receivable  as  insurance  upon  the  life  of  a  nonresident 
decedent,  and  any  moneys  deposited  with  any  person  carrying  on 

the  banking  business,  by  or  for  a  nonresident  decedent  who  was  not  engaged 
in  business  in  the  United  States  at  the  time  of  his  death,  shall  not,  for  the 
purpose  of  this  title,  be  deemed  property  within  the  United  States. 

444  Missionaries  duly  commissioned  and  serving  under  boards  of  foreign 
missions  of  the  various  religious  denominations  in  the  United  States, 

dying  while  in  the  foreign  missionary  service  of  such  boards,  shall  not,  by 
reason  merely  of  their  intention  to  permanently  remain  in  such  foreign  ser- 
vice, be  deemed  nonresidents  of  the  United  States,  but  shall  b.e  presumed 
to  be  residents  of  the  State,  the  District  of  Columbia,  or  the  Territories  of 

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Alaska  or  Hawaii  wherein  they  respectively  resided  at  the  time  of  their 
commission  and  their  departure  for  such  foreign  service. 

445      In  the  case  of  any  estate  in  respect  to  which  the  tax  has  been  paid, 
if  necessary  to  allow  the  benefit  of  the  deduction  under  paragraphs 
(2)  and  (3)  of  subdivision  (a)  or  (b)  the  tax  shall  be  redetermined  and  any 
excess  of  tax  paid  shall  be  refunded  to  the  executor. 

[Notice  and  return  to  be  filed  by  executor.] 

■446  Sec.  404.  That  the  executor,  within  two  months  after  the  decedent's 
death,  or  within  a  like  period  after  qualifying  as  such,  shall  give 
written  notice  thereof  to  the  collector.  The  executor  shall  also,  at  such 
times  and  in  such  manner  as  may  be  required  by  regulations  made  pursuant 
to  law,  file  with  the  collector  a  return  under  oath  in  duplicate,  setting  forth 
(a)  the  value  of  the  gross  estate  of  the  decedent  at  the  time  of  his  death,  or, 
in  case  of  a  nonresident,  of  that  part  of  his  gross  estate  situated  in  the  United 
States;  (b)  the  deductions  allowed  under  section  403;  (c)  the  value  of  the 
net  estate  of  the  decedent  as  defined  in  section  403;  and  (d)  the  tax  paid  or 
payable  thereon;  or  such  part  of  such  information  as  may  at  the  time  be 
ascertainable  and  such  supplemental  data  as  may  be  necessary  to  establish 
the  correct  tax. 

447  Return  shall  be  made  in  all  cases  where  the  gross  estate  at  the  death 
of  the  decedent  exceeds  $50,000,  and  in  the  case  of  the  estate  of  every 

nonresident  any  part  of  whose  gross  estate  is  situated  in  the  United  States. 
If  the  executor  is  unable  to  make  a  complete  return  as  to  any  part  of  the 
gross  estate  of  the  decedent,  he  shall  include  in  his  return  a  description  of 
such  part  and  the  name  of  every  person  holding  a  legal  or  beneficial  interest 
therein,  and  upon  notice  from  the  collector  such  person  shall  in  like  manner 
make  a  return  as  to  such  part  of  the  gross  estate.  The  Commissioner  shall 
make  all  assessments  of  the  tax  under  the  authority  of  existing  administra- 
tive special  and  general  provisions  of  law  relating  to  the  assessment  and  col- 
lection of  taxes. 

[When  Collector  shall  make  the  return.] 

448  Sec.  405.    That  if  no  administration  is  granted  upon  the  estate  of 
a  decedent,  or  if  no  return  is  filed  as  provided  in  section  404,  or  if  a 

return  contains  a  false  or  incorrect  statement  of  a  material  fact,  the  collector 

or  deputy  collector  shall  make  a  return  and  the  Commissioner  shall  assess 
the  tax  thereon. 

[Payment  of  tax.    Extension  of  time.  Penalty.] 

449  Sec.  406.    That  the  tax  shall  be  cine  and  pa}  able  one  year  after  ihe 
decedent's  death;  but  in  any  case  where  the  Commissioner  fmds 

that  pay  ment  of  the  tax  within  such  period  would  impose  undue  hardship 
upon  the  estate,  he  may  grant  an  extension  or  extensions  of  time  for  payment 
not  to  exceed  three  years  from  the  due  date. 

450  The  executor  shall  pay  the  tax  to  the  collector  or  deputy  collector, 
and  to  such  portion  of  tlu-  la.v.  not  paid  within  one  year  and  six 

months  after  the  decedent's  death,  interest  at  the  rate  of  6  per  centum  per 

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annum  from  the  expiration  of  one  year  after  such  death  shall  be  added  as 
part  of  the  tax  irrespective  of  any  extension  or  extensions  of  time  that  may 
have  been  granted  for  the  payment  of  the  tax,  or  any  portion  thereof. 

[Payment  of  additional  tax.  Receipts.  Discharge  of  executor  from 
personal  liability.] 

451  Sec.  407.    That  where  the  amount  of  tax  shown  upon  a  return  made 
in  good  faith  has  been  fully  paid,  or  time  for  payment  has  been 

extended,  as  provided  in  section  406,  beyond  one  year  and  six  months  after 
the  decedent's  death,  and  an  additional  amount  of  tax  is,  after  the  expiration 
of  such  period  of  one  year  and  six  months,  found  to  be  due,  then  such  addi- 
tional amount  shall  be  paid  upon  notice  and  demand  by  the  collector,  and 
if  it  remains  unpaid  for  one  month  after  such  notice  and  demand  there  shall 
be  added  as  part  of  the  tax  interest  on  such  additional  amount  at  the  rate 
of  10  per  centum  per  annum  from  the  expiration  of  such  period  until  paid, 
and  such  additional  tax  and  interest  shall,  until  paid,  be  and  remain  a  lien 
upon  the  entire  gross  estate. 

452  The  collector  shall  grant  to  the  person  paying  the  tax  duplicate 
receipts,  either  of  which  shall  be  sufficient  evidence  of  such  payment, 

and  shall  entitle  the  executor  to  be  credited  and  allowed  the  amount  thereof 
by  any  court  having  jurisdiction  to  audit  or  settle  his  accounts. 

453  If  the  executor  files  a  complete  return  and  makes  written  applica- 
tion to  the  Commissioner  for  determination  of  the  amount  of  the 

tax  and  discharge  from  personal  liability  therefor,  the  Commissioner,  as  soon 
as  possible  and  in  any  event  within  one  year  after  receipt  of  such  applica- 
tion, shall  notify  the  executor  of  the  amount  of  the  tax,  and  upon  payment 
thereof  the  executor  shall  be  discharged  from  personal  liability  for  any  addi- 
tional tax  thereafter  found  to  be  due,  and  shall  be  entitled  to  receive  a  re- 
ceipt or  writing  showing  such  discharge:  Provided,  however,  That  such  dis- 
charge shall  not  operate  to  release  the  gross  estate  from  the  lien  of  any  addi- 
tional tax  that  may  thereafter  be  found  to  be  due  while  the  title  to  such 
gross  estate  remains  in  the  heirs,  devisees,  or  distributees  thereof;  but  no 
part  of  such  gross  estate  shall  be  subject  to  such  lien  or  to  any  claim  or  de- 
mand for  any  such  tax  if  the  title  thereto  has  passed  to  a  bona  fide  purchaser 
for  value. 

454  Sec.  408.    That  if  the  tax  herein  imposed  is  not  paid  on  or  before 
the  due  date  thereof  the  collector  shall,  upon  instructions  from  the 

commissioner,  proceed  to  collect  the  tax  under  the  provisions  of  general 
law,  or  commence  appropriate  proceedings  in  any  court  of  the  United  States, 
in  the  name  of  the  United  States,  to  subject  the  property  of  the  decedent  to 
be  sold  under  the  judgment  or  decree  of  the  court.  From  the  proceeds  of 
such  sale  the  amount  of  the  tax,  together  with  the  costs  and  expenses  of 
every  description  to  be  allowed  by  the  court,  shall  be  first  paid,  and  the 
balance  shall  be  deposited  according  to  the  order  of  the  court,  to  be  paid 
under  its  direction  to  the  person  entitled  thereto. 

455  If  the  tax  or  any  part  thereof  is  paid  by,  or  collected  out  of  that  part 
of  the  estate  passing  to  or  in  the  possession  of,  any  person  other 

than  the  executor  in  his  capacity  as  such,  such  person  shall  be  entitled  to 

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reimbursement  out  of  any  part  of  the  estate  still  undistributed  or  by  a  just 
and  equitable  contribution  by  the  persons  whose  interest  in  the  estate  of 
the  decedent  would  have  been  reduced  if  the  tax  had  been  paid  before  the 
distribution  of  the  estate  or  whose  interest  is  subject  to  equal  or  prior  lia- 
bility for  the  payment  of  taxes,  debts,  or  other  charges  against  the  estate, 
it  being  the  purpose  and  intent  of  this  title  that  so  far  as  is  practicable  and 
unless  otherwise  directed  by  the  will  of  the  decedent  the  tax  shall  be  paid 
out  of  the  estate  before  its  distribution.  If  any  part  of  the  gross  estate 
consists  of  proceeds  of  policies  of  insurance  upon  the  life  of  the  decedent 
receivable  by  a  beneficiary  other  than  the  executor,  the  executor  shall  be 
entitled  to  recover  from  such  beneficiary  such  portion  of  the  total  tax  paid 
as  the  proceeds,  in  excess  of  $40,000,  of  such  policies  bear  to  the  net  estate. 
If  there  is  more  than  one  such  beneficiary  the  executor  shall  be  entitled  to 
recover  from  such  beneficiaries  in  the  same  ratio. 

[Tax  a  lien  for  ten  years.] 

456  Sec.  409.    That  unless  the  tax  is  sooner  paid  in  full,  it  shall  be  a 
lien  for  ten  years  upon  the  gross  estate  of  the  decedent,  except  that 

such  part  of  the  gross  estate  as  is  used  for  the  payment  of  charges  against  the 
estate  and  expenses  of  its  administration,  allowed  by  any  court  having  juris- 
diction thereof,  shall  be  divested  of  such  lien.  If  the  Commissioner  is  satis- 
fied that  the  tax  liability  of  an  estate  has  been  fully  discharged  or  pro- 
vided for,  he  may,  under  regulations  prescribed  by  him  with  the  approval 
of  the  Secretary,  issue  his  certificate,  releasing  any  or  all  property  of  such 
estate  from  the  lien  herein  imposed. 

457  If  (a)  the  decedent  makes  a  transfer  of,  or  creates  a  trust  with  respect 
to,  any  property  in  contemplation  of  or  intended  to  take  effect  in 

possession  or  enjoyment  at  or  after  his  death  (except  in  the  case  of  a  bona 
fide  sale  for  a  fair  consideration  in  money  or  money's  worth)  or  (b)  if  insur- 
ance passes  under  a  contract  executed  by  the  decedent  in  favor  of  a  specific 
beneficiary,  and  if  in  either  case  the  tax  in  respect  thereto  is  not  paid  when 
due,  then  the  transferee,  trustee,  or  beneficiary  shall  be  personally  liable 
for  such  tax,  and  such  property,  to  the  extent  of  the  decedent's  interest 
therein  at  the  time  of  such  transfer,  or  to  the  extent  of  such  beneficiary's 
interest  under  such  contract  of  insurance,  shall  be  subject  to  a  like  lien  equal 
to  the  amount  of  such  tax.  Any  part  of  such  property  sold  by  such  trans- 
feree or  trustee  to  a  bona  fide  purchaser  for  a  fair  consideration  in  money 
or  money's  worth  shall  be  divested  of  the  lien  and  a  like  lien  shall  then  attach 
to  all  the  property  of  such  transferee  or  trustee,  except  any  part  sold  to  a 
bona  fide  purchaser  for  a  fair  consideration  in  money  or  money's  worth. 

[Penalty  for  failure  to  file,  or  for  false,  notice  or  return.] 

458  Sec.  410.    That  whoever  knowingly  makes  any  false  statement  in 
any  notice  or  return  required  to  be  filed  under  this  title  shall  be  liable 

to  a  penalty  of  not  exceedi  lg  $5,000,  or  imprisonment  not  exceeding  one  year, 
or  both. 

459  Whoever  fails  to  comply  with  any  duty  imposed  upon  him  by  section 
404,  or,  having  in  his  possession  or  control  any  record,  file,  or  paper. 

containing  or  supposed  to  contain  any  information  concerning  the  estate 

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of  the  decedent,  or,  having  in  his  possession  or  control  any  property  com- 
prised in  the  gross  estate  of  the  decedent,  fails  to  exhibit  the  same  upon 
request  to  the  Commissioner  or  any  collector  or  law  officer  of  the  United 
States,  or  his  duly  authorized  deputy  or  agent,  who  desires  to  examine  the 
same  in  the  performance  of  his  duties  under  this  title,  shall  be  liable  to  a 
penalty  of  not  exceeding  $500,  to  be  recovered,  with  costs  of  suit,  in  a  civil 
action  in  the  name  of  the  United  States. 

[Probate  proceedings  in  U.  S.  Court  for  China.] 

460  Sec.  411.    (a)    That  the  term  "resident"  as  used  in  this  title  in- 
cludes a  citizen  of  the  United  States  with  respect  to  whose  property 

any  probate  or  administration  proceedings  are  had  in  the  United  States 
Court  for  China.  Where  no  part  of  the  gross  estate  of  such  decedent  is 
situated  in  the  United  States  at  the  time  of  his  death,  the  total  amount  of 
tax  due  under  this  title  shall  be  paid  to  or  collected  by  the  clerk  of  such 
court,  but  where  any  part  of  the  gross  estate  of  such  decedent  is  situated 
in  the  United  States  at  the  time  of  his  death,  the  tax  due  under  this  title 
shall  be  paid  to  or  collected  by  the  collector  of  the  district  in  which  is  situated 
the  part  of  the  gross  estate  in  the  United  States,  or,  if  such  part  is  situated 
in  more  than  one  district,  then  the  collector  of  such  district  as  may  be  desig- 
nated by  the  Commissioner. 

461  (b)    For  the  purpose  of  this  section  the  clerk  of  the  United  States 
Court  for  China  shall  be  a  collector  for  the  territorial  jurisdiction  of 

such  court,  and  taxes  shall  be  collected  by  and  paid  to  him  in  the  same  man- 
ner and  subject  to  the  same  provisions  of  law,  including  penalties,  as  the 
taxes  collected  by  and  paid  to  a  collector  in  the  United  States. 

462  (c)    The  proviso  in  the  Act  entitled  "An  Act  making  appropriation 
for  the  Diplomatic  and  Consular  Service  for  the  fiscal  year  ending 

June  30,  1921,"  approved  June  4,  1920,  which  reads  as  follows:  "Provided, 
That  in  probate  and  administration  proceedings  there  shall  be  collected  by 
said  clerk,  before  entering  the  order  of  final  distribution,  to  be  paid  into  the 
Treasury  of  the  United  States,  the  same  inheritance  taxes  from  time  to 
time  collected  under  the  laws  enacted  by  the  Congress  of  the  United  States 
from  the  estates  of  decedents  residing  within  the  territorial  jurisdiction  of 
the  United  States,"  is  hereby  repealed. 

[Assessment  and  collection  of  estate  taxes  accrued  under  the  Revenue 

Act  of  1918.] 

463  Sec.  1400  [of  the  Revenue  Act  of  1921].    (a)  That  the  following 
parts  of  the  Revenue  Act  of  1918  are  repealed,  to  take  effect  (except 

as  otherwise  provided  in  this  Act)  on  January  1,  1922,  subject  to  the  limita- 
tions provided  in  subdivision  (b) : 

Title  IV  (called  "Estate  Tax")  on  the  passage  of  this  Act  [i.  e.,  at  3:55 
P.1M.,  November  23,  1921]; 

jfs  sjc  sfs  «|6  sj»  sjc 

464  (b)  The  parts  of  the  Revenue  Act  of  1918  which  are  repealed  by 
this  Act  shall  (unless  otherwise  specifically  provided  in  this  Act) 

remain  in  force  for  the  assessment  and  collection  of  all  taxes  which  have 

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1-2-22. 

1921  ESTATE  TAX  LAW. 


accrued  under  the  Revenue  Act  of  1918  at  the  time  such  parts  cease  to  be 
in  effect,  and  for  the  imposition  and  collection  of  all  penalties  or  forfeitures 
which  have  accrued  or  may  accrue  in  relation  to  any  such  taxes.  In  the  case 
of  any  tax  imposed  by  any  part  of  the  Revenue  Act  of  1918  repealed  by  this 
Act,  if  there  is  a  tax  imposed  by  this  Act  in  lieu  thereof,  the  provision  impos- 
ing such  tax  shall  remain  in  force  until  the  corresponding  tax  under  this  Act 
takes  effect  under  the  provisions  of  this  Act.    *    *    *  . 


General  Administrative  Law  Provisions. 
[Read  under  Miscellaneous  Matters  at  back  of  the  book.] 


465      For  1f465  see  page  135. 

I 


I 


C-9fyfi£ht  1922,  by  The  Corpora to*   /*./  .'  v. 
WAR  TAX  154  SERVKl. 


1-3-22.      (2)  3-30-22. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


OFFICIAL  RULINGS,  REGULATIONS,  OPINIONS,  AND  DECISIONS 

UNDER  THE 
ESTATE  TAX  LAWS 
MADE  AVAILABLE  DURING  1922. 


{Decision.) 

(Revenue  Act  of  1921.) 

December  21,  1921. 

'As  the  1921  Act,  in  specific  terms,  provides  that  the  assessment  and  collection 
of  taxes  accrued  under  the  1918  Act  shall  be  in  accordance  with  the 
provisions  thereof,  a  contention  that  the  provisions  of  the 
1921  Act,  in  this  regard,  are  to  be  applied 
retroactively,  is  without  merit. 


DISTRICT  COURT  OF  THE  UNITED  STATES. 
District  of  Rhode  Island. 


Frank  L.  Polk,  et  al. 
v. 

Frank  A.  Page,  individually  and  as  Collector 
of  Internal  Revenue. 


Equity  No.  152. 


465      Brown,  J.  (Orally):    This  case  came  on  to  be  heard  on  plaintiff's 
30       motion  for  the  entry  of  a  decree  [see  1(355];  whereupon  the  United 
223      States  objected  that  by  virtue  of  the  Revenue  Law  of  1921  [1(449, 
315       herein]  the  mode  of  collection  heretofore  ordered  by  the  Commissioner 

was  made  applicable  to  the  present  case. 
4  66  Upon  hearing  of  counsel  the  Court  was  clearly  of  the  opinion  that  such 
contention  of  the  applicability  of  the  Revenue  Act  of  1921  was  with- 
out merit,  and  that,  on  the  contrary,  by  the  provisions  of  Sec.  1400,  paragraph 
b  [1f464  herein],  the  provision  of  the  Revenue  Act  of  1918  relating  to  the 
assessment  and  collection  of  taxes  was  specifically  continued  in  force,  and  that 
the  argument  of  the  United  States  was  based  upon  omission  of  material 
portions  of  the  statutes  quoted. 


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3-30-22. 


ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


(Decision.) 
Revenue  Act  of  1918. 
March  21,  1922. 

The  tax  being  due  and  payable  one  year  after  decedent's  death,  in- 
junctive relief  against  its  collection  by  distraint  within  the  180  day  period 
thereafter  will  not  be  granted,  there  being  ample  remedy  at  law  to  redress 
any  alleged  injury  consequent  on  enforced  payment  prior  to  the  expiration 
of  one  year  and  189  days. 

United  States  Circuit  Court  of  Appeals 
for  the  First  Circuit. 

MALCOLM  E.  NICHOLS,  Individually  and  as  Collector  of 
Internal  Revenue 
defendant,  appellant, 

WILLIAM  A.  GASTON  ET  AL.,  Executors, 
plaintiffs,  appellees. 


appeal  from  the  district  court  of  the  united  states 
for  the  district  of  massachusetts. 


467  Bingham,  J.    This  is  an  appeal  from  a  final  decree  -of  the  District 
30       Court  for  Massachusetts  in  a  suit  in  equity  brought  by  Gaston  and 

223       Falvey,  executors  of  the  estate  of  James  M.  Prendergast,  against 
315       Nichols  individually  and  as  Collector  of  Internal  Revenue  for  the 
465       District  of  Massachusetts,  restraining  the  latter  from  collecting  a 
tax  assessed  against  the  estate. 

468  The  complainants  and  the  defendant  are  citizens  of  Massachusetts. 
Prendergast  died  November  29,   1920.     The  complainants  duly 

filed  their  return,  setting  forth  the  value  of  the  estate,  and  the  Commissioner 
of  Internal  Revenue  assessed  thereon  a  tax  of  $83,900.36,  under  Title  IV  of 
the  Revenue  Act  of  February  24,  1919  (40  Stat,  at  Large,  p.  1096).  The 
jurisdiction  of  the  District  Court,  as  a  Federal  court,  is  invoked  on  the 
ground  that  the  suit  is  one  arising  under  the  internal  revenue  laws  of  the 
United  States. 

469  It  is  conceded  that  the  tax  of  $83,900.36  assessed  against,  the  estate 
is  legal  and  proper.    The  contention  of  the  complainants  is  that, 

under  Section  408  of  the  Act  of  1919,  they  are  given  a  year  and  180  days 
after  their  testator's  death  in  which  to  pay  the  tax,  even  though  the  Com- 
missioner of  Internal  Revenue  had  not  extended  the  time  of  payment  under 
Section  406  for  180  days  after  its  due-date,  and  that  the  defendant  was  not 
authorized  to  enforce  its  collection  by  distraint  or  otherwise  until  after  the 
expiration  of  the  180  days;  that,  in  violation  of  this  right,  the  defendant, 
pretending  to  act  in  his  capacity  as  collector,  on  the  4th  of  January,  1922, 
and  before  the  180  days  had  expired,  notified  the  complainants  that,  unless 
the  tax  was  paid  within  ten  days,  he  should  proceed  to  collect  the  same, 
with  costs,  by  seizure  and  sale  of  property;  that,  under  Section  408  of  the 
Act  of  1919  the  collector  is  prevented  from  collecting  the  tax  by  distraint  or  i 

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3-30-22. 


ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


otherwise  within  the  180  days;  and  that  the  threatened  seizure,  if  carried 
out,  would  have  been  unauthorized  and  an  act  not  done  by  him  in  his  official 
capacity  or  with  color  of  law.  They  further  contend  and  allege  in  their  bill 
that,  if  to  avoid  such  threatened  distraint,  they  at  this  time  paid  the  tax, 
they  would  be  remediless  in  law,  as  they  had  the  privilege,  under  Section 
406,  of  paying  the  tax  at  any  time  down  to  May  28,  1922,  without  interest. 
It  was  also  alleged  in  the  bill  that  the  payment  of  the  tax  at  the  time  of  the 
commencement  of  the  suit,  rather  than  on  May  28,  1922,  would  subject  the 
estate  to  a  loss  of  interest  on  the  money  during  the  interim  of  about  three 
thousand  dollars  and  would  subject  the  estate  to  the  difficulty  of  converting 
the  assets  into  cash  for  the  immediate  payment  of  a  large  sum  of  money.  But 
it  appears  in  the  final  decree  that  it  was  stipulated  in  open  court  that  the 
complainants  had,  at  the  time  of  the  commencement  of  the  suit  and  at  the 
time  of  entering  the  decree,  assets  in  their  hands  sufficient  to  meet  the  tax, 
and  that  the  loss  which  they  would  have  sustained  by  the  payment  would 
have  been  the  interest  on  the  tax,  unless  they  were  able  to  recover  it  back 
from  the  United  States. 

470  The  basis  of  the  decree  was  that  the  payment  of  the  tax  was  "not 
required  by  law  or  compellable  by  distraint  until  one  year  and  180 

days  after  the  death  of"  the  decedent;  that  payment  of  the  tax  at  the  time  of 
the  filing  of  the  bill  instead  of  in  May,  1922,  "would  have  subjected  the 
estate  ...  to  loss  of  interest  on  the  money  so  paid  during  the  interim, 
amounting  to  the  sum  of  approximately  $3,000;"  and  that  if,  to  avoid  the 
threatened  distraint,  the  complainants  should  "pay  such  tax  prior  to  May 
28,  1922,  they  would  be  remediless  in  the  law." 

471  The  questions  sought  to  be  raised  are  (1)  whether,  on  the  facts 
herein  stated,  the  complainants  are  entitled  to  injunctive  relief; 

and  (2)  whether,  in  view  of  Section  3224  of  the  Revised  Statutes,  which 
provides  that  "no  suit  for  the  purpose  of  restraining  the  assessment  or  collec- 
tion of  any  tax  shall  be  maintained  in  any  court,"  this  proceeding  can  be 
maintained. 

472  We  think  that  there  can  be  no  doubt  but  that  the  District  Court  as 
a  Federal  court,  had  jurisdiction  authorizing  it  to  entertain  the 

proceeding,  as  it  involves  a  controversy  arising  under  the  laws  of  the  United 
States;  and  that  the  broad  questions  are  whether,  on  the  admitted  and 
agreed  facts,  that  court,  as  a  court  of  equity,  was  warranted  in  granting  the 
injunction,  especially  in  view  of  the  provisions  of  Section  3224. 

473  It  is  a  well  recognized  rule  that  a  court  of  equity  will  not  grant 
injunctive  relief  to  complainants  who  have  a  remedy  at  law  in  the 

absence  of  a  showing  that  the  legal  remedy  is  inadequate.  If  on  the  facts  in 
this  case  the  complainants  would  have  had  a  remedy  at  law  to  redress  their 
alleged  injury,  it  cannot  be  contended  that  it  would  have  been  inadequate 
for  the  reason  that  the  damages  suffered  would  have  been  irreparable,  as  it 
appears  that  the  only  loss  they  would  have  sustained,  had  they  paid  the  tax 
when  demanded,  would  have  been  the  loss  of  the  use  of  the  money  during 
the  balance  of  the  180  days,  or  in  the  vicinity  of  three  thousand  dollars. 

474  The  question  therefore  is,  so  far  as  equity  jurisdiction  is  concerned, 
whether  the  complainants  would  have  been  without  a  legal  remedy 

provided  they  had  paid  the  tax  under  protest  at  the  time  of  its  demand. 

475  Under  Title  XIII  of  the  Revenue  Law  of  1919, — General  Admin- 
istrative Provisions — Section  1316  (a),  it  is  provided: — 

"Sec.  1316  (a)  That  Section  3220  of  the  Revised  Statutes  is  hereby 
amended  to  read  as  follows: 

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ESTATE  TAXES  REGULATIONS,  ETC.-  1922. 


"  'See.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to  regula- 
tions prescribed  by  the  Secretary  of  the  Treasury,  is  authorized  to  remit, 
refund,  and  pay  back  all  taxes  erroneously  or  illegally  assessed  or  collected, 
all  penalties  collected  without  authority,  and  all  taxes  that  appear  to  be 
unjustly  assessed  or  excessive  in  amount,  or  in  any  manner  wrongfully  col- 
lected; also  to  repay  to  any  collector  or  deputy  collector  the  full  amount  of 
such  sums  of  money  as  may  be  recovered  against  him  in  any  court,  for  any 
internal  revenue  taxes  collected  by  him,  with  the  cost  and  expenses  of  suit; 
also  all  damages  and  costs  recovered  against  any  assessor,  assistant  assessor, 
collector,  deputy  collector,  agent,  or  inspector,  in  any  suit  brought  against 
him  by  reason  of  any  thing  done  in  the  due  performance  of  his  official  duty, 
and  shall  make  report  to  Congress  at  the  beginning  of  each  regular  session 
of  Congress  of  all  transactions  under  this  section.'  " 

476  This  provision  of  law  was  first  enacted  July  13,  1866  (14  Stat,  at 
Large,p.  Ill),  and  as  above  set  forth  is,  so  far  as  concerns  the  ques- 
tion here  considered,  the  same  as  when  first  enacted.  It  thus  appears  from 
the  language  of  the  act  that  had  the  complainants  paid  the  tax  under  protest 
at  the  time  it  was  demanded,  they  could  have  recovered  judgment  against 
the  collector  for  all  damages  they  sustained,  if  the  collection  was  premature 
and  they  were  thereby  damaged.  City  of  Philadelphia  v.  Collector,  5  Wall. 
720,  731  (decided  Dec.  1866);  Moore  v.  Miller,  5  Court  of  App.  Dist.  Col. 
413,  429.  And  the  following  decisions  disclose  that  they  would  have  been 
entitled  to  interest  on  the  damages  sustained  down  to  the  entry  of  final 
judgment  (Schellv.  Cochran,  107  U.  S.  625;  Kinney  v.  Conant,  166  Fed.  720), 
and  that,  upon  a  certificate  of  probable  cause  by  the  court,  under  Section 
989  of  the  Revised  Statutes,  the  liability  of  the  Government  to  pay  the 
judgment  would  attach.  United  States  v.  Sherman,  98  U.  S.  565;  Erskine  v. 
Van  Arsdale,  15  Wall.  75;  National  Volunteer  Home  v.  Parrish,  229  U.  S. 
494,  496;  Sage  v.  United  States,  250  U.  S.  33,  37;  Smietanka  v.  Indiana  Steel 
Co.  (decided  October  24,  1921)— U.  S. — .  The  fact  that  interest  on  the 
judgment,  after  it  becomes  final,  as  defined  in  Schell  v.  Cochran,  supra,  does 
not  run  against  the  Government  (it  being  presumed  that  the  Government  is 
always  ready  and  able  to  pay),  has  never  been  regarded  as  rendering  the 
remedy  at  law  inadequate. 

477  We  are  therefore  of  the  opinion  that  the  complainants  have  failed 
to  show  that  they  would  have  had  no  remedy  at  law.  On  the  con- 
trary, it  would  seem  that  they  would  have  had  a  legal  remedy  by  which  they 
might  have  been  reimbursed  for  all  damages  sustained,  in  case  it  should 
be  found  that  the  defendant  was  not  authorized  to  demand  and  enforce  the 
collection  of  the  tax  within  the  180  days  after  it  became  due,  and  that  the 
court  below  was  without  authority  to  grant  the  injunction,  irrespective  of 
the  inhibition  contained  in  Section  3224  of  the  Revised  Statutes. 

478-  In  view  of  the  conclusion  reached,  we  do  not  feel  called  upon  to 
decide  whether  Section  3224  imposes  upon  a  court  of  equity  any 
greater  restraint  as  to  enjoining  the  assessment  and  collection  of  a  tax  than 
it  would  properly  be  called  upon  to  exercise  had  the  statute  not  been  en- 
acted. The  remedy  at  law  is  regarded  as  exclusive  and,  in  the  absence  of 
extraordinary  circumstances  such  as  would  warrant  the  interposition  of  a 
court  of  equity,  has  always  been  held  to  be  exclusive. 

479      In  United  States  v.  Pacific  R.  R.,  4  Dill.  66,  70,  Mr.  Justice  Miller, 
sitting  as  Circuit  Justice  for  the  Eastern  District  of  Missouri,  in 
speaking  of  the  legal  remedy  afforded  by  Section  3220  of  the  Revised  Statutes, 
said: 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


"And  we  have  said  over  and  over  again  in  our  courts  that  that  was  a 
complete  and  exclusive  system  of  correctional  justice  in  regard  to  the  collec- 
tion of  taxes  unjustly  assessed;  that  it  was  the  only  system,  and  by  that 
ruling  we  abide.  There  can  be  no  such  thing  as  obstructing  and  objecting 
to  the  payment,  as  in  the  case  of  adjusting  the  accounts  of  individuals." 

480  It  would  seem,  however,  that  the  inhibition  of  Section  3224  applies 
to  all  assessments  or  collections  of  internal  revenue  taxes  made  or 

attempted  to  be  made  under  color  of  office  by  internal  revenue  officers 
charged  with  general  jurisdiction  over  the  assessment  and  collection  of  such 
taxes,  and  that,  if  the  Commissioner  of  Internal  Revenue,  in  assessing  a  tax, 
or  the  collector,  in  collecting  it,  acts  under  color  of  his  office,  Section  3224 
applies,  and  that  no  suit  to  restrain  the  assessment  or  collection  of  the  tax 
can  be  maintained. 

481  In  Dodge  v.  Osborn,  240  U.  S.  118,  Chief  Justice  White,  in  speaking 
of  Sections  3220  and  3224,  said: 

"The  plain  purpose  and  scope  of  the  sections  are  thus  stated  in  Snyder 
v.  Marks,  109  U.  S.  189,  193-  194,  a  suit  brought  to  enjoin  the  collection  of  a 
revenue  tax  on  tobacco: 

"  'The  inhibition  of  Rev.  Stat.,  s.  3224,  applies  to  all  assessments  of  taxes, 
made  under  color  of  their  offices,  by  internal  revenue  officers  charged  with 
general  jurisdiction  of  the  subject  of  assessing  taxes  against  tobacco  manu- 
facturers. The  remedy  of  a  suit  to  recover  back  the  tax  after  it  is  paid  is 
provided  by  statute,  and  a  suit  to  restrain  its  collection  is  forbidden.  The 
remedy  so  given  is  exclusive,  and  no  other  remedy  can  be  substituted  for  it. 
.  .  .  Cheatham  v.  United  States,  92  U.  S.  85,  88;  and  again  in  State  Rail- 
road Tax  Cases,  92  U.  S.  575,  613,  it  was  said  by  this  court,  that  the  system 
prescribed  by  the  United  States  in  regard  to  both  customs  duties  and  internal 
revenue  taxes,  of  stringent  measures,  not  judicial,  to  collect  them,  with  appeals 
to  specified  tribunals,  and  suits  to  recover  back  moneys  illegally  exacted  was 
a  system  of  corrective  justice  intended  to  be  complete,  and  enacted  under  the 
right  belonging  to  the  Government  to  prescribe  the  conditions  on  which  it 
would  subject  itself  to  the  judgment  of  the  courts  in  the  collection  of  its 
revenues.  In  the  exercise  of  that  right,  it  declares,  by  s.  3224,  that  its  officers 
shall  not  be  enjoined  from  collecting  a  tax  claimed  to  have  been  unjustly 
assessed,  when  those  officers,  in  the  course  of  general  jurisdiction  over  the 
subject-matter  in  question,  have  made  the  assignment  (assessment)  and 
claim  that  it  is  valid.'  " 

482  In  Dodge  v.  Osborn,  it  was  held  that  it  was  "no  longer  open  to  question 
that  a  suit  may  not  be  brought  to  enjoin  the  assessment  or  collec- 
tion of  a  tax  because  of  the  alleged  unconstitutionality  of  the  statute  imposing 
it;"  that  averments  that  unless  the  tax  were  enjoined  many  suits  by  other 
persons  would  be  brought  for  recovery  of  the  taxes  paid  by  them  and  that 
the  taxes  assessed  would  be  a  lien  upon  the  plaintiff's  property  constituting 
a  cloud  thereon,  were  wholly  inadequate  to  sustain  jurisdiction;  and  that 
the  statute  plainly  forbids  the  enjoining  of  a  tax  "unless  by  some  extraordi- 
nary and  entirely  exceptional  circumstance  its  provisions  are  not  applicable." 

483  No  question  is  raised  in  this  case  as  to  the  authority  of  the  Com- 
missioner to  assess  the  tax  or  as  to  the  legality  of  the  tax  which  he 

assessed.  It  is  claimed,  however,  that  the  defendant,  in  undertaking  to 
collect  the  tax,  was  acting  without  color  of  authority;  that  his  acts  were 
purely  ministerial  and  in  no  way  involved  the  exercise  of  discretion. 

484  By  Section  1305,  Title  XIII  of  the  Act  of  1919,  it  is  provided: 

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"Sec.  1305.  That  all  administrative,  special  or  stamp  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable,  are 
hereby  extended  to  and  made  a  part  of  this  Act,  and  every  person  liable  to 
any  tax  imposed  by  this  Act,  or  for  the  collection  thereof,  shall  keep  such 
records  and  render,  under  oath,  such  statements  and  returns,  and  shall 
comply  with  such  regulations  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  from  time  to  time  prescribe." 

485  By  Section  404 — Title  IV  of  the  Act  of  1919 — it  is  provided: 
"Sec.  404.    .    .    .    The  Commissioner  shall  make  all  assessments  of  the 

tax  under  the  authority  of  existing  administrative,  special  and  general  pro- 
visions of  law  relating  to  the  assessment  and  collection  of  taxes." 

486  By  Section  3182  of  the  Revised  Statutes  it  is  provided: 

"Sec.  3182.  The  Commissioner  of  Internal  Revenue  is  hereby  authorized 
and  required  to  make  the  inquiries,  determinations,  and  assessments  of  all 
taxes  and  penalties  imposed  by  this  Title,  or  accruing  under  any  former 
internal-revenue  act,  where  such  taxes  have  not  been  duly  paid  by  stamp 
at  the  time  and  in  the  manner  provided  by  law,  and  shall  certify  a  list  of  such 
assessments  when  made  to  the  proper  collectors  respectively,  who  shall 
proceed  to  collect  and  account  for  the  taxes  and  penalties  so  certified,  etc." 

487  And  Sections  3183,  3184  and  3187  provide: 

"Sec.  3183.  It  shall  be  the  duty  of  the  collectors,  or  their  deputies,  in 
their  respective  districts,  and  they  are  authorized  to  collect  all  the  taxes  im- 
posed by  law,  however  the  same  may  be  designated,  etc." 

"Sec.  3184.  Where  it  is  not  otherwise  provided,  the  collector  shall  in 
person  or  by  deputy,  within  ten  clays  after  receiving  any  list  of  taxes  from 
the  Commissioner  of  Internal  Revenue,  give  notice  to  each  person  liable  to 
pay  any  taxes  stated  therein,  to  be  left  at  his  dwelling  or  usual  place  of  busi- 
ness, or  to  be  sent  by  mail,  stating  the  amount  of  such  taxes  and  demanding 
payment  thereof.  If  such  person  does  not  pay  the  taxes,  within  ten  days 
after  the  service  or  the  sending  by  mail  of  such  notice,  it  shall  be  the  duty  of 
the  collector  or  his  deputy  to  collect  the  said  taxes  with  a  penalty  of  five  per 
centum  additional  upon  the  amount  of  taxes,  and  interest  at  the  rate  of  one 
per  centum  a  month." 

"Sec.  3187.  If  any  person  liable  to  pay  any  taxes  neglects  or  refuses  to 
pay  the  same  within  ten  days  after  notice  and  demand,  it  shall  be  lawful  for 
the  collector  or  his  deputy  to  collect  the  said  taxes,  with  five  per  centum 
additional  thereto,  and  interest  as  aforesaid,  by  distraint  and  sale,  in  the 
manner  hereafter  provided,  of  the  goods,  chattels,  or  effects,  including  stocks, 
securities,  and  evidences  of  debt,  of  the  person  delinquent  as  aforesaid,  etc." 

488  By  Section  1307, — Title  XIII  of  the  Act  of  1919— it  is  provided: 
"Sec.  1307.    That  in  all  cases  where  the  method  of  collecting  the  tax 

imposed  by  this  Act  is  not  specifically  provided  in  this  Act,  the  tax  shall  be 
collected  in  such  manner  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  prescribe,  etc." 

489  See  Art.  116  [1[298]  of  the  Regulations  for  remedies  prescribed  for 
collection  of  tax. 

490  These  provisions  of  law  vested  the  Commissioner  of  Internal  Revenue 
with  authority  to  assess  the  tax  in  question  and  to  certify  the  same 

in  his  list  to  the  defendant  for  collection,  whose  duty  it  was  to  proceed  and 
collect  the  tax  in  accordance  with  his  precept.  The  Commissioner  in  issuing 
his  list  to  the  defendant  for  the  collection  of  the  tax  necessarily  determined 
that  the  tax  was  due  and  payable,  that  no  postponement  of  the  time  of  pay- 


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rnent  had  been  granted,  and  that  the  defendant  should  proceed  forthwith 
to  collect  it.  It  appears  by  Article  90  [1J223]  of  the  Rules  and  Regulations 
issued  by  the  Commissioner,  with  the  approval  of  the  Secretary  of  the 
Treasury,  construing  Section  406,  that  the  estate  tax  is  due  and  payable  one 
year  from  the  date  of  death,  and  by  Article  93  [^[268]  that  the  time  of  pay- 
ment is  to  be  extended  only  in  case  the  Commissioner  finds  that  payment 
of  the  tax  one  year  from  the  date  of  death  would  impose  undue  hardship 
upon  the  estate.  It  cannot  therefore  be  well  claimed  that  the  defendant,  in 
proceeding  under  his  precept  and  demanding  payment  of  the  tax,  was  not 
acting  under  color  of  authority  or  of  his  office,  the  Commissioner  of  Internal 
R.evenue  having,  in  the  exercise  of  his  general  jurisdiction  and  with  the 
approval  of  the  Secretary  of  the  Treasury,  determined  that  the  tax  was  due 
and  payable  at  the  end  of  one  year  from  the  death  of  the  decedent  and  issued 
his  list  or  precept  for  its  collection.   Moore  v.  Miller,  supra,  430. 

491  If,  under  Section  406  and  the  Regulations,  the  tax  is  due  and  payable 
at  the  expiration  of  a  year  from  death,  where  no  postponement  has 

been  granted,  then  the  provisions  of  Sections  406  and  408  are  entirely  con- 
sistent with  one  another  and  there  is  nothing  in  either  section  incompatible 
with  action  by  the  collector,  upon  receipt  of  the  list,  in  forthwith  demanding 
payment  of  the  tax  under  Section  3184,  and,  if  it  is  not  paid,  issuing  a  dis- 
traint warrant  and  enforcing  collection  by  distraint  under  Section  3187. 

492  Indeed  it  is  quite  probable  that  the  correct  interpretation  of  Section 
406  is  that  the  tax  is  due  and  collectible  one  year  after  decedent's 

death,  in  the  absence  of  a  postponement  of  the  time  of  collection  for  cause 
shown;  that  if  no  postponement  from  the  due-date  is  procured,  payment  is 
demandable  forthwith,  with  the  right  to  invoke  the  usual  remedies  for  its 
collection;  that  if  a  postponement  is  obtained  for  180  days  and  the  tax  is 
paid  on  or  before  the  expiration  of  that  time,  no  interest  charge  is  to  be  made; 
that,  if  the  tax  is  not  paid  on  or  before  the  expiration  of  the  postponed  period 
of  180  days,  then  interest  for  the  180  days  is  to  be  added  to  the  tax,  and,  under 
Section  408,  the  collector  is  thereupon  to  proceed  to  collect  the  tax  and  avail 
himself  of  the  usual  remedies,  unless  the  time  of  payment  is  further  delayed 
or  extended  by  the  Commissioner;  that  Section  408  by  requiring  the  collector, 
if  the  tax  has  not  been  paid  within  the  180  days  after  it  is  due,  to  then  proceed 
to  collect  it  under  the  provisions  of  general  law,  etc.,  unless  there  is  reasonable 
cause  for  further  delay,  recognizes  there  has  been  a  previous  delay  in  its  collec- 
tion and  that  it  was  for  cause,  the  cause  provided  for  in  Section  406;  and  that 
Section  408  is  not  in  conflict  with  Section  406  as  to  time  of  collection  but 
supplementary  thereto  and  in  harmony  therewith.  We  do  not,  however,  find 
it  necessary  to  construe  the  law. 

493  The  only  case  called  to  our  attention  in  which  a  court  has  granted  an 
injunction   restraining  federal  officials  in  the  collection  of  a  tax, 

since  Section  3224  was  enacted  in  1867,  is  Frayser  &  Co.  v.  Russell,  3  Hughes, 
227.  But  an  examination  of  that  case  discloses  that  what  the  collector  was 
asserting  to  be  a  tax  was  not  a  tax;  that  the  collector  had  attempted  to  assess 
the  tax  himself,  whereas,  under  Section  3371  of  the  Revised  Statutes  it  was 
made  the  duty  of  the  Commissioner  of  Internal  Revenue  to  make  the  assess- 
ment and  certify  the  same  to  the  collector.  As  the  Commissioner  of  Internal 
Revenue  had  not  assessed  the  tax  and  certified  it  to  the  collector,  the  latter 
had  neither  a  tax  to  collect  nor  color  of  authority  for  its  collection. 

494  The  decree  of  the  District  Court  is  reversed,  and  the  case  is  remanded 
to  that  court  with  directions  to  enter  a  decree  of  dismissal,  with  costs 

in  this  court  and  the  court  below  to  the  appellant. 

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(T.  D.  3319.) 

495  Bequest  or  devise  in  lieu  of  dower : Decision  of  Court:  Act  of  Sep- 
107       tember  8,  1916.— Constitutionality  of  Act:  Title  II,  Act  of  September 

8,  1916,  imposing  an  estate  tax,  is  constitutional.  Decision  of  the 
United  States  Supreme  Court  in  New  York  Trust  Co.  v.  Eisner,  41  Sup.  Ct. 
506  H[390],  held  controlling.  Deduction;  State  Transfer  Tax  Not  Deductible 
as  a  Charge  Against  the  Estate:  The  New  York  State  Transfer  Tax  is  not 
a  charge  that  affects  "the  estate  as  a  whole."  It  diminishes  each  legacy 
bequeathed  by  decedent,  and  is  therefore  not  "a  charge  against  the  estate1' 
and  may  not  be  deducted  from  the  gross  estate  under  the  provisions  of 
Section  203  of  the  Revenue  Act  of  1916.  Decision  of  the  United  States 
Supreme  Court  in  New  York  Trust  Co.  v.  Eisner,  41  Sup.  Ct.  506  [1f390], 
held  controlling. 

Gross  Estate;  Bequest  or  Devise  in  Lieu  of  Dower:  If  a  widow  accepts 
a  provision  made  in  lieu  of  dower,  the  value  of  the  property  thus  bequeathed 
or  devised  must  be  included  in  the  gross  estate,  as  defined  in  Section  203  of 
the  Revenue  Act  of  1916,  and  the  amount  so  included  may  not  be  diminished 
by  deducting  the  value  of  the  widow's  dower  in  decedent's  realty. 

496  (The  appended  decision  [syllabus  only]  of  the  United  States  District 
Court  for  the  Southern  District  of  New  York,  in  the  case  of  Title 

Guarantee  &  Trust  Company  and  Minnie  W.  Teets,  as  Executors  of  the 
Last  Will  and  Testament  of  Joseph  W.  Teets,  deceased,  v.  Edwards, 
Collector,  the  syllabus  [1f495]  of  which  appears  above  is  published  not  as  a 
ruling  of  the  Treasury  Department,  but  for  the  information  of  internal 
revenue  officers  and  others  concerned.)    (T.  D.  3319,  April  5,  1922.) 


(Decision.) 

(Revenue  Act  of  1916.) 

S^&te  and  municipal  bonds  held  by  decedent  to  be  included  in  determining 
value  of  gross  estate  for  purposes  of  the  tax. 

Supreme  Court  of  the  United  States. 

Mary  Louise  Greiner,  Executrix,  etc.,  \  Jn  Error  to  the  District  Court 
Plaintiff  in  Error,  /    of  the  United  States  for  thc 

vs  ) 
C.  G.  Lewellyn,  Collector  of  Internal  (    Western   District  of  Pennsyl- 
Revenue.  /  vania. 

[April  10,  1922.] 

Mr.  Justice  Brandeis  delivered  the  opinion  of  the  Court. 
497  This  action  was  brought  in  the  federal  court  for  Western  Penn- 
425  sylvania  against  the  Collector  of  Internal  Revenue  to  recover  part 
of  an  amount  assessed  as  estate  tax  under  the  Act  of  September  8. 
1916,  c.  463,  Title  II,  39  Stat.  756,  777,  and  paid  by  the  plaintiff  as  executrix 
of  the  estate  of  Kate  B.  Kingsley.  In  determining  the  net  value  of  the 
estate  upon  the  transfer  of  which  the  tax  was  imposed,  the  Collector  had 
included  bonds  issued  by  political  subdivisions  of  the  State  of  Pennsylvania. 
The  executrix  claimed  that  to  include  these  municipal  bonds  was' in  effect 
to  tax  them — which  the  Federal  Government  is  under  the  Constitution 


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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


without  power  to  do.  Pollock  v.  Farmers'1  Loan  &  Trust  Co.,  157  U.  S.  429, 
583,  654;  158  U.  S.  601,  618,  693.  The  District  Court  overruled  this  claim 
and  entered  judgment  for  defendant.  The  case  comes  here  on  writ  of  error 
under  Section  238  of  the  Judicial  Code.  Whether  Congress  has  power  to 
require  that  state  and  municipal  bonds  held  by  a  decedent  be  included  for 
the  purpose  of  determining  the  net  value  on  which  the  estate  tax  is  imposed 
is  the  sole  question  presented  for  decision. 

498  That  the  Federal  Government  has  power  to  tax  die  transmission  of 
legacies  was  settled  by  Knowlton  v.  Moore,  178  U.  S.  41;  and  that 
it  has  the  power  to  tax  the  transfer  of  the  net  assets  of  a  decedent's  estate 
was  settled  by  New  York  Trust  Co.  v.  Eisner,  256  U.  S.  345  [1f390].  The 
latter  case  has  established  also  that  the  estate  tax  imposed  by  the  Act 
of  1916,  like  the  earlier  legacy  or  succession  tax,  is  a  duty  or  excise,  and  not 
a  direct  tax  like  that  on  income  from  municipal  bonds.  Pollock  v.  Farmers' 
Loan  y  Trust  Co.,  supra.  A  State  may  impose  a  legacy  tax  on  a  bequest 
to  the  United  States,  United  States  v.  Perkins,  163  U.  S.  625,  or  on  a  bequest 
which  consists  wholly  of  United  States  bonds,  Plummer  v.  Coler,  178  U.  S. 
115;  Orr  v.  Gilman,  183  U.  S.  278  [see  1fl73].  Likewise  the  Federal  Govern- 
ment may  impose  a  succession  tax  upon  a  bequest  to  a  municipal  corporation 
of  a  State,  Snyder  v.  Bettman,  190  U.  S.  249,  or  may,  in  determining  the 
amount  for  which  the  estate  tax  is  assessable,  under  die  Act  of  1916,  include 
sums  required  to  be  paid  to  a  State  as  inheritance  tax,  for  the  estate  tax  is 
the  antithesis  of  a  direct  tax,  New  York  Trust  Co.  v.  Eisner,  supra.  Munici- 
pal bonds  of  a  State  stand  in  this  respect  in  no  different  position  from  money 
payable  to  it.  The  transfer  upon  death  is  taxable,  whatsoever  the  character 
of  the  property  transferred  and  to  whomsoever  the  transfer  is  made.  It 
follows  that  in  determining  the  amount  of  decedent's  net  estate  municipal 
bonds  were  properly  included. 

Affirmed. 


{Decision.) 
(Revenue  Act  of  1916) 

The  text  of  the  1916  Act  is  not  to  be  construed  as  applying  to  transfers 
in  contemplation  of  death,  etc.,  completed  before  the  passage  of  the  Act. 

Supreme  Court  of  the  United  States. 


In  Error  to  the  United 
States  Circuit  Court  of 
Appeals  for  the  Sixth 
Circuit. 


Victor  E.  Shwab,  Executor  of  the  last 
will  and  testament  of  Augusta  j. 
Dickel,  Deceased,  Plaintiff  in  Error, 

ton  -sew  fmb  ,h>  1 1  ••••.;#£.»;.;  ••,        n  ,U  i..- 
Emanuel  J.  Doyle,  United  States  Col- 
lector of  Internal  Revenue  for  the 
Fourth  Collection  District  of  Michi- 
gan. 

[May  I,  1922.| 

Air.  justice  McKknna  delivered  the  opinion  of  the  Court. 
499      Augusta  Dickel  by  a  deed  dated  April  21,  1915,  assigned  and  delivered 
10      to  the  Detroit  Trust  Company,  stocks,  bonds  or  securities  of  the 
109      declared  value  of  $1,000,000- —with  all  their  unmatured  coupons, 
427      and  die  proceeds  to  be  derived  therefrom,  both  principal  and  income, 
in  trust  to  invest  and  reinvest  and  to  pay  the  net  income  for  life  to 

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Victor  E.  Shwab  or  on  his  written  order.  After  his  death  the  net  income  was 
directed  to  be  paid  to  six  beneficiaries,  his  children.  A  power  of  delegating 
and  selling  or  exchanging  all  securities  was  given  to  Shwab,  and  of  reinw  ->t 
ment.  During  the  life  of  Shwab  the  net  income  was  to  be  paid  to  him  or  his 
order.  After  his  death  the  trust  was  to  continue  during  the  lives  of  the 
beneficiaries  and  the  net  income  was  to  be  paid  to  them  during  their  rcspeci  un- 
lives in  equal  shares. 

500  There  were  other  rights  and  powers  given  to  plaintiff  and  the  bene- 
ficiaries not  necessary  to  mention. 

501  The  trust  deed  was  accepted  by  the  Detroit  Trust  Con  panv  on  or 
before  June  3,  1915. 

602  Augusta  Dickel  died  September  16,  1916,  possessed  of  an  estate  of 
$800,000.  Seven  days  before  her  death  Congress  passed  an  act 
entitled,  "Estate  Tax  Act,"  39  Stat.  777-780.  The  Act  provided  that  accord- 
ing to  certain  percentages  of  the  value  of  the  net  estate,  a  tax  was  to  be  im- 
posed upon  the  transfer  of  the  net  estate  of  every  decedent  dying  after  the 
passage  of  the  Act,  "to  the  extent  of  any  interest  therein  of  which  the  de- 
cedent has  at  any  time  made  a  transfer,  or  with  respect  to  which  he  has  created 
a  trust,  in  contemplation  of  or  intended  to  take  effect  in  possession  or  enjoy- 
ment at  or  after  his  death,  except  in  case  of  a  bona  fide  sale  for  a  fair  con- 
sideration in  money  or  money's  worth.  Any  transfer  of  a  material  part  of 
his  property  in  the  nature  of  a  final  disposition  or  distribution  thereof,  made 
by  the  decedent  within  two  years  prior  to  his  death  without  such  a  considera- 
tion, shall,  unless  shown  to  the  contrary,  be  deemed  to  have  been  made  in 
contemplation  of  death  within  the  meaning  of  this  title:    .    .  ." 

503  Under  the  assumption  that  the  Act  was  applicable  to  the  deed  made 
by  Augusta  Dickel  to  the  Detroit  Trust  Company  a  tax  was  assessed 

and  exacted  from  plaintiff  in  error  (here  called  plaintiff)  in  the  sum  of 
$56,548.41.  Plaintiff  paid  it  under  protest  and  then  to  recover  it  brought 
this  action  in  the  District  Court  of  the  United  States  for  the  Western  District 
of  Michigan,  Southern  Division. 

504  A  jury  being  impaneled  to  try  the  case,  the  plaintiff  presented  his 
contentions  in  requests  for  charges.    These  were,  (1)  to  find  for 

plaintiff.  (2)  Upon  refusal  of  the  court  .to  so  charge  but  not  otherwise,  that 
the  deed  of  Mrs.  Dickel  to  the  Detroit  Trust.  Company  took  effect  more  than 
a  year  before  the  enactment  of  the  Act  of  September  8,  1916,  that  is,  took 
effect  immediately,  not  in  possession  or  enjoyment  at  or  after  the  death  of 
Mrs.  Dickel.  (3)  The  words  "in  contemplation  of  death"  do  not  refer  to 
that  general  expectation  of  death  which  every  mortal  entertains,  but  rather 
the  apprehension  which  arises  from  some  existing  condition  of  body  or  some 
impending  peril.  (4)  If  Mrs.  Dickel  when  she  made  the  trust  deed  was  not 
in  that  apprehension  arising  from  that  condition  of  body  or  of  an  ffrtpeiiding 
peril,  it  was  not  made  within  the  meaning  of  the  Act  of  Congress.  (5)  Mrs. 
Dickel  having  made  the  deed  before  the  Act  of  Congress  was  passed,  her 
purpose  was  not  to  defeat  or  evade  the  Federal  Revenue  haw. 

505  There  were  other  requests  for  instructions  to  the  jury  not  material 
to  be  considered  except  that  the  Act  of  Congress  was  not  retrospective 

in  character  and,  therefore,  did  not  impose  a  tax  on  the  deed  from  Mrs. 
Dickel  to  the  Trust  Company.  And  that  if  it  could  be  considered  to  have 
that  character  and  effect,  it  would  be  unconstitutional  and  void  as  a  denial 
of  due  process  of  law,  and  the  taking  of  private  property  for  public  use 


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without  just  compensation,  contrary  to  the  Fourteenth  Amendment  of  the 
Constitution  of  the  United  States. 

506  The  court  ruled  against  all  of  the  requests  so  far  as  the  court  con- 
sidered them  as  presenting  questions  of  law,  but  considered  that 
whether  the  trust  deed  was  made  in  contemplation  of  death  was  a  question 
for  the  jury  and  submitted  it  to  them,  with  aiding  and  defining  explanations, 
and  concluded  by  declaring,  "the  whole  question  is  the  question  whether  the 
transfer  was  made  in  contemplation  of  death;  that  is  all  there  is  to  it." 
607  The  verdict  of  the  jury  was  in  favor  of  the  defendant,  upon  which 
judgment  was  duly  entered.  It  was  affirmed  by  the  Circuit  Court 
of  Appeals  (269  Fed.  321),  to  the  action  of  which  this  writ  of  error  is  directed. 

508  Plaintiff  urges  against  the  judgment  of  the  Circuit  Court  of  Appeals 
all  of  the  contentions  presented  in  his  requests  made  to  the  District 

Court  for  instructions  to  the  jury,  but  so  diverse  and  extensive  consideration 
is  only  necessary  if  the  Act  of  Congress  be  of  retrospective  operation.  To 
that  proposition  we  shall,  therefore,  address  our  attention. 

509  The  initial  admonition  is  that  laws  are  not  to  be  considered  as  apply- 
ing to  cases  which  arose  before  their  passage  unless  that  intention 

be  clearly  declared.  1  Kent.  455;  Eidman  v.  Martinez,  184  U.  S.  578;  White 
v.  United  States,  191  U.  S.  545;  Gould  v.  Gould,  245  U.  S.  151;  Story,  Const, 
Sec.  1398.  The  comment  of  Story  is,  "restrospective  laws  are,  indeed,  gen- 
erally unjust;  and,  as  has  been  forcibly  said,  nefther  accord  with  sound 
legislation  nor  with  the  fundamental  principles  of  the  social  compact." 

510  There  is  absolute  prohibition  against  them  when  their  purpose  is 
punitive;  they  then  being  denominated  ex  post  facto  laws.    It  is 

the  sense  of  the  situation  that  that  which  impels  prohibition  in  such  case 
exacts  clearness  of  declaration  when  burdens  are  imposed  upon  completed 
and  remote  transactions,  or  consequences  given  to  them  of  which  there  could 
have  been  no  foresight  or  contemplation  when  they  were  designed  and  con- 
summated. 

61  1       The  Act  of  September  8,  1916,  is  within  the  condemnation. 

512  There  is  certainly  in  it  no  declaration  of  retroactivity,  "clear,  strong 
and  imperative,"  which  is  the  condition  expressed  in  United  States 

v.  Heth,  3  Cranch  398,  413;  also  United  States  v.  Burr,  159  U.  S.  78,  82-83. 

513  If  the  absence  of  such  determining  declaration  leaves  to  the  statute 
a  double  sense,  it  is  the  command  of  the  cases,  that  that  which  rejects 

retroactive  operation  must  be  selected. 

514  The  circumstances  of  this  case  impel  to  such  selection.    If  retro- 
activity be  accepted,  what  shall  mark  its  limit?    The  Circuit  Court 

of  Appeals  found  the  interrogation  not  troublesome.  It  said,  "Congress 
would,  we  think,  scarcely  be  impressed  with  a  practical  likelihood  that  a 
transfer  made  many  years  before  a  grantor's  death  (say  twenty-five  years,  to 
use  plaintiff's  suggestion)  would  be  judicially  found  to  be  made  in  contem- 
plation of  death  under  the  legal  definition  applicable  thereto,  and  without 
the  aid  of  the  two  years  prima  facie  provision."  In  other  words,  the  sense 
of  courts  and  juries,  good  or  otherwise,  might,  against  the  words  of  the 
statute,  and  against  what  might  be  the  evidence  in  the  case,  unhelped  by 
the  presumption  declared,  fix  the  years  of  its  retrospect.  This  would  seem 
to  make  the  difficulty  or  ease  of  proof  a  substitute  for  the  condition  which  the 
statute  makes  necessary  to  the  imposition  of  the  tax,  that  is,  the  disposition 
with  which  the  transfer  is  made;  and  certainly  whether  that  disposition 
exist  at  an  instant  before  death  or  years  before  death,  it  is  a  condition  of  the 
tax. 

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615  The  construction  of  the  Government  is  more  tenable  though  more 
unrestrained.  It  accepted  in  bold  consistency,  at  the  oral  argument, 
the  challenge  of  twenty-five  years,  and  a  ruling  of  the  Commissioner  of 
Internal  Revenue,  in  bolder  confidence,  extends  the  statute  to  "transfers  of 
any  kind  made  in  contemplation  of  death  at  any  time  whatsoever  (italics  ours) 
prior  to  September  8,  1916."  The  sole  test  in  the  opinion  of  that  officer  is 
"the  date  of  the  death  of  the  decedent."  He  fixes  no  period  to  the  retrospect 
he  declares,  but  reserves,  if  he  be  taken  at  his  word,  the  transfers  of  all 
times  to  the  demands  of  revenue.  In  this  there  is  much  to  allure  an  admin- 
istrative officer.  Indeed,  its  simplicity  attracts  anyone.  It  removes  puzzle 
from  construction  and  perplexity  and  pertinence  on  account  of  the  distance 
of  death  from  the  transfer,  risking  no  chances  of  courts  or  juries,  in  repug- 
nance or  revolt,  taking  liberties  with  the  Act  to  relieve  from  its  exactions  to 
the  demands  of  revenue. 

516  If  Congress,  however,  had  the  purpose  assigned  by  the  Commis- 
sioner it  should  have  declared  it;  when  it  had  that  purpose  it  did 
declare  it.  In  the  Revenue  Act  of  1918  it  reenacted  Section  202  of  the  Act 
of  September  8,  1916,  and  provided  that  the  transfer  or  trust  should  be 
taxed  whether  "made  or  created  before  or  after  the  passage  of"  the  Act. 
And  we  cannot  accept  the  explanation  that  this  was  an  elucidation  of  the 
Act  of  1916,  and  not  an  addition  to  it,  as  averred  by  defendant,  but  regard 
the  Act  of  1918  rather  as' a  declaration  of  a  new  purpose;  not  the  explanation 
of  an  old  one.  But  granting  the  contention  of  the  defendant  has  plausibility, 
it  is  to  be  remembered  that  we  are  dealing  with  a  tax  measure  and  whatever 
doubts  exist  must  be  resolved  against  it. 

617  This  we  have  seen  is  the  declaration  of  the  cases  and  this  the  basis 
of  our  decision,  that  is,  has  determined  our  judgment  against  the 
retroactive  operation  of  the  statute.  There  are  adverse  considerations  and 
the  Government  has  urged  them  all.  To  enter  into  a  detail  of  them  or  of 
the  cases  cited  to  sustain  them  and  of  those  cited  to  oppose  them,  either 
directly  or  in  tendency,  and  the  examples  of  the  States  for  and  against  them, 
would  extend  this  opinion  to  repellent  length.  We  need  only  say  that  we 
have  given  careful  consideration  to  the  opposing  argument  and  cases,  and  a 
careful  study  of  the  text  of  the  Act  of  Congress,  and  have  resolved  that  it 
should  be  not  construed  to  apply  to  transactions  completed  when  the  Act 
became  a  law.  And  this,  we  repeat,  is  in  accord  with  principle  and  authority. 
It  is  the  proclamation  of  both  that  a  statute  should  not  be  given  a  retrospective 
operation  unless  its  words  make  that  imperative  and  this  cannot  be  said  of 
the  words  of  the  Act  of  September  8,  1916. 

Judgment  reversed. 


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In  Error  to  the  District  Court 
of  the  United  States  for  the 
Northern  District  of  Cal- 
ifornia. 


(Decision.) 
(Revenue  Act  of  1916.) 

The  text  of  the  1916  Act  is  not  to  be  construed  as  applying  to  transfers 
intended  to  take  effect  in  possession  or  enjoyment  at  or  after  death,  etc., 
which  transfers  were  completed  before  the  passage  of  the  Act. 

Supreme  Court  of  the  United  States. 

Union  Trust  Company  of  San  Francisco  and 
Albert  Lachman,  as  Executors  of  the  last 
will  and  testament  of  Henriette  S.  Lach- 
man, deceased,  Plaintiffs  in  Error, 
vs. 

Justus  S.  Wardell,  United  States  Collector  of 
Internal  Revenue  for  the  First  District  of 
California,  and  John  L.  Flynn,  United 
States  Collector  of  Internal  Revenue  for  the 
First  District  of  California. 

[May  1,  1922.] 

Mr.  Justice  McKenna  delivered  the  opinion  of  the  Court. 
518      This  case  was  argued  at  the  same  time  and  submitted  with  No.  200, 
10      Shzuab  v.  Doyle,  just  decided  [1J499].    It  involves,  as  that  case  did, 
110      the  Estate  Tax  Act  of  September  8,  1916,  and  its  different  facts 
427      illustrate  and  aid  the  principle  upon  which  that  case  was  decided. 
619       Plaintiffs  in  error  are  executors  of  the  last  will  and  testament  of 
Henriette  S.  Lachman,  deceased.    They  were  also  parties  to  a  trust 
deed  made  by  her  during  her  lifetime.    They  sued  defendant  in  error  Wardell, 
he  then  being  United  States  Collector  of  Internal  Revenue  for  the  First 
District  of  California  to  recover  the  sum  of  $4,545.50  that  being  the  amount 
of  a  tax  assessed  against  the  estate  of  Henriette  S.  Lachman,  upon  the  value 
of  4,985  shares  of  stock  transferred  in  trust  by  Henriette  S.  Lachman  to 
trustees  upon  the  assumption  that  the  Act  of  Congress  of  September  8,  1916 
was  applicable  to  the  trust. 

S20  The  following  is  a  summary  of  the  facts  stated  narratively.  On 
May  31,  1901,  Henriette  S.  Lachman  was  the  owner  of  7,475  shares  of 
capital  stock  of  the  S.  &  H.  Lachman  Estate,  a  corporation.  On  that  date 
she  executed  and  delivered  to  Albert  Lachman  and  Henry  Lachman,  her  sons, 
the  following  instrument: 

"Almeda,  Cal.,  May  31,  1901. 
"To  Albert  Lachman  and  Henry  Lachman,  my  sons: 

"This  is  to  certify  that  I  have  delivered  to  you  seven  thousand  four 
hundred  and  seventy-five  (7,475)  shares  of  the  capital  stock  of  the  S.  &  LI. 
Lachman  Estate,  represented  by  certificates,  numbers  eleven  (11),  twelve 
(12)  and  thirteen  (13)  respectively,  however,  upon  the  following  trust: 

"To  pay  to  me  during  my  lifetime,  all  the  income  earned  and  derived 
therefrom,  and,  upon  my  death,  to  deliver  two  thousand  four  hundred  and 
ninety  (2,490  )shares,  respectively  by  certificates  number  eleven  (11)  unto 
Henry  Lachman,  thenceforth  for  his  absolute  property;  two  thousand  four 
hundred  and  ninety-five  (2,495)  shares,  represented  by  certificate  number 
thirteen  (13)  unto  Albert  Lachman,  thenceforth  for  his  absolute  property; 
and  yourselves,  to-wit,  Albert  and  Flenry  Lachman,  to  hold  two  thousand 

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four  hundred  and  ninety  (2,490)  shares,  represented  by  certificate  number 
twelve  (12)  upon  my  death,  in  trust  paying  the  income  derived  therefrom 
unto  my  daughter,  Rebecca,  wife  of  Leo  Metzger,  and  upon  the  death  of  my 
said  daughter,  the  income  and  earnings  derived  from  said  two  thousand  four 
hundred  and  ninety  (2,490)  shares  shall  be  held,  or  expended,  by  you,  accord- 
ing to  your  judgment,  for  the  benefit  of  my  grandchildren,  the  children  of 
my  said  daughter,  Rebecca  Metzger,  and  upon  the  youngest  of  said  children 
attaining  the  age  of  majority,  all  the  then  surviving  children  of  my  said 
daughter,  Rebecca  Metzger,  shall  be  immediately  entitled  to  said  two  thou- 
sand four  hundred  and  ninety  (2,490)  shares  in  equal  proportions. 

Henriette  Lachman." 

52 1  The  requirements'of  the  deed  were  performed  upon  the  contingencies 
occurring  for  which  it  provided. 

522  On  November  14,  1916,  Henriette  S.  Lachman  died,  being  then  a 
resident  of  Alameda  County,  California,  leaving  an  estate  of  the 

value  of  $302,963.64,  which  included  2,490  shares  of  the  stock  that  passed 
to  her  upon  the  death  of  her  husband  and  25  shares  of  stock  in  a  business 
that  had  been  conducted  by  her  husband  but  did  not  include  the  transfer 
of  the  4,985  shares  included  in  the  trust  deed. 

523  The  will  was  duly  probated  and  the  tax  under  the  Act  of  September 
8,  1916,  was  paid  on  the  property  which  passed  under  her  will,  but 

no  tax  was  paid  on  the  4,985  shares  transferred  15  years  before  by  the  trust 
deed. 

524  The  Commissioner  having  ruled  that  those  shares  were  subject  to  a 
tax,  assessed  against  them  the  sum  of  $4,545.50.    It  was  paid  under 

protest  and  this  action  was  brought  for  its  recovery. 

525  Wardell  demurred  to  the  complaint  on  the  ground  that  it  did  not 
state  facts  sufficient  to  constitute  a  cause  of  action  against  him.  The 

demurrer  was  sustained  and  judgment  entered  dismissing  the  complaint. 

526  Stating  the  contention  of  the  plaintiffs,  the  court  said  it  was  that 
"the  act  should  not  be  construed  as  to  include  transfers  made  prior 

to  its  passage,  and  that  if  it  be  so  construed  the  act  is  unconstitutional." 
The  court  observed  that  "both  of  these  questions  were  determined  adversely 
to  the  plaintiffs  by  the  Circuit  Court  of  Appeals  for  the  Eighth  Circuit  in 
Shwab,  Executor  v.  Doyle,  not  yet  reported."  And  said  further,  "In  that 
case  the  transfer  was  made  in  contemplation  of  death,  whereas  in  the  present 
case  the  transfer  was  intended  to  take  effect  in  possession  or  enjoyment  at 
or  after  death,  but  manifestly  the  same  rule  of  construction  will  apply  to 
both  provisions,  and  the  same  rule  of  constitutional  validity." 

527  The  court,  while  apparently  relying  on   Shzvab  v.   Doyle,  declared 
that  it  entertained  "no  doubt  that  the  act  was  intended  to  operate 

retrospectively,  and  a  contrary  construction  could  only  be  justified  on  the 
principle  that  such  a  construction  would  render  the  act  utl£6MtftMBft]ix.a' 

528  The  same  contentions  are  made  against  and  for  t he  ruling  of  the 
court  as  were  made  in  Shzvab  v.  Doyle.    It  is  not  necessary  to  repeat 

them.  They  are,  with  but  verbal  variations,  the  same  as  in  Sh;rab  v.  Doyle, 
and  the  Commissioner  so  considering,  submits  this  case  upon  his  brief  in  that. 

529  We  have  there  stated  them  and  passed  judgment  upon  that  which 
we  think  determines  the  case,  that  is,  the  retroactivity  of  the  Act  of 

September  8,  1916.  The  facts  in  this  case  fortify  the  reasoning  in  that.  In 
this  case  the  Act  is  given  operation  against  an  instrument  executed  15  year* 
before  the  passage  of  the  Act. 

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630      The  record  exhibits  proceedings  that  should  be  noticed.   The  de- 
murrer of  Wardell  was  sustained  to  the  complaint,  and  a  judgment 
of  dismissal  entered  January  13,  1921. 

531  On  February  2,  1921,  plaintiffs  gave  notice  of  a  motion  to  substitute 
John  S.  Flynn  as  defendant  in  the  place  and  stead  of  Wardell  in  so 
far  as  the  action  was  against  Wardell  in  his  official  capacity,  and  to  permit 
it  to  be  continued  and  prosecuted  against  him  so  far  as  it  was  against  him 
personally. 

53  2      The  grounds  of  the  motion  were  stated  to  be  that  he  had  resigned 
and  Flynn  had  been  appointed  his  successor  and  was  then  the  acting 
Collector. 

533  On  February  7,  1921,  the  motion  was  granted.    The  order  of  the 
court  recited  the  resignation  of  Wardell  and  the  succession  of  Flynn. 

And  it  being  uncertain  as  to  whether  this  was  a  proper  case  for  the  substitu- 
tion of  Flynn  or  was  one  which  should  proceed  against  Wardell,  and  it  ap- 
pearing to  the  court  on  motion  of  plaintiffs  that  it  was  necessary  for  the 
survivor  to  obtain  a  settlement  of  the  questions  involved,  it  was  ordered  that 
so  far  as  the  action  was  against  Wardell  in  his  official  capacity,  it  might  be 
sustained  against  Flynn  as  his  successor,  and  that  so  far  as  it  was  against 
Wardell  personally,  it  should  be  continued  against  him.  And  it  was  ordered 
that  the  action  should  thereafter  proceed  against  Flynn  and  Wardell  without 
further  pleadings  or  process. 

534  On  February  9,  1921,  Flynn  filed  an  appearance  by  attorneys  which 
recited  that  he  had  been  substituted  in  the  place  of  Wardell  in  so  far 

as  the  action  was  against  Wardell  in  his  official  capacity,  and  thereby  appeared 
in  the  action  as  such  defendant. 

535  It  will  be  observed  that  there  was  no  resistance  to  the  motion  of 
substitution  of  Flynn  nor  exception  by  him,  and  that  he  almost 

immediately  appeared  in  the  action  in  compliance  with  the  order  of  the 
court.  The  subsequent  proceedings  were  directed  as  much  against  him  as 
against  Wardell,  the  bond  upon  the  writ  of  error  running  to  both. 
53  6  However,  this  Court  decided  in  Smietanka,  Collector  v.  Indiana  Steel 
Company,  October  24th  of  this  term,  that  a  suit  may  not  be  brought 
against  a  Collector  of  Internal  Revenue  for  the  recovery  of  a  tax,  in  the  col- 
lection and  disbursement  of  which,  such  officer  had  no  agency.  We  think 
the  bringing  of  Flynn  into  the  case  was  error.  Therefore,  upon  the  return 
of  the  case  to  the  District  Court,  he  shall  be  permitted  to  set  up  the  defense 
of  non-liability,  if  he  be  so  advised,  and,  if  he  set  up  the  defense,  it  shall  be 
ruled  as  sufficient  for  the  reasons  we  have  given. 

judgment  reversed  and  cause  remanded 
for  further  proceedings  in  accordance 
with  this  opinion. 


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(Decision.) 
(Revenue  Act  of  1916.) 

The  text  of  the  1916  Act  is  not  to  be  construed  as  applying  to  transfers 
in  contemplation  of  death,  etc.,  completed  before  the  passage  of  the  Act. 

Supreme  Court  of  the  United  States. 


In  Error  to  the  District 
Court  of  the  United 
States  for  the  Northern 
District  of  California. 


Harriet  J;.  Levy,  Pauline  Jacobs  and  Adeline 
Salinger,  Plaintiffs  in  Error, 
vs. 

Justus  S.  Wardell,  United  States  Collector  of 
Internal  Revenue  for  the  First  District  of 
California,  and  John  L.  Flynn,  United  States 
Collector  of  Internal  Revenue  for  the  First 
District  of  California. 

[May  1,  1922.] 

Mr.  Justice  McKenna  delivered  the  opinion  of  the  Court. 
53  7      The  case  was  determined  in  the  court  below  upon  demurrer  to  the 
10      complaint.  The  complaint  alleged  that  on  the  19th  day  of  December, 
108      1902,  and  for  sometime  prior  thereto,  Henriette  Levy  was  the  owner 
427      of  22,014  shares  of  the  capital  stock  of  the  Levy  Estate  Company,  a 
corporation.    On  that  date  she  conveyed  to  the  plaintiffs  Harriet 
L.  Lev}-,  Pauline  Jacobs  and  Adeline  Salinger,  each  5,000  shares  of  that 
stock.    On  the  14th  day  of  January,  1903,  she  conveyed  to  these  plaintiffs 
2,660  shares  each. 

538  On  the  17th  day  of  January,  1907,  she  and  the  plaintiffs  entered 
into  an  agreement,  which  recited  errors  made  in  the  issue  of  the 

stock,  and  agreed  that  the  number  of  shares  to  which  each  was  entitled  was 
as  follows:  to  Henriette  Levy  10  shares,  to  Harriet  L.  Levy  7,328  shares,  to 
Pauline  Jacobs  7,338  shares,  to  Adeline  Salinger  7,337  shares  and  to  Ruth 
Salinger  1  share. 

539  On  the  same  date  the  agreement  was  carried  out  by  the  board  of 
directors  of  the  company,  and  on  that  date  Henriette  Levy  conveyed 

her  10  shares  to  Harriet  L.  Levy. 

540  The  transfers  of  the  stock  to  plaintiffs  were  complete  and  there  were 
no  agreements  or  stipulations  by  which  Henriette  Levy  would  be 

entitled  to  a  return  of  the  stock  except  that  the  plaintiffs  promised  and  agreed 
to  pay  to  her  the  dividends  accruing  thereon  during  her  lifetime,  she,  however, 
retaining  no  testamentary  disposition  or  any  legal  right  whatsoever  over  the 
stock  or  any  of  it,  or  any  right  of  revocation. 

541  Llenriette  Levy  at  the  time  of  the  transfers  was  in  good  health  and 
made  them  to  get  rid  of  the  care  and  worry  of  business  and  to  vest 

in  plaintiffs  definite  and  irrevocable  present  rights  of  ownership  in  the  stock, 
and  the  transfers  were  not  in  contemplation  of,  or  intended  to  take  effect  in 
possession  or  enjoyment  at  or  after  her  death. 

542  She  died  on  the  15th  day  of  December,  1916,  being  at  that  time,  and 
at  the  time  of  the  transfers,  a  resident  of  Alameda  County,  California. 

Plaintiffs  are  her  surviving  children  and  were  at  such  time,  and  arc  now, 
residents  of  the  State. 

543  She  left  no  property  or  estate  or  assets  whatever,  and  consequently, 
there  was  no  estate  to  administer,  nor  any  estate  upon  which  any 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


tax  could  be  levied.  Notwithstanding  the  facts,  the  Commissioner  of  Internal 
Revenue  of  the  United  States,  assuming  to  act  under  the  provisions  of  the 
Act  of  September  8,  1916,  attempted  to  levy  and  assess  a  tax  in  the  sum  of 
$12,460.84,  and  demanded  and  threatened  to  enforce  payment  of  the  same. 
In  consequence  thereof  the  plaintiffs  paid  the  tax.  Subsequently  they  de- 
manded a  refund  of  the  tax  which  demand  was  refused. 

544  At  the  time  of  the  transfers  there  was  no  law  of  the  State  of  California 
imposing  any  transfer  or  inheritance  tax,  nor  was  there  a  law  of  the 

United  States  to  that  effect,  and  all  of  the  transfers  were  intended  to  take 
effect  in  possession  and  enjoyment  upon  their  date.  The  Act  of  Congress, 
therefore,  should  not  be  construed  to  be  retroactive,  and  if  so  construed,  was 
in  violation  of  the  Constitution  of  the  United  States  in  that  it  would  take  the 
property  of  plaintiffs  without  due  process  of  law  in  violation  of  the  Fifth 
Amendment,  and  would  not  be,  besides,  a  transfer  tax  or  an  indirect  tax  but. 
would  be  a  direct  tax  thereon  in  violation  of  Article  1,  Section  9,  subdivision  4 
of  the  Constitution  of  the  United  States  because  not  laid  in  proper  relation 
to  census  or  enumeration  as  therein  provided. 

545  Judgment  was  prayed  for  the  sum  of  $12,460.84  with  interest  from 
the  26th  day  of  December,  1917. 

546]     Wardell  filed  a  demurrer  to  the  complaint  which  was  sustained,  and 
the  action  dismissed.  To  that  judgment  this  writ  of  error  is  directed. 
For  the  reasons  stated  in  Shwab  v.  Doyle  [1f499],  we  think  the  judgment  was 
erroneous. 

647  There  was  a  proceeding  in  the  case  to  which  we  must  give  attention. 
The  judgment  of  dismissal  was  entered  January  20,  1921.  On 

February  14,  1921,  an  order  of  the  court  was  made  and  entered  which  recited 
the  resignation  of  Wardell  as  Collector  and  the  appointment  of  John  L. 
Flynn  as  Collector,  and  as  doubts  existed  as  to  whether  the  case  was  proper 
for  the  substitution  of  Flynn  as  successor  of  Wardell,  it  was  ordered  that  so 
far  as  the  action  was  against  Wardell  in  his  official  capacity,  the  same  might 
be  maintained  against  Flynn,  and  that  so  far  as  it  was  against  Wardell 
personally,  it  might  be  continued  against  him  personally  without  further 
pleadings  or  process. 

648  On  February  15,  1921,  Flynn  enteredjhis  appearance  which,  after 
reciting  the  fact  of  his  substitution  as  defendant  in  place  of  Wardell, 

in  so  far  as  the  action  was  against  Wardell  in  his  official  capacity,  declared 

that  he,  Flynn,  appeared  in  the  "action  as  such  defendant." 

549      It  will  be  observed  that  there  was  no  resistance  by  Flynn  to  his 

substitution  and  the  subsequent  proceedings  were  directed  as  much 
against  him  #as  against  Wardell,  the  bond  upon  the  writ  of  error  running  to 
both.  As  we  have  said,  however,  in  Union  Trust  Company  et  al.  v.  Wardell 
and  Flynn  (No.  236)  [1(518],  this  Court  decided  in  Smietanka,  Collector  v. 
Indiana  Steel  Company,  October  24th  of  this  term,  that  an  action  could  not 
be  maintained  against  a  Collector  of  Internal  Revenue  for  the  recovery  of  a 
tax  in  the  collection  and  disbursement  of  which  he  had  no  agency. 
560      This  was  Flynn's  situation  and  bringing  him  into  the  case  was  error. 

Therefore,  upon  return  of  the  case  to  the  District  Court  he  shall  be 
permitted  to  set  up  the  defense  of  non-liability,  if  so  advised,  and,  if  he  set 
up  the  defense,  it  shall  be  ruled  as  sufficient  for  the  reasons  we  have  given. 

Judgment  reversed  and  cause 
remanded  for  further  proceedings  in 
accordance  with  this  opinion. 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


(Decision.) 
(Revenue  Acts  of  1916-1917.) 

The  text  of  the  1916  Act  is  not  to  be  construed  as  applying  to  transfers  in 
contemplation  of  death,  etc.,  completed  before  the  passage  of  the  Act. 

Supreme  Court  of  the  United  States. 

John  C.  Knox,  as  surviving  executor  of  the  last 

will  and  testament  of  Jonas  B.  Kissam,  de-  In  Error  to  the  United 
ceased,  et  al.,  Plaintiffs  in  Error,  States  Circuit  Court  of 

vs.  >     Appeals  for  the  Second 

Richard    J.   McElligott,   as   late   Collector  of  Circuit. 

Internal  Revenue  for  the  Third  District  of 
*    New*j  York. 

[May  I,  1922.] 

Mr.  Justice  McKenna  delivered  the  opinion  of  the  Court. 

551  This  case  involves  the  same  principles  and  contentions  passed  on  in 
10      Nos.  200  [1f499],  236  [*1518]  and  303  [1f537].    It,  as  they,  is  an  action 

108  to  recover  a  tax  ($11,819.74)  assessed  by  the  Commissioner  of 
427  Internal  Revenue  as  an  additional  estate  tax  on  the  estate  of  Jonas 
B.  Kissam,  deceased,  under  the  Act  of  September  8,  1916,  as  amended 

in  1917.    It,  the  action,  was  brought  in  the  United  States  District  Court  for 

the  Southern  District  of  New  York. 

552  The  complaint  was  a  voluminous  paper  and  contained  at  least  four 
causes  of  action.  As  to  the  first,  consisting  of  twenty-two  para- 
graphs, Elligott  filed  a  demurrer.  Plaintiff  made  a  motion  for  judgment  on 
the  pleadings.  The  motion  was  granted  and  a  final  judgment  was  awarded 
against  "defendant  on  the  merits  for  the  relief  prayed  for  in  the  first  cause  of 
action  set  forth"  in  the  complaint. 

553  The  judgment  was  reversed  by  the  Circuit  Court  of  Appeals,  275 
Fed.  546. 

554  The  following  four  paragraphs  are  a  summary  of  the  allegations  of 
the  complaint  stated  narratively: 

555  In  1912  the  decedent,  Jonas  B.  Kissam,  was  the  owner  of  certain 
bonds  and  mortgages  and  corporate  bonds.  In  that  year  he  con- 
veyed the  property  to  the  plaintiff  in  error,  John  C.  Knox  who,  shortly 
thereafter,  reconveyed  the  same  to  Kissam  and  his  wife  Cornelia  B.  Kissam. 
as  joint  tenants.   All  of  the  parties  resided  in  the  State  of  New  York. 

556  In  1917  Kissam  died  leaving  Mrs.  Kissam  surviving  him.    She  was 
made  one  of  the  executors  of  the  will  as  well  as  sole  beneficiary 

thereunder. 

557  On  December  7,  1917,  she  as  executrix  and  Knox  as  executor,  made 
a  return  of  the  Federal  Estate  Tax  on  the  entire  estate  of  Jonas  B. 

Kissam.  They  included  in  the  return  the  value  of  one-half  of  the  jointly 
owned  property  which  was  owned  and  enjoyed  by  decedent,  but  did  not 
include  the  value  of  the  one-half  of  the  jointly  owned  property  which  had 
been  owned  and  enjoyed  by  Mrs.  Kissam  since  the  creating  of  the  joint 
estates  in  July  and  August  of  1912. 

558  A  tax  of  $5,354.14  based  upon  the  return  was  paid  by  the  plaintiffs 
in  error.    On  May  9,  1919,  the  Commissioner  of  Internal  Revenue 

added  to  the  estate  the  one-half  interest  of  the  value  of  the  estate  and  assessed 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


as  a  tax  in  addition  to  that  which  was  paid,  the  sum  of  $13,668.60.  The 
additional  tax  was  paid  under  protest  and  to  recover  it  is  the  purpose  of  the 
action. 

559  The  Circuit  Court  of  Appeals  stating  the  contention  of  the  executors 
said,  that  "they  claimed  that  the  assessment  was  void  as  to  the  half 

of  the  joint  property  which  vested  in  Cornelia  [Mrs.  Kissam]  before  the 
passage  of  the  Act  of  September  8,  1916,  as  amended,  and  also  that  the  Act 
itself  was  unconstitutional  as  a  direct  tax  upon  property  without  apportion- 
ment among  the  several  States  as  required  by  Article  1,  Section  9,  Sub- 
division 4,  of  the  Constitution." 

560  But  this  contention  was  the  alternative  of  the  contention  which 
plaintiffs  in  error  also  made,  that  the  Act  of  September  8,  1916,  as 

amended,  was  not  intended  to  have  retrospective  operation.  And  this  was 
the  decision  of  the  District  Court,  the  court  saying,  "It  is  true  section  201 
provides  that  the  tax  is  imposed  upon  the  transfer  of  the  net  estate  of  'every 
decedent  dying  after  the  passage  of  this  Act';  but  the  assumption  must  be 
that  this  relates  to  estates  thereafter  created  and  not  to  then  existing 
property."  And  the  court  added  "At  the  time  the  statute  was  passed  Cornelia 
Kissam's  interest  belonged  to  her."  The  court  further  observed,  "From 
the  structure  of  the  Act  to  say  that  the  measure  of  the  tax  is  the  extent  of 
the  interest  of  both  joint  tenants  is,  in  effect,  to  say  that  a  tax  will  be  laid  on 
the  interest  of  Cornelia  in  respect  of  which  Jonas  had  in  his  lifetime  no  longer 
either  title  or  control."  The  court  rejected  that  conclusion  and  denied  to 
the  Acts  of  Congress  retroactive  operation.  To  this  the  Circuit  Court  of 
Appeals  was  opposed  and  reversed  the  judgment  based  upon  it. 

561  It  will  be  observed,  therefore,  that  this  case  involves  the  same  ques- 
tion as  that  decided  in  Shwab  v.  Doyle  [11499],  and  on  the  authority 

of  that  case  the  judgment  of  the  Circuit  Court  of  Appeals  is  reversed  and  the 
cause  remanded  for  further  proceedings  in  accordance  with  this  opinion. 

So  ordered. 

(T.  D.  3324.) 
Decision  of  U.  S.  District  Court:  1916  Act. 

{Prior  to  U.  S.  Supreme  Court  Decisions  of  May  1,  1922.) 
[Syllabus  only,  1f563  to  If 566.] 

562  The  decision  of  the  United  States  District  Court  for  the  District  of 
10      Minnesota,  in  the  case  of  Clara  B.  Congdon,  Walter  B.  Congdon, 

110      Edward  C.  Congdon,  and  Marjorie  C.  Dudley  (formerly  Marjorie 

427      Congdon),  as  Executors  of  the  last  will  and  testament  of  Chester  A. 

518  Congdon,  deceased,  v.  Margaret  C.  Lynch,  as  Executrix  of  the  last 
will  and  testament  of  Edward  J.  Lynch,  deceased,  Collector  of 
Internal  Revenue  for  the  District  of  Minnesota,  substituted  in  place  of  Edward 
J.  Lynch,  as  Collector  of  Internal  Revenue  for  the  District  of  Minnesota, 
Deceased,  the  syllabus  of  which  appears  below  is  published,  not  as  a  ruling 
of  the  Treasury  Department,  but  for  the  information  of  internal  revenue 
officers  and  others  concerned.  (T.  D.  3324,  May  6,  1922.) 
663  1.  Constitutionality  of  Act. — Title  II,  Act  of  September  8,  1916, 
imposing  an  estate  tax,  is  constitutional.  Decision  of  the  United 
States  Supreme  Court  in  New  York  Trust  Co.  v.  Eisner,  41  Sup.  Ct.  506, 

[1f390],  held  controlling. 

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6-10-22. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


564  2.    Estate  tax — Retroactivity.— Section  202(b)  of  the  Revenue  Act 
of  1916  is  retroactive,  and  applies  to  a  trust  executed  prior  to  the 

passage  of  the  Act,  to  take  effect  in  possession  or  enjoyment  at  or  after  the 
death  of  the  donor,  who  dies  after  the  passage  of  the  Act. 

565  3.   Trusts  to  Take  Effect  in  Possession  or  Enjoyment  at  or  After 
Donors  Death — Powers  Reserved  to  Donor  Evidence  of  Intention. 

— On  August  3,  1916,  decedent  placed  certain  securities  in  trust  by  an  in- 
strument in  writing  appointing  trustees  who  accepted  the  trust  and  dis- 
tributed the  income  to  the  beneficiaries  named.  Decedent  did  not  change 
the  terms  of  the  trust  prior  to  his  death  on  November  21,  1916.  The  trust 
did  not  expressly  provide  that  it  was  to  take  effect  in  possession  or  enjoy- 
ment at  or  after  the  donor's  death.  The  donor  reserved  neither  income,  a 
life  estate,  nor  the  right  to  revoke,  but  did  reserve:  (1)  the  right  to  change 
the  beneficiaries  and  their  respective  interests,  and  the  income  therefrom; 
(2)  the  right  to  change  the  trustees  and  the  number  of  the  trustees,  (the 
trustees  being  the  donor,  his  wife,  and  his  children);  (3)  the  right  to  modify 
the  period  of  the  trust;  (4)  the  right  to  change  the  disposition  of  the  trust 
fund  at  the  expiration  of  the  trust  period;  (5)  the  right  to  compel  the  trustees 
to  pay  out  of  the  income  or  principal  of  the  trust  premiums  on  any  insur- 
ance policies  on  the  donor's  life,  which  were  payable  to  any  beneficiary  or 
to  the  other  trustees  and  the  beneficiaries;  (6)  the  right  to  terminate  the 
trust  at  any  time  within  five  years — the  property  then  to  revert  to  the 
donor;  (7)  the  power  to  prevent  the  sale,  disposition,  pledge,  or  incum- 
brance of  certain  specified  securities,  his  written  consent  being  requisite; 
(8)  the  right  in  case  the  trust  should  end  during  the  donor's  life  to  secure 
the  reversion  to  the  donor.  Held,  that  the  management,  control,  and  dis- 
position retained  by  the  donor  was  complete,  except  that  he  could  not  make 
himself  a  beneficiary  of  the  trust  and  under  certain  circumstances  could  not 
secure  the  reversion  to  himself;  until  his  death,  when  the  reserved  rights 
would  cease,  the  trust  could  not  take  full  effect  in  complete  possession  or  in 
complete  enjoyment,  and  there  could  be  "no  element  of  finality"  about  the 
trust.  Although  donor  did  not  reserve  a  life  estate  in  himself  or  in  a  third 
person  during  his  life,  he  did  reserve  the  power  to  defeat  the  substantial 
rights  of  the  beneficiaries  and  as  far  as  the  beneficiaries  were  concerned, 
the  reserved  rights  were  tantamount  to  a  power  of  revocation.  In  conclu- 
sion the  court  held  that  the  trust  was  intended  to  take  possession  in  effect 
or  enjoyment  at  or  after  the  death  of  the  donor  and  was  within  the  provi- 
sions of  Section  202(b)  of  the  Revenue  Act  of  1916.  The  trust  property 
was,  therefore,  properly  included  in  the  gross  estate. 

566  4.   Net  Estate — Deduction  of  State  Inheritance  and  Succession 
Taxes. — Sums  paid  as  inheritance  or  succession  taxes  in  the  states 

of  Arizona,  Michigan,  Minnesota,  New  York  and  Washington;  may  not  be 
deducted  from  the  gross  estate  as  charges  against  the  estate,  under  the  pro- 
visions of  Section  203  of  the  Revenue  Act  of  1916.  Decision  of  United  States 
Supreme  Court  in  New  York  Trust  Co.  v.  Eisner,  41  Sup.  Ct.  506  ft390j, 
held  controlling.    (Syllabus  referred  to  in  1J562.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
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ESTATE  TAXES  REGULATIONS,  ETC.  —1922. 


(T.  D.  3325.) 

567       [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Nichols 
^467      vs.  Gaston  which  is  reproduced  in  full  herein  beginning  at  1[467. — 
The  Corporation  Trust  Company.] 


(T.  D.  3326.) 

568      [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Greiner 
497      vs.  Lewellyn,  which  is  reproduced  in  full  herein  beginning  at  ^[497. — 
The  Corporation  Trust  Company.] 


{Decision.) 
(Revenue  Act  of  1918.) 
May  16,  1922. 

The  tax  being  due  and  payable  one  year  after  decedents  death,  in- 
junctive relief  against  its  collection  by  distraint  within  the  180  day  period 
thereafter  will  not  be  granted,  there  being  ample  remedy  at  law  to  redress 
any  alleged  injury  consequent  on  enforced  payment  prior  to  the  expiration 
of  one  year  and  180  days. 


United  States  Circuit  Court  of  Appeals  for  the  Fip>.st  Circuit. 


Frank  A.  Page,  Individually  and  as  Collector  of 
Internal  Revenue, 
Defendant,  Appellant, 
v. 

Frank  L.  Polk  Et  Al.,  Executors, 
Plaintiffs,  Appellees. 


Appeal  from  the  District  Court  of  the  United  States 
for  the  District  of  Rhode  Island. 


569  Bingham,  J. — This  is  an  appeal  from  a  final  decree  of  the  District 
223  Court  for  Rhode  Island  [1[355  herein]  in  a  suit  in  equity  brought  by 
225  Frank  L.  Polk  and  the  United  States  Trust  Company  of  New  York, 
315      Executors  of  the  Estate  of  Josephine  Brooks,  against  Frank  A.  Page 

individually  and  as  Collector  of  Internal  Revenue  for  the  District  of 
Rhode  Island,  restraining  the  latter  from  collecting  a  tax  assessed  against 
the  estate. 

570  The  complainants  are  citizens  of  New|York  and  the  defendant  is  a 
citizen  of  Rhode  Island.  Josephine  Brooks  died  August  17,  1920.  The 

complainants  duly  filed  their  return  setting  forth  the  value  of  the  estate,  and 
the  Commissioner  of  Internal  Revenue  assessed  thereon  a  tax  of  $245,787.67, 
under  Title  IV  of  the  Revenue  Act  of  February  24,  1919  (Stat,  at  Large,  p. 
1096).  i  The  jurisdiction  of  the  District  Court,  as  a  federal  court,  is  involved 
on  the  ground  of  diverse  citizenship  and  that  the  amount  involved  exceeds 

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ESTATE  TAXES  REGULATIONS,  ETC.- -1922. 


five  thousand  dollars  exclusive  of  interest  and  costs;  also  on  the  ground  that 
the  suit  is  one  arising  under  the  internal  revenue  laws  of  the  United  States. 

571  There  is  no  controversy  as  to  the  legality  or  amount  of  the  tax  as- 
sessed against  the  estate.    The  complainants  contend  that  under 

Section  408  of  the  Act  of  1919,  they  are  given  a  year  and  180  days  after  their 
testatrix's  death  in  which  to  pay  the  tax,  even  though  the  Commissioner  of 
Internal  Revenue  had  not  extended  the  time  of  payment  under  Section  406 
for  180  days  after  its  due  date,  and  that  the  defendant  was  not  authorized  to 
enforce  its  collection  by  distraint  or  otherwise  until  after  the  expiration  of 
180  days;  that  in  violation  of  this  right,  the  defendant,  pretending  to  act  in 
his  capacity  as  collector,  on  the  28th  day  of  September,  1921,  and  before  the 
180  days  had  expired,  notified  the  con  plainants  that,  unless  the  tax  was  paid 
within  ten  days,  he  should  proceed  to  collect  the  same,  with  costs,  by  seizure 
and  sale  of  property;  that  under  Section  408  of  the  Act  of  1919  the  collector 
is  prevented  from  collecting  the  tax  by  distraint  or  otherwise  within  180  days; 
and  that  the  threatened  seizure,  if  carried  out,  would  have  been  unauthorized 
and  an  act  not  done  by  him  in  his  official  capacity  or  with  color  of  law.  They 
further  contend  and  allege  in  their  bill  that  if,  to  avoid  such  threatened  dis- 
traint, they  at  this  time  paid  the  tax,  they  would  be  remediless  in  law,  as  they 
had  the  privilege,  under  Section  406,  of  paying  the  tax  at  any  time  down  to 
February  13,  1922,  without  interest.  It  was  also  alleged  in  the  bill  that  the 
payment  of  the  tax  at  the  time  of  the  con-mencement  of  the  suit  rather  than 
on  February  13,  1922,  would  subject  the  estate  to  loss  of  interest  on  the  money 
during  the  interim  in  excess  of  five  thousand  dollars,  and  would  subject  the 
estate  to  the  difficulty  of  converting  the  assets  into  cash  for  immediate  pay- 
ment of  a  large  sum  of  money.  ,  But  it  appears  in  the  final  decree  that  it  was 
stipulated  in  open  court  that  the  coir  plainants  had,  at  the  time  of  the  com- 
mencement of  the  suit  and  at  the  time  of  entering  the  decree,  assets  in  their 
hands  sufficient  to  meet  the  tax,  and  that  the  loss  which  they  would  have 
sustained  by  the  payment  would  have  been  the  interest  on  the  tax,  unless 
they  were  able  to  recover  it  back  from,  the  United  States. 

572  It  was  decreed  that  the  payment  of  the  tax  was  "not  required  by 
law  or  compellable  by  distraint  until  one  year  and  180  days  after 

the  death  of  Josephine  Brooks,  which  occurred  on  the  seventeenth  day  of 
August,  1920";  that  payment  of  the  tax  "at  the  time  of  the  filing  of  the 
original  bill  herein,  instead  of  in  February,  1922  .  .  .,  would  have  subjected 
the  estate  ...  to  loss  of  interest  on  the  money  so  paid  during  the  interim 
amounting  to  a  sum  in  excess  of  $5,000;  and  that  if,  to  avoid  the  threatened 
distraint,  the  plaintiffs  should  themselves  pay  such  tax  prior  to  February  13, 
1922,  they  would  be  remediless  in  the  law."  It  was  further  decreed  that  the 
defendant,  his  agents  and  servants,  be  permanently  restrained  "from  making 
or  attempting  to  make  any  seizure,  distress  or  distraint  of  the  property  of 
the  complainants  .  .  .  until  the  expiration  of  the  thirteenth  day  of  February, 
1922  (but  no  longer),"  and  "that  the  complainants  recover  of  the  defendant, 
Frank  A.  Page  individually,  the  sum  of  $46.54,  their  costs  and  disbursements 
herein  duly  taxed." 

573  The  bill  of  complaint  was  filed  October  4,  1921.  The  final  decree 
was  entered  December  27,  1921.  A  petition  for  appeal  and  assign- 
ment of  errors  was  filed  January  27,  1922,  and  on  that  day  the  appeal  was 
allowed  and  citation  issued  returnable  to  this  court  February  24,  1922,  the 
service  of  which  was  accepted  January  27,  1922.  The  record  was  filed  in 
this  court  February  9,  1922. 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


574  On  February  10,  1922,  the  180  days  having  nearly  elapsed,  the  com- 
plainants paid  the  Collector  of  Internal  Revenue  the  tax  in  question. 
When  the  case  came  on  for  hearing  in  this  court  the  appellees  (com- 
plainants) moved  to  affirm  the  decree  or  dismiss  the  appeal  on  the 
ground  that,  the  tax  having  been  paid,  the  questions  presented  by  the  appeal 
were  academic.  The  appellant  objected  and  now  contends  that  the  case 
should  be  considered  on  its  merits  and  the  decree  reversed  on  the  authority 
of  our  decision  of  March  21,  1922,  in  Nichols  v.  Gaston  et  al.,  Executors 
H[467,  herein];  that  no  other  course  can  properly  be  taken  as  costs  were 
awarded  against  him  in  the  court  below,  which  he  has  paid. 

675  Costs  having  been  decreed  against  the  appellant  from  which  he 
would  be  relieved  if  the  decree  should  be  reversed,  we  think  the  case 

must  be  considered  on  its  merits.  Matter  of  Application  of  Martin  v.  W.  J. 
Johnston  Co.,  128  N.  Y.  605. 

676  The  facts  in  this  case,  so  far  as  they  relate  to  the  right  of  the  appellees 
to  restrain  the  appellant  from  collecting  the  tax,  differ  in  no  respect 

from  those  considered  by  us  in  Nichols  v.  Gaston  et  al.,  Executors,  supra,  in 
which  it  was  held  that  the  injunction  was  improperly  issued.  We  see  no 
occasion  for  receding  from  the  views  there  expressed  and  are  of  the  opinion 
that  the  appellees'  motion  should  be  denied,  the  decree  of  the  District  Court 
reversed,  and  costs  awarded  the  appellant  in  this  court  and  in  the  court  below. 

The  decree  of  the  District  Court  is  reversed  and  the  case  is  remanded  to 
that  court  with  directions  to  enter  a  decree  dismissing  the  bill,  with  costs 
to  the  appellant  in  this  court  and  in  the  District  Court. 


(T.  D.  3338.) 


677      [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Union 
518      Trust  Company,  et  al.,  executors  vs.  Wardell,  collector,  which  is  re- 
produced in  full  beginning  at  ^[518. — The  Corporation  Trust  Com- 
pany.] 


(T.  D.  3339.) 


678      [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Shwab, 
499      executor,  vs.  Doyle,  collector,  which  is  reproduced  in  full  beginning 
at  1J499. — The  Corporation  Trust  Company.] 


(T.  D.  3348.) 


578a    [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Page 
569      vs.  Polk,  which  is  reproduced  in  full  beginning  at  ^[569. — The  Cor- 
poration Trust  Company.] 


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8-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


REGULATIONS  63 

(1922  EDITION) 

[Promulgated  July  27,  1922.] 
Relating  to 

ESTATE  TAX 

Under  the 

REVENUE  ACT  OF  1921 
Complete  index  beginning  on  page  207. 

These  regulations  apply  to  the  estates  of  decedents  dying  after  the  effective  date  of 
Title  IV  of  the  Revenue  Act  of  1921  [i.  e.  after  3.55  P.  M.,  Washington  time,  November 
23,  1921].  Estate  Tax  Regulations  No.  37  (revised  January,  1921)  [page  33,  herein] 
remain  in  full  force  and  effect,  subject  to  such  modifications  and  changes  therein  as  are 
specified  in  Article  106,  infra  [^776]. 


TABLE  OF  CONTENTS. 

(The  section  numbers  refer  to  the  statute,  and  the  article  numbers  to  the  regulations.) 

Paragraph 

Section  400.  Definitions   416 

Section  401.  Description  of  tax   421 

Article   1.  The  various  statutes   579 

2.  Transfers  reached   580 

3.  Neither  a  property  nor  an  inheritance  tax   581 

4.  Description  of  taxable  estates   582 

5.  Definition  of  "resident"  and  "nonresident"   583 

6.  Manner  of  determining  liability   587 

7.  Rates  of  tax   588 

8.  Computation  of  tax   590 

9.  Exempt  estates   593 

10.  Exemption  must  be  proved   597 

Section  402.  Gross  estate   424 

Section  402.  (a)  General.   425 

Article  11.  Character  of  interests  included   601 

12.  Specific  property  to  be  included   604 

13.  Value   608 

14.  Rules  for  the  valuation  of  property   609 

(1)  Real  estate   609 

(2)  Stocks  and  bonds   610 

(3)  Interest  in  business   614 

(4)  Notes,  secured  and  unsecured   615 

(5)  Cash  on  hand  or  on  deposit   616 

(6)  Patents,  trade-marks,  and  copyrights   617 

(7)  Accounts  receivable,  claims,  judgments,  etc   618 

(8)  Other  property   619 

(9)  Household  and  personal  effects — General  provisions   620 

(a)  When  value  is  less  than  $2,000   621 

(b)  When  value  is  more  than  $2,000   625 

(c)  Appraisers  and  basis  of  appraisals   627 

15.  Valuation  of  annuities,  and  of  life  and  remainder  interests   629 

Section  402.  (b)  Dower  and  curtesy   426 

Article  16.  Dower  and  curtesy   641 

Section  402.  (c)  Transfers  by  decedent  in  his  lifetime   427 

Article  17.  Nature  and  time  of  transfer   642 

18.  Transfers  in  contemplation  of  death — Nature  of  transfer   643 

19.  Transfers  intended  to  take  effect  at  or  after  death — General   646 

20.  Reservation  of  income   647 

21.  Power  of  revocation  or  control   649 

22.  Valuation  of  property  transferred   650 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


Paragraph 

Section  402.  (d)  Property  held  jointly   428 

Article  23.  Property  held  jointly  or  as  tenants  by  the  entirety   651 

24.  Taxable  portion   653 

Section  402.  (e)  Property  passing  under  power  of  appointment   429 

Article  25.  General  rules   656 

26.  Powers  exercised  before  and  after  February  24,  1919   659 

Section  402.  (f)  Insurance   430 

Article  27.  Taxable  insurance   660 

28.  Insurance  in  favor  of  the  estate   661 

29.  Insurance  receivable  by  other  beneficiaries   662 

30.  Effective  date  of  insurance  provisions   663 

31.  Valuation  of  insurance   664 

Section  403.  Deductions   431 

Section  403.  (a)  Deductions — Estates  of  residents   432 

Section  403.  (a)  (1)  General   433 

Article  32.  Deduction  of  claims,  expenses,  etc   665 

33.  Effect  of  court  decree   666 

34.  Funeral  expenses   667 

35.  Administration  expenses   668 

36.  Executor's  commissions   669 

37.  Attorney's  fees   673 

38.  Miscellaneous  administration  expenses   676 

39.  Claims  against  the  estate   677 

40.  Taxes   678 

41.  Unpaid  mortgages   681 

42.  Losses  from  casualty  or  theft   682 

43.  Support  of  dependents   683 

Section  403.  (a)  (2)  Property  previously  taxed   434 

Article  44.  Deduction  of  the  value  of  transfers  taxed  within  five  years   684 

45.  Property  originally  received   688 

46.  Property  acquired  in  exchange   689 

Section  403.  (a)  (3)  Transfers  for  public,  charitable,  etc.,  uses   435 

Article  47.  Transfers  for  public,  charitable,  religious,  etc.,  uses   691 

48.  Religious,  charitable,  scientific,  and  educational  corporations   694 

49.  Proof  required   696 

50.  Conditional  bequests   697 

51.  Effective  date   699 

Section  403.  (a)  (4)  Specific   exemption   436 

Article  52.  Specific  exemption   700 

Section  403.  (b)  Estates  of  nonresidents   437 

Article  53.  Situs  of  property  of  nonresident  decedents   701 

Section  403.  (b)  (1)  (2)  (3)  Deductions  438,  439,  440 

Article  54.  Net  estate   703 

55.  Deduction  of  claims,  expenses,  etc   704 

56.  Deduction  of  value  of  transfers  taxed  within  five  years   706 

57.  Deduction  of  value  of  transfers  for  public,  charitable,  religious,  etc.,  uses.  707 

58.  Determination  of  net  estate   708 

59.  Payment  of  tax   711 

Section  404.  Preliminary  notice   446 

Article  60.  When  notice  required   712 

61.  Notice  by  executor  or  administrator   713 

62.  Notice  by  others  than  duly  qualified  executor  or  administrator   714 

63.  Exemption  claimed  on  account  of  military  service;  notice  required..  .  .  715 

64.  Preliminary  notice;  estates  of  nonresidents   716 

65.  Transfer  agents'  notice;  estates  of  nonresidents   717 

66.  Transfer  of  stocks  and  bonds  of  nonresident  decedents;  how  made..  .  .  719 
Section  404.  The  return   446 

Article  67.  When  return  required — Date  of  filing   721 

68.  Persons  liable  for  return   722 

69.  Preparation  of  return   723 

70.  Supplemental  data   724 

71.  Procedure  where  no  return  has  been  made   725 

72.  Investigation  of  returns   726 

73.  Return  of  estates  of  nonresidents  ;.  .  729 

74.  Estates  of  nonresidents — Supplemental  data   730 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


Section  404.    The  return. — Concluded.  Paragraph 
Article  75.  Returns  confidential  j  732 

76.  Disclosure  to  persons  having  material  interest   733 

77.  Attorneys  must  have  authorization   734 

Section  405.  Revised  statutes,  Sec.  3176.   Return  by  collector  or  Commissioner. .  448,  8071 

Article  78.  Return  by  collector  or  Commissioner   735 

Section  406.  Payment  of  tax  and  interest   449 

Section  407.  Adjustment  of  tax — Interest.   45 1 

Article  79.  Payment  of  tax;  general   736 

80.  Payment  by  bonds  or  uncertified  check   739 

81.  The  executor  shall  pay  the  tax   741 

82.  Extension  of  time  for  payment  ,   742 

83.  Interest  on  tax.   744 

Section  408.  Collection  of  tax   454 

Article  84.  Remedy  not  exclusive   747 

Section  408.  Reimbursement   455 

Article  85.  Right  to  reimbursement  not  enforcible  by  Commissioner   748 

Section  409.  Lien — Remedy  against  transferee  and  insurance  beneficiary   456 

Section  407.  Discharge  of  executor  from  personal  liability   453 

Article  86.  Property  subject  to  lien.   749 

87.  Pvdease  of  lien   752 

Section  410.  Revised  Statutes,  Sec.  3176.    Penalties   458,  8073 

Article  88.  Nature  of  penalties   755 

89.  Penalties  for  false  or  fraudulent  notice  or  return   757 

90.  Penalty  for  failure  to  file  notice  or  return   758 

91.  Penalty  for  failure  to  exhibit  records  or  property   759 

Revised  Statutes,  Sees.  3220,  322S,  3228.    Claims  for  abatement  and 

refund   8023,  8047,  8057 

Article  92.  Kinds  of  relief   760 

93.  Claim  for  abatement   761 

94.  Accrual  of  interest  as  affected  by  abatement  claim   762 

95.  Limitation  of  time  to  file  claim  for  abatement  of  additional  tax   763 

96.  Claim  for  refund   764 

97.  Payment  of  claims  and  interest  '   765 

Revised  Statutes,  Sees.  3229,  5292,  5293.    Power  to  compromise  or  remit 

penalties  preceding  767 

Article  98.    Power  to  compromise  or  remit   767 

Revised  Statutes,  Sec.  3467.    Personal  liability  of  executor  preceding  768 

Article  99.  Extent  of  liability   768 

Sections  1308,  1310.    Examination  of  records  and  taking  of  testimony   8002-3 

Article  100.  Securing  evidence — Taking  testimony   769 

101.  Power  to  compel  compliance   770 

Sections  1300,  1307.    Remedies  for  collection   8000-1 

Article  102.  Remedies  for  collection  of  tax   771 

103.  Executor's  duty  to  keep  records   772 

104.  Executor's  duty  to  render  statements   773 

Section  411.  Estates  administered  in  the  United  States  Court  for  China   460 

Section  1400.  Scope  of  repeal   463 

Article  105.  Scope  of  repeal   775 

106.  Promulgation  of  regulations  and  amendments  to  Regulations  37  (1918 

Act)....   776 

List  of  the  several  divisions  and  of  locations  of  offices  of  internal  revenue  agents  in 

charge      777 


579  Article  1.  The  various  statutes. — The  Federal  estate  tax  was  first 
416  imposed  by  the  Act  of  September  8,  1916.  This  law  was  amended  by 
the  Act  of  March  3,  1917  (Title  III),  and  the  Act  of  October  3,  1917 
(Title  IX).  These  two  statutes  increased  the  rate  of  tax.  The  Revenue 
Act  of  1918  (Title  IV),  which  became  effective  6.55  p.  m.,  Washington,  D.  C. 
time,  February  24,  1919,  reduced  the  rates  applicable  to  the  smaller  net  estates 
as  compared  with  those  of  Title  IX  of  the  Revenue  Act  of  1917,  and  contained 
a  number  of  provisions  not  found  in  any  of  the  prior  acts.    The  Revenue 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


Act  of  1921  (Title  IV)  became  effective  at  3.55  p.  m.,  Washington,  D.  C. 
time,  November  23,  1921.  It  re-enacts  without  change  the  rates  of  Title  IV 
of  the  Revenue  Act  of  1918,  supplants  all  prior  acts  as  to  the  estates  of  de- 
cedents dying  after  the  effective  date  thereof,  embodies  numerous  changes, 
but  continues  many  of  the  provisions  of  the  earlier  acts.  It  is  herein  referred 
to  as  "the  statute."    References  to  other  statutes  are  specific. 

580  Art.  2.  Transfers  reached. — The  statute  subjects  to  tax  transfers 
by  will  and  under  intestate  laws,  and  also  transfers  made  by  the 
decedent  in  his  lifetime,  when  made  in  contemplation  of  death  or  intended 
to  take  effect  in  possession  or  enjoyment  at  or  after  his  death,  excepting, 
however,  bona  fide  sales  for  a  fair  consideration  in  money  or  money's  worth. 
Transfers  of  certain  other  property  interests  are  also  included. 

531  Art.  3.  Neither  a  property  nor  an  inheritance  tax. — The  Federal 
estate  tax  is  imposed  upon  the  transfer  of  the  net  estate  of  every 
person  dying  after  September  8,  1916,  determined  in  the  manner  prescribed 
by  the  applicable  law.  (See  Art.  1.)  The  tax  is  not  laid  upon  the  property, 
but  upon  its  transfer  from  the  decedent  to  others.  The  subject  of  tax  is 
the  transfer  of  the  entire  net  estate,  not  any  particular  legacy,  devise,  or 
distributive  share,  and  the  relationship  of  the  beneficiary  to  the  decedent  has 
no  bearing  upon  the  question  of  liability,  or  the  extent  thereof.  The  transfer 
of  property  is  taxable,  although  it  escheats  to  the  State  for  lack  of  heirs. 

ESTATES  SUBJECT  TO  TAX. 

582  Art.  4.  Description  of  taxable  estates. — The  tax  is  imposed  upon 
421       the  transfer  of  the  net  estate.    The  term  "net  estate"  has  a  distinct 

meaning  in  the  statute,  signifying  the  difference  between  the  total 
value  of  the  gross  estate  and  the  total  of  the  authorized  deductions.  One 
of  the  deductions  authorized  in  the  estate  of  a  resident  decedent  is  the  specific 
sum  of  $50,000,  and  consequently  there  is  no  net  estate  where  the  gross  estate 
does  not  exceed  that  amount.  No  such  deduction  is  authorized  in  the  estate 
of  a  nonresident  decedent.    (See  Arts.  53  to  58,  inclusive.) 

583  Art.  5.  Definition  of  "resident"  and  "nonresident." — The  statute 
432  provides  (paragraph  (5)  of  section  2)  that  the  term  "United  States," 
437       when  used  in  a  geographical  sense,  includes  only  the  States,  the 

Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

584  A  resident  is  one  who,  at  the  time  of  his  death,  had  his  domicile  in 
the  United  States;  or  one  who  was  a  citizen  of  the  United  States  at 

time  of  death  and  with  respect  to  whose  property  any  probate  or  adminis- 
tration proceedings  are  had  in  the  United  States  Court  for  China.  (See 
Sec.  411.)  A  missionary  who,  at  the  time  of  death,  was  serving  as  such  under 
a  foreign  missionary  board  of  any  religious  denomination  in  the  United  States, 
will  be  presumed  to  have  died  a  resident  of  the  United  States,  if  domiciled 
therein  at  the  time  of  his  or  her  commission  and  departure  for  such  service, 
and  not  a  nonresident  merely  by  reason  of  his  or  her  intention  to  permanently 
remain  in  such  service.  (See  Sec.  403(b).)  Subject  to  the  foregoing  ex- 
ceptions, and  the  presumption  applying  in  the  case  of  such  missionaries,  all 
other  persons  are  nonresidents. 

585  Except  as  stated  above,  and  in  section  400  of  the  statute  in  respect 
to  the  exemption  accorded  on  account  of  military  or  naval  service 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


in  the  late  war,  the  statute  takes  no  account  of  the  citizenship  of  the  decedent, 
but  prescribes  different  rules  for  the  estates  of  residents  and  nonresidents. 
686  A  citizen  of  the  United  States  is  a  nonresident  if  his  domicile  is  in 
Porto  Rico,  the  Philippine  Islands,  or  other  foreign  country,  whereas 
a  citizen  of  a  foreign  country  is  a  resident  if  his  domicile  is  in  the  United 
States.  A  person  acquires  a  domicile  in  a  place  by  living  there,  for  even  a 
brief  period  of  time,  with  no  definite  present  intention  of  later  removing 
therefrom.  Residence  without  the  requisite  intention  to  remain  will  not 
suffice  to  constitute  domicile,  nor  will  intention  to  change  domicile  effect  such 
a  change  unless  accompanied  by  actual  removal. 

DETERMINATION  OF  TAX  LIABILITY. 

587  Art.  6.  Manner  of  determining  liability. — The  first  step  in  the  de- 
421  termination  of  tax  liability  is  to  ascertain  the  total  value  of  the 
decedent's  gross  estate.  (See  Arts.  11  to  31,  inclusive;  also  Art.  53.) 
The  second  step  is  to  subtract  from  this  value  the  total  deductions  authorized 
in  order  to  arrive  at  the  value  of  the  net  estate.  (See  Arts.  32  to  52,  inclusive, 
as  to  estates  of  residents;  and  Arts.  54  to  58,  inclusive,  as  to  estates  of  non- 
residents.) The  third  step  is  to  obtain  the  sum  of  certain  percentages  of 
successive  portions  of  the  net  estate,  as  provided  by  the  applicable  taxing 
act.    (See  Arts.  7  and  8.) 

588*'  Art.  7.  Rates  of  tax. — The  Revenue  Act  of  1916,  the  amendment 
|thereto  of  March  3,  1917,  the  Revenue  Act  of  1917,  and  the  Revenue 
Act  of  1918,  each  imposed  different  rates  of  tax.  The  rates  imposed  by  the 
Revenue  Act  of  1921  are  the  same  as  those  prescribed  in  the  Revenue  Act  of 
1918.  In  each  act  the  rates  contained  therein  are  applicable  to  the  estates 
of  decedents  dying  on  or  after  the  effective  date  thereof,  and  prior  to  the 
effective  date  of  the  next  succeeding  act.  A  table  of  the  several  rates  is  given 
below: 


Rates  of  estate  tax. 


Blocks  of  net  estate. 

Act  of 
1916 
(effective 
Sept.  9, 

1916). 

2 

Amend- 
ment of 
Mar.  3, 

1917 
(effective 
Mar.  3, 
1917). 

3 

Act  of 
1917 
(effective 
Oct.  4, 
1917). 

4 

Acts  of 
of  1918 
and  1921 

(For  • 
effective 
dates,  see 
below.) 

Exceeding 

Not  exceed- 
ing 

Amount  of 
block. 

Per  cent. 

Per  cent. 

Per  cent. 

P*  cent. 

$50,000 

$50,000 

1 

1* 

2 

1 

$50,000 

150.000 

100,000 

2 

4 

2 

150,000 

250,000 

100,000 

3 

6 

3 

260,000 

450,000 

200.000 

4 

8 

4 

450,000 

750,000 

300,000 

5 

10 

6 

(750.000 

1,000,000 

250,000 

6 

P 

10 

8 

1,000,000 

1,500,000 

500,000 

6 

12 

10 

1,500,000 

2,000,000 

500,000 

6 

9 

12 

12 

2,000,000 

3,000,000 

1.000,000 

7 

ioh 

14 

14 

3,000,000 

4,000,000 

1,000,000 

8 

12 

16 

16 

4,000,000 

5,000,000 

1,000.000 

9 

13X 

18 

18 

5,000,000 

6,000,000 

1.000.000 

10 

15 

20 

20 

6,000,000 

7,000,000 

1,000,000 

10 

15 

20 

20 

7,000,000 

8,000,000 

1,000,000 

10 

15 

20 

20 

8,000,000 

9,000.000 

1,000.000 

10 

15 

22 

22 

9,000,000 

10,000,000 

1.000,000 

10 

15 

22 

22 

10,000,000 

10 

15 

25 

25 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  162  SERVICE 


«-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


589  The  rates  prescribed  by  the  different  acts,  as  set  forth  above,  apply 
to  the  estates  of  decedents  dying  within  the  following  dates: 

Column  1,  Revenue  Act  of  1916,  effective  Sept.  9,  1916,  to  Mar.  2,  1917,  inclusive. 

Column  2,  amendment  of  Mar.  3,  1917,  effective  Mar.  3,  1917,  to  Oct.  3,  1917,  inclusive. 

Column  3,  Revenue  Act  of  1917,  effective  Oct.  4,  1917,  to  6.55  p.  m.,  Washington,  D.  C, 
time,  Feb.  24,  1919,  inclusive. 

Column  4,  Revenue  Act  of  1918,  effective  6.55  p.  m.  Feb.  24,  1919,  to  3.55  p.  m.,  Nov. 
23,  1921  (Washington,  1).  C,  time),  on  which  last  named  hour  and  date  the  revenue  Act 
of  1921,  became  effective. 

590  Art.  8.    Computation  of  tax. — For  the  purpose  of  computing  the  tax, 
the  net  estate  is  divisible  into  blocks,  each  block  being  taxed  at  a 

different  and  increasing  rate.  The  preceding  table  gives  the  amount  of  the 
various  blocks  and  the  applicable  rate  of  tax  under  each  of  the  taxing  acts. 
For  example,  the  tax  upon  the  net  estate  of  $1,240,000  of  a  decedent  dying 
on  March  1,  1919,  is  computed  as  follows: 

Amount  of  first  block   $50,000  at    1  per  cent  $500 

Amount  of  second  block   100,000  at    2  per  cent  2,000 


59 1  There  is  subjoined  a  table  for  ascertaining  the  tax  without  the  detailed 
computation  given  above.  An  illustration  of  its  use  is  as  follows: 
The  net  estate  of  a  decedent  dying  March  1,  1919,  amounts  to  $1,240,000. 
By  reference  to  the  table  it  will  be  seen  that  the  last  complete  block  preceding 
this  amount  is  $1,000,000,  and  that  the  total  tax  computed  on  a  million  dollars 
under  the  rates  in  force  amounts  to  $51,500.  Upon  the  remainder  of  the  net 
estate,  $240,000,  the  tax  is  computed  at  the  rate  set  out  in  the  next  following 
line,  or  at  10  per  cent.  The  tax  on  this  amount  is  consequently  $24,000. 
The  following  result  is  thus  obtained: 

Total  tax  on  $1,000,000  =  $5 1,500 

Tax  on   240,000=  24,000 

Totals  $1,240,000  $75,500 


Amount  of  third  block. . 
Amount  of  fourth  block 
Amount  of  fifth  block.. 
Amount  of  sixth  block. 
Remainder  


100,000  at  3  per  cent  3,000 
200,000  at  4  per  cent  8,000 
300,000  at  6  per  cent  18,000 
250,000  at  8  per  cent  20,000 
240,000  at  10  per  cent  24,000 


Total  net  estate 


1,240,000  Total  tax 


75,500 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         163  SERVICE 


8-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


592 


a 


o 
o 


sb.  24,  1919 
of  191S 

Total. 

oooooooooooocooo 
oooooocooooooooo 

HMiOOOOO^^^DtcOOO 
r-l  rl  CO  T}<  CD  00  q<N  cd 

.55  p.  m.  Ft 
venue  Acts 
and  1921 

Tax. 

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o©oooo©o©ooooooo 
«o  qqqqqqqqqqqqqqq 
**ci  cd  oo*oo  ooo"ddo"o*odoo* 

HNOCtcOOOOOONIN 

After  6 
(Re 

Rate 
(per 
cent) . 

H(NM^O00ON^(D00OOONN>0 

HHrHrtHINNNNMM 

> 
r  a) 

dj^ 

Total. 

OOOOOOOOOOOOOOOO 
OOOOOOOCOOOOOOOO 

qqqqqqqqqqqqqqqq 

,-*  id  i-T t>T  t-J  c>*  <N  O*  O* <N  c*  C**  CM  C "  CM  :  T 

CO 

,  1917,  to  6 
V,  1919,  incl 
lue  Act  of  1 

H 

eS 
H 

OOOOOOOOOOOOOOOO 
OOOOOOOOOOOOOOOO 

o^o^q^q^q^q^o^q^q^o^q^qq^o^qq^ 
H^odo'ioddddddc  ©*©o* 

«£  tHCO(NCDO-*CDCOOOOCM<N 
-«  i-t  t-i  CN  <N  CS  (N  <N 

;ath. 

|   Oct  4 
Feb.  24 

1  ei 

Rate 
(per 
cent) . 

IN'tfCCfjCONMMHOocOOOINClUJ 

Date  of  d< 

.  3,  1917, 

nent) . 

Total. 

$750 
3,750 
8,250 
20,250 
42  750 
61 ',600 
106,500 
151,500 
256,500 
376,500 
511,500 
661,500 
811,500 
961,500 
,111,500 
,261.500 

S3 

og 

O  P 

~< 

M 

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iCOOOOiOOOOOOOOOCO 

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W 

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©  > 

H 

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'co 

-  -  3 

Mar.  2 
incl 

X  X  3-3*    £  s 

^HCO'«i,<Ct^t>-C35©0(NCO"5"3>0>n»Ol'> 

Sept.  9,  1916,  to  Mar  2,  1917 
inclusive  (Revenue  Act  of  1916) 

Total. 

OOOOOOOOOOOOOOOO 
OOOOOOOOOOOOOOOO 
lOciOifliOOOOOCCOOCOC 

<-<CS'*t>0!^"5'<*<'<*'Tt<^'^-«*< 
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to  oo  io  (no  odd  do  o  ddo 

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Rate 
(per 
cent) . 

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3  ° 

5  S 

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OOOOOOOOOOOOOOOO 

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©*©"o~©"©*©©*  o*c"o*  ©*o*o"©*o*©* 

I0OOOOU2OO0OOCOOOO 
(ShhWDNICiOCOOCOOCO 

Net  estate 

1 

Not  Ex- 
ceeding— 

<-'oooo©oc:>c=lCCC>C!C;co 
c.o  o  o  ©  q©  qqqqqqqqq 

©  aaocSoO^  0©©©OC©0 

I-  cn  ^  b-  ©  iqqqqqqc  qqq 

,-"  h  <N  CO      id  CD*  t-*  00  Ol  o 

Exceeding — 

$60,000 
160,000 
250,000 
450,000 
750,000 
i  nnn  nnn 

1,500,000 
2,000,000 
3,000,000 
4,000,000 
5,000,000 
6.0UU.0U0 
7,000,000 
8,000,000 
9  000,000 
10,000,000 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  ^ !;1  164  SERVICE 


8-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


EXEMPT  ESTATES— SERVICE  IN  WORLD  WAR. 

693  Art.  9.  Exempt  estates. — The  first  exemption  from  estate  tax,  on 
423  account  of  military  or  naval  service  in  the  war  against  Germany,  was 
contained  in  the  Revenue  Act  of  1917,  and  applied  to  the  estate 
"of  any  decedent  dying  while  serving  in  the  military  or  naval  forces  of  the 
United  States,  during  the  continuance  of  the  v/ar  in  which  the  United  States 
is  now  engaged,  or  if  death  results  from  injuries  received  or  disease  con- 
tracted in  such  service,  within  one  year  after  the  termination  of  such  war," 
and  was  limited  to  the  increased  rates  of  tax  imposed  thereby,  and  to  the 
estates  of  decedents  dying  after  its  passage. 

594  In  the  Revenue  Act  of  1918  the  exemption  was  extended  to  include 
the  estate  "of  any  decedent  who  has  died  or  may  die  while  serving 

in  the  military  or  naval  forces  of  the  United  States  in  the  present  war  or  from 
injuries  received  or  disease  contracted  while  in  such  service,"  and  embodied 
a  retroactive  provision  rendering  the  exemption  available  under  the  former 
Acts,  and  authorized  the  refund  of  taxes  collected  under  the  provisions 
thereof  from  estates  to  which  the  exemption  applied.  Where  such  taxes 
have  been  paid  or  collected,  a  claim  for  refund  on  Form  843  should  be  filed 
accompanied  by  such  of  the  proofs  prescribed  in  Article  10  as  may  be  applic- 
able to  the  particular  case.    (See  Arts.  63  and  96.) 

595  The  Revenue  Act  of  1921  exempts  from  tax  the  estates  of  two  classes 
of  decedents,  namely:   (1)  Where  the  decedent  died  from  injuries 

received  or  disease  contracted  in  line  of  duty  while  serving  in  the  military 
or  naval  forces  of  the  United  States  in  the  war  against  the  German  Gov- 
ernment. The  term  "military  or  naval  forces  of  the  United  States"  includes, 
among  other  units,  the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse 
Corps,  Female,  and  the  Navy  Nurse  Corps,  Female;  but  does  not  include 
personnel  of  the  Public  Health  Service.  (2)  Where  the  decedent,  a  citizen  of 
the  United  States,  enlisted  in  the  military  or  naval  forces  of  any  country' 
associated  with  the  United  States  in  the  prosecution  of  such  war,  and  whose 
death  resulted  from  injuries  received  or  disease  contracted  in  line  of  duty 
while  serving  in  such  forces,  either  prior  to  the  entrance  of  the  United  States 
into  such  war,  or  during  the  time  such  country  was  associated  with  the  United 
States  in  the  prosecution  thereof.  The  estate  of  such  a  decedent  is  not 
deprived  of  the  benefit  of  this  exemption  by  reason  of  the  fact  that,  as  a 
condition  precedent  to  his  enlistment  in  the  military  or  naval  forces  of  any 
such  country,  the  decedent  was  required  to  take  an  oath  of  allegiance  to  such 
country  or  to  the  reigning  sovereign  thereof.  Under  the  retroactive  pro- 
vision of  this  Act  the  exemption,  as  will  be  noted,  is  made  available  to  the 
estates  of  those  whose  deaths  resulted  from  injuries  received  or  disease  con- 
tracted "in  line  of  duty"  while  serving,  as  above  set  out,  in  the  military  or 
naval  forces  of  such  a  foreign  country.  The  exemption  is  conditioned,  both 
with  respect  to  service  in  the  military  or  naval  forces  of  the  United  States 
and  such  a  foreign  country,  upon  death  resulting  from  injuries  received  or 
disease  contracted  "in  line  of  duty;"  a  condition  which,  in  all  cases,  operates 
wherever  the  death  occurred  subsequent  to  the  effective  date  of  this  Act. 
(See  Art.  1.)  The  Act  contains  a  refundment  clause  similar  to  that  in  the 
Revenue  Act  of  1918.    (See  Arts.  63  and  96.) 

596  As  to  the  United  States,  and  so  far  as  concerns  the  provisions  of 
the  various  Revenue  Acts  imposing  an  estate  tax,  such  war  ter- 
minated March  3,  1921,  by  virtue  of  the  joint  resolution  of  Congress  approved 
on  that  date. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  165  SERVICE 


! 


8-4-22. 


Regulations  68. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


597  Art.  10.    Exemption  must  be  proved. — In  every  case  where  the  ex- 
emption is  claimed  the  right  must  be  proved  by  the  estate.  Formal 

claim  for  exemption  on  Form  793,  accompanied  by  supporting  evidence,  should 
be  filed  with  the  notice  required  by  section  404  (see  Art.  63),  or  as  soon 
thereafter  as  the  necessary  evidence  may  be  secured,  and  in  any  case  not  later 
than  one  year  after  the  decedent's  death.  Where  decedent  died  before  his 
discharge  from  the  military  or  naval  forces  of  the  United  States,  and  it  is 
claimed  that  his  death  resulted  from  injuries  received  or  disease  contracted 
in  line  of  duty  during  the  war  with  Germany,  there  should  be  submitted: 

(1)  In  the  case  of  a  soldier,  a  certificate  of  the  Adjutant  General  of  the 
Army;  in  the  case  of  a  sailor,  a  certificate  of  the  Surgeon  General  of  the 
Navy;  in  the  case  of  a  Marine,  a  certificate  of  the  Commandant  of  the  Marine 
Corps;  and  in  the  case  of  a  person  who  served  in  any  auxiliary  force  com- 
prehended within  the  term  "military  or  naval  forces  of  the  United  States," 
a  certificate  of  the  proper  authority,  showing  the  occurrence  of  death  while 
in  the  service,  and  whether,  by  the  official  records,  it  resulted  from  injuries 
received  or  disease  contracted  in  line  of  duty  during  such  war. 

(2)  In  the  event  that  the  official  records  do  not  disclose  all  the  pertinent 
facts,  then  affidavits  of  officers  or  enlisted  men  will  be  considered  in  con- 
nection with  such  records  as  to  the  incurrence  of  injury  or  disease  in  line  of 
duty  during  such  war. 

598  Where  the  decedent  died  after  discharge  from  the  military  or  naval 
forces  of  the  United  States,  there  should  be  submitted: 

(1)  Certificate  of  discharge  from  the  service,  or  a  duly  verified  copy  of 
such  certificate. 

(2)  Certified  copy  of  public  record  of  death,  showing  cause  of  death. 

(3)  Affidavit  or  affidavits  of  the  attending  physician  or  physicians, 
setting  forth  decedent's  medical  history  while  under  the  treatment  of  such 
physician  or  physicians. 

(4)  Affidavits  of  officers  or  enlisted  men  or  other  evidence  bearing  upon 
the  question  whether  death  resulted  from  injuries  received  or  disease  con- 
tracted in  line  of  duty  while  serving  in  the  military  or  naval  forces  of  the 
United  States  during  such  war. 

699  Where  it  is  claimed  that  the  decedent,  a  citizen  of  the  United  States 
who  enlisted  in  the  military  or  naval  forces  of  any  country  asso- 
ciated with  the  United  States  in  the  prosecution  of  such  war,  died  from  in- 
juries received  or  disease  contracted  in  line  of  duty  while  in  such  foreign 
service,  as  more  fully  explained  in  the  third  paragraph  of  this  article,  there 
shall  be  submitted: 

(1)  Evidence  showing  his  citizenship  at  the  time  of  such  enlistment. 

(2)  A  complete  copy  of  the  official  records  of  his  service  in  the  forces  of 
the  foreign  country,  certified  by  the  custodian  thereof. 

600  Where,  in  any  case,  it  is  determined  by  the  Commissioner  that  the 
estate  is  entitled  to  the  exemption,  the  executor  will  be  notified  to 
that  effect,  and  his  duties  with  respect  to  the  tax  will  cease.  If  the  evidence 
submitted  in  support  of  the  claim  is  found  not  to  be  satisfactory,  such  further 
evidence  will  be  called  for,  or  such  investigation  instituted,  as  the  Com- 
missioner may  direct.  If  it  is  determined  that  the  estate  is  not  entitled  to 
the  exemption,  the  executor  will  be  required  to  file  return  and  pay  tax  in  the 
same  manner  as  executors  of  other  taxable  estates. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  166  SERVICE 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


GROSS  ESTATE— GENERAL. 

601  Art.  11.    Character  of  interests  included. — It  is  designed  by  the  fore- 
424       going  provision  of  the  statute  that  there  shall  be  included  in  the 

gross  estate  the  value  of  all  property  of  the  decedent  whether  real  or 
personal,  tangible  or  intangible,  the  beneficial  ownership  of  which  was  in  the 
decedent  in  his  lifetime,  and  which,  upon  his  death,  formed  his  estate. 

602  The  test  which  determines  whether  the  value  of  a  given  interest  is 
to  be  so  included,  pursuant  to  the  foregoing  provision  of  the  statute, 

is  that  stated  therein  which  requires  that  the  property,  after  death,  shall 
be  subject  to:  (1)  payment  of  the  charges  against  the  estate,  (2)  payment 
of  the  expenses  of  administration,  and  (3)  distribution  as  a  part  of  the  estate. 

603  The  value  of  a  vested  remainder  should  be  included  in  the  gross 
estate.  Nothing  should  be  included,  however,  on  account  of  a  con- 
tingent remainder  where  the  contingency  does  not  happen  in  the  lifetime  of 
the  decedent,  and  the  interest  consequently  lapses  at  his  death.  Nor  should 
anything  be  included  on  account  of  an  interest  or  an  estate  limited  for  the 
life  of  the  decedent.  There  should  be  included,  however,  the  value  of  an 
annuity  payable  to,  or  an  interest  or  an  estate  vested  in,  the  decedent  for 
the  life  of  another  person  who  survives  him.  For  rules  in  valuing  such  re- 
mainders, annuities,  and  interests  or  estates  pur  autre  vie,  see  Article  15. 

604  Art.  12.    Specific  property  to  be  included. — The  value  of  all  real 
property  situated  in  the  United  States,  and  owned  by  the  decedent 

at  the  date  of  his  death,  should  be  included  in  the  gross  estate,  whether  the 
decedent  was  a  resident  or  a  nonresident,  and  whether  the  property  came 
into  the  possession  and  control  of  the  executor  or  administrator  or  passed 
directly  to  heirs  or  devisees.  The  value  of  real  property  situated  outside 
the  United  States  should  not  be  included,  except  as  otherwise  provided  in 
Articles  55,  56,  and  57,  where  deductions  from  gross  estate  are  claimed  and 
the  decedent  was  a  nonresident.  Where  the  decedent  was  a  resident,  the 
value  of  all  personal  property  owned  by  him  should  be  included,  wherever 
situated.  Where  decedent  was  a  nonresident,  the  value  of  so  much  of  his 
personal  property  as  had  its  situs  in  the  United  States  at  the  time  of  his 
death  should  be  included,  and  the  value  of  his  entire  gross  estate,  wherever 
situated,  if  deductions  are  claimed.  (See  Arts.  55,  56,  and  57.)  As  to  the 
situs  of  the  personal  property  of  nonresident  decedents,  see  Article  53. 

605  A  cemetery  lot  owned  by  the  decedent  is  part  of  his  gross  estate,  but 
its  value  is  limited  to  the  salable  value  of   such  part  of  it  as  is  not 

designed  for  the  interment  of  the  decedent  or  members  of  his  family.  Rents 
and  interest  which  had  accrued  at  the  time  of  the  decedent's  death,  whether 
then  payable  or  not,  and  unpaid  matured  coupons,  should  be  included.  The 
value  of  notes  or  other  claims  held  by  the  decedent  should  be  included,  though 
they  are  canceled  by  his  will.  As  to  the  valuation  of  notes  and  claims,  see 
Article  14,  paragraphs  4  and  7.  All  bonds,  whether  federal,  state,  or  mun- 
cipal,  and  whether  or  not  containing  a  tax-free  covenant,  should  be  included. 

606  Dividends  on  either  common  or  preferred  stock  should  be  included 
only  where  declared  prior  to  the  decedent's  death  and  not  reflected 

in  the  market  value  of  the  stock  on  the  day  of  death.  Thus  dividends,  both 
declared  and  payable  to  holders  of  record  on  a  date  prior  to  the  decedent's 
death,  should  be  included,  provided  the  stock  was  selling  "ex-dividend"  on 
the  date  of  death. 

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607  Example:  A  5  per  cent  dividend  upon  stock  is  declared  March  1, 
payable  on  April  1  to  stockholders  of  record  on  March  15.    If  the 

death  occurred  on  March  10  and  the  market  value  on  that  day  was  90,  the 
value  to  be  returned  for  both  stock  and  dividend  is  90,  the  dividend  being 
reflected  in  the  market  value  of  the  stock.  If  the  death  occurred  on  March 
20,  the  dividend  is  not  reflected  in  the  market  value,  and  must  be  returned 
in  addition  to  the  market  value  of  the  stock  on  March  20. 

608  Art.  13.  Value. — Property  of  the  decedent  should  be  returned  at  its 
market  or  sale  value  at  the  time  of  the  decedent's  death.  The  crite- 
rion of  such  value  is  the  price  which  a  willing  buyer  will  pay  to  a  willing 
seller  for  the  property  in  question  under  the  circumstances  existing  at  the 
date  of  the  decedent's  death  or  within  such  reasonable  period  thereafter  as 
would  afford  proper  opportunity  for  an  examination  and  sale  thereof.  Neither 
depreciation  nor  appreciation  in  value  subsequent  to  the  date  of  decedent's 
death  is  considered. 

609  Art.  14.    Rules  for  the  valuation  of  property. — (1)  Real  estate. — 

Where  real  property  has  been  sold,  the  amount  received  will  be 
taken  as  its  value  provided  the  sale  met  the  conditions  laid  down  in  Article  13. 
Where  no  sale  has  been  made,  the  criterion  of  value  is  the  best  price  which 
could  have  been  obtained  within  a  reasonable  period  of  the  decedent's  death. 
The  property  should  not  be  returned  at  the  local  assessed  value  thereof 
unless  such  value  represents  the  true  market  value  at  the  date  of  decedent's 
death.  All  relevant  facts  and  all  elements  of  value  should  be  considered  in 
every  case. 

610  (2)  Stocks  and  bonds. — The  value  of  stocks  and  bonds  listed  upon 
a  stock  exchange  should  be  determined  by  taking  the  mean  between 

the  highest  and  lowest  quoted  selling  price  upon  the  date  of  death.  If  there 
were  no  sales  on  the  date  of  death  the  value  should  be  determined  by  taking 
the  mean  between  the  highest  and  lowest  sales  upon  the  nearest  date  either 
before  or  after  the  date  of  death  if  within  a  reasonable  period.  If  the  decedent 
died  on  a  Sunday  or  holiday,  the  transaction  of  the  next  previous  business 
day  will  govern.  If  the  security  is  listed  upon  more  than  one  exchange,  the 
records  of  the  principal  exchange  should  be  employed.  In  general,  in  valu- 
ing listed  stocks  and  bonds  the  executor  should  observe  care  to  consult 
accurate  records  to  obtain  value  as  of  the  date  of  death. 

611  If  the  securities  are  not  listed  upon  an  exchange  but  are  dealt  in 
actively  by  brokers  or  have  an  active  market,  the  value  should  be 

determined  by  taking  the  sale  price  as  of  the  date  of  death  or  of  the  nearest 
date  thereto  if  within  a  reasonable  period.  Securities  which  are  not  dealt 
in  actively  enough  to  establish  market  value  clearly  but  in  which  there  are 
occasional  transactions  should  be  valued  upon  the  basis  of  the  nearest  sales 
to  the  date  of  death,  provided  such  sales  were  in  the  normal  course  of  business, 
between  a  willing  buyer  and  a  willing  seller  who  were  trying  to  make  the 
best  bargain  possible.  Where  quotations  are  obtained  from  brokers  or  where 
evidence  as  to  the  sale  of  securities  is  obtained  from  the  officers  of  the  issu- 
ing companies,  the  executor  is  requested  to  preserve  in  his  files  the  letters 
furnishing  quotations  for  inspection  when  the  return  is  verified  by  an  in- 
vestigating officer. 

61  la    Where  securities  are  actively  quoted  on  a  bid  and  asked  basis  and 
actual  sales  are  not  available,  the  bid  price  as  of  the  date  of  death 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


will  be  accepted  as  the  value.  In  the  case  of  corporate  and  other  bonds 
where  there  is  no  active  market,  the  value  is  to  be  determined  by  giving  con- 
sideration to  the  soundness  of  the  security,  the  interest  yield,  the  date  of 
maturity,  and  any  other  relevant  factors. 

61  2  Where  there  is  no  active  market  for  the  stock  or  securities  (whether 
listed  or  unlisted)  owned  by  the  estate,  or  where  the  sales  thereof 
made  from  time  to  time  are  seriously  disproportionate  in  number  of  shares 
sold  to  the  holdings  of  the  decedent,  and  the  executor  proceeds  in  good  faith 
promptly  and  within  a  reasonable  time  to  make  a  bona  fide  sale  or  sales  of 
any  of  such  stocks  or  securities,  the  amount  so  realized  will  be  accepted  as 
the  value.  Sales,  however,  of  only  a  few  shares  out  of  a  large  holding,  or 
sales  made  without  a  real  effort  to  secure  the  widest  market  possible,  or  sales 
made  merely  for  the  purpose  of  fixing  value  will  not  be  considered  as  con- 
clusive. 

612a  If  in  connection  with  the  value  of  any  particular  security  conditions 
of  sale  or  ownership  are  such  that  the  market  value  determined  as 
indicated  above  would  not  afford  a  proper  basis  for  the  valuation  of  the 
decedent's  securities,  the  Commissioner  on  final  audit  will  establish  the 
value  by  considering  all  other  factors  relating  to  the  case.  In  any  case  where 
the  estate  contends  that  the  value  as  established  by  the  general  rules  stated 
above  is  not  the  fair  market  value  for  the  security  owned  by  the  decedent 
on  the  date  of  his  death,  the  evidence  upon  which  it  bases  its  contention 
should  be  filed  with  the  return. 

612b  Stock  in  corporations  where  there  have  been  no  bona  fide  sales 
within  a  reasonable  period  of  a  number  of  shares  fairly  comparable 
to  the  decedent's  holdings  should  be  valued  at  what  a  willing  buyer  would 
pay  to  a  willing  seller,  both  being  fully  informed  of  the  financial  condition 
of  the  company  at  the  date  of  death. 

61  2C  Where  the  decedent's  holdings  are  relatively  small,  a  copy  of  the 
balance  sheet  of  the  corporation  nearest  to  the  date  of  the  decedent's 
death  and  a  statement  of  the  earnings  and  dividends  for  the  five  years  pre- 
ceding death  should  be  submitted  in  duplicate  with  the  return  wherever 
practicable.  Where  the  decedent's  holdings  are  relatively  large,  and  it  is 
practicable  to  do  so,  the  fullest  financial  data  should  be  submitted  in  dupli- 
cate with  the  return,  including  in  particular  balance  sheets  of  the  corpora- 
tion for  the  five  years  preceding  death,  a  statement  of  the  net  earnings  and 
dividends  paid  by  the  company  over  this  period  or  over  a  sufficient  number 
(either  greater  or  less)  of  years  prior  to  the  decedent's  death  to  demonstrate 
the  normal  earning  capacity  of  the  corporation,  and  a  summary  of  the 
market  conditions  and  future  prospects  of  the  company  at  the  date  of  the 
decedent's  death,  together  with  a  statement  showing  the  relation,  if  any, 
of  the  decedent  to  the  actual  operation  of  the  company,  the  effect  of  his 
death  thereon,  and  any  and  all  other  factors  which  may  have  a  bearing  upon 
the  value  of  the  stock.  Where  examinations  of  a  company  have  been  made 
by  accountants,  engineers,  or  other  technical  experts  as  of  or  about  the 
date  of  death,  copies  of  their  reports  should  be  filed  with  the  return  where 
they  can  be  obtained  without  undue  trouble  or  expense  to  the  estate.  In 
general,  the  estate  should  show  the  basis  of  its  return  and  submit  any  finan- 
cial data  that  will  enable  the  commissioner  accurately  and  intelligently  to 
review  the  case. 

613      The  full  value  of  securities  pledged  to  secure  a  loan  should  be  in- 
cluded in  the  gross  estate.    If  the  decedent  had  a  trading  account 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


with  a  broker,  all  securities  belonging  to  the  decedent  and  held  by  the  broker  f 
at  the  date  of  death  must  be  included  at  their  market  value  on  that  date. 
Securities  purchased  on  margin  for  the  decedent's  account  and  held  by  the 
broker  should  also  be  returned  at  their  market  value  on  the  date  of  death. 
The  amount  of  the  decedent's  indebtedness  to  the  broker,  or  other  person 
With  whom  the  securities  were  pledged,  will  be  allowed  as  a  deduction  from 
the  gross  estate.    (See  Art.  39.) 

614  (3)  Interest  in  business. — Care  should  be  taken  to  arrive  at  an 
accurate  valuation  of  any  business  in  which  the  decedent  was  in- 
terested, whether  as  partner  or  proprietor.  A  fair  appraisal  as  of  the  date 
of  death  should  be  made  of  all  the  assets  of  the  business,  tangible  and  in- 
tangible, and  the  business  should  be  given  a  net  worth  equal  to  the  amount 
which  a  purchaser,  whether  an  individual  or  corporation,  would  be  willing 
to  pay  therefor  at  a  normal  sale  in  view  of  the  net  value  of  the  assets  and  the 
demonstrated  earning  capacity.  Special  attention  should  be  given  to  fixing 
an  adequate  figure  for  the  value  of  the  good  will  of  the  business  in  all  cases 
where  the  decedent  has  not,  for  a  fair  consideration  in  money  or  money's 
worth,  agreed  that  his  interest  therein  shall  pass  at  his  death  to  his  surviving 
partner  or  partners. 

614a  In  general,  the  rules  stated  above  relative  to  the  valuation  of  other 
property  are  applicable  to  the  valuation  of  an  interest  as  proprietor 
or  partner  in  a  business,  and  all  evidence  bearing  upon  such  valuation  should 
be  submitted  with  the  return,  including  copies  of  reports  in  any  case  where 
examinations  of  a  business  have  been  made  by  accountants,  engineers,  or 
other  technical  experts  as  of  or  about  the  date  of  decedent's  death. 

615  (4)  Notes,  secured  and  unsecured. — The  value  of  notes,  whether 
secured  or  unsecured,  will  be  presumed  to  be  the  amount  of  unpaid 

principal,  plus  accrued  interest  to  the  date  of  decedent's  death,  unless  the 
executor  establishes  the  right  to  return  them  at  a  lower  value,  or  as  worthless. 
To  establish  such  a  right  it  must  be  shown  by  satisfactory  evidence  that  the 
note,  cither  in  whole  or  in  part,  is  uncollectible  by  reason  of  the  insolvency 
of  the  party  or  parties  liable,  or  for  other  cause,  and  that  the  property,  if 
any,  pledged  or  mortgaged  as  security  is  insufficient  to  satisfy  it. 

616  (5)  Cash  on  hand  or  on  deposit. — The  amount  of  cash  belonging  to 
the  decedent,  either  in  his  possession  at  the  date  of  death  or  in  the 

possession  of  another,  should  be  included.  Bank  accounts  should  be  returned 
in  the  amount  on  deposit  to  the  credit  of  the  decedent  at  the  date  of  death. 
If  checks  then  outstanding,  given  in  discharge  of  bona  fide,  legal  obligations 
of  the  decedent,  and  not  as  transfers  coming  within  the  provisions  of  section 
402  (c),  are  subsequently  honored  by  the  bank  and  charged  to  the  account, 
the  balance  remaining  may  be  returned,  provided  the  payments  effected 
thereby  are  not  claimed  as  deductions  from  the  gross  estate.  Interest  which 
the  bank  agreed  to  pay  upon  condition  that  the  money  remain  on  deposit 
for  a  period  of  time  which  expired  subsequent  to  the  decedent's  death,  should 
not  be  included. 

617  (6)  Patents,  trade-marks,  and  copyrights. — The  basis  for  valuation 

of  an  intangible  asset  of  this  character  is  the  present  worth  of  the 
estimated  future  earnings  of  the  exclusive  right  during  the  rest  of  its  existence. 
The  return  received  by  the  decedent  should  be  considered  in  estimating 
future  earnings. 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


618  (7)  Accounts  receivable,  claims,  judgments,  etc. — A  fair  valuation 
for  assets  of  this  character  at  the  time  of  death  should  be  fixed  by 

the  executor  according  to  the  best  information  available  to  him  at  the  time 
of  making  return.  A  right  of  action  which  terminated  with  the  death  of  the 
decedent  should  not  be  included  in  the  gross  estate. 

619  (8)  Other  property. — With  respect  to  all  other  property,  excepting 
household  and  personal  effects,  concerning  which  see  paragraph  (9) 

of  this  article,  the  executor  should  ascertain  and  return  the  fair  market  value 
thereof  as  of  the  day  of  decedent's  death.  As  to  property  sold  subsequent 
to  death,  see  Article  13.  Live  stock,  farm  machinery,  harvested  and  growing 
crops,  where  of  an  aggregate  value  of  $2,000  or  more,  should  be  valued,  as 
of  the  date  of  decedent's  death,  by  one  or  more  competent  and  disinterested 
appraisers,  and  their  itemized  appraisal  thereof  in  writing,  verified  by  the 
oath  of  each,  should  be  filed  in  duplicate  with  the  return  on  Form  706.  The 
executor  should  also  file  in  duplicate  with  the  return  his  affidavit  as  to  the 
completeness  of  the  itemized  lists  of  such  property  and  of  the  disinterested 
character  and  qualifications  of  the  appraiser  or  appraisers. 

620  (9)  Household  and  personal  effects — General  provisions. — Executors 
and  administrators  are  required  to  have  careful  appraisal  made  of  all 

household  and  personal  effects  of  the  decedent  by  one  or  more'  competent 
and  disinterested  appraisers,  except  as  otherwise  provided  in  subdivision 
(a)  of  this  paragraph,  and  the  appraisal  thereof,  reduced  to  writing  and 
verified  by  the  oath  or  oaths  of  the  appraiser  or  appraisers,  should  be  filed  in 
duplicate  with  the  return  on  Form  706,  accompanied  by  the  affidavit  in  dupli- 
cate of  the  executor  as  to  the  completeness  of  the  itemized  lists  of  such  property 
and  of  the  disinterested  character  and  qualifications  of  the  appraiser  or  ap- 
praisers. Where  it  is  desired  to  effect  distribution  or  sale  of  any  portion  of 
such  property  in  advance  of  an  investigation  by  a  special  officer  of  the  Bureau 
of  Internal  Revenue,  as  provided  in  Article  72,  notice  thereof  should  be  given 
to  the  Internal  Revenue  Agent  in  Charge  for  the  Division  wherein  the  de- 
cedent was  domiciled  at  the  date  of  his  death,  or,  if  such  household  and  per- 
sonal effects  be  not  located  in  such  Division,  then  to  the  Commissioner.  If 
the  return  has  not  been  filed,  the  notice  should  be  accompanied  by  a  yferifi.ejd 
appraisal  of  such  property,  and  an  affidavit  of  the  executor  as  provided  above. 
If  personal  inspection  by  a  special  officer  of  the  Bureau  is  not  deemed  neces- 
sary the  executor  will  be  so  advised.  This  procedure  is  designed  to  facilitate 
disposition  of  such  property  and  to  obviate  future  expense  and  inconvenience 
to  the  estate  by  affording  the  Commissioner  an  opportunity  to  make  an  in- 
vestigation, should  one  be  deemed  necessary,  prior  to  the  sale  or  distribution. 
(For  location  of  the  officers  of  the  several  Internal  Revenue  Agents  in  Charge, 
and  the  territory  embraced  in  their  Divisions,  respectively,  see  Appendix 
[1[777,  herein].) 

621  (a)  When  value  is  less  than  $2,000. — When  the  value  of  the  per- 
sonalty involved  is  less  than  $2,000,  the  detailed  lists  may  be  prepared 

by  the  executor  personally.  A  room  by  room  appraisal  is  desirable;  and  all 
the  articles  should  be  named  specifically,  except  those  of  small  value,  such  as 
common  bric-a-brac  or  cheap  books.  A  separate  value  should  be  given  for 
each  article  named,  except  that  the  values  of  a  number  of  articles  contained 
in  the  same  room  may  be  grouped.  The  value  of  an  article  worth  more  than 
$50  should  be  stated  separately.  Such  an  entry  as  the  following  would  be 
acceptable: 

622  Dining  room:   Table,  six  chairs,  three  pictures  (common  prints), 
value  $75;  sideboard,  $60;  total,  $135. 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


623  If  there  should  be  included  in  the  lot,  however,  jewelry  or  silver- 
ware of  more  than  ordinary  value,  or  articles  having  a  marked  artistic 

value,  the  executor  must  furnish  an  appraisal  by  a  person  or  persons  thor- 
oughly qualified  by  training  and  experience  to  judge  of  the  value  of  such 
articles. 

624  In  the  case  of  effects  having  a  total  value  of  less  than  $2,000,  the 
executor  may  furnish,  as  an  alternative  requirement,  a  sworn  state- 
ment in  duplicate  of  the  aggregate  total  value  of  the  property  by  a  professional 
appraiser  or  appraisers  of  recognized  standing  and  ability,  or  by  a  dealer  or 
dealers  in  the  class  of  personalty  involved. 

625  (b)  When  value  is  more  than  $2,000. — When  the  value  of  the  effects 
is  more  than  $2,000,  detailed  lists  must  be  furnished,  prepared  by  an 

appraiser  or  appraisers  of  recognized  competence,  or  by  a  dealer  or  dealers 
in  the  particular  classes  of  personalty  involved.  The  lists  must  be  prepared 
in  the  same  detail  as  that  indicated  above  for  the  executor's  list.  Where  the  ( 
personalty  includes  jewelry,  silverware,  or  like  articles,  except  in  cases  where 
the  value  of  these  items  is  insignificant,  the  appraisal  of  a  reputable  dealer  or 
appraiser  of  jewelry  must  be  furnished. 

626  In  the  case  of  articles  having  marked  artistic  value,  such  as  paintings, 
engravings,  etchings,  statuary,  vases,  oriental  rugs,  or  antiques, 

the  appraisal  of  an  expert  or  experts  will  be  required.  A  description  of  such 
articles  should  be  fully  given.  Where  paintings  having  artistic  value  are  listed, 
the  size,  subject,  and  artist's  name  should  be  stated.  In  the  case  of  oriental 
rugs,  the  size,  make,  and  general  condition  should  be  given.  The  weight  in 
ounces  of  silverware  should  be  stated. 

627  (c)  Appraisers  and  basis  of  appraisals. — Where  expert  appraisers  are 
to  be  employed,  care  should  be  taken  to  see  that  they  are  men  of  recog- 
nized competence  with  respect  to  the  particular  class  of  property  involved. 
In  order  to  facilitate  the  acceptance  of  the  appraisal,  appraisers  should  be 
employed  whose  competence  is  well  established. 

628  The  value  to  be  arrived  at  in  appraising  articles  of  this  character 
is  the  fair  market  value  on  date  of  decedent's  death.    Where  property 

is  valued  by  legatees  for  purposes  of  distribution,  such  value  will  not  neces- 
sarily be  accepted.  The  original  cost  of  the  articles  is  not  necessarily  a  proper 
basis,  on  account  of  depreciation  or  appreciation  in  value. 

629  Art.  15.    Valuation  of  annuities,  and  of  life  and  remainder  interests. 

— Where  the  decedent  was  entitled  to  receive  an  annuity  of  a  definite 
amount  during  the  lifetime  of  another  person,  its  present  worth  at  the  time 
of  the  decedent's  death  must  be  computed  upon  the  basis  of  the  expectancy 
of  life  of  the  other  person.  The  table  marked  "A,"  a  part  of  this  Article, 
should  be  used  for  this  computation.  The  amount  payable  annually  should 
be  multiplied  by  the  figure  in  column  2  of  the  table  opposite  the  number  of 
years  in  column  1  nearest  to  the  actual  age  of  the  other  person. 

630  Example:  The  decedent  received  under  the  terms  of  his  father's 
will  an  annuity  of  $10,000  for  the  life  of  his  elder  brother.  The 

brother  at  the  decedent's  death  was  40  years  8  months  old.  By  reference  to 
the  table  the  figure  in  column  2  opposite  41  years,  the  number  nearest  to  the 
brother's  age,  is  found  to  be  14.86102.  The  present  worth  of  the  annuity 
is  therefore  $148,610.20. 


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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


631  Where  the  decedent  was  entitled  to  receive  the  annuity  during  a 
specified  number  of  years,  the  table  marked  "B,"  a  part  of  this  article 

should  be  used. 

632  Example:  The  decedent  received  under  the  terms  of  his  father's 
will  an  annuity  of  $10,000  for  a  period  of  20  years,  15  of  which  had 

expired  at  the  decedent's  death.  By  reference  to  the  table  it  is  found  that 
the  figure  in  column  2  opposite  5  years,  the  unexpired  portion  of  the  20-year 
period,  is  4.45182.  The  present  worth  of  the  annuity  is,  therefore,  $44,518.20 
(4.45182  multiplied  by  10,000). 

633  Where  the  decedent  was  entitled  to  receive  the  entire  income  of  certain 
property  during  the  life  of  another  person,  or  for  a  term  of  years,  and 

the  annual  rate  of  income  for  a  period  equal  to  or  exceeding  the  life  ex- 
pectancy of  such  other  person  or  such  term  of  years,  is  fixed  or  definitely 
determinable  at  the  time  of  the  decedent's  death,  then  the  present  worth  of 
decedent's  right  to  such  income  should  be  computed  as  explained  above  in  the 
case  of  an  annuity. 

634  Example:  The  decedent's  father  placed  $100,000  in  trust,  with 
directions  that  it  be  invested  in  state  and  municipal  bonds  and  the 

entire  income  paid  to  the  decedent  during  the  life  of  his  elder  brother,  who  was 
41  years  old  at  the  decedent's  death.  Before  the  decedent's  death  the 
money  was  invested  in  state  and  municipal  bonds  maturing  at  dates  beyond 
such  elder  brother's  life  expectancy,  and  yielding  annually  an  income  of 
$5,000.  In  this  case  the  rate  of  income  is  definitely  determinable.  By  refer- 
ence to  the  table,  it  is  found  that  the  present  worth  of  an  income  of  $5,000, 
dependent  upon  the  life  of  a  person  41  years  of  age,  is  $74,305.10  (14.86102 
multiplied  by  5,000). 

635  Where  the  rate  of  annual  income  is  not  determinable,  or  where  the 
decedent  was  entitled  merely  to  the  personal  use  of  nonincome- 

bearing  property,  a  hypothetical  annuity  at  a  rate  of  4  per  cent  of  the  value 
of  the  property  should  be  made  the  basis  of  the  calculation. 

636  Example:  The  decedent  died  before  a  fund  of  $100,000,  of  which  he 
was  entitled  to  receive  the  income  during  the  life  of  a  person  41  years 

old,  had  been  invested  by  the  trustees.  The  value  of  a  hypothetical  annuity 
of  $4,000,  dependent  upon  the  life  of  such  a  person,  is  indicated  by  the  table 
to  be  $59,444.08  (14.86102  multiplied  by  4,000). 

637  Where  the  decedent  had  a  remainder  interest  in  property  subject 
to  the  life  estate  of  another,  and  such  interest  constituted  an  asset 

of  his  estate,  the  present  worth  of  the  remainder  interest  at  the  time  of 
death  should  be  obtained  by  multiplying  the  value  of  the  property  at  the  time 
of  death  by  the  figure  in  column  3  of  Table  A  opposite  the  number  of  years 
nearest  to  the  age  of  the  life  tenant.  Where  the  remainder  interest  is  subject 
to  an  estate  for  a  term  of  years  Table  B  should  be  used. 

638  Example:  The  decedent  was  entitled  to  receive  property  worth 
$50,000  upon  the  death  of  his  elder  brother,  to  whom  the  income  for 

life  had  been  bequeathed.  The  brother  at  the  time  of  the  decedent's  death 
was  31  years  old.  By  reference  to  the  table  it  is  found  that  the  figure  in 
column  3  opposite  31  years  is  0.31262.  The  present  worth  of  the  remainder 
interest  is,  therefore,  $15,631. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  173  SERVICE 


8-4-22. 


Regulations  6S. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


639  TABLE  "A." 

Table,  single  life,  4  per  cent,  showing  the  present  worth  of  an  annuity,  or 
life  interest,  and  of  a  reversionary  interest. 


1 

2 

3 

1 

L 
2 

3 

Annuity,  or  Reversion,  or 

Annuity,  or 

Reversion,  or 

present  value  present  value 

present  value 

present  value 

of  $1  due  at 

of  $1  due  at 

of  $1  due  at 

of  $1  due  at 

Age 

the  end  of 

the  end  of  the 

Age 

the  end  of 

the  end  of  the 

each  year 

year  of  death 

each  year 

year  of  death 

during  the 

of  a  person 

during  the 

of  a  person 

life  of  a 
person  of 

of  specified 

life  of  a 
person  of 

of  specified 

age 

age 

specified  age 

specified  age 

Annuity 

Reversion 

■ 

Annuity 

Reversion 

0 

$14.72829 

$0.39507 

I  51 

$12.17919 

$0.49311 

1 

17.30771 

.29586 

52 

11.88408 

.50446 

2 

18.69578 

.24247 

53 

11.58531 

.51595 

3 

19.15901 

.22465 

54 

11.28325 

.52757 

4 

19.41226 

.21491 

55 

10.97789 

.53931 

6 

19.55301 

.20950 

56 

10.60982 

.55116 

19.61731 

.20703 

57 

10.35931 

.56310 

6 

7 

19.62502 

.20673 

58 

10.04630 

.57514 

8 

19.61097 

.20727 

59 

9.73131 

.58726 

9 

19.53413 

.21022 

60 

9.41474 

.59943 

10 

19.45359 

.21332 

1  61 

9.09765 

.61163 

11 

19.36943 

.21656 

62 

8.78052 

.623S3 

12 

19.28184 

.21993 

63 

8.46412 

.63600 

13 

19.19065 

.22344 

64 

8.14888 

.64812 

14 

19.09590 

.22708 

65 

7.83552 

.66017 

15 

18.99764 

.23086 

66 

7.52476 

.67212 

16 

18.89569 

.23478 

67 

7.21699 

.68397 

17 

18.79010 

.23884 

68 

6.91298 

.69565 

18 

18.68070 

.24305 

69 

6.61301 

.70719 

19 

18.56751 

.24740 

70 

6.31716 

.71857 

20 

18.45038 

.25191 

71 

6.02612 

.72976 

21 

18.32932 

.25656 

72 

5.74003 

.74077 

22 

18.20416 

.26138 

73 

5.45928 

.75157 

23 

18.07471 

.26636 

74 

5.18402 

.76215 

24 

17.94097 

.27150 

75 

4.91463 

.77251 

25 

17.80274 

.27682 

Z2 

4.65125 

.78264 

26 

17.65984 

.28231 

77 

4.39383 

.79254 

27 

17.51224 

.28799 

i  78 

4.14286 

.80220 

28 

29386 

79 

3.89858 

.81159 

29 

17.20225 

!29991 

80 

3.66071 

.82074 

30 

17.03961 

.30617 

81 

3.42900 

.82965 

31 

16.87176 

.31262 

82 

3.20258 

.83836 

32 

16.69846 

.31929 

83 

9  Q8024 

.84691 

33 

16.51964 

.32617 

84 

2.76106 

!85534 

34 

16.33503 

.33327 

85 

2.54366 

.86371 

35 

16.14437 

.34060 

86 

2.32795 

.87200 

36 

15.94755 

.34817 

87 

2.11384 

.88024 

37 

15.74427 

.35599 

88 

1.90115 

.88842 

38 

15.53421 

.36407 

89 

1.69107 

.89650 

39 

15.31722 

.37241 

90 

1 .48540 

.90441 

40 

15.09295 

.38104 

91 

1 .28432 

.91214 

41 

14.86102 

.38996 

92 

1 .09024 

.91961 

42 

14.62122 

.39918 

93 

.90647 

.92667 

43 

14.37356 

.40871 

94 

.73687 

.93320 

44 

14.11860 

.41852 

95 

.58435 

.93906 

45 

13.85713 

.42857 

96 

.46182 

.94378 

46 

13.58958 

.43886 

97 

.36698 

.94742 

47 

13.31698 

.44935 

98 

.24038 

.95229 

48 

13.03942 

.46002 

99 

.00000 

.96154 

49 

12.75716 

.47088 

60 

12.47032 

.48191 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  174  SERVICE 


8-2-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


640  TABLE  B. 


Table,  single  life,  4  per  cent,  showing  the  present  worth  of  an  annuity,  or 
life  interest,  and  of  a  reversionary  interest — Continued. 


1 

2      .  , 

3 

1 

< 

2      .  , 

3 

Present  worth  of 

Present  worth  of 

an  annuity  of  $1, 

Present  worth  of  | 

an  annuity  of  $1. 

Present  worth  of 

Nwaaber  of 

payable  at  the 

$1,  payable  at 

Number  of 

payable  at  the 

$1,  payable  at  the 

y«ari 

end  of  each  year. 

the  end  of  a  cer- 

years 

end  of  each  year, 

end  of  a  certain 

for  a  certain 

tain  number  of 

for  a  certain 

number  of  years 

number  of  years 

years 

number  of  years 

■ 

Annuity 

Reversion 

1 

Kevertion 

Annuity 

1 

$0.96154 

$0.961538 

16 

$11.65229 

$0.533908 

2 

1.88609 

.924556 

17 

12.16567 

.613373 

3 

2.77509 

.888996 

18 

12.65929 

.493628 

4 

3.62989 

.854804 

19 

13.13394 

.474642 

0 

4.45182 

.821927 

20 

13.59032 

.456387 

6 

5.24214 

.790314 

21 

14.02916 

.438834 

7 

6.00205 

.759918 

22 

14.45111 

.421955 

8 

6.73274 

.730690 

23 

14.85684 

.405726 

9 

7.43533 

.702587 

24 

15.24696 

.390121 

10 

8.11089 

.675564 

25 

15.62208 

.375117 

11 

8.76047 

.649581 

26 

15.98277 

.360689 

12 

9.38507 

.624597 

27 

16.32958 

.346816 

13 

9.98565 

.600574 

28 

16.66306 

.333477 

14 

10.56312 

.577475 

29 

16.98371 

.320651 

15 

11.11839 

.555265 

30 

17.29203 

.308319 

1 

GROSS  ESTATE— DOWER  AND  CURTESY. 

641  Art.  16.    Dower  and  curtesy. — This  provision  includes  dower  and 

426  curtesy  and  all  interests  created  by  statute  in  lieu  thereof,  although 
the  estate  or  interest  so  created  is  different  in  character.    The  effect 

of  the  provision  is  to  require  the  inclusion  of  the  full  value  of  the  property, 
without  deduction  of  the  value  of  the  interest  of  the  surviving  husband  or 
wife.  This  rule  does  not  apply  to  the  estate  of  any  decedent  dying  after  Sep- 
tember 8,  1916,  and  prior  to  6.55  p.  m.,  February  24,  1919  (the  effective  date 
of  Title  IV  of  the  Revenue  Act  of  1918),  unless  the  property  has  its  situs  in 
a  jurisdiction  wherein  dower,  curtesy,  or  the  statutory  interest  in  lieu  thereof 
is  subject  to  the  payment  of  charges  against  the  estate,  the  expenses  of  its 
administration,  and  is  subject  to  distribution  as  part  of  the  estate,  or  unless 
there  has  been  an  election  to  take  property  devised  or  bequeathed  in  lieu  of 
dower,  curtesy,  or  such  statutory  interest,  and  the  property  so  taken  has  its 
situs  in  a  jurisdiction  by  the  laws  of  which  it  is  subject  to  the  payment  of 
such  charges  and  expenses,  and  to  distribution  as  a  part  of  the  estate. 

GROSS  ESTATE— TRANSFERS  BY  DECEDENT  IN  HIS  LIFETIME. 

642  Art.  17.    Nature  and  time  of  transfer. — A  transfer  made  by  the  de- 

427  cedent  at  any  time,  and  in  any  manner,  is  taxable  when  made  in 
contemplation  of  or  intended  to  take  effect  in  possession  or  enjoy- 
ment at  or  after  his  death,  provided  it  was  not  a  bona  fide  sale  for  a  fair  con- 
sideration in  money  or  money's  worth.  To  constitute  such  a  sale  it  must 
have  been  made  in  good  faith,  and  the  price  must  have  been  a  fair  equivalent, 
and  reducible  to  a  money  value.  The  value  of  property,  where  title  was 
so  transferred  by  the  decedent  before  September  9,  1916,  is  to  be  included 
in  his  gross  estate  if  his  death  occurred  after  the  effective  date  of  the  Revenue 
Act  of  1918,  but  it  not  to  be  included  if  he  died  prior  thereto. 

TRANSFERS  IN  CONTEMPLATION  OF  DEATH. 
©43      Art.  18.    Nature  of  transfer. — The  words  "in  contemplation  of 
death"  do  not  mean,  on  the  one  hand,  a  general  expectation  of  death 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


such  as  all  persons  entertain,  nor,  on  the  other,  is  the  meaning  limited  to  an 
expectation  of  immediate  death.  A  transfer,  however,  is  made  in  con- 
templation of  death  wherever  the  person  making  it  is  influenced  to  do  so  by- 
such  an  expectation  of  death,  arising  from  bodily  or  mental  conditions,  as 
prompts  persons  to  dispose  of  their  property  to  those  whom  they  deem 
proper  objects  of  their  bounty.  Such  a  transfer  is  taxable,  although  the 
decedent  parts  absolutely  and  immediately  with  his  title  to  and  possession 
and  enjoyment  of  the  property.  Any  transfer  made  by  a  decedent  within 
two  years  prior  to  his  death,  without  a  fair  consideration  in  money  or  money's 
worth,  is  presumed  to  be  taxable  if  of  a  material  part  of  his  property  and  in 
the  nature  of  a  final  disposition  or  distribution  thereof.  The  executor  must 
return  the  value,  as  of  the  date  of  decedent's  death,  of  all  property  trans- 
ferred by  the  decedent  at  any  time  in  contemplation  of  death,  where  the 
transfer  was  not  a  bona  fide  sale  for  a  fair  consideration  in  money  or  money's 
worth,  and  must  disclose  in  the  return  all  transfers  of  a  material  part  of 
decedent's  property  made  at  any  time  without  such  consideration,  but  need 
not  include  in  the  gross  estate  the  value  of  such  thereof  as  he  contends  were 
not  made  in  contemplation  of  death,  in  which  event  he  may  submit  with  the 
return  evidence  of  all  material  facts  tending  to  disclose  the  decedent's  motive 
at  the  time,  his  then  anticipation  of  death,  and  mental  and  physical  condition. 

644  The  presumption  of  taxability  of  a  transfer  made  within  the  two-year 
period  may  be  rebutted  by  proof  that  it  was  not  made  under  the 

conditions  stated  in  the  statute,  and  such  proof  must  be  filed  with  the  return. 
Unless  proof  is  submitted  which  is  sufficient  to  rebut  the  presumption  the 
transfer  will  be  included  in  the  gross  estate  in  computing  the  tax. 

645  The  fact  that  a  gift  was  made  as  an  advancement,  to  be  taken  into 
account  upon  the  final  distribution  of  the  decedent's  estate,  is  not 

enough,  standing  alone,  to  establish  taxability. 

TRANSFERS  INTENDED  TO  TAKE  EFFECT  AT  OR  AFTER  DEATH. 

646  Art.  19.    General. — All  transfers  at  any  time  made  by  the  decedent, 
other  than  bona  fide  sales  for  a  fair  consideration  in  money  or  money's 

worth,  which  were  intended  to  take  effect  in  possession  or  enjoyment  at  or 
after  his  death,  are  taxable,  and  the  value  of  the  property  so  transferred,  as 
of  the  date  of  the  decedent's  death,  must  be  returned  as  a  part  of  the  gross 
estate. 

647  Art.  20.    Reservation  of  income. — A  transfer,  not  amounting  to  a 
bona  fide  sale  for  a  fair  consideration  in  money  or  money's  worth,  is 

taxable  where  the  decedent  reserved  to  himself  during  life  the  income 
of  the  property  transferred.  In  such  a  case  the  transfer  of  the  principal 
takes  effect  in  possession  and  enjoyment  at  the  death  of  the  decedent,  and 
the  value  of  the  entire  property  should  be  included  in  the  gross  estate.  Where 
the  decedent  reserved  a  proportionate  part  of  the  income,  only  a  corresponding 
proportion  of  the  value  of  the  property  should  be  included  in  the  gross  estate. 
If,  for  example,  he  reserved  one-half  of  the  income,  the  value  of  one-half  of 
the  property  transferred  should  be  included  in  the  gross  estate.  If  he  reserved 
an  annuity,  so  much  of  the  property  as  is  necessary  to  produce  the  annuity 
should  be  included  in  the  gross  estate.  A  transfer  is  taxable  in  accordance 
with  these  principles  whether  the  decedent  reserved  the  annuity  out  of  the 
property  conveyed,  or  payment  thereof  to  him  was  made  by  the  grantee 
upon  an  express  or  an  implied  agreement  to  that  effect.    Where,  however 

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Regulations  68. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


the  transfer  was  made  in  contemplation  of  death,  the  full  value  of  the  trans- 
ferred property,  as  of  the  date  of  the  decedent's  death,  should  be  included 
in  the  gross  estate  irrespective  of  the  amount  of  income  or  of  the  annuity 
payable  to  the  decedent. 

648  A  gift  of  the  principal  intended  to  take  effect  either  in  possession  or 
enjoyment  at  or  after  the  decedent's  death  is  taxable,  although  the 

income  during  the  decedent's  life  was  payable  to  some  one  other  than  himself. 
Example:  The  decedent  transferred  property  to  his  son,  the  latter  agreeing 
to  pay  the  income  to  his  mother  during  the  decedent's  life.  The  transfer  to 
the  son  is  taxable. 

649  Art.  21.  Power  of  revocation  or  control. — Property  held  in  trust 
under  any  instrument  in  which  the  decedent  reserved  a  power  of  re- 
vocation, or  any  power  which  has  that  effect,  constitutes  a  part  of  the  gross 
estate.  For  example,  where  a  decedent  placed  property  in  trust  for  the 
present  benefit  of  his  son,  but  reserved  the  power  to  revoke  the  trust  at  any 
time  during  his  life,  the  value  of  the  entire  property  transferred  should  be 
included  in  the  gross  estate. 

650  Art.  22.    Valuation  of  property  transferred. — The  property  to  be 
valued  is  the  interest  owned  and  transferred  by  the  decedent;  but 

the  value  of  such  property  must  be  ascertained  as  of  the  date  of  the  de- 
cedent's death.  Where  the  transferee  makes  additions  to  the  property,  or 
betterments,  the  enhanced  value  of  the  property  at  that  date,  due  to  such 
additions  or  betterments,  is  not  to  be  included. 

GROSS  ESTATE— PROPERTY  HELD  JOINTLY. 

651  Art.  23.    Property  held  jointly  or  as  tenants  by  the  entirety. — The 

428  statute  provides  for  the  inclusion  in  the  gross  estate  of  interests  held 
jointly  by  the  decedent  and  any  other  person  or  persons,  and  of 
estates  by  the  entirety.  This  class  of  property  includes  all  interests,  whether 
in  real  or  personal  property,  where  the  survivor  takes  the  entire  property 
by  right  of  survivorship,  and  consequently  the  decedent's  interest  therein 
forms  no  part  of  his  estate  for  purposes  of  administration.  It  does  not  include 
interests  held  as  tenants  in  common,  where  the  interest  of  each  tenant  passes 
free  from  any  right  of  survivorship. 

652  The  following  are  examples  of  this  class:  Real  estate  held  by  joint 
tenants;  real  estate  held  by  husband  and  wife  (known  as  an  estate 

by  the  entirety);  money  deposited  in  a  bank  or  trust  company  in  the  joint 
names  of  the  decedent  and  another  and  payable  to  either  or  the  survivor; 
and,  in  general,  all  securities  and  other  personal  property,  where  the  title 
thereto  was  vested  in  the  decedent  and  one  or  more  other  persons,  subject 
to  the  right  of  survivorship. 

653  Art.  24.    Taxable  portion. — The  entire  value  of  such  property  is 
prima  facie  a  part  of  the  decedent's  gross  estate,  but  as  it  is  not  the 

intent  of  the  statute  that  there  should  be  so  included  a  greater  part  or  pro- 
portion thereof  than  is  represented  by  an  outlay  of  funds,  which,  in  the  first 
instance,  were  decedent's  own,  or  more  than  a  fractional  part  equal  to  that 
of  the  other  joint  owner  where  neither  had  parted  with  any  consideration  in 
its  acquirement,  facts,  which  in  a  given  case  bring  it  within  any  one  of  the 
exceptions  enumerated  in  the  statute,  may  be  submitted  by  the  executor. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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8-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


654  Whether  the  value  of  the  entire  property,  on  only  a  part,  or  none 
of  it,  enters  into  the  make-up  of  the  gross  estate,  depends  upon  the 

following  considerations:  (1)  So  much  of  the  property  (whether  the  whole, 
or  a  part  thereof)  as  originally  belonged  to  the  other  joint  owner,  and  which 
at  no  time  in  the  past  had  been  received  or  acquired  by  the  latter  from  the 
decedent  for  less  than  a  fair  consideration  in  money  or  money's  worth,  forms 
no  part  of  the  decedent's  gross  estate.  (2)  Where  the  facts  are  otherwise 
the  same  as  in  (1),  but  the  decedent  paid  to  such  other  joint  owner  a  consid- 
eration for  the  interest  by  him  (the  decedent)  acquired  in  the  property,  then 
such  portion  of  the  value  of  the  property,  proportionate  to  the  consideration 
so  paid,  constitutes  a  part  of  the  gross  estate.  (3)  Where  the  property,  or 
a  part  thereof,  or  a  part  of  the  consideration  wherewith  it  was  acquired,  had 
at  any  time  been  acquired  by  the  other  joint  owner  from  the  decedent  as  a 
gift,  or  for  less  than  a  fair  consideration  in  money  or  money's  worth,  then 
such  portion  of  the  value  of  the  entire  property,  proportionate  to  the  con- 
sideration, if  any,  which  in  the  first  instance  was  paid  from  such  other  joint 
owner's  own  funds,  forms  no  part  of  the  gross  estate.  (4)  Where  the  property 
was  acquired  by  the  decedent  and  his  or  her  surviving  spouse  as  tenants  in 
the  entirety  by  gift,  will,  or  inheritance,  then  but  one-half  of  the  value  of 
the  property  becomes  a  part  of  the  gross  estate.  (5)  Where  acquired  by  the 
decedent  and  the  other  joint  owner  as  joint  tenants  by  gift,  will,  or  inheritance, 
and  their  interests  are  not  otherwise  specified,  or  fixed  by  law,  then  one-haff 
only  of  the  value  of  the  property  is  a  part  of  the  gross  estate;  or,  where  so 
acquired  by  the  decedent  and  two  or  more  persons,  and  the  interests  of  the 
several  joint  tenants  are  not  otherwise  determinable,  then  the  decedent  and 
the  other  joint  tenants  surviving  him  shall  each  be  deemed  the  owner  of  an 
equal  fractional  part,  and  the  value  of  one  only  of  such  fractional  parts  is  to 
be  included  in  the  gross  estate. 

655  The  following  are  given  as  illustrative:  (a)  The  decedent  may  have 
furnished  the  entire  purchase  price,  in  which  case  the  value  of  the 

entire  property  should  be  included  in  his  gross  estate;  (b)  the  decedent  may 
have  furnished  a  part  only  of  the  purchase  price,  in  which  case  only  the  value 
of  a  corresponding  portion  of  the  property  should  be  so  included;  (c)  the 
decedent,  prior  to  acquisition  of  the  property  by  himself  and  the  other  joint 
owner,  may  have  given  to  the  latter  a  sum  of  money  which  later  constituted 
such  other  joint  owner's  entire  contribution  to  the  purchase  price  of  the 
property,  in  which  case  the  entire  value  of  the  property  should  be  included; 
(d)  the  other  joint  owner,  at  a  date  prior  to  the  acquirement  of  the  property, 
may  have  acquired  from  the  decedent,  for  less  than  a  fair  consideration  in 
money  or  money's  worth,  property  which  thereafter  became  as  such,  or  in  a 
converted  form,  part  of  the  purchase  price  of  the  property.  In  such  a  case, 
the  value  of  the  property  to  be  included  is  to  be  reduced  proportionately  to 
the  consideration  furnished  by  the  other  joint  owner  in  the  original  trans- 
action; (e)  the  decedent  may  have  furnished  no  part  of  the  purchase  price, 
in  which  case  no  part  of  the  property  should  be  included;  (J)  the  decedent 
and  spouse  may  have  acquired  the  property  by  will  as  tenants  by  the  entirety, 
in  which  case  one-half  of  the  value  of  the  property  should  be  included. 

GROSS  ESTATE— PROPERTY  PASSING  UNDER  POWER  OF 

APPOINTMENT. 

656  Art.  25.  General  rules. — The  value  of  all  property  passing  under  a 
429       general  power  of  appointment  must  be  included  in  the  gross  estate 

of  the  person  exercising  the  power  (known  as  the  donee,  or  appointor) 

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where  the  power  is  exercised  by  will.  It  should  also  be  so  included 
when  the  power  is  exercised  by  deed  or  other  instrument  executed  in  con- 
templation of,  or  intended  to  take  effect  in  possession  or  enjoyment  at  or 
after,  the  death  of  the  donee  of  the  power.  The  statute,  however,  does  not 
require  inclusion  within  the  gross  estate  of  the  value  of  the  appointed  property 
in  the  case  of  a  bona  fide  sale  thereof  by  the  donee  of  the  power  for  a  fair 
consideration  in  money  or  money's  worth. 

657  Only  property  passing  under  a  general  power  should  be  included. 
A  general  power  is  one  to  appoint  to  any  person  or  persons  in  the  dis- 
cretion of  the  donee  of  the  power.  Where  the  donee  is  required  to  appoint 
to  a  specified  person  or  class  of  persons,  the  property  should  not  be  included 
in  his  gross  estate.  Property  appointed  under  a  general  power  should  be  so 
included,  although  the  persons  to  whom  the  appointment  was  made  would 
have  taken  the  property  had  the  power  not  been  exercised.  A  copy  of  the 
instrument  granting  the  power  should  be  filed  with  Form  706  in  all  cases  in 
order  that  the  Commissioner  may  determine  whether  the  power  is  general  or 
special. 

658  Example:  The  income  of  property  is  left  to  a  person  for  life,  with 
the  right  to  name  in  his  will  the  person  who  shall  receive  the  properly 

upon  his  death.  He  exercises  this  power  in  his  will.  Upon  his  death,  the 
value  of  the  property  so  appointed  should  be  included  in  his  gross  estate. 

659  Art.  26.   Powers  exercised  before  and  after  February  24, 1919. — The 

provisions  of  the  Revenue  Act  of  1918,  and  those  of  the  present 
statute,  respecting  transfers  effected  through  the  exercise  of  a  general  power 
of  appointment  are  identical,  hence,  subject  to  the  exception  stated,  in  the 
preceding  article,  namely,  where  the  appointment  was  made  for  a  fair  con- 
sideration in  money  or  money's  worth,  the  value  of  all  property  so  transferred 
by  the  decedent  in  the  exercise  of  such  a  power  must  be  included  in  the  gross 
estate,  if  his  death  occurred  subsequent  to  6.55  p.  m.,  February  24,  1919 
(the  effective  date  of  the  Revenue  Act  of  1918).  Where,  however,  the  de- 
cedent died  prior  to  the  effective  date  of  the  Revenue  Act  of  1918,  the  value 
of  the  appointed  property  is  not  to  be  so  included. 

GROSS  ESTATE— INSURANCE. 

660  Art.  27.  Taxable  insurance. — The  statute  provides  for  the  inclusion 
430       in  the  gross  estate  of  certain  forms  of  insurance  taken  out  by  the 

decedent  upon  his  own  life.  Two  kinds  of  insurance  are  taxable: 
(a)  all  insurance  receivable  by,  or  for  the  benefit  of,  the  estate;  (b)  all  other 
insurance  to  the  extent  that  it  exceeds  in  the  aggregate  $40,000.  The  term 
"insurance"  refers  to  life  insurance  of  every  description,  including  death 
benefits  paid  by  fraternal  beneficial  societies,  operating  under  the  lodge  system. 
Insurance  is  deemed  to  be  taken  out  by  the  decedent  in  all  cases  where  he 
pays  the  premiums,  either  directly  or  indirectly,  whether  or  not  he  makes 
the  application.  On  the  other  hand,  the  insurance  is  not  deemed  to  be 
taken  out  by  the  decedent,  even  though  the  application  is  made  by  him, 
where  the  premiums  are  actually  paid  by  the  beneficiary,  who  may  be  either 
a  person  or  a  corporation.  Where  the  decedent  takes  out  insurance  in  favor 
of  another  person  or  corporation,  as  collateral  security  for  a  loan  or  other 
accommodation,  and  either  directly  or  indirectly,  pays  the  premiums  thereon, 
the  insurance  must  be  considered  in  determining  whether  there  is  an  excess 
over  $40,000.  The  amount  of  the  loan  outstanding  at  decedent's  death, 
with  interest  accrued  thereon  to  that  date,  will  be  deductible  in  determining 

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the  net  estate.  (See  Art.  39.)  Where  the  decedent  assigns  a  policy,  and 
retains  no  interest  therein,  and  thereafter  pays  no  part  of  the  premiums,  the 
insurance  will  not  be  considered  in  determining  whether  there  is  such  an  excess. 

661  Art.  28.  Insurance  in  favor  of  the  estate. — The  provision  requiring 
the  inclusion  in  the  gross  estate  of  all  insurance  receivable  by  the 
executor,  without  any  deduction,  applies  to  policies  made  payable  to  the 
decedent's  estate  or  his  executor  or  administrator,  and  all  insurance  which  is 
in  fact  receivable  by,  or  for  the  benefit  of,  the  estate.  It  includes  insurance 
taken  out  to  provide  funds  to  meet  the  estate  tax,  and  any  other  taxes  or 
charges  which  are  enforceable  against  the  estate.  The  manner  in  which  the 
policy  is  drawn  is  immaterial  so  long  as  there  is  an  obligation,  legally  binding 
upon  the  beneficiary,  to  use  the  proceeds  in  payment  of  such  taxes  or  charges. 

662.  Art.  29.  Insurance  receivable  by  other  beneficiaries. — The  estate  is 
entitled  to  only  one  exemption  of  $40,000  upon  insurance  receivable 
by  beneficiaries  other  than  the  estate.  For  example,  if  the  decedent  left  life 
insurance  payable  to  three  such  beneficiaries  in  amounts  of  $10,000,  $40,000, 
and  $50,000  (total,  $100,000),  the  amount  of  $60,000  should  be  returned  for 
taxation,  which  is  the  excess  of  the  sum  of  the  three  policies  over  the  exempted 
amount.  The  word  "beneficiaries,"  as  used  in  reference  to  the  $40,000  ex- 
emption, means  persons  entitled  to  the  actual  enjoyment  of  the  insurance 
money. 

663  Art.  30.    Effective  date  of  insurance  provisions. — Insurance  receiv- 
able by  the  estate  must  be  included  in  the  gross  estate  of  all  decedents 

who  died  after  September  8,  1916.  Insurance  payable  to  beneficiaries  other 
than  the  estate,  however,  need  not  be  included  in  the  gross  estate  of  decedents 
who  died  before  the  effective  date  of  Title  IV  of  the  Revenue  Act  of  1918, 
unless  the  insurance  was  originally  payable  to  the  estate,  and  the  policy  was 
thereafter  assigned,  or  made  payable,  to  a  specific  beneficiary  in  contemplation 
of,  or  intended  to  take  effect  in  possession  or  enjoyment  at  or  after  the  de- 
cedent's death;  such  assignment  or  change  in  beneficiary  not  being  for  a 
fair  consideration  in  money  or  money's  worth. 

664  Art.  31.    Valuation  of  insurance. — The  amount  to  be  returned  in  the 
case  of  any  policy  is  the  amount  receivable  by  the  estate  or  other 

beneficiary.  In  cases  where  the  proceeds  of  a  policy  are  made  payable  to 
the  beneficiary  in  the  form  of  an  annuity  for  life  or  for  a  term  of  years,  the 
present  worth  of  the  annuity  at  the  time  of  death  should  be  included  in  the 
gross  estate.  For  the  method  of  computing  the  value  of  such  an  annuity, 
see  Article  15.  Where  the  insurance  contract  gives  an  option  to  receive  a 
fixed  sum  of  money  in  lieu  of  an  annuity,  this  sum,  if  accepted,  represents 
the  value  of  the  insurance  for  the  purpose  of  the  tax.  If  such  sum  is  not 
accepted  the  value  of  the  annuity  is  to  be  included  in  the  gross  estate.  Where 
there  is  more  than  one  option,  and  none  of  them  is  convertible,  the  value  of 
the  insurance  should  be  determined  in  accordance  with  the  option  actually 
exercised. 

DEDUCTIONS— ESTATES  OF  RESIDENTS. 

665  Art.  32.  Deduction  of  claims,  expenses,  etc. — In  order  to  be  deduct- 
433       ible  under  the  foregoing  provision  of  the  statute,  the  item  must  fall 

within  one  of  the  several  classes  of  deductions  specifically  enumer- 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


ated  therein,  and  must  also,  except  in  the  case  of  deductible  losses  during  the 
administration  of  the  estate,  be  one  the  payment  of  which  out  of  the  estate 
is  authorized  by  the  laws  of  the  jurisdiction  under  which  the  estate  is  being 
administered.  Unless  both  of  these  conditions  exist,  the  item  is  not  de- 
ductible. Where  the  item  is  not  one  of  those  described,  it  is  not  deductible 
merely  because  payment  is  allowed  by  the  local  law.  Where  the  amount 
which  may  be  expended  for  the  particular  purpose  is  limited  by  the  local 
law,  no  deduction  in  excess  of  such  limitation  is  permissible.  An  item  may 
be  entered  on  the  return  for  deduction  though  the  exact  amount  thereof  is  not 
then  known,  provided  it  is  ascertainable  with  reasonable  certainty,  and 
will  be  paid.  No  deduction  may  be  taken  upon  the  basis  of  a  vague  or  un- 
certain estimate.  When  an  uncertain  or  contingent  liability  was  unde- 
termined at  the  time  of  audit  of  the  return  by  the  Commissioner,  and,  as  a 
consequence,  deduction  was  not  allowed  therefor  in  such  audit,  the  remedy 
is  by  a  claim  for  abatement  or  refund  when  the  liability  and  the  amount 
thereof  becomes  fixed  and  determined.    (See  Arts.  93  to  97,  inclusive.) 

666  Art.  33.  Effect  of  court  decree. — The  decision  of  a  local  court  as  to 
the  amount  of  a  claim  or  administration  expense  will  ordinarily  be  ac- 
cepted where  the  court  passes  upon  the  facts  upon  which  deductibility  depends. 
Where  the  court  does  not  pass  upon  such  facts  its  decree  will,  of  course,  not 
be  followed.  For  example,  where  the  question  before  the  court  is  whether 
a  claim  should  be  allowed,  the  decree  allowing  it  will  ordinarily  be  accepted 
as  establishing  that  the  claim  is  valid  and  the  amount  of  it.  Where,  however, 
a  legacy  is  left  to  an  executor  in  lieu  of  commissions,  the  allowance  of  the 
legacy  does  not  establish  that  the  executor's  claim  for  commissions  is  equal 
to  the  amount  bequeathed,  and  that  this  amount  is  consequently  deductible. 
(See  Art.  36.)  Nor  will  the  decree  necessarily  be  accepted  even  where  it 
purports  to  decide  the  facts  upon  which  deductibility  depends.  It  must 
appear  that  the  court  actually  passed  upon  the  merits  of  the  case.  This  will 
be  presumed  in  all  cases  where  there  is  an  active  and  genuine  contest.  Where 
the  result  reached  appears  to  be  unreasonable,  this  is  some  evidence  that 
there  was  not  such  a  contest,  but  it  may  be  rebutted  by  proof  to  the  contrary. 
WThere  the  decree  was  rendered  by  consent,  it  will  be  accepted,  provided  the 
consent  was  a  bona  fide  recognition  of  the  validity  of  the  claim — not  a  mere 
cloak  for  a  gift — and  was  accepted  by  the  court  as  satisfactory  evidence  upon 
the  merits.  It  will  be  presumed  that  the  consent  was  of  this  character,  and 
was  so  accepted,  where  it  is  made  by  all  parties  having  an  interest  adverse 
to  the  claim,  when  all  aspects  of  the  matter,  including  its  effect  upon  taxation, 
are  considered.  The  decree  will  not  be  accepted  where  it  appears  to  be  at 
variance  with  the  law  of  the  state;  as,  for  example,  if  an  allowance  is  made 
to  an  executor  in  excess  of  the  rate  prescribed  by  statute. 

667  Art.  34.  Funeral  expenses. — An  executor  may  deduct  such  amounts 
for  funeral  expenses  as  are  actually  expended  by  him,  provided  ex- 
penditures of  this  nature  are  a  liability  of  the  estate  under  the  laws  of  the 
local  jurisdiction.  A  reasonable  expenditure  by  the  executor  for  a  tomb- 
stone, monument,  mausoleum,  or  for  a  burial  lot,  either  for  the  decedent  or 
his  family,  may  be  deducted  under  this  heading,  provided  such  an  expenditure 
is  made  a  charge  upon  the  estate  by  the  local  law.  Included  in  funeral 
expenses  is  the  cost  of  transportation  of  the  person  bringing  the  body  to  .the 
place  of  burial. 

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668  Art.  35.    Administration  expenses. — The  amounts  deductible  from 

the  gross  estate  as  ''administration  expenses"  are  such  expenses  as 
are  actually  and  necessarily  incurred  in  the  administration  of  the  estate;  that 
is,  in  the  collection  of  assets,  payment  of  debts,  and  distribution  among  the 
persons  entitled.  The  expenses  contemplated  in  the  law  are  such  only  as 
attend  the  settlement  of  an  estate  by  the  legal  representative  preliminary  to 
the  transfer  of  the  property  to  individual  beneficiaries  or  to  a  trustee,  whether 
such  trustee  is  the  executor  or  some  other  person.  Expenditures  not  essential 
to  the  proper  settlement  of  the  estate,  but  incurred  for  the  individual  benefit 
of  the  heirs,  legatees,  or  devisees,  may  not  be  taken  as  deductions.  Ad- 
ministration expenses  include  (1)  executor's  commissions;  (2)  attorney's  fees; 
(3)  miscellaneous  expenses.  Each  of  these  classes  is  considered  separately. 
(See  Arts.  36  to  38,  inclusive.) 

669  Art.  36.   Executor's  commissions. — The  amount  deductible  as  execu- 
tor's or  administrator's  commissions  is  such  amount  as  has  actually 

been  paid  or  which  at  the  time  the  return  is  filed  it  is  reasonably  expected 
will  be  paid,  but  no  deduction  will  be  allowed  if  no  commissions  are  to  be 
collected.  Where  the  amount  of  the  commissions  has  not  been  fixed  by  de- 
cree of  the  proper  court,  the  deduction  will  be  allowed  on  the  final  audit  of 
the  return  provided:  (1)  That  the  Commissioner  is  reasonably  satisfied  that 
the  commissions  claimed  will  be  paid:  (2)  that  the  amount  entered  as  a 
deduction  is  within  the  amount  allowable  by  the  laws  of  the  jurisdiction 
wherein  the  estate  is  being  administered;  and  (3)  that  it  is  in  accordance 
with  the  usually  accepted  practice  in  said  jurisdiction  in  estates  of  similar 
size  and  character.  Where  the  commissions  claimed  have  not  been  awarded 
by  the  proper  court  the  Commissioner  on  final  audit  may  disallow  the  de- 
duction in  part  or  in  whole,  as  the  circumstances  in  his  judgment  justify, 
subject  to  such  future  adjustment  as  the  facts  may  later  require.  If  the 
deduction  is  allowed  in  advance  of  payment  and  payment  is  thereafter 
waived,  it  shall  be  the  duty  of  the  executor  to  notify  the  Commissioner. 

670  Executors  should  note  that  the  amounts  received  in  payment  of  the 
commissions  constitute  taxable  income  and  that  amounts  allowed  on 

final  audit  are  cross-referenced  for  income-tax  purposes. 

671  A  bequest  to  an  executor  in  lieu  of  commissions  is  deductible  as  an 
administration  expense  in  the  amount  that  it  does  not  exceed  com- 
missions allowable  under  local  law  and  practice. 

672  Amounts  paid  as  trustees'  commissions  do  not  constitute  expenses 
of  administration  and  are  not  deductible,  whether  received  by  the 

executor  acting  in  the  capacity  of  a  trustee  or  by  a  separate  trustee  as  such. 

673  Art.  37.   Attorney's  fees.  -The  amount  deductible  as  attorney's  fee 
is  the  amount  actually  paid  as  such  or  which  at  the  time  the  return 

is  filed  it  is  reasonably  expected  will  be  paid.  Jf  on  the  final  audit  of  a  re- 
turn, the  fees  claimed  have  not  been  awarded  by  the  proper  court  and  paid, 
the  deduction  will  be  allowed,  provided  that  the  Commissioner  is  reasonably 
satisfied  that  the  amount  claimed  will  be  paid  and  that  it  does  not  exceed 
a  reasonable  remuneration  for  the  services  rendered,  taking  into  full  account 
the  size  and  character  of  the  estate  and  local  law  and  practice. 

674  Where  the  attorney's  fees  have  not  been  paid  at  the  time  of  the  final 
audit  of  the  return,  the  Commissioner  ma}'  disallow  the  deduction 

in  part  or  in  whole,  as  the  circumstances  may  warrant,  subject  to  such  future 
adjustment  as  the  facts  may  require. 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


675  Attorney's  fees  incident  to  litigation  instituted  by  the  beneficiaries 
as  to  their  respective  interests  do  not  constitute  a  proper  deduction, 

inasmuch  as  expenses  of  this  character  are  properly  charges  against  the  bene- 
ficiaries personally  and  are  not  administration  expenses  as  contemplated  by 
the  statute. 

676  Art.  38.    Miscellaneous  administra tic n  expenses. — This  item  includes 
expenses  incident  to  court  proceedings,  or  the  administration  of  the 

estate,  such  as  court  costs,  surrogates'  fees,  accountants'  fees,  appraisers* 
fees,  clerk  hire,  etc.  Expenses  necessarily  incurred  in  distributing  the  estate 
are  deductible.  This  includes  the  cost  of  storing  or  maintaining  property  of 
the  estate,  where  it  is  impossible  to  effect  immediate  distribution  to  the  ben- 
eficiaries. Expenses  for  preserving  and  caring  for  the  property  may  be 
deducted,  but  do  not  include  additions  or  improvements;  nor  will  such 
expenses  be  allowed  for  a  longer  period  than  the  executor  is  required  to  retain 
the  property.  A  brokerage  fee  for  selling  property  of  the  estate  is  deductible 
where  the  sale  is  necessary  in  order  to  pay  the  decedent's  debts,  or  the  ex- 
penses of  administration,  or  to  effect  distribution.  Other  expenses  attending 
the  sale  are  deductible,  such  as  the  fees  of  an  auctioneer,  where  it  is  reasonably 
necessary  to  employ  one. 

677  Art.  39.  Claims  against  the  estate. — The  amounts  that  may  be  de- 
ducted under  this  heading  are  such  only  as  represent  personal  obli- 
gations of  the  decedent  existing  at  the  time  of  his  death,  whether  then 
matured  or  not.  Only  such  claims  as  are  enforceable  against  the  estate  may 
be  deducted. 

678  Art.  40.    Taxes. — Taxes  upon  real  property  should  be  accrued  to  the 
date  of  death  in  order  to  reflect  in  the  gross  estate  the  value  of  the 

property  upon  which  they  were  imposed.  This  is  done  by  ascertaining  the 
time  between  the  first  day  of  the  taxable  period  wherein  the  death  occurs 
and  the  date  of  death,  and  computing  the  proportion  of  the  entire  tax  upon 
the  basis  which  this  period  bears  to  the  entire  taxable  period.  Such  pro- 
portion of  the  tax  had  accrued  upon  the  date  of  death,  and  is  deductible. 

679  Taxes  upon  personal  property  are  either  wholly  deductible,  or  are 
not  deductible  at  all,  depending  upon  whether  the  tax  did,  or  did  not,. 

become  the  personal  obligation  of  the  taxpayer  in  his  lifetime.  If  the  tax 
became  his  personal  obligation  during  his  life,  the  whole  amount  is  deductible 
as  a  claim  against  his  estate.  If  it  did  not  become  such  personal  obligation 
in  his  lifetime,  no  part  of  it  is  deductible.  The  question  when  the  tax  became 
the  personal  obligation  of  the  taxpayer  depends  upon  the  law  of  the  juris- 
diction imposing  the  tax.  Prima  facie,  the  date  when  the  tax  became  the 
personal  obligation  of  the  taxpayer  is  the  date  when  the  assessment  was 
laid. 

680  Federal  taxes  upon  income  received  or  accrued  during  the  decedent's 
lifetime  constitute  a  personal  obligation  of  the  decedent,  and  are 

deductible.  Taxes  upon  income  received  after  the  decedent's  death  are  not 
deductible.    No  estate,  succession,  legacy,  or  inheritance  tax  is  deductible. 

681  Art.  41.    Unpaid  mortgages. — The  full  amount  of  unpaid  mortgages 
on  property  included  in  the  gross  estate  should  be  deducted  under 

this  heading,  including  interest  which  had  accrued  at  the  time  of  death, 
whether  payable  at  that  time  or  not.  The  full  value  of  the  real  estate,  without 

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any  deduction  for  mortgages,  must  be  returned  as  part  of  the  gross  estate. 
Real  property  situated  outside  the  United  States  is  not  a  part  of  the  gross 
estate  of  a  resident  decedent,  nor  may  deduction  be  taken  of  any  mortgage 
upon,  or  any  indebtedness  in  respect  to,  such  property  when  owned  by  a 
resident  decedent. 

682  Art.  42.    Losses  from  casualty  or  theft. — There  may  be  deducted 
under  this  heading  losses  incurred  during  the  settlement  of  the  estate 

arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from  theft,  when 
such  losses  are  not  compensated  for  by  insurance  or  otherwise.  If  the  loss 
is  partly  compensated,  the  excess  of  the  loss  over  such  compensation  may  be 
deducted.  Losses  not  of  the  nature  described  are  not  deductible.  Losses 
sustained  by  reason  of  depreciation  or  otherwise  in  the  value  of  assets  of  the 
estate  subsequent  to  the  decedent's  death,  when  not  arising  from  any  of  the 
causes  named,  are  not  deductible.  In  order  to  be  deductible  a  loss  must 
occur  during  the  settlement  of  the  estate.  Where  property  has  been  de- 
livered to  the  beneficiary,  settlement  has  been  effected,  and  no  deduction 
may  be  had  for  loss  of  the  property. 

683  Art.  43.    Support  of  dependents. — The  support  during  the  settlement 
of  the  estate  of  dependents  of  the  decedent  should  be  deducted,  but 

pursuant  to  the  following  rules: 

(1)  In  order  to  be  deductible,  the  allowance  must  be  authorized  by  the 
laws  of  the  jurisdiction  in  which  the  estate  is  being  administered,  and 
not  in  excess  of  what  is  reasonably  required. 

(2)  The  allowance  for  which  deduction  may  be  made  is  limited  to 
support  during  the  settlement  of  the  estate.  Any  allowance  for  a  more 
extended  period  is  not  deductible. 

(3)  There  must  be  an  actual  disbursement  from  the  estate  to  the 
dependents,  but  after  payment  has  been  made  the  right  of  deduction  is  not 
affected  by  the  fact  that  the  dependents  do  not  expend  the  entire  amount 
for  their  support  during  the  settlement  of  the  estate. 

DEDUCTIONS— PROPERTY  PREVIOUSLY  TAXED. 

684  Art.  44.  Deduction  of  the  value  of  transfers  taxed  within  five 
| 434      years. — Where  there  is  included  in  the  decedent's  gross  estate  property 

received  by  him  by  gift,  will,  or  inheritance  from  any  person  who  died 
within  five  years  prior  to  his  death,  or  property  acquired  in  exchange  for 
property  so  received,  the  statute  authorizes  a  deduction  in  behalf  thereof, 
subject  to  the  following  conditions  and  limitations,  namely: 

(1)  The  two  deaths  must  have  occurred  within  five  years  of  each  other. 

(2)  The  property  must  be  identified  either  as  the  same  which  the  decedent 
so  received,  or  subsequently  acquired  in  exchange  therefor. 

(3)  The  property  must  have  formed  a  part  of  the  gross  estate,  situated 
in  the  United  States,  of  such  prior  decedent. 

(4)  An  estate  tax  must  have  actually  been  paid  by  or  on  behalf  of  the 
estate  of  such  prior  decedent  (the  mere  filing  of  a  return  for  such  estate  not 
being  sufficient). 

(5)  The  property,  or  that  acquired  in  exchange  therefor,  in  so  far  as  it 
constitutes  a  part  of  the  decedent's  gross  estate,  is,  for  the  purpose  of  in- 
clusion therein,  to  be  valued  as  of  the  date  of  the  decedent's  death. 


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(6)  The  deduction,  however,  is  limited  to  the  value  which  the  Com- 
missioner placed  on  the  property  in  determining  the  value  of  the  gross  estate 
of  the  prior  decedent. 

(7)  The  deduction  is  also  limited  to  the  extent  that  the  value  of  the 
property,  or  that  acquired  in  exchange  therefor,  is  included  in  the  decedent's 
gross  estate.    (See  example  following  the  next  paragraph.) 

(8)  The  deduction  is  further  limited  to  the  extent  that  the  value  of  the 
property,  or  of  that  so  acquired  in  exchange,  is  not  deducted  under  para- 
graphs (1)  or  (3)  of  subdivision  (a)  of  section  403. 

685  Example:  The  decedent's  father  died  January  1,  1917.    Included  in 
his  gross  estate  was  a  tract  of  land  comprising  200  acres  upon  which 

the  Commissioner  placed  a  value  for  estate  tax  purposes  of  $20,000.  The 
tax  on  the  father's  estate  was  paid.  The  son,  having  inherited  the  tract 
from  his  father,  sold  100  acres  thereof  on  January  1,  1920,  for  $20,000,  and 
commingled  the  proceeds  with  his  other  funds.  On  the  son's  death,  which 
occurred  January  1,  1921,  the  remaining  one-half  of  the  land  was  returned 
as  a  part  of  his  gross  estate  at  $20,000,  which  was  the  fair  market  value  thereof 
as  of  the  date  of  his  death.  Since  only  one-half  of  the  tract  was  included  in 
the  son's  gross  estate,  the  deduction  is  limited  to  one-half  of  the  value  placed 
by  the  Commissioner  upon  the  whole  tract  when  determining  the  value  of  the 
father's  gross  estate,  or  $10,000. 

686  Under  the  provisions  of  the  Revenue  Act  of  1918  the  deduction  was 
available  only  where  the  prior  decedent  died  after  October  3,  1917, 

the  date  of  the  passage  of  the  Revenue  Act  of  1917,  and  the  decedent's 
death  occurred  subsequent  to  the  effective  date  of  the  Revenue  Act  of  1918. 
But  under  the  provisions  of  the  Revenue  Act  of  1921  the  right  to  such  de- 
duction is  made  available  to  the  estates  of  all  decedents  dying  since  Sep- 
tember 8,  1916.  Where,  under  the  provisions  of  the  Revenue  Act  of  1918, 
or  any  prior  act  of  Congress  imposing  an  estate  tax,  the  deduction  was  not 
available,  the  right  thereto  is  to  be  determined  in  accordance  with  the  pro- 
visions of  paragraph  (2)  of  subdivision  (a)  of  section  403  of  the  Revenue  Act 
of  1921,  but  where  available  under  the  Revenue  Act  of  1918,  it  is  governed  by 
paragraph  (2)  of  subdivision  (a)  of  section  403  of  that  act.  Where  the  tax 
has  been  paid  without  taking  the  deduction,  a  claim  for  refund  may  be  made, 
as  provided  by  Article  96. 

687  The  burden  of  proving  that  the  estate  is  entitled  to  the  deduction 
rests  upon  the  executor. 

688  Art.  45.    Property  originally  received. — If  the  property  originally 
received  from  the  prior  decedent  is  included  in  the  decedent's  gros9 

estate,  the  executor  must  describe  it  fully,  and  prove  its  identity. 

689  Art.  46.    Property  acquired  in  exchange. — The  deduction  for  sub- 
stituted property  is  limited  to  property  acquired  in  exchange  for  the 

identical  property  received  from  the  prior  decedent.  Where  there  is  a  sub- 
sequent exchange,  the  right  to  deduction  is  lost. 

690  In  the  case  of  an  exchange  the  executor  must  describe  and  identify 
fully  both  the  property  originally  received  from  the  prior  decedent 

and  the  property  acquired  in  exchange  therefor.  He  must  also  state  the 
date  of  the  transaction  by  which  the  exchange  was  effected  and  the  name  and 
address  of  the  transferee.  If  the  exchange  was  made  by  written  instrument 
of  public  record,  a  precise  reference  must  be  made  to  the  record  containing  a 
transcript  of  the  instrument,  and,  if  by  instrument  not  of  record,*a  copy  of 

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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


the  instrument  itself  must  be  supplied.  If  there  was  no  written  instrument, 
an  affidavit  as  to  the  facts  of  the  exchange  by  one  or  more  persons  having  per- 
sonal knowledge  of  the  matter  must  be  furnished. 

DEDUCTIONS— TRANSFERS  FOR  PUBLIC,  CHARITABLE,  ETC.,  USES. 

691  Art.  47.   Transfers  for  public,  charitable,  religious,  etc.,  uses. — In 

435  the  estates  of  decedents  dying  after  December  31,  1917,  deduction 
may  be  taken  of  the  value  of  all  property  transferred  by  will,  or  by  the 
decedent  in  his  lifetime  in  contemplation  of  or  intended  to  take  effect  in 
possession  or  enjoyment  at  or  after  his  death  (not  including,  however,  the 
value  of  property  sold  for  a  fair  consideration  in  money  or  money's  worth), 
where,  in  either  case,  the  property  is,  or  has  been,  transferred  (1)  to  or  for 
the  use  of  the  United  States,  any  State,  Territory,  any  political  subdivision 
thereof,  or  the  District  of  Columbia,  for  exclusively  public  purposes;  or  (2) 
to  or  for  the  use  of  any  corporation  or  association  organized  and  operated 
exclusively  for  religious,  charitable,  scientific,  literary,  or  educational  pur- 
poses (including  the  encouragement  of  art  and  the  prevention  of  cruelty  to 
children  or  animals),  where  no  part  of  the  net  earnings  of  the  corporation 
or  association  inures  to  the  benefit  of  any  private  stockholder  or  individual; 
or  (3)  to  a  trustee  or  trustees  exclusively  for  one  or  more  of  the  purposes 
enumerated  in  (2). 

692  Where  a  trust  is  created  for  both  a  charitable  and  a  private  purpose, 
deduction  may  be  taken  of  the  value  of  the  beneficial  interest  in 

favor  of  the  former  only  in  so  far  as  such  interest  is  presently  ascertainable, 
and  hence  severable  from  the  interest  in  favor  of  the  private  use.  Thus, 
when  money  or  property  is  placed  in  trust  to  pay  the  income  to  an  individual 
during  his  life,  and  then  to  pay  or  deliver  the  principal  to  a  charitable  corpo- 
ration, or  to  apply  it  to  a  charitable  purpose,  the  present  value  of  the  prin- 
cipal is  deductible.    For  the  manner  of  determining  such  value,  see  Article  15. 

693  The  deduction  is  not  limited,  in  the  estates  of  resident  decedents,  to 
transfers  to  domestic  corporations  or  associations,  or  to  trustees  for 

use  within  the  United  States. 

694  Art.  48.    Religious,  charitable,  scientific,  and  educational  corpo- 
rations.— A  corporation  or  association  to  which  such  a  transfer  was 

made  must  meet  three  tests:  (1)  it  must  be  organized  and  operated  for  one 
or  more  of  the  specified  purposes;  (2)  it  must  be  organized  and  operated 
exclusively  for  such  purpose  or  purposes;  and  (3)  no  part  of  its  net  earnings 
shall  inure  to  the  benefit  of  private  stockholders  or  individuals. 

695  The  estate  is  not  deprived  of  the  right  to  deduct  the  value  of  property 
so  transferred  by  reason  of  the  fact  that  private  individuals  are  the 

recipients  of  the  benefits  which  the  corporation  or  association  disperses. 
Such  right  is,  however,  lost  wherever  any  part  of  the  net  earnings  of  the 
corporation  or  association  inures  to  the  benefit  of  a  private  stockholder  or 
individual.  Thus,  if  the  shareholders  or  members  of  the  corporation  or 
association  are  entitled,  upon  a  dissolution  thereof,  to  receive  the  proceeds 
of  its  property,  including  accumulated  net  earnings,  no  right  of  deduction 
exists,  even  though  the  by-laws  provide  that  the  shareholders  or  members 
shall  not  receive  dividends  or  other  return  upon  their  shares  or  interests. 

696  Art.  49.    Proof  required. — In  order  to  prove  the  right  of  the  estate 
to  this  deduction  the  executor  must  submit: 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


(1)  Duplicate  copies  of  the  will  of  the  decedent  or  the  instrument,  if  any, 
in  the  case  of  a  transfer  of  property  in  contemplation  of  or  intended  to  take 
effect  in  possession  or  enjoyment  at  or  after  death,  as  required  by  Article  69. 
Where  copies  of  the  will  are  submitted  it  will  be  sufficient  if  one  of  these 
copies  is  certified,  but  in  such  cases  the  collector  should  forward  the  certified 
copy  to  the  commissioner. 

(2)  An  affidavit  by  the  executor  stating  whether  any  action  has  been 
instituted  to  contest  the  will  and  whether,  according  to  his  information  and 
belief,  any  such  action  is  contemplated. 

(3)  Such  other  documents  or  evidence  as  may  be  requested  by  the  com- 
missioner on  review.  A  return  will  not  be  considered  as  complete  within 
the  meaning  of  section  407  of  the  act  until  all  such  evidence  has  been  sub- 
mitted. 

697  Art.  50.    Conditional  bequests. — Where  the  transfer  is  dependent 
upon  the  performance  of  some  act  or  the  happening  of  some  event  in 

order  to  become  effective,  it  is  necessary  that  the  performance  of  the  act  or 
the  occurrence  of  the  event  shall  have  taken  place  before  the  deduction  can 
be  allowed. 

698  Where  the  legatee,  devisee,  donee,  or  trustee  is  empowered  to  divert 
the  property  or  fund,  in  whole  or  in  part,  to  a  use  or  purpose  which 

would  have  rendered  it,  to  the  extent  that  it  is  subject  to  such  power,  not 
deductible  had  it  been  directly  so  bequeathed,  devised,  or  given  by  the  de- 
cedent, deduction  will  be  limited  to  that  portion,  if  any,  of  the  property  or 
fund  which  is  exempt  from  an  exercise  of  such  power. 

699  Art.  51.    Effective  date. — The  deduction  may  be  claimed  by  the 
estates  of  all  decedents  dying  after  December  31,  1917.    Where  the 

tax  has  been  paid  without  taking  the  deduction,  a  claim  for  refund  may  be 
made,  as  provided  by  Article  96. 

SPECIFIC  EXEMPTION. 

700  Art.  52.  Specific  exemption. — There  may  be  deducted  from  the  gross 
436      estate  of  all  resident  decedents  a  specific  exemption  of  $50,000.  No 

such  exemption  is  allowed  in  the  estates  of  nonresident  decedents. 
If  more  than  one  return  is  made  for  purposes  of  the  tax,  the  exemption  may 
be  taken  but  once. 

ESTATES  OF  NONRESIDENTS. 

701  Art.  53.    Situs  of  property  of  nonresident  decedents. — Bonds  actually 

442  within  the  United  States,  moneys  due  on  open  accounts  by  domestic 

443  debtors,  and  stock  of  a  corporation  or  association  created  or  organ- 
ized in  the  United  States,  constitute  property  having  its  situs  in  the 

United  States.  On  the  other  hand,  insurance  upon  the  life  of  a  nonresident, 
and  moneys  deposited  with  any  person  or  corporation  carrying  on  the  banking 
business  in  the  United  States  by  or  for  a  nonresident  not  engaged  in  business 
in  the  United  States  at  the  time  of  his  death,  are  not  to  be  regarded  as  property 
situated  therein. 

702  Property  of  which  the  decedent  has  made  a  transfer,  or  with  respect 
to  which  he  has  created  a  trust,  in  contemplation  of,  or  intended  to 

take  effect  in  possession  or  enjoyment  at  or  after,  death,  is  deemed  to  be 
situated  in  the  United  States  if  so  situated  either  at  the  time  of  the  transfer 
or  the  creation  of  the  trust,  or  at  the  time  of  the  decedent's  death. 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


DEDUCTIONS— ESTATES  OF  NONRESIDENTS. 

703  Art.  54.  Net  estate. — The  gross  estate  of  a  resident  and  of  a  non- 
437       resident  are  made  up  in  the  same  way.    In  ascertaining  the  net 

estate,  however,  the  transfer  of  which  is  subject  to  tax,  there  is  a 
radical  difference  between  the  two  cases.  The  net  estate  in  the  case  of  a 
resident  is  determined  by  making  specified  deductions  from  the  entire  gross 
estate,  whereas  the  net  estate  in  the  case  of  a  nonresident  is  determined  by 
making  the  deductions  from  the  value  of  so  much  of  the  gross  estate  as  is 
situated  in  the  United  States.  Thus,  in  substance,  the  statute  imposes  the 
tax  only  upon  the  transfer  of  so  much  of  the  estate  of  a  nonresident  as,  under 
the  terms  of  the  statute,  had  its  situs  in  the  United  States.  On  the  other 
hand,  the  estates  of  nonresidents  are  not  entitled  to  the  specific  exemption  of 
$50,000.    (See  Art.  58.) 

704  Art.  55.  Deduction  of  claims,  expenses,  etc. — In  estates  of  non- 
438  residents,  deduction  from  gross  estate  may  be  taken,  subject  to  the 
441       limitations  herein  subsequently  to  be  referred  to,  of  disbursements 

for  funeral  expenses,  administration  expenses,  claims  against  the 
estate,  unpaid  mortgages,  losses  incurred  during  the  settlement  of  the  estate 
arising  from  fires,  storms,  shipwreck,  or  other  casualty,  or  from  theft,  when 
such  losses  are  not  compensated  for  by  insurance  or  otherwise,  amounts 
reasonably  required  and  actually  expended  for  the  support  during  settlement 
of  the  estate  of  those  dependent  upon  the  decedent,  as  are  allowed  by  the 
laws  of  the  jurisdiction  under  which  the  estate  is  being  administered.  Treat- 
ment of  the  several  deductions  enumerated  above  will  be  found  in  Articles  32 
to  43,  inclusive.  No  deduction  may  be  taken  of  any  income  taxes  upon  in- 
come received  after  the  death  of  the  decedent,  or  of  any  estate,  succession, 
legacy,  or  inheritance  taxes.  It  is  immaterial  whether  the  amounts  to  be 
deducted  were  incurred  or  expended  within  or  without  the  United  States,  but 
certain  limitations  are  imposed  which  do  not  apply  to  estates  of  resident 
decedents,  namely:  (1)  Only  that  proportion  of  the  aggregate  thereof  is 
deductible  which  the  value  of  that  part  of  the  gross  estate,  which  at  the  time 
of  decedent's  death,  was  situated  in  the  United  States,  bears  to  the  value  of 
the  entire  gross  estate,  wherever  situated;  and  in  no  event  may  a  sum  be 
deducted  in  excess  of  10  per  centum  of  the  value  of  that  part  of  the  gross 
estate  which  at  the  time  of  death  was  situated  in  the  United  States.  (See 
Art.  58.)  Such  10  per  centum  limitation  does  not  apply  to  the  deduction 
subsequently  considered  in  Articles  56  and  57.  (2)  No  deduction  whatever 
may  be  taken  unless  the  executor  includes  in  the  return  the  value  at  the  date 
of  the  nonresident's  death  of  that  part  of  the  gross  estate  not  situated  in  the 
United  States. 

705  In  order  that  the  Commissioner  may  properly  pass  upon  the  items 
claimed  as  deductions,  the  executor  should  submit  a  certified  copy  of 

the  schedule  of  liabilities,  claims  against  the  estate  and  expenses  of  adminis- 
tration filed  under  the  foreign  estate,  succession,  or  death-duty  act;  or,  if 
no  such  schedule  was  filed,  a  certified  copy  of  the  schedule  of  such  liabilities, 
claims  and  expenses  filed  with  the  foreign  court  in  which  administration  was 
had;  or,  if  items  of  deduction  allowable  under  section  403  (b)  (1)  were  not 
included  in  either  such  schedule,  or,  if  no  such  schedules  were  filed,  then  the 
affidavit  of  the  foreign  executor  setting  forth  the  facts  relied  upon  as  entitling 
the  estate  to  the  benefit  of  the  particular  deduction  or  deductions. 


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ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


706  Art.  56.    Deduction  of  value  of  transfers  taxed  within  five  years  — 

.  439  The  right  to  deduct  the  value  of  property  received  by  a  nonresident 
441  decedent  from  any  person  dying  within  five  years  prior  to  his  death, 
or  of  the  value  of  property  acquired  in  exchange  for  property  so  re- 
ceived, is  governed  by  the  same  rules  as  those  which  apply  to  estates  of  resident 
decedents,  subject  to  the  two  following  exceptions:  (1)  That  such  right  is 
limited  to  the  extent  that  the  value  of  the  property,  or  of  that  acquired  in 
exchange  therefor,  is  not  deducted  under  paragraphs  (1)  or  (3)  of  subdivision 
(b)  of  Section  403;  (2)  That  such  right  is  not  available  to  any  extent  unless 
the  executor  includes  in  the  return  the  value  at  the  time  of  the  decedent's 
death  of  that  part  of  the  gross  estate  not  situated  in  the  United  States.  (See 
Arts.  44  to  46,  inclusive.) 

707  Art.  57.    Deduction  of  value  of  transfers  for  public,  charitable,  re- 

440  ligious,  etc.,  uses. — The  right  to  deduct  the  value  of  property  trans- 

441  ferred  by  nonresidents  for  public,  religious,  charitable,  scientific, 
literary,  or  educational  purposes  is  governed  by  the  same  rules  as 

those  applying  to  estates  of  resident  decedents  (Arts.  47  to  51,  inclusive), 
subject,  however,  to  the  two  following  exceptions,  namely:  (1)  That  the  right 
is  limited  to  transfers  to  corporations  and  associations  created  or  organized 
in  the  United  States,  or  to  trustees  for  use  within  the  United  States,  and,  (2) 
is  then  available  only  where  the  executor  includes  in  the  return  the  value  at 
the  time  of  the  nonresident  decedent's  death  of  that  part  of  the  gross  estate 
not  situated  in  the  United  States. 


708  Art.  58.    Determination  of  net  estate. — The  following  example  will 
show  the  manner  of  determining  the  net  estate  of  a  nonresident 

decedent.  The  gross  estate,  wherever  situated,  amounts  to  $1,000,000,  of 
which  $200,000  represents  the  value  of  the  property  having  its  situs  within 
the  United  States  (the  term  "United  States"  including  not  only  the  several 
States,  but  also  the  Territories  of  Alaska  and  Hawaii,  and  the  District  of 
Columbia).  The  funeral  expenses,  administration  expenses,  and  claims 
against  the  estate  aggregate  $75,000,  and  there  are  charitable  bequests,  for 
use  within  the  United  States,  amounting  to  $25,000.  Hence  the  property 
situated  within  the  United  States  constitutes  20  per  cent  of  the  entire  gross 
estate  wherever  situated,  and  a  like  percentage  of  the  $75,000  is  $15,000.  As 
the  last  named  amount  does  not  exceed  10  per  cent  of  the  value  of  the  property 
situated  in  the  United  States,  the  whole  thereof  is  deductible.  The  fol- 
lowing result  is  accordingly  obtained: 

Gross  estate  within  the  United  States   $200,000 

20  per  cent  of  $75,000   $15,000 

Charitable  bequests  for  use  within  the  United  States.   25,000 

  40,000 

Net  estate   $160,000 

709  For  the  manner  of  computing  the  tax  on  the  net  estate,  see  Article  8. 

710  In  the  example  given,  had  the  funeral  expenses,  administration  ex- 
penses and  claims  against  the  estate  aggregated  $150,000,  20  per  cent 

thereof,  or  $30,000,  would  not  have  been  deductible  for  the  reason  that  it 
would  have  exceeded  10  per  cent  of  the  value  of  the  property  situated  in  the 
United  States;  such  10  per  cent  being  the  maximum  permitted  by  the  statute. 
The  deduction  would  accordingly  have  been  limited  to  10  per  cent  of  $200,000, 
plus  the  charitable  bequests,  or  a  total  of  $45,000,  and  the  resultant  net  estate 
would  have  been  $155,000,  instead  of  the  amount  given  in  the  example. 

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ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


7  1  1  Art.  59.  Payment  of  tax. — The  provisions  relating  to  rates  and  pay- 
ment of  the  tax  are  the  same  in  estates  of  nonresidents  and  of  resi- 
dents. The  statute  provides  that  the  executor  shall  pay  the  tax.  If  no 
executor  or  administrator  has  been  appointed,  every  person  in  either  the 
actual  or  constructive  possession  of  any  property  of  the  decedent  is  constituted 
by  the  statute  an  executor  for  the  purpose  of  tax  payment,  and  is  liable  for 
the  tax  to  the  extent  of  the  property  so  in  his  possession.  All  checks,  drafts, 
or  money  orders  should  be  made  payable  to  the  order  of  Collector  of  Internal 
Revenue.    (See  Arts.  79  to  83,  inclusive.) 

PRELIMINARY  NOTICE— ESTATES  OF  RESIDENTS. 

712  Art.  60.  When  notice  required. — A  preliminary  notice  is  required  to 
446       be  filed  in  the  case  of  every  resident  decedent  whose  gross  estate 

exceeded  $50,000  in  value  at  date  of  death.  This  notice  must  be 
filed  in  duplicate  with  the  collector  in  whose  district  the  decedent  had  his 
domicile  at  the  time  of  death.  Where  there  is  doubt  as  to  whether  the 
gross  estate  exceeds  $50,000,  the  notice  should  be  filed,  as  a  matter  of  pre- 
caution, in  order  to  avoid  penalties. 

713  Art.  61.    Notice  by  executor  or  administrator. — The  duly  qualified 
executor  or  administrator  is  required  to  file  such  preliminary  notice 

On  Form  704,  copies  of  which  may  be  obtained  from  the  collector,  within 
two  months  after  qualifying  as  such,  if  notice  has  not  already  been  filed.  The 
primary  purpose  of  the  notice  is  to  advise  the  Government  of  the  existence 
of  taxable  estates,  and  filing  should  not  be  delayed  beyond  the  two-months 
period  because  of  uncertainty  as  to  the  exact  value  of  the  assets.  Since  the 
filing  of  the  notice  within  the  prescribed  period  is  mandatory,  the  estimate  of 
the  gross  estate  called  for  by  the  notice  is  merely  the  best  approximation  of 
value  which  can  be  made  within  the  time  allowed.  The  instructions  upon 
the  back  of  the  form  should  be  read  carefully  before  executing  the  notice. 
The  signature  of  one  executor  or  administrator  upon  Form  704  is  sufficient. 
For  penalties  for  delinquency  in  filing  notice,  or  for  filing  a  false  or  fraudulent 
notice,  see  Articles  88  to  90,  inclusive. 

714  Art.  62.  Notice  by  others  than  duly  qualified  executor  or  admin- 
istrator.— -The  term  "executor"  embraces  any  person  in  actual  or  con- 
structive possession  of  any  property  of  the  decedent  at  the  time  of  the  latter's 
death,  where  there  is  no  duly  qualified  executor  or  administrator.  The  notice 
on  Form  704  must  be  filed  by  such  persons  in  every  case  where  an  executor 
or  administrator  has  not  duly  qualified  as  such  within  two  months  next  fol- 
lowing the  decedent's  death.  Where,  however,  an  executor  or  admin- 
istrator qualifies  within  such  period,  the  duty  of  filing  the  notice  devolves 
upon  him,  and  all  other  persons  are  relieved  therefrom. 

715  Art.  63.    Exemption  claimed  on  account  of  military  service;  notice 
required. — The  executors  of  estates  claiming  the  right  to  exemption 

from  the  tax  under  the  provisions  of  Section  401  (see  Art.  9),  are  required  to 
file  the  two-months  notice  with  the  proper  collector  in  the  same  manner  as 
the  executors  of  taxable  estates.  The  executor  should,  in  addition,  write 
across  the  face  of  the  form  the  words  "Exemption  claimed  on  account  of 
military  service." 


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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


NOTICE— ESTATES  OF  NONRESIDENTS. 

7 1  S  Art.  64.  Estates  of  nonresidents;  preliminary  notice. — In  estates  of 
446  nonresidents,  notice  on  Form  705  should  be  filed  with  the  Commis- 
sioner of  Internal  Revenue,  Washington,  D.  C,  by  every  duly  qualified 
executor  or  administrator.  The  notice  is  necessary  if  any  part  of  the  decedent's 
gross  estate  was  situated  in  the  United  States  at  the  time  of  death,  regardless 
of  the  value  of  that  part  or  of  the  entire  gross  estate.  If  no  executor  or  ad- 
ministrator has  been  appointed,  notice  must  be  filed  within  two  months  after 
the  date  of  death  by  every  person  in  either  the  actual  or  constructive  pos- 
session of  any  property  of  the  decedent  within  the  United  States  at  the  time 
of  his  death.  If  such  person  has  no  knowledge  of  the  decedent's  death 
within  two  months  following  its  occurrence,  he  should  file  the  notice  im- 
mediately upon  obtaining  such  knowledge.  If  there  is  a  delay  of  more  than 
two  months  after  the  death  in  the  appointment  of  an  executor  or  adminis- 
trator, persons  so  in  possession  should  file  notice.  The  term  "person  in  actual 
or  constructive  possession  of  any  property  of  the  decedent"  (Section  400) 
includes,  among  others,  the  decedent's  agents  and  representatives;  safe- 
deposit  companies,  warehouse  companies,  and  similar  custodians  of  property 
in  this  country  of  a  nonresident  decedent;  brokers  holding  as  collateral 
securities  belonging  to  the  decedent  or  investment  funds  owned  by  th^ 
decedent,  and  debtors  of  the  decedent  in  this  country,  but  does  not  include 
any  person,  corporation,  or  association  carrying  on  the  banking  business 
with  whom  or  with  which  money  was  deposited  by  or  for  the  decedent, 
unless,  however,  the  decedent  was  engaged  in  business  in  the  United  States 
at  the  time  of  his  death. 

717  Art.  65.    Transfer  agents*  notice. — A  notice  on  Form  714  is  required 
to  be  filed  whenever  a  corporation,  its  transfer  agent,  registrar,  or 

paying  agent,  is  called  upon  to  make  a  transfer  of  stock  or  bonds,  or  to  pay 
dividends  or  interest,  to  any  successor  in  interest  of  a  nonresident  stock- 
holder or  bondholder  who  died  after  September  8,  1916,  unless  the  transfer 
is  made  upon  the  order  of  an  executor  or  administrator  appointed  in  the  United 
States.  The  notice  is  required  for  dividends  declared,  and  for  interest  which 
had  accrued  on  bonds,  prior  to  the  death  of  the  decedent,  although  payable 
thereafter.  Notice  should  be  filed  with  the  Commissioner  of  Internal 
Revenue  at  Washington,  D.  C,  within  two  months  following  the  date  of 
death,  or  immediately  upon  receipt  of  the  request  for  transfer  or  payment. 
A  transfer  agent  should  be  vigilant  to  report  all  cases  in  which  the  fact  of 
the  death  of  a  nonresident  appears.  Where  the  securities  are  received  without 
the  personal  assignment  of  the  decedent,  but  with  the  transfer  order  of  the 
foreign  executor,  it  is  clear  that  the  case  should  be  reported.  Where  the 
securities  bear  the  personal  assignment  of  the  decedent,  the  transfer  should 
be  reported  if  made  upon  the  order  of  a  foreign  executor,  or  if  information 
is  received  in  any  other  manner  that  the  record  owner  has  died  a  nonresident 
of  the  United  States. 

718  In  order  to  prevent  loss  of  the  tax  upon  nonresident  estates,  it  is 
essential  that  transfer  agents  exercise  great  care  in  reporting  all 

transfers  of  the  kind  described.  Their  records  will  be  examined  from  time 
to  time  by  internal-revenue  officers  to  determine  whether  this  regulation  is 
being  strictly  complied  with.  Failure  to  file  notice  in  the  manner  prescribed 
will  render  the  transfer  agent  liable  to  a  fine. 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


719  Art.  66.    Transfer  of  stocks  and  bonds  of  nonresident  decedents; 
how  made. — Wherever  a  transfer  agent  is  required  to  file  the  notice 

as  provided  in  Article  65,  he  shall  not  make  transfer  of  any  stocks  or  bonds 
standing  in  the  name  of  a  nonresident  decedent  until  there  has  been  delivered 
to  such  collector  of  internal  revenue  as  may  be  designated  by  the  Commis- 
sioner the  bond  of  the  party  to  whom  the  stocks  or  bonds  are  to  be  transferred 
with  corporate  surety  in  an  amount  to  be  fixed  by  the  Commissioner,  not 
exceeding  in  amount  the  value  of  the  stocks  or  bonds  to  be  transferred,  con- 
ditioned for  the  payment  of  the  tax  upon  the  transfer  of  the  decedent's  net 
estate.  Upon  receipt  of  such  notice  the  Commissioner  will  at  once,  upon 
request,  fix  the  amount  for  which  the  bond  is  to  be  given.  In  lieu  of  such 
bond  a  deposit,  either  of  money  or  of  bonds  of  the  United  States,  of  the  amount 
so  fixed  may  be  made  with  such  collector  of  internal  revenue  as  the  Commis- 
sioner may  designate. 

720  Where  bonds  of  the  United  States  or  moneys  are  deposited  in  lieu 
of  the  delivery  of  such  corporate  bond,  return  will  be  made  thereof 

to  the  depositor  after  payment  in  full  of  the  tax  on  the  transfer  of  the  de- 
cedent's net  estate.  If,  however,  the  tax  be  not  paid  in  full  on  or  before  the 
due  date  thereof,  or  within  such  period  as  payment  may  have  been  extended 
by  the  Commissioner,  the  collateral  will  be  subjected  to  payment  of  the  tax, 
or  the  then  unpaid  balance  thereof,  and  the  excess  of  the  deposit,  or  of  the 
proceeds  thereof  remaining,  if  any,  will  be  returned  to  the  depositor.  In 
lieu  of  the  provisions  and  restrictions  hereinbefore  set  forth,  transfer  agents 
are  authorized  to  make  transfer  of  stocks  and  bonds  standing  in  the  name  of 
a  nonresident  decedent  to  the  duly  qualified  ancillary  executor  or  admin- 
istrator within  the  United  States,  provided  that  such  transfer  agent  at  the 
time  of  making  such  transfer  gives  notice  thereof  in  writing  to  the  Com- 
missioner of  Internal  Revenue. 

THE  RETURN — ESTATES  OF  RESIDENTS. 

721  Art.  67.    When  return  required. — Date  of  filing. — A  return  on  Form 

446  706  is  required  in  the  case  of  every  resident  decedent  whose  gross 

447  estate,  as  defined  in  the  statute,  exceeded  $50,000  in  value.  This 
return  must  be  filed  with  the  collector  for  the  district  in  which  the 

decedent  was  domiciled  at  the  time  of  his  death.  It  must  be  filed  in  duplicate 
within  one  year  after  the  date  of  death.  When  the  due  date  for  filing  the 
return,  Form  706,  falls  on  a  Sunday  or  on  a  legal  holiday,  the  due  date  for 
filing  will  be  the  day  following  such  Sunday  or  legal  holiday. 
72 la  If  it  is  impossible  for  the  executor  to  file  a  reasonably  complete 
return  within  one  year  from  the  date  of  death,  the  Commissioner 
may,  upon  application  from  the  executor  showing  good  and  sufficient  cause, 
grant  extensions  of  time  not  to  exceed  a  total  of  180  days  from  the  due  date, 
and  no  single  extension  to  exceed  60  days.  At  the  expiration  of  the  last 
extension  period  granted,  a  return  as  complete  as  possible  must  be  filed,  and 
the  executor  may  thereafter  file  an  amended  return  when  the  condition  of 
the  estate  permits.  An  extension  of  time  for  filing  the  return  does  not 
operate  to  extend  the  time  for  the  payment  of  the  tax,  which  is  due  one  year 
after  the  decedent's  death  unless  an  extension  of  time  in  which  to  make 
payment  has  been  obtained  as  provided  in  article  82. 

722  Art.  68.   Persons  liable  for  return. — The  statute  provides  that  the 
duly  qualified  executor  or  administrator  shall  file  the  return.   If  there 

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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


is  more  than  one  executor  or  administrator,  the  return  must  be  made  jointly 
by  all.  Where  no  executor  or  administrator  has  been  appointed,  every 
person  in  actual  or  constructive  possession  of  any  property  of  the  decedent 
is  constituted  by  the  statute  an  executor  for  the  purposes  of  the  tax,  and  is 
required  to  make  and  file  a  return  as  provided  by  Section  404.  Where,  in 
any  case,  the  executor  is  unable  to  make  a  complete  return  as  to  any  part  of 
the  gross  estate,  he  is  required  to  give  all  the  information  he  has  as  to  such 
property,  including  a  full  description,  and  the  name  of  every  person  holding 
a  legal  or  beneficial  interest  in  the  property.  Where  the  executor  is  unable 
to  make  a  return  as  to  any  property,  the  statute  requires  every  person  holding 
a  legal  or  beneficial  interest  therein,  upon  notice  from  the  collector,  to  make 
return  as  to  such  part  of  the  gross  estate.  For  penalties  for  delinquency  in 
filing  return,  or  for  filing  a  false  or  fraudulent  return,  see  Articles  88  to  90, 
inclusive. 

723  Art.  69.  Preparation  of  return. — The  return  must  be  made  on  Form 
706,  copies  of  which  will  be  supplied  by  the  collector.  It  must  con- 
tain an  itemized  inventory,  by  schedule,  of  the  property  constituting  the 
gross  estate,  and  of  the  deductions.  The  instructions  printed  on  the  form 
should  be  carefully  followed.  All  documents  and  vouchers  used  in  preparing 
the  return  should  be  retained  by  the  executor,  so  as  to  be  available  for  in- 
spection whenever  required.  Duplicate  certified  copies  of  the  will,  if  any, 
must  be  submitted  with  the  return,  together  with  duplicate  copies  of  the  other 
documents  required  by  the  instructions  printed  on  the  form,  or  any  documents 
which  the  executor  may  desire  to  submit  with  the  return  in  explanation 
thereof. 

724  Art.  70.  Supplemental  data. — The  statute  provides  that  the  execu- 
tor, in  addition  to  filing  notice  and  return,  shall  furnish  such  supple- 
mental data  as  may  be  necessary  to  establish  the  correct  tax.  It  is  therefore 
the  duty  of  the  executor  to  furnish  upon  request  copies  of  any  documents  in 
his  possession  relating  to  the  estate,  or  on  file  in  any  court  having  jurisdiction 
over  the  estate,  appraisal  lists  of  any  items  included  in  the  gross  estate,  copies 
of  balance  sheets  or  other  financial  statements  relating  to  the  value  of  stock, 
and  any  other  information  obtainable  by  him  that  may  be  found  necessary 
in  the  determination  of  the  tax.  Failure  to  comply  with  such  a  request  will 
render  the  executor  liable  to  a  fine  not  to  exceed  $500,  and  proceedings  may 
be  instituted  in  the  proper  United  States  court  to  secure  compliance  there- 
with.   (See  Sections  410  and  404.) 

725  Art.  71.  Procedure  where  no  return  has  been  made. — Section  405  of 
448       the  statute  provides  that  if  no  return  is  filed  for  the  estate  of  a  de- 
cedent, or  if  a  return  contains  a  false  or  incorrect  statement  of  a 

material  fact,  the  collector  or  deputy  collector  shall  make  a  return.  The 
Commissioner  may  amend  this  return  from  such  knowledge  or  information 
as  he  can  obtain,  through  testimony  or  otherwise.  A  return  so  made  by  the 
Commissioner,  or  made  by  the  collector  or  deputy  collector,  is  a  sufficient 
basis  for  assessing  the  tax.  Where  a  tax  is  found  to  be  due  upon  such  a 
return,  both  the  estate  and  the  executor  will  be  liable  for  penalties  as  well  as 
for  the  tax. 

726  Art.  72.   Investigation  of  returns. — An  investigation  of  every  return 
for  estate  tax  will  be  conducted  to  verify  its  accuracy.   The  investi- 

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gation  will  be  made  by  special  officers  of  the  Bureau.  The  fact  that  an  in- 
vestigation is  made  does  not  reflect  upon  the  competence  or  good  faith  of  the 
executor,  since  investigations  are  required  in  all  cases.  The  executor  should 
co-operate  with  the  examining  officer  in  order  that  the  tax  liability  may  be 
correctly  determined  and  the  case  closed.  During  the  course  of  the  investiga- 
tion the  examining  officer  will  inspect  the  books  and  records  of  the  estate, 
interview  the  executor  and  other  persons  having  knowledge  of  the  decedent's 
affairs,  verify  the  value  of  the  assets  and  the  deductions,  and  take  such  other 
steps  as  may  be  necessary  in  order  that  the  correct  amount  of  tax  may  be 
determined. 

727  Upon  completion  of  the  investigation  the  executor  will  be  apprised 
by  the  examining  officer  of  his  findings,  and  will  be  given  an  oppor- 
tunity to  discuss  the  case  and  present  such  data  as  he  may  desire  the  Com- 
missioner to  consider  in  connection  with  the  examining  officer's  report.  Upon 
the  completion  of  a  review  and  audit  by  the  Commissioner,  the  executor  will 
be  informed  by  letter  of  the  result  thereof.  If  the  letter  contains  notification 
of  an  amount  of  unpaid  tax,  such  unpaid  amount  should  be  remitted  promptly 
to  the  collector,  and  if  not  paid  within  the  time  specified  by  the  applicable 
provisions  of  section  406  or  section  407,  interest  will  be  added  as  required 
thereby.    (See  Art.  83.) 

728  It  is  the  purpose  of  the  Commissioner  to  make  these  investigations 
as  soon  as  practicable  after  the  filing  of  the  return.  Where  the  execu- 
tor files  a  complete  return,  and  makes  written  application  to  the  Commissioner 
for  a  determination  of  the  tax  and  discharge  from  personal  liability  therefor, 
the  Commissioner  will,  within  one  year  after  receipt  of  such  application,  notify 
the  executor  of  the  amount  of  the  tax,  and,  upon  payment  thereof,  the  executor 
will  be  discharged  from  personal  liability  for  any  additional  estate  tax  there- 
after found  to  be  due.  (See  Sec.  407.)  This  provision  applies  also  to  cases 
arising  under  the  Revenue  Act  of  1918.  Attention  is  here  directed  to  Sec- 
tion 250  (d)  of  the  statute  which  embodies  a  provision,  "That  in  the  case 
of  income  received  during  the  lifetime  of  a  decedent,  all  taxes  due  thereon 
shall  be  determined  and  assessed  by  the  Commissioner  within  one  year  after 
written  request  therefor  by  the  executor,  administrator,  or  other  fiduciary 
representing  the  estate  of  such  decedent:    *    *  *." 

THE  RETURN— ESTATES  OF  NONRESIDENTS. 

729  Art.  73.   Return  of  estates  of  nonresidents. — A  return  on  Form  706 

446  must  be  filed  in  duplicate  with  the  Commissioner  of  Internal  Revenue, 

447  Washington,  D.  C,  or  with  such  collector  of  internal  revenue  as  the 
Commissioner  may  designate,    within  one  year  after  the  date  of 

death  of  ever  nonresident  decedent,  if  any  part  of  the  gross  estate  of  such 
decedent  was  situated  in  the  United  States  at  the  time  of  his  death.  It  is 
the  duty  of  the  duly  qualified  executor  or  administrator  to  file  a  return  for  the 
whole  of  that  part  of  the  gross  estate  situated  in  the  United  States,  whatever 
its  value.  If  the  duly  qualified  executor  or  administrator  is  unable  to  make  a 
complete  return  as  to  any  part  of  the  gross  estate,  he  is  required  to  give  all 
the  information  available  to  him  as  to  such  part,  including  a  description  there- 
of and  the  name  of  every  person  holding  a  legal  or  beneficial  interest  therein. 
If  deductions  are  claimed,  see  Articles  55,  56  and  57.  If  no  executor  or 
administrator  has  been  appointed,  all  persons  in  actual  or  constructive 
possession  of  any  property  of  the  decedent  situated  in  the  United  States  are 
required  to  file  a  return  for  such  portion  of  the  gross  estate  as  had  its  situs 
therein.    (See  Art.  53.) 

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730  Art.  74.   Supplemental  data. — Pursuant  to  the  provisions  of  Section 
404,  with  respect  to  furnishing  supplemental  data,  the  duly  qualified 

executor  or  administrator  of  a  nonresident  decedent  is  required  to  file  with  the 
return: 

(1)  Certified  copy  of  will,  or,  if  the  decedent  left  several  wills,  to  govern 
in  different  jurisdictions,  certified  copy  of  each  will. 

(2)  Certified  copy  of  inventory  of  property  filed  under  a  foreign  estate, 
succession  or  death-duty  act;  or,  if  no  such  inventory  was  filed,  a  certified 
copy  of  inventory  filed  with  the  foreign  court  of  probate  jurisdiction. 

731  The  specified  information  is  required  whether  or  not  the  executor 
wishes  to  claim  the  deductions  authorized  in  section  403(b). 

PRIVILEGED  CHARACTER  OF  RETURNS. 

732  Art.  75.  Returns  confidential. — All  estate  tax. returns  and  notices  are 
treated  as  privileged  communications  and  may  not  be  exhibited  to 

any  person  other  than  the  executor  or  his  duly  authorized  agent,  except  as 
stated  in  Article  76.  This  requirement  of  secrecy  will  be  rigidly  enforced, 
and  extends  to  information  of  a  private  nature  submitted  or  obtained  in 
connection  with  a  return  or  notice.  The  requirement  does  not  operate  to 
prevent  internal  revenue  officers  from  disclosing  the  returned  value  of  any 
item  or  the  amount  of  any  specific  deduction,  where  such  disclosure  is  neces- 
sary in  order  to  arrive  at  a  correct  determination  of  the  tax.  This  right  of 
disclosure,  however,  does  not  extend  to  such  information  as  the  amount  of 
the  estate,  the  amount  of  tax,  or  other  general  data.  Nor  are  the  records  in 
possession  of  the  Bureau,  whether  on  file  with  the  Commissioner  or  the 
collector,  open  to  inspection,  except  as  provided  in  Article  76. 

733  Art.  76.  Disclosure  to  persons  having  material  interest. — Where  any 
person  other  than  the  executor  has  a  material  interest  in  ascertaining 

any  fact  disclosed  by  the  return,  or  in  obtaining  information  as  to  the  payment 
of  the  tax,  he  shall  make  a  written  application  to  the  Commissioner  of  Internal 
Revenue  for  such  information,  setting  forth  the  nature  of  his  interest  and  the 
purpose  of  the  application.  The  Commissioner  will  review  the  application, 
and,  if  it  is  approved,  the  collector  will  be  directed  to  exhibit  the  return  to  the 
applicant,  or  give  him  such  information  as  is  specified,  or  the  Commissioner 
may  permit  an  inspection  of  the  return  on  file  in  the  Bureau,  or  furnish  such 
information  as  he  deems  advisable.  Under  no  circumstances  shall  the  col- 
lector give  information  to  persons  other  than  the  executor  except  upon  the 
written  order  of  the  Commissioner,  and  then  only  to  the  extent  authorized 
by  such  order. 

734  Art.  77.   Attorneys  must  have  authorization. — In  all  cases  where  in- 
formation is  sought  regarding  an  estate,  or  an  interview  asked,  by 

an  attorney  whose  name  does  not  appear  on  Form  706  as  the  attorney  for  the 
estate,  or  by  any  agent  of  the  executor  or  administrator,  the  information  or 
interview  will  be  denied  unless  the  attorney  or  agent  presents  a  signed  state- 
ment from  the  executor  or  administrator  authorizing  him  to  act  in  his  behalf. 
Where  his  name  as  attorney  for  the  estate  appears  on  Form  706,  his  identity 
must  be  established.  If  an  attorney  or  other  person  asks  a  ruling  on  a  question 
of  law  arising  in  a  specific  estate,  the  Commissioner  may  require  satisfactory 
evidence  of  the  right  to  obtain  such  ruling. 

734a     For  regulations  governing  the  recognition  of  attorneys,  agents,  and 
other  persons  representing  claimants  and  executors  before  the  Treas- 

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ury  Department,  reference  should  be  made  to  Treasury  Department  Circu- 
lar No.  230,  dated  April  25,  1922  [^[3174  Income  Tax  Service],  copies  of 
which  may  be  obtained  on  application  to  the  chief  clerk  of  the  Treasury 
Department. 

RETURN  BY  COLLECTOR. 

735      Art.  78.   Return  by  collector  or  Commissioner. — Where  there  is  no 

448  duly  qualified  executor  or  administrator,  or  no  return  is  filed  within 
8071     one  year  after  the  decedent's  death,  or  if  a  filed  return  contains  a 

false  or  incorrect  statement  of  a  material  fact,  the  collector  or  deputy 
collector  may  make  a  return  from  such  information  as  he  possesses  or  is  able 
to  obtain.  The  Commissioner  may  also  make  a  return  in  such  cases,  or  amend 
any  return  made  by  a  collector  or  deputy  collector,  and  any  return  so  made  or 
amended,  or  made  by  a  collector  or  deputy  collector  and  approved  by  the 
Commissioner,  shall  be  prima  facie  good  and  sufficient  for  all  legal  purposes, 
and  the  Commissioner  will  assess  the  tax  in  the  same  manner  as  though  the 
return  had  been  filed  by  the  person  on  whom  the  duty  to  make  the  return 
rested. 

PAYMENT  OF  TAX  AND  INTEREST. 

73  6      Art.  79.  Payment  of  tax;  general. — While  no  interest  may  be  added 

449  to  the  tax  unless  payment  thereof  has  not  been  made  within  one  year 
451      and  six  months  after  decedent's  death,  the  tax  itself  is  due  and  must 

be  paid  within  one  year  after  the  decedent's  death  unless  an  extension 
of  time  for  the  payment  thereof  has  been  granted  by  the  Commissioner.  No 
discount  will  be  allowed  for  payment  in  advance  of  the  due  date.  The  col- 
lector will  grant  to  the  person  paying  the  tax  duplicate  receipts,  either  of 
which  will  be  sufficient  evidence  of  such  payment,  and  entitle  the  executor 
to  be  credited  with  the  amount  by  any  court  having  jurisdiction  to  audit  or 
settle  his  accounts. 

737  Payment  of  the  amount  of  tax  shown  to  be  due  by  a  return  made  in 
good  faith  will  be  considered  payment  of  the  tax  in  full,  subject, 

however,  to  adjustment  resulting  from  an  investigation  of  the  estate.  If  the 
return  is  not  made  in  good  faith,  the  payment  of  the  amount  of  tax  shown  to 
be  due  thereby  will  not  be  deemed  to  be  payment  in  full  of  the  tax,  but  in- 
terest will  attach,  and  penalties  will  be  imposed,  as  set  forth  in  articles  83  and 
89. 

738  Following  an  investigation  of  the  estate  the  tax  liability  will  be  finally 
determined  by  the  Commissioner  upon  the  basis  of  such  investigation. 

If  at  the  time  the  Commissioner's  determination  is  made  the  tax  has  been 
paid  upon  the  basis  of  the  return,  an  adjustment  will  be  made  of  the  amount 
of  tax.  If  the  amount  of  tax  already  paid  exceeds  the  amount  of  tax  as  finally 
determined,  the  Commissioner  will  refund  such  excess.  If  the  amount  of  tax 
as  finally  determined  exceeds  the  amount  of  tax  already  paid,  the  collector 
will  notify  the  executor  of  the  amount  of  the  unpaid  balance  of  the  tax  and 
demand  payment  thereof.  Payment  should  be  made  by  the  executor  im- 
mediately upon  the  receipt  of  such  notification.  When  the  investigation  of 
the  return  shows  that  no  further  tax  is  due,  the  executor  will  be  notified  to 
that  effect.  Until  the  receipt  of  such  notification,  he  should  reserve  a  sufficient 
portion  of  the  estate  to  satisfy  any  additional  tax. 

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739  Art.  80.   Payment  by  bonds  or  uncertified  check. — Payment  of  the 
estate  tax  may  be  made  with  bonds  or  notes  (including  Victory  Notes 

and  Treasury  Notes)  of  the  United  States  bearing  interest  at  a  higher  rate 
than  4  per  centum  per  annum,  provided  they  were  owned  by  the  decedent 
continuously  for  at  least  six  months  prior  to  the  date  of  his  death,  and  con- 
stituted a  part  of  his  estate  at  death.  Such  bonds  and  notes  are  receivable 
at  par  and  interest  accrued  at  the  time  of  the  payment.  When  such  bonds 
or  notes  are  to  be  tendered  in  payment  of  estate  taxes,  a  copy  of  either 
Department  Circular  No.  225  [1f236  herein],  as  heretofore  or  hereafter  sup- 
plemented should  be  procured  and  the  requirements  thereof  carefully  noted. 

740  Collectors  may  accept  uncertified  checks  in  payment  of  estate  taxes, 
provided  such  checks  are  collectible  at  par,  that  is,  for  their  full 

amount,  without  any  deduction  for  exchange  or  other  charges.  The  collector 
will  stamp  upon  the  face  of  each  check  before  deposit  thereof  the  words, 
"This  check  is  in  payment  of  an  obligation  to  the  United  States  and  must  be 
paid  at  par.  No  protest,"  with  his  name  and  title.  The  day  on  which  the 
collector  receives  the  check  will  be  considered  the  date  of  payment  so  far  as 
the  taxpayer  is  concerned,  unless  the  check  is  returned  dishonored.  If  the 
bank  on  which  any  such  check  is  drawn  should  refuse  to  pay  it  at  par,  the 
check  should  be  returned  through  the  depositary  bank  and  be  treated  in  the 
same  manner  as  a  bad  check.  All  expenses  incident  to  the  attempt  to  collect 
such  a  check  and  the  return  of  it  through  the  depositary  bank  must  be  paid 
by  the  drawer  of  the  check  to  the  bank  on  which  it  is  drawn,  since  no  deduc- 
tion can  be  made  from  amounts  received  in  payments  of  taxes.  See  Section 
3210  of  the  Revised  Statutes.  If  any  taxpayer  whose  check  has  been  returned 
uncollected  by  the  depositary  bank  should  fail  at  once  to  make  the  check 
good,  the  collector  should  proceed  to  collect  the  tax  as  though  no  check  had 
been  given.  A  taxpayer  who  tenders  a  certified  check  in  payment  of  taxes 
is  also  not  released  from  his  obligation  until  the  check  lias  been  paid.  See 
chapter  191  of  the  Act  of  March  2,  1911. 

740a    Treasury  Department  Circular  No.  176,  as  amended,  prescribes  de- 
tailed regulations  governing  the  deposit  and  collection  of.  checks. 
Collectors  are  referred  to  paragraphs  13-16  and  paragraph  26  thereof  as  to 
the  deposit  of  taxpayers'  checks  and  the  handling  of  uncollected  or  lost  items. 

741  Art.  81.  The  executor  shall  pay  the  tax. — The  statute  provides  that 
the  executor  or  administrator  shall  pay  the  tax.   This  duty  applies  tc 

the  entire  tax,  regardless  of  the  fact  that  the  gross  estate  consists  in  part  ot 
property  which  will  not  come  into  his  possession.  Where  there  is  no  duly 
qualified  executor  or  administrator,  all  persons  in  actual  or  constructive  pos- 
session of  any  property  of  the  decedent  are  liable  for  and  required  to  pay  the 
tax  to  the  extent  of  the  value  of  such  property.  See,  also,  Article  86.  As  to 
the  personal  liability  of  the  executor,  see  Article  99. 

742  Art.  82.    Extension  of  time  for  payment. — In  any  case  where  the 
Commissioner  finds  that  payment  of  the  tax  within  one  year  after 

the  decedent's  death  would  impose  undue  hardship  upon  the  estate,  an 
extension  or  extensions  of  time  will  be  granted  by  him  for  the  payment  of  the 
tax  for  a  period  not  to  exceed  in  all  three  years  from  the  due  date.  Extensions 
of  time  for  tax  payment  will  be  granted  only  in  exceptional  cases,  where  it  is 
evident  that  the  payment  of  the  tax  within  the  statutory  period  would  cause 
the  estate  serious  financial  loss.   No  single  extension  for  more  than  one  year 

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will  be  granted.  Application  for  extension  of  time  for  payment  should  be 
filed  with  the  collector,  and  should  contain  a  full  statement  of  the  facts  upon 
which  the  application  is  based.  The  collector  will  refer  the  application  to  the 
Commissioner,  with  suitable  recommendations. 

743  An  extension  of  time  to  pay  the  tax  does  not  relieve  from  the  duty 
of  filing  the  return  within  one  year  from  the  date  of  death,  nor  will 

it  operate  to  prevent  interest  from  accruing  as  provided  in  the  statute. 

744  Art.  83.    Interest  on  tax. — Sections  406  and  407  contain  the  only 
provisions  relating  to  interest  on  estate  tax  and  consequently  all 

questions  of  this  character  must  be  determined  in  accordance  therewith. 
Section  407  deals  with  interest  upon  additional  tax,  and  applies  only  to  caser 
where  the  amount  of  tax  shown  upon  a  return  made  in  good  faith  is  fully 
paid  within  one  year  and  six  months  after  decedent's  death,  or  time  for  pay- 
ment of  any  portion  thereof  is  extended  beyond  such  period,  and  whereafter 
the  lapse  of  such  year  and  six  months,  the  Commissioner  determines  that  the 
correct  amount  of  tax  is  in  excess  of  that  indicated  by  such  return.  The  ad- 
ditional tax  so  determined,  if  not  paid  within  one  month  after  notice  and  de- 
mand by  the  collector,  bears  interest  at  the  rate  of  10  per  centum  per  annum 
from  the  expiration  of  such  time  until  payment  is  received  by  the  collector. 

745  All  other  cases  fall  within,  and  are  governed  by,  the  provisions  of 
Section  406.    Thus,  where  any  portion  of  the  tax  shown  upon  a 

return  made  in  good  faith  is  not  paid  within  one  year  and  six  months  following 
decedent's  death,  interest  accrues  thereon,  though  an  extension  of  time  for 
payment  may  have  been  granted,  at  the  rate  of  6  per  centum  per  annum 
from  the  due  date  (one  year  after  decedent's  death)  until  payment  is  received 
by  the  collector.  Likewise,  in  the  case  of  a  return  so  made  and  where  no 
extension  of  time  for  payment  is  granted,  so  much  of  the  entire  tax  (that  is,  the 
amount  of  tax  as  finally  determined  by  the  Commissioner,  whether  determined 
by  him  before  or  after  the  expiration  of  such  period  of  one  year  and  six 
months  following  the  decedent's  death,  and  whether  the  amount  so  determined 
be  greater  or  less  than  that  shown  upon  the  return)  as  is  not  paid  within  such 
period  bears  interest  at  the  rate  of  6  per  centum  per  annum  from  the  due  date 
until  payment  is  received  by  the  collector. 

746  Where  the  return  is  not  made  in  good  faith,  Section  407  has  no 
application,  even  though  an  extension  of  time  may  have  been  pro- 
cured, and  hence  in  all  such  cases  an}*  portion  of  the  entire  tax  not  paid 
within  such  period  of  one  year  and  six  months  following  decedent's  death 
bears  interest  at.  the  rate  of  6  per  centum  per  annum  from  the  due  date  of  the 
tax  (one  year  after  decedent's  death")  until  payment  thereof  is  received  by  the 
collector. 

COLLECTION  OF  TAX. 

747  Art.  84.    Remedy  not  exclusive. — The  remedy  by  action,  here  [r454] 

454  provided,  is  not  exclusive.    For  other  available  remedies  for  the  col- 
lection of  the  tax.  see  Article  102. 

REIMBURSEMENT. 

748  Art.  85.  Right  to  reimbursement  not  enforcible  by  Commissioner. — 

455  Where  any  portion  of  the  tax  is  paid  by,  or  collected  out  of  that  part 
of  the  estate  passing  to,  or  in  the  possession,  of,  any  person  other  than 

the  duly  qualified  executor  or  administrator,  such  person  may  be  entitled  to  re- 

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imbursement,  either  out  of  the  undistributed  estate  or  by  contribution  from 
other  beneficiaries  whose  shares  or  interests  in  the  estate  would  have  been 
reduced  had  the  tax  been  paid  before  distribution  of  the  estate,  or  whose 
shares  or  interests  are  subject  either  to  an  equal  or  prior  liability  for  the 
payment  of  taxes,  debts,  or  other  charges  against  the  estate.  The  executor 
is  also  entitled  to  require  beneficiaries  under  insurance  policies  to  bear  their 
proportion  of  the  tax.  These  provisions,  however,  are  not  designed  to  curtail 
the  right  of  the  Commissioner  to  collect  the  tax  from  any  person,  or  out  of 
any  property,  liable  therefor.  The  Commissioner  can  not  be  required  to 
apportion  the  tax  among  the  persons  liable,  nor  to  enforce  any  right  to  reim- 
bursement or  contribution.  For  example,  where  a  transfer  has  been  made 
in  contemplation  of  death,  the  Commissioner  may  hold  both  the  executor 
and  the  transferee  liable  for  the  tax  with  respect  to  the  property  transferred. 
In  such  case,  if  the  tax  is  paid  by  the  executor,  he  may  not  look  to  the  Com- 
missioner for  relief  by  refund  of  part  of  the  tax. 

LIEN. 

749  Art.  86.  Property  subject  to  lien. — This  lien  attaches  to  every  part 
453  of  the  gross  estate,  whether  or  not  the  property  comes  into  the  pos- 
456      session  of  the  duly  qualified  executor  or  administrator.    It  attaches 

to  the  extent  of  the  tax  shown  to  be  due  by  the  return  and  of  any 
additional  tax  found  to  be  due  upon  investigation. 

750  Where  the  decedent  transferred  or  placed  in  trust  property  in  con- 
templation of  or  intended  to  take  effect  in  possession  or  enjoyment 

at  or  after  his  death  (except  in  the  case  of  a  bona  fide  sale  for  a  fair  con- 
sideration in  money  or  money's  worth),  and  where  proceeds  of  insurance  on 
his  life  passed  to  a  specific  beneficiary  other  than  the  duly  qualified  executor 
or  administrator,  a  lien  attaches  thereto  to  the  amount  of  the  tax  in  respect 
to  the  particular  property  or  money  received  by  such  transferee,  trustee,  or 
insurance  beneficiary,  and  such  transferee,  trustee,  or  insurance  beneficiary 
is  personally  liable  for  such  tax.  Where  the  transferee  or  trustee  sells  the 
property  to  a  bona  fide  purchaser  for  a  fair  consideration  in  money  or  money's 
worth  the  lien  upon  the  property  is  divested;  but  there  is  substituted  a  like 
lien  upon  all  the  property  of  such  transferee  or  in  case  of  such  transfer  by  a 
trustee  upon  all  the  assets  of  the  trust  estate,  except  such  part  as  may  be 
sold  to  a  bona  fide  purchaser  for  such  a  consideration. 

751  The  lien  upon  the  entire  property  constituting  the  gross  estate  con- 
tinues for  a  period  of  10  years  after  the  decedent's  death,  except — 

(1)  Where  the  tax  is  paid  in  full  before  the  expiration  of  such  period; 

(2)  Such  portion  of  the  gross  estate  as  is  used  for  the  payment  of  charges 
against  the  estate  and  expenses  of  its  administration  allowed  by  any  court 
having  jurisdiction  thereof; 

(3)  Such  portion  of  the  gross  estate  as  has  passed  to  a  bona  fide  purchaser 
for  value  after  payment  of  the  full  amount  of  tax  determined  by  the  Com- 
missioner pursuant  to  a  request  of  the  executor,  as  authorized  by  Section  407, 
for  discharge  from  personal  liability  (see  Art.  72); 

(4)  Such  property  as  has  been  sold  by  any  transferee  or  trustee  to  a  bona 
fide  purchaser  for  a  fair  consideration  in  money  or  money's  worth,  where  such 
property  was  received  from  the  decedent  as  a  transfer  in  contemplation  of, 
or  intended  to  take  effect  in  possession  or  enjoyment  at  or  after,  his  death' 
(except  in  the  case  of  a  bona  fide  sale  for  a  fair  consideration  in  money  Of 
money's  worth); 

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(5)  Where  the  Commissioner  issues  his  certificate  releasing  such  lien 
(see  Art.  87). 

762  Art.  87.  Release  of  lien. — The  statute  provides  that,  if  the  Com- 
missioner is  satisfied  that  the  tax  liability  of  an  estate  has  been  fully 
discharged  or  provided  for,  he  may  issue  his  certificate  releasing  any  or  all 
property  of  the  estate  from  the  lien.  The  issuance  of  certificates  is  a  matter 
resting  within  the  discretion  of  the  Commissioner,  and  certificates  will  be 
issued  only  in  case  there  is  actual  need  therefor.  In  most  cases  the  receipts 
issued  by  the  collector  constitute  sufficient  acquittance. 

753  The  tax  will  be  considered  fully  discharged  for  the  purpose  of  the 
issuance  of  a  certificate  only  when  investigation  has  been  completed, 

and  payment  of  the  tax,  as  determined  by  the  Commissioner,  has  been  made. 
A  certificate  of  release  of  lien  may  be  issued  by  the  Commissioner  under  these 
circumstances  as  to  any  or  all  property  of  the  estate,  upon  the  filing  by  the 
executor  of  an  application  in  duplicate  on  Form  791.  The  form  must  contain 
all  the  information  called  for. 

754  Where  the  tax  liability  has  not  been  fully  discharged,  as  provided 
above,  no  general  certificate  of  release  will  be  granted,  but  releases  of 

lien  upon  particular  items  of  property  will  be  issued  upon  the  filing  with  the 
Commissioner  of  such  security,  if  any,  as  he  may  require.  Where  security  is 
required,  a  corporate  indemnity  bond  must  be  furnished,  or  Liberty  Bonds, 
or  other  bonds  or  notes  of  the  United  States,  must  be  deposited  with  the 
collector.  In  lieu  of  such  security,  the  Commissioner  may  in  any  case  issue 
the  release  upon  payment  of  the  estimated  tax  upon  the  transfer  of  the 
property  released,  computed  at  the  highest  rate  applicable  to  the  estate.  If, 
upon  consideration  of  the  application,  the  Commissioner  finds  the  issuance  of 
the  certificate  to  be  warranted,  the  collector  will  notify  the  executor  of 
the  amount  of  the  bond,  as  fixed  by  the  Commissioner. 

PENALTIES. 

765      Art.  88.    Nature  of  penalties. — Two  kinds  of  penalties  are  provided 
458      for  delinquency  with  respect  to  the  duties  imposed  by  the  estate  tax 
8073  law: 

(1)  A  specific  penalty,  to  be  recovered  by  suit,  unless  paid  on  demand,  or 
adjusted  by  an  acceptance  of  an  offer  in  compromise;  and 

(2)  A  penalty  of  a  certain  percentage  of  the  tax,  to  be  added  to  the  tax 
and  collected  in  the  same  manner  as  the  tax. 

756  In  any  case  where  more  than  one  penalty  is  provided,  the  Govern- 
ment may  impose  any  one  or  more  thereof. 

757  Art.  89.   Penalties  for  false  or  fraudulent  notice  or  return. — Where 
statements  in  the  notice  required  by  Section  404,  or  in  the  return, 

are  knowingly  and  willfully  false,  the  person  making  them  is  subject  to  a 
penalty  not  exceeding  $5,000,  or  imprisonment  for  not  exceeding  one  year, 
or  both;  and,  for  a  false  or  fraudulent  return,  50  per  centum  may  be  added 
to  the  amount  of  the  tax. 

758  Art.  90.    Penalty  for  failure  to  file  notice  or  return. — For  failure  to 
file  the  notice  or  the  return  within  the  time  prescribed,  the  person 

in  default  is  subject  to  a  penalty  not  to  exceed  $500;  and,  for  the  failure  to 
file  the  return  within  the  time  prescribed,  25  per  centum  may  be  added  to  the 
amount  of  the  tax,  unless  the  failure  so  to  file  the  return  was  due  to  a  reason- 
able cause  and  not  to  willful  neglect. 

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759  Art.  91.   Penalty  for  failure  to  exhibit  records  or  property. — Where  a 
person  in  possession  or  control  of  any  record,  file,  or  paper,  supposed 

to  contain  information  relating  to  the  estate,  or  having  in  his  possession  or 
control  property  comprised  in  the  gross  estate  of  the  decedent,  fails  to  exhibit 
the  same,  upon  the  request  of  the  Commissioner  or  any  collector  or  law  officer 
of  the  United  States,  or  his  duly  authorized  deputy  or  agent,  in  the  per- 
formance of  his  duties,  he  is  liable  to  a  penalty  not  to  exceed  $500,  to  be 
recovered  by  civil  action.  He  must  comply  with  such  a  request  whether  or 
not  he  believes  that  the  documents  contain  information  relating  to  the  estate. 

CLAIMS  FOR  ABATEMENT  AND  REFUND. 

760  Art.  92.  Kinds  of  relief. — Two  forms  of  relief  are  afforded  the  ex- 
8023  ecutor  in  cases  where  he  believes  that  an  excessive  amount  of  tax  or 
8047  an  illegal  penalty  has  been  assessed  or  paid  either  upon  the  basis  of 
8050  the  return  or  of  the  investigation  conducted  by  the  Bureau.  The 

two  forms  of  relief  are: 

(1)  Claim  for  abatement,  where  the  alleged  excessive  tax  or  illegal  penalty 
has  been  assessed  but  not  paid. 

(2)  Claim  for  refund,  where  such  tax  or  penalty  has  been  paid. 

761  Art.  93.    Claim  for  abatement. — Claims  for  the  abatement  of  taxes 
or  penalties  illegally  assessed  must  be  made  upon  Form  843,  and  must 

be  sustained  by  the  affidavit  of  the  executor  or  other  parties  cognizant  of  the 
facts.  When  a  tax  or  penalty  has  been  assessed,  the  presumption  is  that  the 
assessment  is  correct;  and  the  burden  of  showing  that  it  was  improperly  or 
illegally  assessed  rests  upon  the  applicant  for  abatement.  The  affidavit 
must  therefore  contain  a  full  and  explicit  statement  of  all  the  material  facts 
relating  to  the  claim  in  support  of  which  it  is  offered  in  order  that  the  claim 
may  receive  proper  consideration.  Nothing  should  be  left  to  inference,  but 
all  the  facts  relied  upon  should  appear  in  the  papers  themselves.  The  filing 
of  a  claim  for  the  abatement  of  a  tax  or  penalty  alleged  to  have  been  erron- 
eously or  illegally  assessed  does  not  necessarily  operate  as  a  suspension  of  the 
collection  thereof.  The  collector  may  proceed  to  collect  if  he  thinks  it 
necessary,  and  leave  the  taxpayer  to  his  remedy  by  a  claim  for  refund. 

762  Art.  94.   Accrual  of  interest  as  affected  by  abatement  claim. — Where 
a  claim  for  abatement  is  rejected,  the  making  of  the  application  does 

not  affect  the  running  of  interest.  The  allowance  of  the  claim,  however,  in 
whole  or  part,  discharges  all  liability  for  interest  upon  the  portion  of  the  claim 
allowed.  The  same  rules  apply  where,  upon  the  request  of  the  executor,  a 
reinvestigation  is  made. 

763  Art.  95.    Limitation  of  time  to  file  claim  for  abatement  of  additional 
tax. — If  it  is  desired  to  file  claim  for  abatement  of  the  additional 

amount  of  tax  disclosed  upon  an  investigation,  such  claim  must  be  filed  with 
the  collector  within  one  month  after  receipt  by  the  executor  of  the  Com- 
missioner's letter  of  notification.  After  that  period  the  claim  will  not  be 
considered,  but  the  tax  must  be  paid,  and  adjustment  sought  by  claim 
for  refund. 

764  J    Art.  96.    Claim  for  refund. — Claims  for  the  refunding  of  estate  taxes 

imposed  by  any  of  the  several  Revenue  Acts,  and  of  penalties  in 

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respect  thereto,  which  are  alleged  to  have  been  collected  without  legal 
authority,  must  be  presented  to  the  Commissioner  within  four  years  next 
after  payment  thereof.  Such  claims  must  be  made  on  Form  843.  As  in  the 
case  of  claims  for  abatement,  the  burden  of  proof  rests  upon  the  claimant. 
All  the  facts  relied  upon  in  support  of  the  claim  should  be  clearly  set  forth 
under  oath.    With  the  claim  should  be  presented,  in  addition  to  the  evidence: 

(1)  Where  the  claim  is  made  by  an  executor  or  administrator,  a  certificate 
of  the  court  showing  that  the  appointment  remains  in  full  force  and  effect. 

(2)  Where  the  executor  or  administrator  has  been  discharged  and  no 
administrator  de  bonis  non  has  been  appointed  and  qualified,  there  should 
be  submitted,  in  lieu  of  the  certificate  above  mentioned,  (a)  a  certified  copy 
of  the  court  order  granting  the  discharge,  and,  (b)  a  certified  copy  of  the  order 
of  distribution,  or,  if  such  order  does  not  fully  disclose  the  identity  of  the 
person  or  persons  entitled  to  receive  any  amount  that  may  be  refunded  and 
the  percentage  or  proportion  thereof  to  which  each,  if  more  than  one,  is 
entitled,  there  should  be  submitted  a  certified  copy  of  the  decedent's  will,  if 
any,  and  such  further  proof  as  may  be  requisite  to  establish  both  the  identity 
of  such  person  or  persons  and  the  percentage  or  proportion  of  the  amount 
sought  to  be  refunded  to  which  each,  where  there  are  more  than  one,  is 
entitled. 

(3)  Where  a. claim  is  filed  after  the  administration  of  the  estate  has 
been  closed,  and  is  signed  by  one  only,  or  by  less  than  all,  of  a  number  of 
beneficiaries  entitled  to  share  in  the  refund,  or  is  signed  by  a  person  acting 
as  attorney  or  agent  for  the  interested  parties,  there  must  accompany  the 
claim,  in  addition  to  the  proof  required  in  paragraph  (2)  above,  a  power  of 
attorney,  duly  executed  by  all  beneficiaries  entitled  to  any  portion  of  the 
repayment,  authorizing  the  claimant  or  claimants  to  present  the  matter 
before  the  Bureau. 

765  Art.  97.    Payment  of  claims  and  interest. — Warrants  in  payment  of 
claims  allowed  will  be  drawn  to  the  order  of  the  person  or  persons 

entitled  to  the  proceeds,  and  will  be  forwarded  directly  to  such  person  or 
persons  by  the  Treasurer  of  the  United  States,  except  where  delivery  to  an 
attorney  or  agent  has  been  authorized  in  accordance  with  the  regulations 
contained  in  Treasury  Department  Circular  No.  230  [^3174,  Income  Tax 
Service],  dated  April  25,  1922,  as  heretofore  or  hereafter  amended  or  sup- 
plemented. If  the  claimants  are  indebted  to  the  United  States  for  taxes, 
such  taxes  must  be  paid  before  the  warrants  are  delivered.  (Act  of  Mar.  3, 
1875  (18  Stats.  481).) 

766  On  the  allowance  of  a  claim  for  refund  of  taxes  paid  Section  1324 
of  the  statute  provides  for  the  payment  of  interest  upon  the  total 

amount  of  such  refund  at  the  rate  of  one-half  of  1  per  centum  per  month  to 
the  date  of  such  allowance,  as  follows:  (1)  If  such  amount  was  paid  under  a 
specific  protest  setting  forth  in  detail  the  basis  of  and  reasons  for  such  protest, 
from  the  time  when  such  tax  was  paid,  or  (2)  if  such  amount  was  not  paid 
under  protest  but  pursuant  to  an  additional  assessment,  from  the  time  such 
additional  assessment  was  paid,  or  (3)  if  no  protest  was  made  and  the  tax 
was  not  paid  pursuant  to  an  additional  assessment,  from  six  months  after 
the  date  of  filing  of  such  claim  for  refund. 

POWER  TO  COMPROMISE  OR  REMIT  PENALTIES. 

Revised  Statutes,  Sec.  3229  (Comp.  Sts.,  1916,  Sec.  5952).  The  Onimi^iona  of 
Internal  Revenue,  with  the  advice  and  consent  of  the  Secretary  o\  Tie   Treasury,  may 

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compromise  any  civil  or  criminal  case  arising  under  the  internal-revenue  laws  instead  >f 
commencing  suit  thereon;  and,  with  the  advice  and  consent  of  the  said  Secretary  and  the 
recommendation  of  the  Attorney  General,  he  may  compromise  any  such  case  u  [\  r  a  suit 
thereon  has  been  commenced.  Whenever  a  compromise  is  made  in  any  case  there  shall  be 
placed  on  file  in  the  office  of  the  Commissioner  the  opinion  of  the  Solicitor  of  Internal  Rev- 
enue, or  of  the  officer  acting  as  such,  with  his  reasons  therefor,  with  a  statement  of  the 
amount  of  tax  assessed,  the  amount  of  additional  tax  or  penalty  imposed  by  law  in  con- 
sequence of  the  neglect  or  delinquency  of  the  person  against  whom  the  tax  is  assessed,  and 
the  amount  actually  paid  in  accordance  with  the  terms  of  the  compromise. 

Revised  Statutes,  Sec.  5292  (Comp.  Sts.,  1916,  Sec.  10,130).  Whenever  any  person 
who  shall  have  incurred  any  fine,  penalty,  or  forfeiture,  or  disability  *  *  *  shall  refer 
his  petition  to  the  judge  of  the  district  in  which  such  fine,  penalty,  or  forfeiture,  or  dis- 
ability has  accrued,  truly  and  particularly  setting  forth  the  circumstances  of  his  case,  and 
shall  pray  that  the  same  may  be  mitigated  or  remitted,  the  judge  shall  inquire,  in  a  summary 
manner,  into  the  circumstances  of  the  case;  first  causing  reasonable  notice  to  be  given  to 
the  person  claiming  such  fine,  penalty,  or  forfeiture,  and  to  the  attorney  of  the  United 
States  for  such  district,  that  each  may  have  an  opportunity  of  showing  cause  against  the 
mitigation  or  remission  thereof;  and  shall  cause  the  facts  appearing  upon  such  inquiry  to 
be  stated  and  annexed  to  the  petition,  and  direct  their  transmission  to  the  Secretary  of 
the  Treasury.  The  Secretary  shall  thereupon  have  power  to  mitigate  or  remit  such  fine, 
forfeiture,  or  penalty,  or  remove  such  disability,  or  any  part  thereof,  if,  in  his  opinion,  the 
same  was  incurred  without  willful  negligence,  or  any  intention  of  fraud  in  the  person  in- 
curring the  same;  and  to  direct  the  prosecution  if  any  has  been  instituted  for  the  recovery 
thereof,  to  cease  and  be  discontinued,  upon  such  terms  or  conditions  as  he  may  deem 
reasonable  and  just. 

Revised  Statutes,  Sec.  5293  (Comp.  Sts.,  1916,  Sec.  10,131).  The  Secretary  of  the 
Treasury  is  authorized  to  prescribe  such  rules  and  modes  of  proceeding  to  ascertain  the 
facts  upon  which  an  application  for  remission  of  a  fine,  penalty,  or  forfeiture,  is  founded, 
as  he  deems  proper,  and,  upon  ascertaining  them,  to  remit  the  fine,  penalty,  or  forfeiture, 
if  in  his  opinion  it  was  incurred  without  willful  negligence  or  fraud,  in  either  of  the  fol- 
lowing cases: 

First.  If  the  fine,  penalty,  or  forfeiture  was  imposed  under  authority  of  any  revenue 
law,  and  the  amount  does  not  exceed  $1,000.    *    *  * 

767  Art.  98.  Power  to  compromise  or  remit. — The  Commissioner,  with 
8059  the  advice  and  consent  of  the  Secretary  of  the  Treasury,  may  com- 
promise any  civil  or  criminal  case  arising  under  the  internal-revenue 
laws  instead  of  commencing  suit  thereon,  and  with  the  advice  and  consent 
of  the  Secretary,  and  upon  the  recommendation  of  the  Attorney-General, 
may  compromise  any  such  case  after  suit  thereon  has  been  commenced  by  the 
United  States.  Accordingly,  the  power  to  compromise  extends  to  (a)  both 
civil  and  criminal  cases;  (b)  cases  whether  before  or  after  suit;  and  (c)  both 
taxes  and  penalties,  except  that  taxes  legally  due  from  a  solvent  taxpayer 
may  not  be  compromised.  Refunds  can  not  be  made  of  accepted  offers  in 
compromise  in  cases  where  it  is  subsequently  ascertained  that  no  violation 
of  law  was  involved.  Where  a  fine,  penalty,  or  forfeiture,  not  exceeding 
$1,000,  is  incurred  without  willful  negligence  or  fraud,  it  may  be  remitted 
by  the  Secretary  of  the  Treasury;  and  he  may  mitigate  or  remit  other  fines, 
penalties,  forfeitures,  and  disabilities  where  the  court  has  inquired  into  the 
matter  and  made  findings. 

PERSONAL  LIABILITY  OF  EXECUTOR. 

Revised  Statutes,  Sec.  3467  (Comp.  Sts.,  1916,  Sec.  6373).  Every  executor,  admin- 
istrator, or  assignee,  or  other  person,  who  pays  any  debts  due  by  the  person  or  estate  from 
[for]  whom  or  for  which  he  acts,  before  he  satisfies  and  pays  the  debts  due  to  the  United 
States  from  such  person  or  estate,  shall  become  answerable  in  his  own  person  and  estate 
for  the  debts  so  due  toj.the  United  States,  or  for  so  much  thereof  as  may  remain  due  and 
unpaid. 


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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


768  Art.  99.  Extent  of  liability. — The  executor  is  personally  liable  for 
449      the  payment  of  the  estate  tax  to  the  amount  of  the  full  value  of  the 

assets  of  the  estate  which  have  at  any  time  come  into  his  hands. 
Where  no  executor  or  administrator  has  been  appointed,  every  person  in 
actual  or  constructive  possession  of  any  property  of  the  decedent  is  liable 
for  the  tax  as  an  executor  to  the  value  of  such  property,  except  as  limited  by 
Article  87  in  the  case  of  transferees,  trustees  and  insurance  beneficiaries. 

EXAMINATION  OF  RECORDS  AND  TAKING  OF  TESTIMONY. 

769  Art.  100.  Securing  evidence— Taking  testimony. — In  order  to  ascer- 

8002  tain  the  correctness  of  a  return,  or  to  make  a  return  where  none 

8003  has  been  made,  the  Commissioner  has  power  to  require  the  attend- 
ance, and  to  take  the  testimony,  of  the  person  rendering  the  return^ 

or  any  officer  or  employee  of  such  person,  or  any  other  person  having  knowl- 
edge in  the  premises.  Such  persons  may  be  required  to  produce  any  relevant 
book,  paper,  or  other  record.  This  power  may  be  exercised  by  any  revenue 
agent  or  inspector  designated  for  the  purpose. 

770  Art.  101.   Power  to  compel  compliance. — Where  any  person  is  sum- 
moned to  appear  and  testify,  or  to  produce  books,  papers,  or  other 

data,  the  District  Court  of  the  United  States  for  the  district  in  which  such 
person  resides  has  power  to  compel  the  giving  of  the  testimony,  or  the 
production  of  the  books,  papers,  or  data,  and  to  issue  any  appropriate  process, 
writ,  or  order. 

REMEDIES  FOR  COLLECTION. 

771  Art,  102.    Remedies  for  collection  of  tax. — The  provisions  of  the 

8000  statute  quoted  above  apply  to  the  estate  tax  law;  and  three  remedies. 

8001  are  thus  provided  for  the  collection  of  the  tax: 

(1)  Collection  by  distraint. — The  collector  may  issue  warrant  of 
distraint  authorizing  the  seizure  and  sale  of  any  or  all  of  the  assets  of  the 
estate.   (See  R.  S.,  Sees.  3187  et  seq.;  Comp.  Sts.,  1916,  Sec.  5909  et  seq.) 

(2)  Collection  by  suit  to  subject  the  property  to  sale. — The  collector  may  com- 
mence in  any  court  of  the  United  States  appropriate  proceedings,  in  the  name 
of  the  United  States,  to  subject  the  property  of  the  decedent  to  sale  under 
the  judgment  or  decree  of  the  court. 

(3)  Collection  by  suit  for  personal  liability. — The  personal  liability  of  the 
executor,  of  the  transferee  or  trustee  of  property  transferred  in  contemplation 
of  or  intended  to  take  effect  in  possession  or  enjoyment  at  or  after  dececent's 
death,  and  of  the  beneficiary  of  life  insurance,  may  be  enforced  by  any 
appropriate  action. 

772  Art.  103.   Executor's  duty  to  keep  records. — It  is  the  duty  of  the 
executor  to  keep  such  records  as  the  Commissioner  may  require. 

Executors  are  required  to  keep  such  complete  and  detailed  records  of  the 
affairs  of  the  estate  as  will  enable  the  Commissioner  to  determine  accurately 
the  amount  of  the  tax  liability. 

773  Art.  104.  Executor's  duty  to  render  statements. — It  is  the  duty  of  the 
executor  not  only  to  make  the  formal  return,  but  also  to  render  any 

other  sworn  statement  which  the  Commissioner  may  require  for  the  purpose 
of  determining  whether  a  tax  liability  exists. 

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8-4-22. 


Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC. — 1922. 


ESTATES  ADMINISTERED  IN  THE  UNITED  STATES  COURT 

FOR  CHINA. 


7  74 


[Repeats  the  law  merely. — Sec.  411,  H460-462.] 


SCOPE  OF  REPEAL. 

775  Art.  105.  Scope  of  repeal. — The  Revenue  Act  of  1921  retains  in  force 
the  provisions  of  Title  IV  of  the  Revenue  Act  of  1918  for  the  assess- 
ment and  collection  of  all  taxes  accruing  thereunder,  and  for  the  imposition 
and  collection  of  all  penalties  which  have  accrued  or  may  accrue  in  relation 
to  any  such  taxes. 

776  Art.  106.  Promulgation  of  regulations. — In  pursuance  of  the  statute, 
116  the  foregoing  regulations  are  hereby  made  and  promulgated,  and  all 
145  rulings  inconsistent  herewith  are  hereby  revoked.  These  regu- 
201  lations  apply  to  all  pending  estate  tax  cases  except  where  a  par- 
207a     ticular  question  is  governed  by  a  specific  provision  of  the  earlier 

statutes  differing  from  the  Revenue  Act  of  1921,  in  which  cases  the 
provisions  of  the  applicable  statute  control  and  Regulations  37  (revised 
January,  1921)  [beginning  on  page  33  herein]  remain  in  full  force  and  effect, 
subject  to  the  following  changes: 

Article  47  [1fl45]  is  amended  to  read  as  follows: 

The  unpaid  principal  of  mortgages  on  property  of  the  decedent,  whether  the  property 
be  situated  within  or  without  the  United  States,  including  interest  accrued  to  the  date  of 
death,  is  deductible. 

Articles  29  [1)116],  71  [1f20l],  and  76-A  [If 207 A]  are  revoked. 

D.  H.  BLAIR, 

Commissioner  of  Internal  Revenue. 

Approved  Jul)'  27,  1922.    [Released  for  publication  August  7,  1922.] 

A.  W.  MELLON, 

Secretary  of  the  Treasury. 


u-I4 


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Regulations  63. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


777    LIST  OF  THE  SEVERAL  DIVISIONS  AND  LOCATIONS  OF 
OFFICES  OF  INTERNAL  REVENUE  AGENTS  IN  CHARGE. 


(Communications  should  be  addressed: 

United  States  Internal  Revenue  Agent  in  Charge, 

 »    ■'  *.«•  * j.  *  •  *  ■  ■  •  •  •  •  • 

City.  State. 


Name  of  division. 


Atlanta  

Baltimore. . . 

Boston  

Buffalo  

Chicago  

Cincinnati. . 

Cleveland. . . 

Columbia. .  . 
Denver  

Detroit  

Greensboro. 
Honolulu. . . 
Huntington. 
Indianapolis 
Louisville. . . 
Milwaukee.  . 
Nashville.  . . 

Newark  

New  Haven. 

New  Orleans 
New  York. . 


Oklahoma  

Omaha  

Philadelphia. . , 

Pittsburgh..  . . 

Portland  

Richmond  

St.  Louis  

St.  Paul..  

Salt  Lake  City 
San  Antonio. . 
San  Francisco. 

Seattle  

Springfield..  . . 
Wichita  


Territory  embraced. 


Location  of  office. 


Florida  and  Georgia  

Delaware,  District  of  Columbia, 
Maryland. 

Maine,  Massachusetts,  New  Hamp- 
shire, and  Vermont. 

Twenty-first  and  twenty-eighth  col- 
lection districts  of  New  York. 

First  collection  district  of  Illinois..  . 

First  and  eleventh  collection  districts 
of  Ohio. 

Tenth  and  eighteenth  collection  dis- 
tricts of  Ohio. 

South  Carolina  

Arizona,  Colorado,  New  Mexico,  and 
Wyoming. 

Michigan  

North  Carolina  

Hawaii  

West  Virginia  

Indiana   . .  . 

Kentucky  

Wisconsin  

Alabama  and  Tennessee  

New  Jersey  

Rhode  Island,  Connecticut,  and 
fourteenth  collection  district,  New 
York  (except  Westchester  County, 
and  the  twenty-third  and  twenty- 
fourth  wards  of  New  York  City). 

Louisiana  and  Mississippi  

First  and  second  collection  districts 
of  New  York,  Westchester  County 
and  twenty-third  and  twenty- 
fourth  wards  of  New  York  City 
being  part  of  the  fourteenth  collec- 
tion district  of  New  York. 

Arkansas  and  Oklahoma  

Iowa  and  Nebraska  

First  and  twelfth  collection  districts 
of  Pennsylvania. 

Twenty-third  collection  district  of 
Pennsylvania. 

Oregon  

Virginia  

Missouri  

Minnesota,  North  Dakota  and  South 
Dakota. 

Idaho,  Montana,  and  Utah  

Texas  

California  and  Nevada  

Washington  and  Alaska   ... . 

Eighth  collection  district  of  Illinois.  . 
Kansas  


Atlanta,  Ga. 
Baltimore,  Md. 

Boston,  Mass. 

Buffalo,  N.  Y. 

Chicago,  111. 
Cincinnati,  Ohio. 

Cleveland,  Ohio. 

Columbia,  S.  C. 
Denver,  Colo. 

Detroit,  Mich. 
Greensboro,  N.  C. 
Honolulu,  Hawaii. 
Huntington,  W.  Ya. 
Indianapolis,  Ind. 
Louisville,  Ky. 
Milwaukee,  Wis. 
Nashville,  Tenn. 
Newark,  N.  J. 
New  Haven,  Conn. 


New  Orleans,  La. 
New  York  City. 


Oklahoma,  Okla. 
Omaha,  Nebr. 
Philadelphia,  Pa. 

Pittsburgh,  Pa. 

Portland,  Oreg. 
Richmond,  Va. 
St.  Louis,  Mo. 
St.  Paul,  Minn. 

Salt  Lake  City,  Utah. 
San  Antonio,  Tex. 
San  Francisco,  Calif. 
Seattle,  Wash. 
Springfield,  111. 
Wichita,  Kans. 


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ESTATE  TAX  INDEX. -REGULATIONS  63:  1921  ACT. 

The  references  are  to  paragraph  numbers. 

(See  page  158  for  an  analytical  Table  of  Contents  of  the  Regulations.) 
Government  index,  the  references  having  been  changed  to  paragraph  numbers. 


Abatement,  claim  for.  .  760 
Accountants,  fees  of — deductibility.  .676 
Accounts,  valuation  of.  .618 
Additional  tax: 

Abatement,  claim  for.  .  760 

Determination  of.  .  726 

Discharge  from  personal  liability.  .  726 

Interest  on.  .  744 

Lien  of.  .  749 

Payment  of.  .  736 

Personal  liability  for.  .741,  768 
Adjustment  of  tax.  .726 
Administration  expenses,  definition  of.  .676 
Administrator  {see  Section  400  and  Executor) 
Ad  valorem  penalty.  .  755 

Advance  payment,  no  discount  because  of.  .  736 
Advancement,  not  necessarily  taxable.  .645 

Agent,  transfer,  nonresident  estate,  when  to  give  notice  of.  .717 

Alaska,  included  in  the  term  "United  States".  .583 

Allies  {see  Associated  nation).  .593 

Animals,  loss  of  during  administration.  .682 

Annuity: 

Created  in  connection  with  a  transfer.  .647 

Included  in  gross  estate.  .601 

Valuation  of.  .629 
Annuity  insurance,  valuation  of.  .  664 
Antiques.  .  626 

Appointment,  property  passing  under  power  of.  .656,  659 
Appraisal: 

Assets  of  business.  .614 

Household  and  personal  effects.  .620 

Other  property.  .619 
Appraisers: 

Expert  required.  .614,  619,  620,  627 

Fees  of — deductibility.  .676 
Army  Nurse  Corps,  female.  .593 
Artistic  value,  articles  of.  .  626 
Assessment  of  estate  tax.  .669,  673,  725,  735,  761 
Assignee,  personal  liability  of.  .  768 
Assignment  of  insurance  policy.  .660 

Associated  nation,  United  States  citizen  serving  in  force  of.  .593 

Attendance,  power  to  require.  .  769,  770 

Attorney,  power  of.  .  734,  764 

Attorney's  fees  when  deductible.  .668,  673 

Auctioneers,  fees  of — deductibility.  .  676 

Bank  deposits,  amount  to  be  included  in  gross  estate.  .616 
Bankers  {see  Nonresident  estates).  .716 

Beneficial  interest,  person  holding,  when  required  to  make  return: 

Nonresident  estates.  .729 

Resident  estates.  .  722 
Beneficial  ownership  of  decedent  in  his  lifetime.  .601 
Beneficial  societies,  fraternal,  death  benefits  paid  by.  .660 


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ESTATE  TAX  INDEX. — REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Beneficiary: 

Estate  previously  taxed,  decedent  a- — of.  .  684 

See  also,  Nonresident  estates.  .  706 
Insurance.  .660-664 

Insurance,  legally  bound  to  use  proceeds  for  payment  of  taxes  or  charges  against 
estate.  .  661 

Liability  of.  .748,  749,  768 
Benefits,  death.  .660 
Bequests: 

Conditional — when  deductible.  .  697 
See  also  Nonresident  estates.  .  707 

In  lieu  of  dower  or  like  interest.  .641 

In  lieu  of  executor's  commission.  .671 

Public  or  charitable.  .691-699,  707 
Betterments  to  property  transferred.  .650 
Bonds: 

All,  whether  Federal,  State,  or  municipal,  and  whether  or  not  containing  a  tax-free 

covenant.  .  605 
Estates  of  nonresidents.  .701,  717,  719 
Of  United  States,  payment  of  tax  with.  .  739 
Valuation  of.  .610 
Books: 

And  records,  production  of.  .  769,  770 
Valuation  of.  .  621 
Bric-a-brac.  .  621 

Broker's  fee,  deductibility  of.  .676 

Brokers  in  possession  of  securities  or  funds  of  nonresident  decedent.  .716 
Burial  expenses,  deductibility  of  charge  for.  .667 
Business,  valuation  of  interest  in.  .614 

Caring  for  property  of  the  estate,  expense  of.  .  676 
Cash  on  hand  or  on  deposit,  valuation  of.  .616 
Casualty,  losses  from.  .682 

See  also  Nonresident  estates.  .  705 
Cemetery  lot,  inclusion  in  gross  estate.  .605 

Charges  against  the  estate,  life  insurance  to  provide  for  payment  of.  .661 

Charitable  bequests.  .691-699,  707 

Checks: 

Outstanding  at  date  of  death.  .609 

Payment  of  tax  with.  .  740 
China — estate  of  United  States  citizen  probated  in  United  States  Court  for  China.  .584 

See  also  Section  411.  .460 
Citizen  of  United  States — estate  of,  probated  in  United  States  Court  for  China.  .584 

See  also  Section  411.  .460 
Citizen  of  the  United  States  who  served  in  the  war  against  Germany.  .593,  597 
Citizenship  not  test  of  residence.  .  585 
Claims: 

Held  by  decedent.  .604 

Valuation  of.  .618 
Claims  against  estate-,  deduction  of.  .677,  705 

See  also.  .613 
Claims  for  abatement  or  refund.  .760 
Clerk  hire,  deductibility.  .  676 
Close  corporation,  valuation  of  stock  in.  .610 
Coast  Guard,  re  service  in — exemption.  .593 
Collection  of  tax.  .747,  771 
Commissions: 

See  also  Nonresident  estates.  .  705 

Administrator's,  executor's,  trustee's.  .669 

Broker's.  .  676 
Compromise  of  penalties  or  disputed  tax.  .767 
Computation  of  tax.  .587,  590 

See  also  Nonresident  estates.  .  708 


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ESTATE  TAX  INDEX. — REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Conditional  charitable,  etc.,  bequests.  .697 

See  also  Nonresident  estates.  .  707 
Conditional  deduction  of  attorney's,  administrator's,  or  executor's  fees.  .669,  673 
Constructive  possession,  person  in.  .714,  729,  741,  768 

See  also  Nonresident  estates.  .711,  716,  722 
Contemplation  of  death: 

Exercise  of  power  of  appointment  in.  .  656 

Transfer  in.  .642,  643,  650 
Contingent  liabilty,  deduction  of.  .665 
Contingent  remainder.  .601,  629 

Contribution,  by  persons  liable  for  the  tax,  to  the  person  paying.  .  748 

Contribution  to  purchase  price  of  property  held  jointly  or  as  tenants  by  the  entirety  .653 
Control  of  corpus  or  income  of  property  transferred — effect  of  reservation  of.  .649 
Copyrights,  valuation  of.  .617 

Corporation,  nonresident  estate,  when  to  give  notice  of.  .717 
Court  costs,  deduction  of.  .676 

See  also  Nonresident  estates.  .  705 
Court  decree,  effect  of,  as  fixing  amounts  deductible.  .666 
Crops,  valuation  of  growing.  .619 
Curtesy.  .  641 

Custodians  of  property  of  nonresident  decedents.  .716 

Data,  supplemental,  to  be  furnished  in  behalf  of  the  estate.  .  724,  730 
Date  for  filing: 

Return.  .721,  729 

Preliminary  notice.  .713,  714,  716,  717 
Death  benefits,  taxable  as  insurance.  .660 
Death: 

Contemplation  of.  .643 

Transfer  in  contemplation  of.  .642,  643,  650 

Transfer  intended  to  take  effect  in  possession  or  enjovment  at  or  after  death.  .642, 
646-650 

Value  at  date  of,  of  property  transferred.  .650 
Debtor  of  decedent: 

Insolvency  of.  .615 

Personal  liability  of.  .  769 
Debts  of  decedent.  .  665 

See  also  Nonresident  estates.  .705 
Decree,  court,  effect  of,  as  fixing  amounts  deductible.  .666 
Deductions: 

Estates  of  nonresidents.  .582,  703-708 

Estates  of  residents.  .582,  665-700 
Delinquency — penalties.  .755,  758 
Dependents,  support  of.  .683 
Depreciation  after  date  of  death.  .608,  682 
Determination  of  net  estate.  .582,  587 

See  also  Nonresident  estates.  .  705,  708 
Determination  of  tax.  .587,  736 

See  also  Nonresident  estates.  .  703,  708 
Devise  for  public,  charitable,  religious,  etc.,  uses.  .691 
Devise  in  lieu  of  dower  or  like  interest.  .641 
Discharge: 

From  personal  liability  for  tax.  .728 

Of  lien  for  tax.  .751 
Discount,  none  allowed  on  tax.  .  736 
Disease: 

Contracted  in  line  of  duty.  .593 

Loss  from,  when  deductible.  .  682 
Distraint,  collection  of  tax  by.  .771 
Distributing  estate,  expenses  of.  .676 

See  also  Nonresident  estates.  .  705 
Distribution  of  property,  restrictions  on.  .620 
District  of  Columbia — included  in  term  "United  States".  .583 

See  also.  .691 


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ESTATE  TAX  INDEX.— REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Dividends: 

Notice  of  nonresident  decedent.  .717 

When  to  be  included  in  gross  estate.  .606 
Domestic  corporations,  stock  in,  part  of  estate  of  nonresident.  .701 
Domestic  insurance  company,  insurance  in,  not  a  part  of  estate  of  nonresident.  .701 
Domicile.  .583,  712 
Donee  of  power  of  appointment.  .656 
Dower.  .  641 
Due  date: 

Interest  on  tax  from.  .744 

Of  tax.  .736 

Educational  uses,  transfers  for.  .694 

See  also  Nonresident  estates.  .  707 
Effective  dates  of  various  statutes.  .579,  588 

Election  to  take  under  will: 

See  Dower;  Curtesy.  .641 

See  Executor's  commission.  .669 

See  Attorney's  fee.  .673 
Election  under  insurance  policy.  .664 
Enhancement  of  value  subsequent  to  death.  .608 
Enhancement  of  value  of  property  transferred.  .650 
Engravings.  .  626 

Equitable  {see  Beneficial  ownership).  .  601 

Escheated  property,  transfer  taxable.  .581 

Estate,  insurance  in  favor  of.  .660,  661 

Estate  of  decedent,  what  constitutes.  .601 

Estate  tax,  character  of — not  a  property  or  legacy  tax.  .581 

Estates,  by  the  entirety,  joint,  life,  remainder  and  in  reversion.  .629,  651,  653 

Etchings.  .626 

Exchange,  property  acquired  by — of  property  previously  taxed.  .  689 

See  also  Nonresident  estates.  .  706 
Ex  dividend — stock  selling.  .  606 
Executor: 

Commissions.  .  668,  669 

See  also  Nonresident  estates.  .  705 
Defined.  .714 

See  also  Nonresident  estates.  .716 
Discharge  from  personal  liability.  .  726 

Expense  of  holding  property  as  trustee,  by — not  an  administration  expense.  .  668 
Failure.    See  Penalties. 

Final  accounting,  receipt  for  payment  of  tax,  entitles  him  to  credit.  .  736 

Foreign,  directing  transfer  of  securities.  .717 

Insurance  receivable  by.  .660,  661 

Legacy  to,  in  lieu  of  commissions.  .671 

Penalties.  .725,  755,  759 

Personal  liability  of.  .711,  725,  741,  768,  771 

Reimbursement  by  certain  persons.  .748 

Result  of  investigation — informed  of.  .  727 

Should  reserve  sufficient  assets  to  satisfy  any  additional  tax.  .738 
Executor's  duties: 

Furnish  copies.  .724 

Give  preliminary  notice.  .713 

See  also  Nonresident  estates.  .716 
Keep  records.  .  772 
Pay  the  tax.  .  741 

See  also  Nonresident  estates.  .711 
Render  statements.  .773 

Reserve  sufficient  assets  to  satisfy  additional  tax.  .  738 

Retain  all  documents  and  vouchers.  .723 
Exempt  estates: 

Less  than  $50,000,  in  case  of  doubt,  file  notice.  .712 

Military,  etc.,  exemption.  .593,  597,  715 
Exemption,  $40,000  of  life  insurance.  .660,  662 


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ESTATE  TAX  INDEX. — REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Exemption  for  military,  etc.,  service,  how  claimed.  .597,  715 
Exemption,  specific.  582,  700 

None  in  nonresident  estates.  .582,  703 
Expectation  of  death.  .643 
Expenses  deductible.  .665-676 

See  also  Nonresident  estates.  .  705 
Extension  of  time  for  return.  .721 
Extension  of  time  for  payment  of  tax.  .742,  744 

Farm  machinery.  .619 
Federal  bonds: 

Payment  of  tax  with.  .  739 

Transfer  of  taxable.  .605 
Federal  taxes  upon  income.  .680,  728 
Fees,  deductible.  .668,  676 

Fiduciary,  when  to  give  preliminary  notice.  .714,  716 
Fires,  losses  from.  .682 
Foreign  country: 

Citizen  of,  may  be  a  resident.  .584 

Decedent  a  resident  of.    See  Nonresident  estates. 

Inventory  filed  in  connection  with  proceedings  in.  .  730 
Foreign  military  force,  decedent  who  served  with.  .  593,  597 
Fraternal  beneficial  societies,  death  benefits  paid  by.  .660 
Fraud  in  return,  effect  of.  .744,  757 
Funeral  expense.  .  665,  666,  667 
Furniture,  valuation  of.  .  620 

General  power  of  appointment.  .656 
Germany,  war  against.  .593 
Gift: 

Joint  tenancy  or  tenancy  by  the  entirety.  .653 
When  taxable.  .  642-650,  653 
Gross  estate.  .582,  601,  701,  703 
Lien  for  tax  on.  .  749 

Hawaii,  included  in  the  term  "United  States".  .  583 
Heirs: 

Property  passing  directly  to.  .604 

When  none,  transfer  by  escheat  to  State  is  taxable.  .581 
See  also  Liability. 
Household  effects,  valuation  and  distribution  of.  .620 

Husband  and  wife.    See  Dower;  Curtesy;  Joint  interests;    Tenancy  by  the  entirety;  Pre- 
viously taxed  property. 

Income  of  property  transferred,  reservation  of,  in  favor  of  grantor  or  of  another.  .647,  691 
Income  tax,  Federal.  .  680,  728 
Inheritance  tax,  estate  tax  is  not  an.  .581 
Insurance: 

Life.  .  660-664 

Losses  compensated  by.  .682 
Interest  accrued  at  time  of  death — whether  then  payable  or  not.  .  605 
Interest  on: 

Bank  account.  .  616 

Bonds.  .605 

Estate  tax.  .  742,  744,  762,  765 
Mortgages  against  estate.  .681,  776 
Mortgages  owned  by  estate.  .605 
Notes  owned  by  estate.  .605,  615 
Refund.  .  766 

Internal  revenue  agents  in  charge,  list  of  offices  of.  .777 
Inventory,  of  nonresident  estate — power  to  require.  .730 
Investigation  of  returns.  .726,  736 

Jewelry,  valuation  of.  .620 
Joint  account  in  bank.  .651 


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8-4-22. 

ESTATE  TAX  INDEX.-  -REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

oint  interests.  .651,  653 

udgments  in  favor  of  decedent's  estate.  .618 
udgments  of  local  court — effect  on  deductions.  .666 

Legacy,  estate  tax  is  not  upon  any  particular.  .581 
Legacy  for  public,  charitable,  religious,  etc.,  uses.  .691-699 
Legacy  in  lieu  of  commissions.  .666 

Legal  interest — person  holding,  when  required  to  make  return: 

Nonresident  estates.  .729 

Resident  estates.  .722 
Liability: 

Contingent,  deduction  of.  .  665 

Personal — of  administrator,  assignee,  beneficiary,  person  in  possession,  transferee, 
trustee.  .711,  725,  748,  768,  771 
Liberty  bonds: 

Payment  of  tax  with.  .  739 

Transfer  of  taxable.  .605 
Lien  for  the  tax: 

Property  subject  to.  .  749 

Release  of  lien.  .  752 
Life  estates.  .601,  629,  656 
Life  insurance,  when  taxable.  .660-664 
Line  of  duty,  service  in  military  forces.  .593 
Litigation  to  determine  respective  shares  of  beneficiaries.  .  673 
Live  stock,  valuation  of.  .619 
Lodge,  death  benefits  paid  by.  .660 
Losses  during  administration.  .665,  682 

Machinery,  farm.  .619 
Marine  Corps,  service  in.  .  593 
Mausoleum.  .  667 

Military  service — exemption  because  of.  .597 

Military  forces  of  United  States  or  of  an  associated  nation — exemption  because  of  service 

in.  .593,  597 

Miscellaneous  administration  expenses.  .665,  668,  676 
Missionary,  residence  of.  .583 

m   See  also  403  (b).  .444^ 
Mitigation  of  fines,  penalties,  or  forfeitures.  .767 
Modified  articles  of  Regulations  No.  37.  .  776 
Money  due  nonresident  decedents,  situs  of.  .701 
Money  in  joint  account.  .651,  653 
Money  on  deposit.  .616 
Monument,  deduction  for.  .667 
Mortgage  owned  by  decedent.  .615 
Mortgage,  deduction  of.  .681,  704,  776 
Municipal  bonds,  transfer  of,  taxable.  .605 

Naval  forces  of  United  States  or  of  an  associated  nation.  .  593 
Net  estate: 

Estates  of  residents.  .581,  582,  587,  665-700 

See  Deductions. 

See  also  Estates  of  nonresidents.  .  703 
Nonresident  estates  (see,  generally,  titles  under  general  index): 
Administrator  shall  pay  the  tax.  .711,  741 
Agents  of  nonresident  decedent.  .716 
Bankers.  .716 

Beneficial  interest,  person  holding,  when  required  to  make  return  .72^ 
Bonds — 

Interest  accrued  prior  to  death.  .717 

Situs  of.  .  701 

Tax  free.  .  605 

Transfer  after  notice.  .719 
Deductions.  .  703 

See  also  specific  titles  under  Deductions. 
Defined.  .583 


Copyright  1922,  by  Tk*  Corporation  Trust  Compn.y. 
WAR  TAX         212  SERVICE 


8-4-22. 


ESTATE  TAX  INDEX.— REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Nonresident  estates — Concluded. 
Executor  shall — 

Give  notice.  .713,  716 

Pay  the  tax.  .711,  741 
Information  concerning,  requirement  of.  .  730 
Insurance  in  domestic  company — not  part  of  gross  estate.  .  701 
Moneys  due  from  domestic  debtors — when  part  of  gross  estate.  .701 
Moneys  on  deposit.  .701 
Net  estate — how  determined.  .  703 
Notice.  .716-719 
Payment  of  tax.  .  711 

Personal  property — when  included  in  gross  estate.  .701 

Person  holding  beneficial  interest,  when  required  to  make  return.  .  729 

Possession,  persons  in  actual  or  constructive.  .716 

Presumption.  .583 

Property  in  the  United  States.  .604,  701,  716 
Real  property  in  the  United  States.  .604,  716 
Real  property  outside  the  United  States.  .  604,  704 
Return.  .  704,  729 

Specific  exemption — none.  .582,  703 

Stock  in  domestic  corporation.  .701 

Tax  confined  to  estate  in  United  States.  .  703 
Notes  of  United  States,  payment  of  tax  with.  .739 
Notes,  valuation  of.  .615 
Notice,  preliminary.  .712-719 

Failure  to  file.  .  758 

False  or  fraudulent.  .  757 
Nurse — exempt  estates.  .593 

Offices — list  of  Internal  Revenue.  .777 
Oriental  rugs,  valuation  of.  .625 

Paintings,  valuation  of.  .625 
Partner,  decedent's  interest  as.  .614 
Patents,  valuation  of.  .617 
Payment  of  tax: 

By  certain  bonds  or  notes  of  United  States.  .  739 

By  uncertified  check.  .740 

Executor  shall  make.  .741 

Extension  of  time  for.  .  742 

See  also  Nonresident  estates.  .711 

Proceedings  to  enforce.  .771 

Receipt  for.  .  736 

Settlement  of  executor's  accounts — receipt  entitles  to  credit.  .  736 
Shown  due  by  return — effect  of.  .744 
Time  of.  .  736 
Penalties: 

Abatement.  .  761 

Ad  valorem.  .  755 

Avoid,  in  case  of  doubt.  .  723 

Compromise.  .  767 

For  delinquency.  .  755,  758 

For  failure  to  exhibit  records.  .759 

For  failure  to  file  notice  or  return.  .758 

For  failure  to  furnish  copies  of  documents,  upon  request.  .724 

For  false  and  fraudulent  notice  or  return.  .  757 

Nature  of.  .  755 

Refund  of.  .  764,  765 

Remission  of.  .  767 

Return  not  in  good  faith.  .744,  757 
Person  in  actual  or  constructive  possession — when  must  file  return: 
*  Nonresident  estates,  .729 

Resident  estates.  .122 
Personal  effects,  valuation  and  distribution  of.  .620 


Copyright  1922,  by  The  Corporation  Trust  Company. 
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8-4-22. 

ESTATE  TAX  INDEX.— REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Personal  liability — persons  subject  to — administrator,  assignee,  beneficiary,  executor,  per- 
son in  possession,  transferee,  trustee.  .711,  725,  748,  768,  771 

Personal  property,  inclusion  and  valuation  of.  .601,  629,  651,  653 
See  also  Nonresident  estates.  .701 

Philippine  Islands,  not  included  in  term  "United  States".  .583 

Policy  of  life  insurance.  .  660-664 

Porto  Rico,  not  included  in  term  "United  States".  .583 
Power  of  appointment,  property  passing  under.  .656,  659 
Power  of  attorney.  .  764 
Preliminary  notice.  .712-719 

Failure  to  file.  .758 

False  or  fraudulent.  .757 
Present  worth  of  annuities  and  future  interests.  .629 
Presumptions: 

Assessment  of  estate  tax  correct.  .761 

Consent  decree.  .666 

Property  held  jointly  or  as  tenants  by  the  entirety.  .  653 
Residence.  .  584 

Taxability  of  transfers,  if  not  rebutted  (the  value  of  transfers  must  be  returned)..  643 
Two  years  of  death,  transfer  within.  .  644 

When  tax  upon  personal  property  becomes  a  personal  obligation.  .679 
Previously  taxed  property.  .  684-689 

See  also  Nonresident  estates.  .  706 
Prints,  common.  .621 

Privileged  character  of  return  and  other  records.  .  732,  733 
Proceeds  of  life  insurance  subject  to  lien  for  tax.  .  750 
Promulgation  of  regulations.  .  776 
Property  previously  taxed.  .  684-689 

See  also  Nonresident  estates.  .  706 
Property  transferred — inclusion  in  gross  estate.  .  642-650 
Property,  valuation  of.  .608-629,  650 
Protest,  payment  of  tax  under.  .765 

Rates  of  tax  (sec.  401).  .588,  590 

Real  property  (generally).  .601,  604,  609 

Assessment  for  local  taxation  not  determinative  of  value.  .  609 

Devisee,  taking  directly.  .  604 

Entirety,  estate  by.  .651,  653 

Jointly  owned  property.  .651,  653 

Heirs  taking  directly.  .604 

Life  estate.  .601,  629 

Mortgaged,  full  value  to  be  returned.  .681 

Mortgage  on.  .681,  705,  776 

Outside  the  United  States.  .604,  681,  705-707 

Taxes  on.  .  678 

Valuation.  .  609 
Rebuttal  of  presumption  of  taxability  of  transfers.  .643 
Receipts  granted  upon  payment  of  tax.  .  736 
Records: 

Executor,  duty  to  keep.  .  772 

Exhibit,  penalty  for  failure  to.  .  759 

Production  of.  .  769,  770 
Refunds,  claims  for.  .  760,  764,  765 

Registrar,  nonresident  estate — when  to  give  notice.  .717 
Regulations  No.  37,  modified,  revoked  and  superseded  articles  of.  .776 
Reimbursement  for  tax  paid.  .748 
Release  of  lien.  .  752 

Relief  from  excessive  assessment  or  collection.  .  760 

Remainder  interest.  .601,  629 

Remainder,  interest  in  reversion  or.  .601,  629 

Remedies  for  collection.  .771 

Remission  of  penalties.  .767 

Rents,  accrued  at  time  of  death — whether  then  payable  or  not.  .604 
Repeal  of  revenue  act  of  1918,  scope  of.  .775 


Copyright  1922,  by' Tin  Corporation  :  Trust  Company. 
WAR  TAX         214  SERVICE 


8-4-22. 


ESTATE  TAX  INDEX. — REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Transfers  made  by  decedent  in  his  lifetime — Concluded. 
Interest  transferred  by  decedent.  .650 
Liability,  persons  subject  to  tax.  .741,  748,  749,  768  771 
Lien  for  tax.  .  749 

Persons  liable  for  tax  on.  .741,  748,  749,  768,  771 

Property  subject  to  lien  for  tax.  .  749 

Reimbursement  of  executor  for  tax  paid  on.  .  748 

Situs  of  property  transferred  by  nonresident.  .701 

Time  of.  .  642 

Transferee — 

Personal  liability  of.  .741,  748,  749,  768,  771 
Reimbursement  of  executor  by,  for  tax  paid  on  transfer  .  748 

Trust,  property  held  in.  .649,  701 

Trustee,  personal  liability  of.  .752,  768 

Valuation  of  property  transferred.  .642-647,  650 
Transfers  previously  taxed.  .684 

See  also  Nonresident  estates.  .  706 
Trust  company,  money  deposited  with  and  payable  to  survivor.  .6^1 
Trustee,  suit  to  enforce  personal  liability  of.  .771 

See  also  Transfers  made  by  decedent  in  his  lifetime;  Personal  liability. 
Trustee's  commissions,  not  deductible.  .672 

Uncertain  liability,  deduction  of.  .  665 
United  States: 

Mortgages  on  property  outside — death  before  Act  1921.  .776 
Use  of  term  denned.  .  583 

See  also  Section  403b  and  section  411.  .444,  460 
Use,  personal,  of  nonincome  bearing  property,  valuation  of.  .635 

Valuation,  Rules  for.  .  609,  629 

Life  insurance.  .  664 

Previously  taxed  property.  .  684 

Transfers,  property  in  certain.  .  642-650 
Value  at  the  time  of  death.  .608 

See  also  Life  insurance  and  transfers;  Valuation. 
Vases,  valuation  of.  .  626 
Verification  of  return.  .  726,  736,  769,  770 
Vested  remainder.  .601,  629 

Vouchers,  duty  of  executor  to  furnish  copies  and  retain.  .723,  724 

Waiver  of  personal  inspection  of  household  and  personal  effects  by  officer  of  Bureau  .  .620 
War,  World.  .593 

Warehouse  companies,  duties  in  connection  with  nonresident  estates.  .716 

Widow.    See  Dower;  Support  of  dependents;  Joint  interests;  Previously  taxed  property; 

Tenants  by  the  entirety. 
Will: 

Creating  joint  tenancy  or  tenancy  by  the  entirety.  .  653 
Duplicate  certified  copies,  to  be  filed  with  return.  .696,  723 

See  also  Nonresident  estates.  .  730 
Election  to  take  under.  .641,  669,  673 
Exercise  of  power  of  appointment  by.  .656 
Notes  or  other  claims  canceled  by.  .  605 
Property  acquired  under  and  previously  taxed.  .684 

See  also  Nonresident  estates.  .  706 
Transfer  by,  for  public  and  similar  uses.  .691,  697 

See  also  Nonresident  estates.  .  707 
Transfers  by,  taxable.  .  580 
World  War,  service  in.  .593= 
Worthless  notes,  value  of.  .615]|'i 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         217  SERVICE 


C-9-22.     (2)  8-4-22. 

ESTATE  TAXES  REGULATIONS,  ETC.  1922. 


TREASURY  DKIM.RTMK.Vr 
Form  71*—  K»v)*«i  March,  IM2 


NOTICE  BY  TRANSFER  AGENTS — ESTATE  OF  NONRESIDEN' 


This  notice  must  ba  filed  in  duplicate.    (Observe  instructions  on  revert*  tide  J 


Name  of  decedent.  

Date  of  death....  

Place  of  death  if  known . 
Residence   


Commissioner  ok  Internal  Revenue, 

Estate  Tax  Division,  Treasury  Department, 
Washington,  D.  C. 

The  undesigned,  pursuant  to  the  requirements  of  section  404  of  the  Revenue  Act  of  hereby  gives  notice  that  on 

the  day  of   .  ,  19   ,  a  communication  was  received  from  _    

  :  ,  aeting-in  the  capacity  of  ,  ,  _., 

whose  address  is  _  ,  directing  the  transfer  to  

   ,  whose  add reaa  is  ,  the  stock*  or  bond*  listed 

below  of  the  _    Company  ta  corporation  orgaui/.ed  in  l  lie 

United  States  i,  owned  by  the  above-named  decedent  at  time  of  death. 

Number.         j  Description.  Ia<*  value. 


<  Attut'h  ^Cltetiuif  it  moa-  spate  in  required.  J 

The  names  and  addresses. of  the  legal  representative*  oi  the  decedent  a  estate,  in  so  far  us  known  or  shown  by  the  records  of  Uua 
company,  arei 

Namt  Address. 

Executor  or  (Iu  United  States    

adminiHtmtor|0uteick  U  nited  States   

[In  United  States   _  -.   

Attorneys^ 

lOutside  United  States.  .     —   . 


The  undersigned  has  information  that  property  owned  by  the  decedent  at  the  time  of  death  was  in  the  possession  of  others  as  shown 
below: 

Aruv/i*  of  possessor.  Address,  Description. 


I  heheuy  CERTIFY  tliat  I  have  carefullv  read  the  instructions  on  the  reverse  -i<ie  of  this  form  and  that  ail  statements  iuadr  bttwil 
are  correct  to  (he  best  of  my  knowledge  and  lielief. 


Signature  . 
Designation 
Address  


[For  the  use  of  this  Form  714  see  *.  7  I  7 .  J 

(For  the  reverse  of  this  Form  714  see  page  219  opposite.] 


tbpytljht  1922,  by  the  Corporation  Trust  Company. 

WAR  TAX        218  skrvkt: 


6-9-22.    (2)  6-26-22. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


(Reverse  of  Form  714. — Estate  Tax.    For  the  obverse  see  page  218  opposite.] 

INSTRUCTIONS 


1.  By  whom  notice  must  he  -filed. — This  notice  must  be  filed  by  each  com 
pany,  transfer  agent,  or  registrar  requested  to  make  transfer  of  stocks  or  bonds 
owned  by  any  person  who  at  the  time  of  death  was  a  nonresident  of  the  United 
States,  and  issued  by  a  corporation  organized  in  the  United  States.  The  term 
"  United  States "  means  the  several  States,  the  Territories  of  Alaska  and 
Hawaii,  and  the  District  of  Columbia. 

2.  Time  of  filing. — This  notice  must  be  filed  by  the  company,  transfer 
agent,  or  registrar  within  two  months  following  the  date  of  death,  or  imme- 
diately upon  receipt  of  the  request  for  the  transfer,  unless  the  transfer  is  made 
upon  the  order  of  an  executor  or  administrator  appointed  in  the  United  States. 

3.  Place  of  filing. — This  notice  must  be  filed  with  the  Commissioner  of 
Internal  Revenue  at  Washington,  D.  C. 

4.  Supplemental  data. — Copy  of  will,  inventory,  or  other  documents 
received  with  the  order  for  transfer  will  assist  the  Bureau  of  Internal  Revenue 
if  submitted  with  this  notice.  Transfer  of  stock  should  not  be  made  unless 
notice  has  been  filed  with  the  Commissioner  of  Internal  Revenue  and  permis- 
sion to  make  such  transfer  has  been  granted.         2_8945  ^i,,™™™*™, 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  219  SERVICE 


6-26-22. 


ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


(Decision.) 

Revenue  Act  of  1918. — Equally  applicable  to  the  1921  Act. 
June  20,  1922. 

For  the  purposes  of  the  deduction  on  account  of  charitable  bequests,  the 
amount  of  "bequests  to  charity"  out  of  the  residuary  estate,  is  the 
amount  of  the  residuary  estate  after  state  transfer  or  succession 
taxes  have  been  paid  therefrom  by  the  terms  of  the  will, 
without  further  reduction  by  the  amount  of  the  Federal 
Estate  Tax  on  the  net  estate  though  such  tax  in  fact 
does  reduce  by  its  amount  the  residuary  estate 
passing  to  charity. 

UNITED  STATES  DISTRICT  COURT: 

SOUTHERN  DISTRICT  OF  NEW  YORK. 

Joseph  Fermain  Slocum,  FIerbert  Jermain  Slocum,  Stephen  L'Hommedieu 
Slocum,  Robert  W.  DeForest  and  Henry  W.  DeForest,  as 
executors  of  the  Last  Will  and  Testament  of  Margaret 
Olivia  Sage, 

Plaintiffs, 

against 

William  H.  Edwards,  formerly  Collector  of  Internal  Revenue  for  the 
Second  District  of  New  York, 

Defendant. 


77  8      Augustus  N.  Hand,  District  Judge: — This  is  an  action  brought  to 
18       recover  federal  estate  taxes  alleged  to  have  been  erroneously  assessed 

158       and  collected.    The  gross  estate  amounted  to   $49,129,256.99 

435       The  funeral  and  administration  ex- 
penses and  debts  amounted  to   $3,789,321.74 

The  bequests  for  charitable,  religious,  public 
and  similar  purposes,  without  any  deduction 
for  State  taxes  or  estate  succession  taxes  pay- 
able under  Clause  6  of  the  will  out  of  the  res- 
iduary estate  on  bequests  to  individuals.  .  .  .  36,721,855.70 

Specific  exemption   50,000.00 

  40,561,177.44 


This  left  a  net  estate  of   $8,568,079.55 

according  to  the  return  made  by  the  estate  upon  which  would  be  a  total  tax 
of  $1,406,977.50. 

7  79  The  Commissioner  of  Internal  Revenue  revised  this  tax  by  deducting 
from  the  bequests  for  charitable  purposes  the  amount  of  State 
transfer  taxes,  viz.:  $5,741.83  payable  under  Clause  6  of  the  will  from  the 
residuary  estate  which  went  to  charity.  He  also  deducted  from  the  residuary 
estate  going  to  charity  the  federal  estate  tax.  This  lessened  the  amount  of 
the  charitable  bequests  which  are  made  deductible  in  computing  the  net 
estate  subject  to  the  estate  tax  and  increased  the  tax  accordingly.  The 
sum  of  $413,629.62  and  interest  is  the  amount  of  overpayment  now  sought 
to  be  recovered. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  220  SERVICE 


6-26-22. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


7  80  Section  203  of  the  Revenue  Act  of  1916  provides  that  for  the  purpose 
of  the  tax  the  value  of  the  net  estate  shall  be  determined  by  deducting 
from  the  value  of  the  gross  estate  funeral  expenses,  administration  expenses, 
claims  against  the  estate  and  "such  other  charges  against  the  estate  as  are 
allowed  by  the  laws  of  the  jurisdiction  whether  within  or  without  the  United 
States  under  which  the  estate  is  administered." 

781  Section  403  (a)  (3)  of  the  Revenue  Act  of  1918  allows  as  a  further 
deduction: 

"(3)  The  amount  of  all  bequests,  legacies,  devises  or  gifts  to  or 
for  the  use  of  the  United  States,  any  state,  territory,  any  political 
subdivision  thereof,  or  the  District  of  Columbia,  for  exclusively 
public  purposes  or  to  or  for  the  use  of  any  corporation  organized 
and  operated  exclusively  for  religious,  charitable,  scientific,  literary 
or  educational  purposes,  including  the  encouragement  of  art  and  the 
prevention  of  cruelty  to  children  or  animals,  no  part  of  the  net 
earnings  of  which  inures  to  the  benefit  of  any  individual,  or  to  a 
trustee  or  trustees  exclusively  for  such  religious,  charitable,  scientific, 
literary  or  educational  purposes.  This  deduction  shall  be  made  in 
the  case  of  all  decedents  who  have  died  since  December  31,  1917." 

782  The  question  for  consideration  is  the  meaning  to  be  attached  to  the 
words:  "The  amount  of  all  bequests,  legacies,  devises  or  gifts"  when 

applied  to  a  residuary  gift  to  charity.  This  amount  whatever  it  may  be  is 
what  is  to  be  deducted  in  finding  the  net  estate  upon  which  the  tax  is  to  be 
calculated.  The  charitable  recipients  of  the  testator's  bounty  ultimately 
receive  only  a  balance  constituted  after  the  Government  has  taken  out  the 
estate  tax  levied  as  an  excise  tax  upon  the  privilege  granted  to  the  testator 
of  transmitting  his  property  at  death.  In  the  case  of  an  estate  bequeathed 
to  a  single  individual  the  estate  tax  might  have  been  computed  upon  what 
he  would  receive  after  the  estate  had  suffered  diminution  by  the  tax  itself 
but  such  has  never  been  the  practice,  and  the  uniform  theory  has  been  that 
the  estate  passing  was  to  be  treated  without  regard  to  the  incidence  of  the 
tax  itself.  I  see  no  reason  why  a  different  rule  should  be  adopted  in  dealing 
with  the  words  "The  amount  of  all  bequests,  legacies,  devises  or  gifts"  even 
when  applied  to  a  residue  to  charity.  In  the  first  case  if  the  taxes  had  been 
computed  upon  the  amount  actually  passing  after  deducting  the  tax  millions 
of  dollars  would  have  been  saved  to  taxpayers.  It  does  not  seem  consistent 
to  look  at  the  matter  in  a  different  way  in  dealing  with  the  present  case, 
particularly  in  view  of  the  liberal  legislation  enacted  in  aid  of  charitable 
gifts.  ' 

783  l&The  State  legacy  tax  amounting  to  $5,741.83  payable  out  of  the  gen- 

eral estate  under  Clause  6  of  the  will  would  not,  under  the  New  York 
decisions  be  deductible  from  the  residuary  estate  in  appraising  the  value  of 
that  estate  for  the  purpose  of  transfer  taxes.    Matter  of  Swift,  137  N.  Y.  77. 

784  The  Government  in  this  case  wishes  to  increase  the  net  taxable 
estate  by  reducing  the  deductible  residuary  bequests  to  charity  which 

have  to  pay  this  $5,741.83  to  the  extent  of  that  sum.  In  my  opinion  the  de- 
cision of  the  New  York  Courts  in  construing  the  Transfer  Tax  Act  should  not 
control  the  present  situation.  If  the  New  York  Courts  had  reached  any  other 
decision  than  the  one  they  did  and  had  held  that  a  direction  to  pay  a  tax 
upon  a  legacy  to  A  out  of  the  general  estate  lessened  the  general  estate  for 
purposes  of  taxation  by  the  amount  of  the  tax  on  A's  legacy,  the  effect  would 
have  been  to  free  the  estate  from  any  tax  on  the  amount  saved  to  A  by  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         221  SERVICE 


6-26-22. 


ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


direction  that  the  tax  on  his  legacy  should  be  paid  from  another  fund.  Such 
a  result  was  unreasonable,  and  the  New  York  Court  properly  held  was  not 
within  any  justifiable  construction  of  the  statute. 

785  In  the  present  case,  however,  there  is  a  direction  under  Clause  6  of 
the  will  that  taxes  on  legacies  to  certain  individuals  should  be  paid 

out  of  the  general  estate.  It  may  well  be  that  this  direction  should  not 
affect  the  amount  or  method  of  ascertaining  any  legacy  tax,  but  where  the 
deduction  allowed  for  charitable  bequests  in  computing  the  net  taxable  estate 
is  limited  to  the  amount  of  such  bequests  a  specific  charge  by  the  terms  of 
the  will  upon  a  portion  of  the  estate  bequeathed  to  charity  alters  the  plain 
testamentary  disposition  of  the  testator's  property  to  that  extent  and  limits 
the  amount  of  the  charitable  bequests  pro  tanto.  It  will  be  said  that  if  the 
subtraction  of  the  amount  of  all  bequests  to  charity  is  to  take  into  account 
legacy  taxes  payable  out  of  such  bequest  by  the  terms  of  the  will,  it  should 
take  into  account  the  Federal  estate  tax  which  is  a  legal  charge  upon  the 
estate.  I  do  not  think  the  cases  are  parallel.  The  testator  by  her  own 
direction  limited  the  amount  which  the  residuary  legatees  would  receive  by 
the  legacy  taxes.  On  the  other  hand,  the  uniform  practice  has  been  to 
disregard  the  Federal  estate  tax  itself  in  determining  the  net  estate.  It  is 
reasonable  to  apply  the  same  rule  in  determining  what  is  the  residue  which 
the  testatrix  gave  to  charity  for  the  purpose  of  claiming  the  statutory  de- 
duction.   Judge  Rose  in  Dugan  v.  Miles,  276  Fed.  401,  followed  this  rule. 

786  The  motion  for  judgment  dismissing  the  amended  complaint  is  denied, 
and  judgment  is  directed  for  the  plaintiffs,  with  interest,  except  as  to 

the  tax  on  the  sum  of  $5,741.83,  which  sum  should  be  deducted  from  the 
residue  passing  to  chanty  and  thus  added  to  the  net  estate  for  purposes  of 
taxation. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  222  SERVICE 


8-10-22. 


ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


TRT  YSURY  DEPARTMENT 

j-S^ifSOTiSPS"      PRELIMINARY  NOTICE-ESTATE  OF  RESIDENT 


To  be  filed  in  duplicate  by  executor  or  person  in  possession  of  property.    (Observe  instructions  on  reverse  aide.) 


District...  .. 
Date  filed 


Name  of  decedent. 

Date  of  death  

Place  of  death  

Residence  


Collector  of  Internal  Revenue, 


10. 


1.  I,  pursuant  to  the  requirements  of  section  404  of  the 

Revenue  Act  of  1021,  approved  N'ovembgr.  23,  1021,  hereby  give  notice  that 

(Pill  in  (fl)  or  (?;)  as  facts  warrant.) 

(e)  I  qualified  as  execut  — adniinistrat  — of  the  estate  of  the  above-named  decedent  in  the   

 Court  at   on  the  ,  day  of   ,  19  - 


(b)  I  had  actual  or  constructive  possession  of  property  of  the  above-named  decedent  on  date  of  death.  The  description 
and  approximate  value  of  such  property  at  the  time  of  death  were  as  follows: 

Description.  Value. 


(Attach  schedule  if  more  space  Is  required.) 

2.  To  the  best  cf  my  knowledge  the  value  of  the  gross  estate  of  the  decedent  exceeds  $r>0,000,  and  the  approximate  values  of 
the  various  classes  of  property  comprising  the  gross  estate  at  date  of  death  were  as  follows: 

Real  estate   .-.  .  •-  m  -   $  _  

Stocks  and  bond9  ...i..^.i^...v^,f^..,..i..t^..«_T   _  

Miscellaneous  personality  -   !   .   '  — 1™.:   I  

Property  transferred  (see  Instructions  5  (<"))  .   

Property  owned  jointly  _  -  ~  „  

Life  insurance  for  benefit  of  estate    _  -  „  

Other  Ufa  Insurance.  — -  -    

(Estimated  values  mil  be  accepted.)  Tcta!  L  

That  the  names  and  addresses  of  the  legal  representatives  cf  the  estate  .and  their  attorneys  insofar  as  >sc*n  to  me  at<= 

Name,  Address, 


Executor- 
Administrators 


I  heels v  cEBiir?  that  I  ha-ve  carefully  read  the  Instruction?  en  *bp  rc**rs*  *H*  of  ihlo  form  nnd  tti.it  nil  »bc  pta'cmcntc-  mane 

r?ln  are  corrcrt  fo  the  heat  of  my  lrnowledse  and  belief, 

3  COT* 

Signature...  ,  ,  -  -  


tyrelgnatton 
Address 


(Rw  PKregrnph  2  of  InftrucUnos  no  barfc.) 


[Obverse  of  Form  704.] 

[For  the  use  of  this  Form  704  see  ^"7 1 3.] 


&0&rrighi  ISt&i.  by  i  he  corfvfasion  J  rust  €»tk#kn$ 
•W  4  F.  T  a  X         lo.  3       '  i  E^R  V I  &  h 


S-10-22. 


ESTATE  TAXES  REGULATIONS,  ETC. — 1 922. 


INSTRUCTIONS 


1.  Estates  subject  to  notice. — This  notice  must  be  liled  for  tlio  estates  of  all  resident  decedents  where  In 
any  case  the  value  of  the  gross  estate,  as  defined  by  the  law,  exceeds  $50,000. 

2.  Persons  required  to  file  notice. — Where  an  executor  or  administrator  has  been  appointed  by  court 
decree,  he  must  fde  the  notice,  which  must  contain  a  statement  of  the  value  of  all  the  property  constituting 
the  gross  estate  of  the  decedent.  Except  as  hereinafter  mentioned,  all  persons  having  actual  or  constructive 
possession  of  any  property  of  the  decedent  at  the  time  of  his  death  must  file  this  notice.  This  requirement 
applies  to  agents,  bankers,  brokers,  custodians,  debtors,  factors,  fiduciaries,  guardians,  joint  owners,  partners, 
safe-deposit  companies,  trustees,  warehouse  companies,  and  all  other  persons  having  possession  of  property 
of  the  decedent.  Such  persons  are  relieved  of  the  duty  of  filing  notice  only  where  the  executor  or  adminis- 
trator has,  within  the  time  prescribed,  filed  a  notice  including  the  property  in  the  possession  of  such  persons. 
In  case  of  doubt,  the  notice  should  be  tiled. 

The  notice  may  be  executed  by  one  executor  or  administrator. 

3.  Time  for  filin'j  notice. — An  executor  or  administrator,  appointed  by  court  decree,  must  file  the  notice 
within  two  months  after  his  qualification.  Persons  having  actual  or  constructive  possession  of  the  property 
of  the  decedent,  when  required  to  file  notice,  must  file  the  same  within  two  months  after  the  decedenfs  death. 

4.  Place  of  filing. — This  notice  must  be  filed  with  the  Collector  of  Internal  Revenue  for  the  distric  t  in 
which  the  decedent  had  his  domicile  at  time  of  death. 

5.  Gross  estate. — The  gross  estate  as  defined  by  section  -102  of  the  Revenue  Act  of  1921-,  approved  November 
23,  1921,  includes— 

(«)  Property  which  after  decedent's  death  is  subject  to  payment  of  charges,  to  expenses  of  admin- 
istration, and  to  distribution  as  a  part  of  bis  estate, 
(o)  Interest  of  surviving  spouse,  as  dower,  curtesy,  or  estate  in  lieu  thereof* 

(c)  Property  transferred  or  placed  in  trust  in  contemplation  of,  or  intended  to  take  effect  in  posses- 
sion or  enjoyment  a1  or  after  death. 
(cZ)  Property  held  joiutly  or  as  tenants  in  the  entirety. 

(c)  Property  passing  under  a  general  power  of  appointment  exercised  by  decedent. 
(/')   (1)  Insurance  payable  to  a  decedent's  estate,  hi*  personal  representatives,  or  t<>  any  person  for 
the  benefit  of  the  estate. 
(2)  Insurance  payable  to  beneficiaries,  other  than  1 1"'  estate,  in  evcoss  of  $10,000. 

6.  Lien.-  The  las  is  a  Hen  for  ten  years  upon  the  entire  gross  estate,  except  such  part  of  it  as  is  used  for 
the  payment  of  charges  against  the  estate  and  expenses  of  its  administration  allowed  by  any  court  having 
jurisdiction. 

7  Penalties  — The  penalty  for  knowingly  making  any  false  statement  in  this  notice  is  a  fine  not  to  exceed 
?r>,000,  or  imprisonment,  or  both.  Penalty  for  failure  to  tile  notice  as  required  is  a  flue  not  to  exceed  $r>00. 
and  cost  of  suit. 

8.  Delinquency. — In  the  event  of  failnrc  to  file  this  notice  within  the  two  months  prescribed  by  law.  a 
detailed  explanation  under  oath  should  accompany  notice  when  Bled.  :' 

IRevnre'of  Form  704. J 


{^■{■ynght  ItoUj  fal  Ike  L-Jiporst ,o>t  l"ru>l  ft$U$t0]k 


8-17-22.    (2)  9-25-22. 

ESTATE  TAXES  REGULATIONS,  ETC.— 1922. 


(T.  D.  3383) 

7  87      Receipt  of  Liberty  Bonds,  Victory  Notes,  and  Treasury  Notes  for 
231      Estate  or  Inheritance  Taxes— The  appended  [If 788]  department 
236      circular,  issued  under  date  of  June  30,  1922,  with  reference  to  receipt 
265      of  Treasury  notes  of  the  United  States  in  payment  of  Federal  estate 
and  inheritance  taxes,  is  published  for  the  information  of  internal- 
revenue  officers  and  others  concerned.    This  circular  supplements  Depart- 
ment Circular  No.  225,  dated  January  31,  1921  (T.  D.  3144)  [1[265].    (T.  D. 
3383,  signed  by  Commissioner  D.  H.  Blair^and  dated  August  9,  1922.) 

788  1.    The  provisions  of  Department  Circular  No.f225,  dated  January 
31,  1921,  prescribing  regulations  governing  the  receipt  of  Liberty 

bonds  and  Victory  "notes  for  Federal  estate  or  inheritance  taxes  are  hereby 
extended  and  made  applicable  to  Treasury  notes  of  the  United  States  now 
or  hereafter  issued  under  authority  of  Section  18  of  the  Second  Liberty 
Bond  Act,  as  amended  and  supplemented,  bearing  interest  at  a  higher  rate 
than  4  per  centum  per  annum,  and  any  such  Treasury  notes  shall  accordingly 
be  receivable  by  the  United  States  at  par  and  accrued  interest  in  payment 
of  any  estate  or  inheritance  taxes  imposed  by  the  United  States,  under  or  by 
virtue  of  any  present  or  future  law,  upon  the  same  terms  and  conditions  as 
provided  in  said  Department  Circular  No.  225,  dated  January  31,  1921, 
with  respect  to  the  acceptance  of  Liberty  bonds  and  Victory  notes  bearing 
interest  at  a  higher  rate  than  4  per  centum  per  annum. 

789  2.    The  issues  of  Treasury  notes  at  this  date  outstanding,  bearing 
interest  at  a  higher  rate  than  4  per  centum  per  annum,  are: 


Description 

Date  of  Issue 

Short  Title 

(a)  5%  per  cent  notes,  payable  June  15,  1924  

June  15,  1921 
Sept.  15,  1921 
Feb.  1,  1922 
Mar.  15,  1922 
June  15,  1922 

Series  A-1924 
Series  B-1924 
Series  A-1925 
Series  A-1926 
Series  B-1925 

790  3.   For  the  calculation  of  accrued  interest  on  the  current  coupons  of 
Treasury  notes  tendered  in  payment  of  estate  or  inheritance  taxes 

under  this  circular,  the  method  outlined  in  Exhibit  B  ft[26 1-262]  to  Depart- 
ment Circular  No.  225,  dated  January  31,  1921,  should  be  followed.  Interest 
tables  at  the  various  rates  borne  by  Treasury  notes  may  be  obtained  from 
the  Treasury  Department,  Division  of  Loans  and  Currency,  Washington. 
The  interest  tables  appropriate  for  use  in  connection  with  the  issues  of 
Treasury  notes  at  present  outstanding  are  as  follows: 

Form  General  1017,  for  Series  A-1924  (interest  dates  June  15  and 
December  15). 

Form  General  1016,  for  Series  B-1924  (interest  dates  March  15  and 
September  15). 

Form  L.  &  C.  369,  for  Series  A-1925?prior  to  September  15,  1922 
(interest  during  this  period  is  on  annual  365-day  basis). 

Form  L.  &  C.  435,  for  Series  A-1925  subsequent  to  September  15, 
1922  (interest  dates  March  15  and  September  15). 

Form  L.  &  C.  435,  for  Series  A-1926  (interest  dates  March  15  and 
September  15), 

791  Interest  tables  or  decimals  for  computing  interest  as  may  be  re- 
quired for  other  or  future  issues  may  be  obtained  from  the  Treasury 

Department,1  Division  of  Loans  and  Currency,  Washington,  upon  request. 
(Extension  of  Department  CirculafJNo.  225,  signedjbyf Secretary  rA.  W. 
Mellon,  da  ted;  June  30,  1922iand;appended  to  T.  D.  3383.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         225  SERVICE 


9-25-22. 


ESTATE  TAXES  REGULATIONS,  ETC.— -1922. 


(T.  D.  3384.) 

79  2       [Regulations  63  (1922  Edition)  are  further  designated    as  T.  D. 
579      3384. — The  Corporation  Trust  Company.] 


79  3  No  certificate  releasing  lien  (waiver)  required  before  transfer  of 
282  stock  of  a  foreign  corporation  standing  in  the  name  of  a  nonresident 
752       decedent. — Referring  to  60-day  notice,  on  Form  705,  filed  for  the 

estate  of' —  -  ,  deceased  September  29,  1921,  by  the  Guaranty 

Trust  Company  of  New  York,  you  are  advised  that  the  stock  of  the  British 
American  Tobacco  Company  may  be  transferred  without  a  waiver  from  this 
office,  as  this  is  not  stock  of  a  corporation  organized  within  the  United 
States,  and  such  stock  is  not  taxable  as  a  part  of  the  decedent's  gross  estate 
in  the  United  States.  (Letter  to  Solomon  Hanford,  New  York,  N.  Y., 
signed  by  Deputy  Commissioner  AIcKenzic  Moss,  and  dated  September  11, 
1922.) 


Copyright  1')22 .  by   The  Corporation  Trust  (  ompany. 
WAR  TAX  226  SERVICK 


8-7-22. 


ESTATE  TAX. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 
Estate  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference 

T.  D.  Subject  Paragraph 

1918  Law  Provisions   1 

Reg.  37  Regulations  under  1918  law  (revision  of  January  21,  1921)  as 

amended  and  supplemented  to  December  20,  1921.  40 
Regulations  37  (1918  Act)  further  amended   776 

Special  "Substantial  payment"  as  a  prerequisite  to  granting  of 

extention   of  time  for  payment  of  estate  tax. 
(August  25,  1921.)   309 

Special  Interest  on  unpaid  tax.    (August  25,  1921.)   310 

Special  60-day  notice  and  payment  of  insurance  by  insurance 

companies,  the  insurance  not  being  part  of  the 
decedent's  gross  estate.    (March  12,  1921.)   313 

Decision  Polk  vs.  Page.  U.  S.  District  Court  decision,  1918  Act. 

Tax  not  due  and  payable  until  one  year  and  180 
days  after  decedent's  death,  and  hence  the  right  to 
collect  by  distraint  within  that  period  is  denied. 
The  statutory  inhibition  against  suit  for  restrain- 
ing the  collection  of  a  tax  has  no  application  in  the 
case  of  a  tax  not  yet  due  and  payable.  (November 
17,  1921.)   315,  465 

3138                                   Community  property  in  the  eight  states  having  com- 
munity property  laws.    (March  3,  1921.)   356 

Decision  N.  Y.  Trust  Company  vs.  Eisner.    United  States 

Supreme  Court  decision,  1916  Act.  New  York 
transfer  taxes,  and  other  inheritance,  succession 
and  legacy  taxes  are  not  deductible  in  the  deter- 
mination of  net  estate  subject  to  Federal  estate 
tax.    (May  16,  1921.)   390 

Decision  U.  S.  vs.  Field.    U.  S.  Supreme  Court  decision,  1916 

Act  as  amended.    Property  passing  under  general 
power  of  appointment.    (February  28,  1921.).  .  .  396 

The  matters  listed  above  are  indexed.    (See  index  following  page  124.) 

The  regulations,  rulings,  etc.,  listed  below,  are  those  issued  during  1922. 

1 92 1  Law  Provisions   416 

Reg.  63  Regulations  63.— 1921  Act.    Comprehensive  regulations  relating  to 

the  Revenue  Act  of  1921,  fully  indexed  beginning 
on  page  207,  and  with  complete  table  of  contents 
beginning  on  page  158   579 

Decision  Polk  vs.  Page.  U.  S.  District  Court  decision,  1921  Act. 

On  the  assessment  and  collection  of  taxes  accrued 
under  the  1918  Act.    (December  21,  1921.)   465 

3267  (This  Treasury  Decision  reproduces  the  U.  S.  Supreme 

Court  Decision  in  N.  Y.  Trust  Co.  vs.  Eisner,  ^[390 
herein.) 

Decision'  Nichols  vs.  Gaston.    U.  S.  Circuit  Court  of  Appeals 

decision,  1918  Act.  The  tax  being  due  and  pay- 
able one  year  after  decedent's  death,  injunctive 
relief  against  its  collection  by  distraint  within  the 
180  day  period  thereafter  will  not  be  granted 
(March  21,  1922.)   467 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Estate  Tax  Supplementary  Page  1. 


In  blank  at  present. 


WAR  TAX  SERVICE 

te  Tax  Supplementary  Pa 


9-25-22. 

ESTATE  TAX. — RUNNING  TABLE  OF  CONTENTS.— Continued. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 
Estate  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 


T.  D.  Subject  Paragraph 

3319  Title  Guarantee  and  Trust  Co.  (Teets)  vs.  Edwards. 

U.  S.  District  Court  Decision.    Bequest  or  devise 

in  lieu  of  dower  (April  5,  1922)   495 

Decision  Greiner  vs.  Lewellyn,  U.  S.  Supreme  Court.   Value  of 

State  and  municipal  bonds  to  be  included  in  value 
of  gross  estate  (April  10,  1922)   497 

Decisions  (1)  Shwab  vs.  Doyle   499 

(2)  Union  Trust  Co.  vs.  Wardell   518 

(3)  Levy  vs.  Wardell   537 

(4)  Knox  vs.  McElligott   551 


(1),  (2),  (3),  and  (4).  The  text  of  the  1916  Act  is 
not  to  be  construed  as  applying  to  transfers  in 
contemplation  of  death,  etc.,  completed  before 
the  passage  of  the  Act.  (U.  S.  Supreme  Court, 
May  1,  1922.) 

3324  Congdon  vs.  Lynch.    U.  S.  District  Court  decision, 

1916  Act.  The  1916  Act  is  retroactive,  apply- 
ing to  trusts  created  prior  to  the  passage  of  the 
Act  to  take  effect  in  possession  or  enjoyment  at 
or  after  the  trustor's  death.    (T.  D.  dated  May 


8,  1922.)   562 

3325  Reprint  of  Nichols  vs.  Gaston  opinion  (1[467,  herein). .  567 

3326  Reprint  of  Greiner  vs.  Lewellyn  opinion  (H497,  herein) .  568 
Decision                               Page  vs.  Polk,  reversing  Polk  vs.  Page,  ^[315  q.  v.  above 

(C.  C.  of  A.,  1st  Circuit,  May  16,  1922)   569 

3338  Reprint  of  Union  Trust  Company  vs.  Wardell  opinion 

(H5 18  herein)  (<   577 

3339  Reprint  of  Shwab  vs.  Doyle  opinion  (1f499  herein) ....  578 

3348  Reprint  of  Page  vs.  Polk  opinion  (^f 569  herein)   578a 

Reg.  63  Regulations  63. — 1921  Act.    Complete  regulations  re- 

lating to  the  Revenue  Act  of  1921,  fully  indexed 
beginning  on  page  207,  and  with  complete  table 

of  contents  beginning  on  page  158   579 

Reg.  37  Regulations  37— 1918  Act.    Amended   776 

Decision  Slocum  et  al.,  executors  (Sage  estate)  vs.  Edwards. — 

Deductible  amount  of  charitable  bequests  out  of 
residual  estate  out  of  which  State  succession  and 
Federal  estate  taxes  are  paid  (June  20,  1922)   778 

3383  Department  Circular  225  extended  and  made  applicable 

to  receipt  of  Treasury  Notes  for  Estate  Taxes 
(August  9,  1922).  ..    787 

3384  Treasury  Decision  designation  for  Regulations  63  (1922 

Edition)  beginning  on  page  158   792 

Special  No  certificate  releasing  lien  (waiver)  required  before 

transfer  of  stock  of  a  foreign  corporation  standing 
in  the  name  of  a  nonresident  decedent  (Sept.  11, 
1922)   793 


Insert  this  page  immediately  before  the  yellow  guide  card  *  'Excess  Profits  Tax." 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Estate  Tax  Supplementary  Page  3. 


1-2-22. 


For  the  excess-profits  tax  law  for  1921  see  page  401. 

V 


WAR-PROFITS  AND  EXCESS-PROFITS  TAXES. 

As  the  occasions  will  be  many  during  1922  when  the  necessity  will  arise  to 
refer  to  the  exact  language  of  the  excess-profits  tax  provisions  of  the  Revenue 
Act  of  1918,  and  to  the  official  regulations  and  rulings  based  specifically 
thereon,  we  republish  these  herein.  Moreover  it  will  be  borne  in  mind,  at 
least  pending  the  promulgation  by  the  Government  of  the  regulations  relating 
specifically  to  the  law  imposing  an  excess-profits  tax  for  1921,  that  there  are 
no  essential  differences  whatsoever  between  the  two  laws  (other  than  the 
grouping  of  domestic  corporations  entitled  to  the  benefits  of  Section  262, 
*;1083,  with  foreign  corporations). 

The  provisions  of  the  Revenue  Act  of  1918  relating  to  the  excess-profits 
tax,  and  the  formal  regulations  bearing  thereon,  are  reproduced  on  the  pages 
immediately  following.  The  caption  to  each  page  shows  distinctly  that  the 
1918  Act  is  involved. 

The  provisions  of  the  Revenue  Act  of  1921  relating  to  the  excess-profits 
tax  for  1921  are  reproduced  beginning  on  page  401,  following  the  Supple- 
mentary Bulletin  Rulings.  There  too  will  be  found  the  formal  regulations 
relating  specifically  to  the  1921  Act,  as  well  as  current  Treasury  Decisions, 
etc.,  etc. 


Copyriglit  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  SERVICE 

Excess-Profits  Tax  Fore-Page. 


1-2-22. 


For  the  excess-profits  tax  law  for  1921  see  page  401. 


WAR-PROFITS  AND  EXCESS-PROFITS  TAXES. 

As  the  occasions  will  be  many  during  1922  when  the  necessity  will  arise  to 
refer  to  the  exact  language  of  the  excess-profits  tax  provisions  of  the  Revenue 
Act  of  1918,  and  to  the  official  regulations  and  rulings  based  specifically 
thereon,  we  republish  these  herein.  Moreover  it  will  be  borne  in  mind,  at 
least  pending  the  promulgation  by  the  Government  of  the  regulations  relating 
specifically  to  the  law  imposing  an  excess-profits  tax  for  1921,  that  there  are 
no  essential  differences  whatsoever  between  the  two  laws  (other  than  the 
grouping  of  domestic  corporations  entitled  to  the  benefits  of  Section  262, 
TJ1083,  with  foreign  corporations). 

The  provisions  of  the  Revenue  Act  of  1918  relating  to  the  excess-profits 
tax,  and  the  formal  regulations  bearing  thereon,  are  reproduced  on  the  pages 
immediately  following.  The  caption  to  each  page  shows  distinctly  that  the 
1918  Act  is  involved. 

The  provisions  of  the  Revenue  Act  of  1921  relating  to  the  excess-profits 
tax  for  1921  are  reproduced  beginning  on  page  401,  following  the  Supple- 
mentary Bulletin  Rulings.  There  too  will  be  found  the  formal  regulations 
relating  specifically  to  the  1921  Act,  as  well  as  current  Treasury  Decisions, 
etc.,  etc. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Excess-Profits  Tax  Fore-Page. 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX 
FOR  1918,  1919,  and  1920. 

BEING  TITLE  III  OF  THE  REVENUE  ACT  OF  1918. 

[For  the  law  imposing  a  war-profits  and  excess-profits  tax  for  the 
calendar  year   1921  see  beginning  on  page  40 1,  immediately 
following  the  Supplementary  Bulletin  Rulings.] 


[The  captions  and  other  matters  in  [brackets]  are  ours.] 


TITLE  III.— WAR-PROFITS  AND  EXCESS-PROFITS  TAX 

REVENUE  ACT  OF  1918. 

PART  I.— General  Definitions. 

500  Sec.  300  [of  the  Revenue  Act  of  1918  of  which  this  Title  is  a 
597  part].  That  when  used  in  this  title  the  terms  [see  definitions 
below]  "taxable  year,"  "fiscal  year,"  "personal  service  corpora- 
tion," "paid  or  accrued,"  and  "dividends"  shall  have  the  same 
meaning  as  provided  for  the  purposes  of  income  tax  in  sections 
200  and  201.  The  first  taxable  year  for  the  purposes  of  this  title 
shall  be  the  same  as  the  first  taxable  year  for  the  purposes  of  the 
income  tax  under  Title  II. 

fyt* b -sift* :mlfc>?:tr--4prrw ^nsbfrib!' , myp  9fb  JjffHl ;  (b)  .JPOfr  j*2  80S 
[Definitions  of  terms,  extracted  from  Titles  I  and  II.] 
["Taxable  year"  and  "Fiscal  year".] 

601  The  term  "taxable  year"  means  the  calendar  year,  or  the  fiscal 
year  ending  during  such  calendar  year,  upon  the  basis  of  which 
the  net  income  is  computed  under  section  212  or  section  232.  The 
term  "fiscal  year"  means  an  accounting  period  of  twelve  months 
ending  on  the  last  day  of  any  month  other  than  December.  The 
first  taxable  year,  to  be  called  the  taxable  year  1918,  shall  be 
the  calendar  year  1918  or  any  fiscal  year  ending  during  the 
calendar  year  1918 ; 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  301  SERVICE 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW.— 1918  ACT. 


["Personal  Service  Corporation".] 

602  The  term  "personal  service  corporation"  means  a  corporation 
656  whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the, 
principal  owners  or  stockholders  who  are  themselves  regularly 
engaged  in  the  active  conduct  of  the  affairs  of  the  corporation 
and  in  which  capital  (whether  invested  or  borrowed)  is  not  a 
material  income-producing  factor;  but  does  not  include  any  for- 
eign corporation,  nor  any  corporation  50  per  centum  or  more 
of  whose  gross  income  consists  either  (1)  of  gains,  profits  or 
income  derived  from  trading  as  a  principal,  or  (2)  of  gains, 
profits,  commissions,  or  other  income,  derived  from  a  Govern- 
ment contract  or  contracts  made  between  April  6,  1917,  and 
November  11,  1918,  both  dates  inclusive; 

["Government  Contracts."] 

503  The  term  "Government  contract"  means  (a)  a  contract 
605    made  with  the  United  States,  or  with  any  department,  bureau, 

officer,  commission,  board,  or  agency,  under  the  United  States 
and  acting  in  its  behalf,  or  with  any  agency  controlled  by  any 
of  the  above  if  the  contract  is  for  the  benefit  of  the  United  States, 
or  (b)  a  subcontract  made  with  a  contractor  performing  such  a 
contract  if  the  products  or  services  to  be  furnished  under  the 
subcontract  are  for  the  benefit  of  the  United  States.  The  term 
"Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive"  when  applied  to 
a  contract  of  the  kind  referred  to  in  clause  (a)  of  this  paragraph, 
includes  all  such  contracts  which,  although  entered  into  during 
such  period,  were  originally  not  enforceable,  but  which  have  been 
or  may  become  enforceable  by  reason  of  subsequent  validation 
in  pursuance  of  law; 

["Paid  or  incurred"  and  "Paid  or  accrued".] 

504  The  term  "paid,"  for  the  purposes  of  the  deductions  and  credits 
under  this  title,  means  "paid  or  accrued"  or  "paid  or  incurred," 
and  the  terms  "paid  or  incurred"  and  "paid  or  accrued"  shall  be 
construed  according  to  the  method  of  accounting  upon  the  basis 
of  which  the  net  income  is  computed  under  section  212. 

[Dividends.] 

605  Sec.  201.  (a)  That  the  term  "dividend"  when  used  in  this  title 
(except  in  paragraph  (10)  of  subdivision  (a)  of  section  234) 
means  (1)  any  distribution  made  by  a  corporation,  other  than 
a  personal  service  corporation,  to  its  shareholders  or  members, 
whether  in  cash  or  in  other  property  [or  in  stock  of  the  corpo- 
ration], out  of  its  earnings  or  profits  accumulated  since  Febru- 
ary 28,  1913,  or  (2)  any  such  distribution  made  by  a  personal 
service  corporation  out  of  its  earnings  or  profits  accumulated 
since  February  28,  1913,  and  prior  to  January  1,  1918. 

608  (b)  Any  distribution  shall  be  deemed  to  have  been  made  from 
earnings  or  profits  unless  all  earnings  and  profits  have  first  been 
distributed.    Any  distribution  made  in  the  year  lb  18  or  any 


C0Pyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  302  SERVICE 


WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW.— 1918  ACT. 


year  thereafter  shall  be  deemed  to  have  been  made  from  earnings 
or  profits  accumulated  since  February  28,  1913,  or,  in  the  case 
of  a  personal  service  corporation,  from  the  most  recently  accu- 
mulated earnings  or  profits;  but  any  earnings  or  profits  accu- 
mulated prior  to  March  1,  1913,  may  be  distributed  in  stock  divi- 
dends or  otherwise,  exempt  from  the  tax,  after  the  earnings  and 
profits  accumulated  since  February  28,  1913,  have  been  dis- 
tributed. 

507  (c)  [A  dividend  paid  in  stock  of  the  corporation  shall  be  con- 
sidered income  to  the  amount  of  the  earnings  or  profits  dis- 
tributed.] Amounts  distributed  in  the  liquidation  of  a  corporation 
shall  be  treated  as  payments  in  exchange  for  stock  or  shares, 
and  any  gain  or  profit  realized  thereby  shall  be  taxed  to  the 
distributee  as  other  gains  or  profits. 

508  [  (d)  If  any  stock  dividend  (1)  is  received  by  a  taxpayer  be- 
tween January  1  and  November  1,  1918,  both  dates  inclusive,  or 
(2)  is  during  such  period  bona  fide  authorized  or  declared,  and 
entered  on  the  books  of  the  corporation,  and  is  received  by  a 
taxpayer  after  November  1,  1918,  and  before  the  expiration  of 
thirty  days  after  passage  of  this  Act,  then  such  dividend  shall, 
in  the  manner  provided  in  section  206,  be  taxed  to  the  recipient 
at  the  rates  prescribed  by  law  for  the  years  in  which  the  corpora- 
tion accumulated  the  earnings  or  profits  from  which  such  divi- 
dend was  paid,  but  the  dividend  shall  be  deemed  to  have  been 
paid  from  the  most  recently  accumulated  earnings  or  profits.] 

509  (e)  Any  distribution  made  during  the  first  sixty  days  of  any 
taxable  year  shall  be  deemed  to  have  been  made  from  earnings 
or  profits  accumulated  during  preceding  taxable  years ;  but  any 
distribution  made  during  the  remainder  of  the  taxable  year  shall 
be  deemed  to  have  been  made  from  earnings  or  profits  accumu- 
lated between  the  close  of  the  preceding  taxable  year  and  the 
date  of  distribution,  to  the  extent  of  such  earnings  or  profits, 
and  if  the  books  of  the  corporation  do  not  show  the  amount  of 
such  earnings  or  profits,  the  earnings  or  profits  for  the  account- 
ing period  within  which  the  distribution  was  made  shall  be 
paid  from  the  most  recently  accumulated  earnings  or  profits. 

PART  II.— -Imposition  of  Tax. 

510  Sec.  301.  (a)  That  in  lieu  of  the  tax  imposed  by  Title  II 
598  of  the  Revenue  Act  of  1917,  but  in  addition  to  the  other  taxes 
602   imposed  by  this  Act,  there  shall  be  levied,  collected,  and  paid 

for  the  taxable  year  1918  upon  the  net  income  of  every  corpo- 
ration a  tax  equal  to  the  sum  of  the  following: 

First  Bracket. 

30  per  centum  of  the  amount  of  the  net  income  in  excess  of  the 

511  excess-profits  credit  (determined  under  section  312)  and  not  in 
excess  of  20  per  centum  of  the  invested  capital  ; 

Second  Bracket. 

512  ^5  Per  centum  °f  tne  amount  of  the  net  income  in  excess  of  20 
per  centum  of  the  invested  capital ; 

Copyright  1922,  by  The  Corporation  Trust  Company, 

WAR  TAX  303  SERVICE 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. — 1918  ACT. 


Third  Bracket. 

513  The  sum,  if  any,  by  which  80  per  centum  of  the  amount  of 
the  net  income  in  excess  of  the  war-profits  credit  (determined 
under  section  311)  exceeds  the  amount  of  the  tax  computed  under 
the  first  and  second  brackets, 

514  (b)  For  the  taxable  year  1919  and  each  taxable  year  thereafter 

603  there  shall  be  levied,  collected,  and  paid  upon  the  net  income 
of  every  corporation  (except  corporations  taxable  under  subdi- 
vision (c)  of  this  section)  a  tax  equal  to  the  sum  of  the  following: 

First  Bracket. 

515  20  per  centum  of  the  amount  of  the  net  income  in  excess  of 
the  excess-profits  credit  (determined  under  section  312)  and  not 
in  excess  of  20  per  centum  of  the  invested  capital; 

Second  Bracket. 

516  40  per  centum  of  the  amount  of  the  net  income  in  excess  of  20 
per  centum  of  the  invested  capital. 

517  (c)  For  the  taxable  year  1919  and  each  taxable  year  thereafter 

604  there  shall  be  levied,  collected,  and  paid  upon  the  net  income  of 
626   every  corporation  which  derives  in  such  year  a  net  income  of 

more  than  $10,000  from  any  Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive,  a  tax  equal  to  the  sum  of  the  following: 

518  (1)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in 
subdivision  (a)  as  the  part  of  the  net  income  attributable  to 
such  Government  contract  or  contracts  bears  to  the  entire  net 
income.  In  computing  such  tax  the  excess-profits  credit  and  the 
war-profits  credit  applicable  to  the  taxable  year  shall  be  used; 

519  (2)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in 
subdivision  (b)  as  the  part  of  the  net  income  not  attributable  to 
such  Government  contract  or  contracts  bears  to  the  entire  net 
income. 

620  For  the  purpose  of  determining  the  part  of  the  net  income 
607    attributable  to  such  Government  contract  or  contracts,  the  proper 

apportionment  and  allocation  of  the  deductions  with  respect  to 
gross  income  derived  from  such  Government  contract  or  contracts 
and  from  other  sources,  respectively,  shall  be  determined  under 
rules  and  regulations  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary. 

621  (d)  In  any  case  where  the  full  amount  of  the  excess-profit 
621   credit  is  not  allowed  under  the  first  bracket  of  subdivision  (a) 

or  (b),  by  reason  of  the  fact  that  such  credit  is  in  excess  of  20 
per  centum  of  the  invested  capital,  the  part  not  so  allowed  shall 
be  deducted  from  the  amount  in  the  second  bracket. 
522  (e)  For  the  purposes  of  the  Act  approved  March  21,  1918, 
entitled  "An  Act  to  provide  for  the  operation  of  transportation 
systems  while  under  Federal  control,  for  the  just  compensation 
of  their  owners,  and  for  other  purposes,"  the  tax  imposed  by 
this  title  shall  be  treated  as  levied  by  an  Act  in  amendment  of 
Title  II  of  the  Revenue  Act  of  1917. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

war'tax        304  SERVICE 


WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW.— 1918  ACT. 


[Maximum  Tax  Limitation.] 

623  Sec.  302.  That  the  tax  imposed  by  subdivision  (a)  of  section 
639   301  shall  in  no  case  be  more  than  30  per  centum  of  the  amount 

of  the  net  income  in  excess  of  $3,000  and  not  in  excess  of  $20,000, 
plus  80  per  centum  of  the  amount  of  the  net  income  in  excess 
of  $20,000;  the  tax  imposed  by  subdivision  (b)  of  section  301 
shall  in  no  case  be  more  than  20  per  centum  of  the  amount  of 
the  net  income  in  excess  of  $3,000  and  not  in  excess  of  $20,000, 
plus  40  per  centum  of  the  amount  of  the  net  income  in  excess 
of  $20,000;  and  the  above  limitations  shall  apply  to  the  taxes 
computed  under  subdivisions  (a)  and  (b)  of  section  301,  respec- 
tively, when  used  in  subdivision  (c)  of  that  section.  Nothing 
in  this  section  shall  be  construed  in  such  manner  as  to  increase 
the  tax  imposed  by  section  301. 

[Partial  Personal  Service  Corporations.] 

624  Sec.  303.  That  if  part  of  the  net  income  of  a  corporation  is 
645   derived  (1)  from  a  trade  or  business  (or  a  branch  of  a  trade 

or  business)  in  which  the  employment  of  capital  is  necessary, 
and  (2)  a  part  (constituting-  not  less  than  30  per  centum  of  its 
total  net  income)  is  derived  from  a  separate  trade  or  business  (or 
a  distinctly  separate  branch  of  the  trade  or  business)  which  if 
constituting  the  sole  trade  or  business  would  bring  it  within  the 
class  of  "personal  service  corporations  [fl  502]",  then  (under 
regulations  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary)  the  tax  upon  the  first  part  of  such  net  income 
shall  be  separately  computed  (allowing  in  such  computation  only 
the  same  proportionate  part  of  the  credits  authorized  in  sections 
311  and  312),  and  the  tax  upon  the  second  part  shall  be  the  same 
percentage  thereof  as  the  tax  so  computed  upon  the  first  part  is 
of  such  first  part :  Provided,  That  the  tax  upon  such  second  part 
shall  in  no  case  be  less  than  20  per  centum  thereof,  unless  the 
tax  upon  the  entire  net  income,  if  computed  without  benefit  of 
this  section,  would  constitute  less  than  20  per  centum  of  such 
entire  net  income,  in  which  event  the  tax  shall  be  determined 
upon  the  entire  net  income,  without  reference  to  this  section, 
as  other  taxes  are  determined  under  this  title.  The  total  tax 
computed  under  this  section  shall  be  subject  to  the  limitations 
provided  in  section  302. 

[Exempt  Corporations.] 

625  Sec.  304.  (a)  That  the  corporations  enumerated  in  section  231 
666    [1T667]  shall,  to  the  extent  that  they  are  exempt  from  income  tax 

under  Title  IT,  be  exempt  from  taxation  under  this  title. 

626  (b)  Any  corporation  whose  net  income  for  the  taxable  year  is 
666   less  than  $3,000  shall  be  exempt  from  taxation  under  this  title. 

527       (c)  In  the  case  of  any  corporation  engaged   in   the  mining 
682   of  gold,  the  portion  of  the  net  income  derived  from  the  mining 
of  gold  shall  be  exempt  from  the  tax  imposed  by  this  title,  and 
the  tax  on  the  remaining  portion  of  the  net  income  shall  be 
the  proportion  of  a  tax  computed  without  the  benefit  of  this  sub- 


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division  which  such  remaining  portion  of  the  net  income  bears 
to  the  entire  net  income. 

[Specific  Exemption  in  relation  to  tax  for  less  than  12  months.] 

528  Sec.  305.  That  if  a  tax  is  computed  under  this  title  for  a 
634   period  of  less  than  twelve  months,  the  specific  exemption  of 

684  $3,000,  wherever  referred  to  in  this  title,  shall  be  reduced  to 
an  amount  which  is  the  same  proportion  of  $3,000  as  the  number 
of  months  in  the  period  is  of  twelve  months. 

PART  III.— Credits. 

529  Sec.  310.  That  as  used  in  this  title  the  term  "prewar  period" 

685  means  the  calendar  years  1911,  1912,  and  1913,  or,  if  a  corpora- 
tion was  not  in  existence  during  the  whole  of  such  period,  then  as 
many  of  such  years  during  the  whole  of  which  the  corporation 
was  in  existence. 

[The  War-Profits  Credit.] 

630      Sec.  311.  (a)  That  the  war-profits  credit  shall  consist  of  the 

686  sum  of : 

531  (1)  A  specific  exemption  of  $3,000;  and 

532  (2)  An  amount  equal  to  the  average  net  income  of  the  corpo- 
ration for  the  prewar  period,  plus  or  minus,  as  the  case  may 
be,  10  per  centum  of  the  difference  between  the  average  invested 
capital  for  the  prewar  period  and  the  invested  capital  for  the 
taxable  year.    If  the  tax  is  computed  for  a  period  of  less  than 

634  twelve  months  such  amount  shall  be  reduced  to  the  same  pro- 
portion thereof  as  the  number  of  months  in  the  period  is  of 
twelve  months. 

[No  income  for  the  prewar  period.] 

533  (b)  If  the  corporation  had  no  net  income  for  the  prewar  period, 
688   or  ^  the  amount  computed  under  paragraph  (2)  of  subdivision 

(a)  is  less  than  10  per  centum  of  its  invested  capital  for  the 
taxable  year,  then  the  war-profits  credit  shall  be  the  sum  of: 

534  (1)  A  specific  exemption  of  $3,000;  and 

535  (2)  An  amount  equal  to  10  per  centum  of  the  invested  capital 
for  the  taxable  year. 

[Not  in  existence  in  Prewar  Period.] 

636  (c)  If  the  corporation  was  not  in  existence  during  the  whole 
690   of  at  least  one  calendar  year  during  the  prewar  period,  then,  ex- 
cept as  provided  in  subdivision  (d),  the  war-profits  credit  shall 
be  the  sum  of : 

637  (1)  A  specific  exemption  of  $3,000;  and 

638  (2)  An  amount  equal  to  the  same  percentage  of  the  invested 
694   capital  of  the  taxpayer  for  the  taxable  year  as  the  average  per- 
centage of  net  income  to  invested  capital,  for  the  prewar  period, 
of  corporations  engaged  in  a  trade  or  business  of  the  same  gen- 
eral class  as  that  conducted  by  the  taxpayer;  but  such  amount 

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shall  in  no  case  be  less  than  10  per  centum  of  the  invested  capital 
of  the  taxpayer  for  the  taxable  year.  Such  average  percentage 
shall  be  determined  by  the  Commissioner  on  the  basis  of  data 
contained  in  returns  made  under  Title  II  of  the  Revenue  Act  of 

1917,  and  the  average  known  as  the  median  shall  be  used.  If 
such  average  percentage  has  not  been  determined  and  published 
at  least  30  days  prior  to  the  time  when  the  return  of  the  taxpayer 
is  due,  then  for  purposes  of  such  return  10  per  centum  shall  be 
used  in  lieu  thereof;  but  such  average  percentage  when  deter- 
mined shall  be  used  for  the  purposes  of  section  250  [payment 
of  the  tax]  in  determining  the  correct  amount  of  the  tax. 

539  (d)  The  war-profits  credit  shall  be  determined  in  the  manner 
722    provided  in  subdivision  (b)  instead  of  in  the  manner  provided  in 

subdivision  (c),  in  the  case  of  any  corporation  which  was  not  in 
existence  during  the  whole  of  at  least  one  calendar  year  during 
the  prewar  period,  if  (1)  a  majority  of  its  stock  at  any  time  dur- 
ing the  taxable  year  is  owned  or  controlled,  directly  or  indi- 
rectly, by  a  corporation  which  was  in  existence  during  the  whole 
of  at  least  one  calendar  year  during  the  prewar  period,  or  if  (2) 
50  per  centum  or  more  of  its  gross  income  (as  computed  under 
section  233  for  income  tax  purposes)  consists  of  gains,  profits, 
commissions,  or  other  income,  derived  from  a  government  con- 
tract or  contracts  made  between  April  6,  1917,  and  November  11, 

1918,  both  dates  inclusive. 

540  (e)  A  foreign  corporation  shall  not  be  entitled  to  a  specific 
exemption  of  $3,000.  [See  Sec.  327,  fl56S,  and  Sec.  328,  ff570, 
of  the  law.] 

[The  Excess-Profits  Credit.] 

541  Sec.  312.  That  the  excess-profits  credit  shall  consist  of  a 

724  specific  exemption  of  $3,000  plus  an  amount  equal  to  8  per 
centum  of  the  invested  capital  for  the  taxable  year. 

542  A  foreign  corporation  shall  not  be  entitled  to  the  specific 

exemption  of  $3,000.  [See  Sec.  327,  p6S,  and  Sec.  328,  p70f 
of  the  law.] 

PART  IV.— Net  Income. 

543  Sec.  320.  (a)  That  for  the  purpose  of  this  title  the  net  income 

725  of  a  corporation  shall  be  ascertained  and  returned — 

544  (1)  For  the  calendar  years  1911  and  1912  upon  the  same 
basis  and  in  the  same  manner  as  provided  in  section  38  of  the 
Act  entitled  "An  Act  to  provide  revenue,  equalize  duties,  and 
encourage  the  industries  of  the  United  States,  and  for  other 
purposes,"  approved  August  5,  1909,  except  that  taxes  imposed 
by  such  section  and  paid  by  the  corporation  within  the  year 
shall  be  included ; 

545  (2)  For  the  calendar  year  1913  upon  the  same  basis  and  in 
the  same  manner  as  provided  in  Section  II  of  the  Act  entitled 
"An  Act  to  reduce  tariff  duties  and  to  provide  revenue  for  the 
Government,  and  for  other  purposes,"  approved  October  3,  1913, 
except  that  taxes  imposed  by  section  38  of  such  Act  of  August 
5,  1909.  and  paid  by  the  corporation  within  the  year  shall  be 

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included,  and  except  that  the  amounts  received  by  it  as  dividends 
upon  the  stock  or  from  the  net  earnings  of  other  corporations 
subject  to  the  tax  imposed  by  Section  II  of  such  Act  of  Octo- 
ber 3,  1913,  shall  be  deducted;  and 

646  (3)  For  the  taxable  year  upon  the  same  basis  and  in  the  same 
manner  as  provided  for  income  tax  purposes  in  Title  II  of 
this  Act. 

647  (b)  The  average  net  income  for  the  prewar  period  shall  be 
687   determined  by  dividing  the  number  of  years  within  that  period 

during  the  whole  of  which  the  corporation  was  in  existence  into 
the  sum  of  the  net  income  for  such  years,  even  though  there 
may  have  been  no  net  income  for  one  or  more  of  such  years. 

PART  V.— Invested  Capital. 
[Definitions.] 

548  Sec.  325.  (a)  That  as  used  in  this  title — 

549  The  term  "intangible  property"  means  patents,  copyrights, 
738   secret  processes  and  formulae,  good  will,  trade-marks,  trade- 
brands,  franchises,  and  other  like  property; 

550  The  term  "tangible  property"  means  stocks,  bonds,  notes,  and 

738  other  evidences  of  indebtedness,  bills  and  accounts  receivable, 
leaseholds,  and  other  property  other  than  intangible  property; 

651  The  term  "borrowed  capital"  means  money  or  other  property 

739  borrowed,  whether  represented  by  bonds,  notes,  open  accounts, 
or  otherwise; 

652  The  term  "inadmissible  assets"  means  stocks,  bonds,  and  other 
743   obligations  (other  than  obligations  of  the  United  States),  the 

dividends  or  interest  from  which  is  not  included  in  computing 
net  income,  but  where  the  income  derived  from  such  assets  con- 
sists in  part  of  gain  or  profit  derived  from  the  sale  or  other 
disposition  thereof,  or  where  all  or  part  of  the  interest  derived 
from  such  assets  is  in  effect  included  in  the  net  income  because 
of  the  limitation  on  the  deduction  of  interest  under  paragraph 
(2)  of  subdivision  (a)  of  section  234,  a  corresponding  part  of 
the  capital  invested  in  such  assets  shall  not  be  deemed  to  be 
inadmissible  assets ; 

653  The  term  "admissible  assets"  means  all  assets  other  than  inad- 

750  missible  assets,  valued  in  accordance  with  the  provisions  of  sub- 
division (a)  of  section  326.  section  330,  and  section  331. 

664  (b)  For  the  purposes  of  this  title,  the  par  value  of  stock  or 
shares  shall,  in  the  case  of  stock  or  shares  issued  at  a  nominal 
value  or  having  no  par  value,  be  deemed  to  be  the  fair  market 
value  as  of  the  date  or  dates  of  issue  of  such  stock  or  shares 

[Computing  "Invested  Capital."] 

566      Sec.  326.  (a)  That  as  used  in  this  title  the  term  "invested 

751  capital"  for  any  year  means  (except  as  provided  in  subdivisions 
820    (b)  and  (c)  of  this  section)  : 

666      (1)  Actual  cash  bona  fide  paid  in  for  stock  or  shares ; 
753 
815 

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557  (2)  Actual  cash  value  of  tangible  property,  other  than  cash, 
754  bona  fide  paid  in  for  stock  or  shares,  at  the  time  of  such  pay- 
ment, but  in  no  case  to  exceed  the  par  value  of  the  original 
stock  or  shares  specifically  issued  therefor,  unless  the  actual 
cash  value  of  such  tangible  property  at  the  time  paid  in  is  shown 
to  the  satisfaction  of  the  Commissioner  to  have  been  clearly  and 
substantially  in  excess  of  such  par  value,  in  which  case  such 
excess  shall  be  treated  as  paid-in  surplus :  Provided,  That  the 
Commissioner  shall  keep  a  record  of  all  cases  in  which  tangible 
property  is  included  in  invested  capital  at  a  value  in  excess  of 
the  stock  or  shares  issued  therefor,  containing  the  name  and 
address  of  each  taxpayer,  the  business  in  which  engaged,  the 
amount  of  invested  capital  and  net  income  shown  by  the  return, 
the  value  of  the  tangible  property  at  the  time  paid  in,  the  par 
value  of  the  stock  or  shares  specifically  issued  therefor,  and  the 
amount  included  under  this  paragraph  as  paid-in  surplus.  The 
Commissioner  shall  furnish  a  copy  of  such  record  and  other 
detailed  information  with  respect  to  such  cases  when  required 
by  resolution  of  either  House  of  Congress,  without  regard  to  the 
restrictions  contained  in  section  257; 

558  (3)  Paid-in  or  earned  surplus  and  undivided  profits;  not  in- 
760  eluding  surplus  and  undivided  profits  earned  during  the  year; 
810 

559  (4)  Intangible  property  bona  fide  paid  in  for  stock  or  shares 
804   prior  to  March  3,  1917,  in  an  amount  not  exceeding  (a)  the 

actual  cash  value  of  such  property  at  the  time  paid  in,  (b)  the 
par  value  of  the  stock  or  shares  issued  therefor,  or  (c)  in  the 
aggregate  25  per  centum  of  the  par  value  of  the  total  stock  or 
shares  of  the  corporation  outstanding  on  March  3,  1917,  which- 
ever is  lowest; 

560  W  Intangible  property  bona  fide  paid  in  for  stock  or  shares 

804  on  or  after  March  3,  1917,  in  an  amount  not  exceeding  (a)  the 
actual  cash  value  of  such  property  at  the  time  paid  in,  (b)  the 
par  value  of  the  stock  or  shares  issued  therefor,  or  (c)  in  the 
aggregate  25  per  centum  of  the  par  value  of  the  total  stock 
or  shares  of  the  corporation  outstanding  at  the  beginning  of  the 
taxable  year,  whichever  is  lowest:  Provided,  That  in  no  case 
shall  the  total  amount  included  under  paragraphs  (4)  and  (5) 
exceed  in  the  aggregate  25  per  centum  of  the  par  value  of  the 
total  stock  or  shares  of  the  corporation  outstanding  at  the  begin- 
ning of  the  taxable  year;  but 

561  i  (b)  As  used  in  this  title  the  term  "invested  capital"  does  not 
739   include  borrowed  capital. 

662      (c)  There  shall  be  deducted  from  invested  capital  as  above 

805  defined  a  percentage  thereof  equal  to  the  percentage  which  the 
amount  of  inadmissible  assets  is  of  the  amount  of  admissible 
and  inadmissible  assets  held  during  the  taxable  year. 

563  ■  (d)  The  invested  capital  for  any  period  shall  be  the  average 
634  invested  capital  for  such  period,  but  in  the  case  of  a  corpora- 

806  tion  making  a  return  for  a  fractional  part  of  a  year,  it  shall 
(except  for  the  purpose  of  paragraph  (2)  of  subdivision  (a) 
of  section  31X1  be  the  same  fractional  part  of  such  average 
invested  capital. 

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664      The  average  invested  capital  for  the  prewar  period  shall 
687   be  determined  by  dividing  the  number  of  years  within  that 
period  during  the  whole  of  which  the  corporation  was  in  existence 
into  the  sum  of  the  average  invested  capital  for  such  years. 

[Special  cases  subject  to  special  tax.] 

565  Sec.  327.  That  in  the  following  cases  the  tax  shall  be  deter- 
831   mined  as  provided  in  section  328 : 

566  (a)  Where  the  Commissioner  is  unable  to  determine  the  in- 
vested capital  as  provided  in  section  326 ; 

667  (b)  In  the  case  of  a  foreign  corporation  [see^830  and  fl852]  ; 

668  (c)  Where  a  mixed  aggregate  of  tangible  property  and  in- 
756   tangible  property  has  been  paid  in  for  stock  or  for  stock  and 

bonds  and  the  Commissioner  is  unable  satisfactorily  to  determine 
the  respective  values  of  the  several  classes  of  property  at  the 
time  of  payment,  or  to  distinguish  the  classes  of  property  paid 
in  for  stock  and  for  bonds,  respectively ; 

669  (d)  Where  upon  application  by  the  corporation  the  Commis- 

831  sioner  finds  and  so  declares  of  record  that  the  tax  if  determined 
without  benefit  of  this  section  would,  owing  to  abnormal  condi- 
tions affecting  the  capital  or  income  of  the  corporation,  work 
upon  the  corporation  an  exceptional  hardship  evidenced  by  gross 
disproportion  between  the  tax  computed  without  benefit  of  this 
section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  section  328.  This  subdivision  shall  no- 
apply  to  any  case  (1)  in  which  the  tax  (computed  without  bene- 
fit of  this  section)  is  high  merely  because  the  corporation  earned 
within  the  taxable  year  a  high  rate  of  profit  upon  a  normal  in- 
vested capital,  nor  (2)  in  which  50  per  centum  or  more  of  the 
gross  income  of  the  corporation  for  the  taxable  year  (computed 
under  section  233  of  Title  II)  consists  of  gains,  profits,  commis- 
sions, or  other  income,  derived  on  a  cost-plus  basis  from  a  Gov- 
ernment contract  or  contracts  made  between  April  6.  1917.  and 
November  11,  1918.  both  dates  inclusive. 

[The  special  tax  applicable  to  the  special  cases.  1 

670  Sec.  328.  (a)  In  the  cases  specified  in  section  327  the  tax  shall 

832  be  the  amount  which  bears  the  same  ratio  to  the  net  income  of 
the  taxpayer  (in  excess  of  the  specific  exemption  of  $3,000)  for 
the  taxable  year,  as  the  average  tax  of  representative  corpora- 
tions engaged  in  a  like  or  similar  trade  or  business,  bears  to 
their  average  net  income  (in  excess  of  the  specific  exemption  of 
$3,000)  for  such  year.  In  the  case  of  a  foreign  corporation  the 
tax  shall  be  computed  without  deducting-  the  specific  exemption 
of  $3,000  either  for  the  taxpayer  or  the  representative  corpora- 
tions. 

[  671  In  computing:  the  tax  under  this  section  the  Commissioner 
832  shall  compare  the  taxpayer  only  with  representative  corporations 
whose  invested  capital  can  be  satisfactorily  determined  under 
section  326'  and  which  are.  as  nearly  as  may  be.  similarly  circum- 
stanced with  respect  to  gross  income,  net  income,  profits  per 
unit  of  business  transacted  and  capital  employed,  the  amoun* 

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and  rate  of  war  profits  or  excess  profits,  and  all  other  relevant 
facts  and  circumstances. 

672  (b)  For  the  purposes  of  subdivision  (a)  the  ratios  between 
832    the  average  tax  and  the  average  net  income  of  representative 

corporations  shall  be  determined  by  the  Commissioner  in  accord- 
ance with  regulations  prescribed  by  him  with  the  approval  of  the 
Secretary. 

673  In  cases  in  which  the  tax  is  to  be  computed  under  this  section, 
•33    if  the  tax  as  computed  without  the  benefit  of  this  section  is  less 

than  50  per  centum  of  the  net  income  of  the  taxpayer,  the  install- 
ments shall  in  the  first  instance  be  computed  upon  the  basis  of 
such  tax ;  but  if  the  tax  so  computed  is  50  per  centum  or  more  of 
the  net  income,  the  installments  shall  in  the  first  instance  be 
computed  upon  the  basis  of  a  tax  equal  to  50  per  centum  of  the 
net  income.  In  any  case,  the  actual  ratio  when  ascertained  shall 
be  used  in  determining  the  correct  amount  of  the  tax.  If  the 
correct  amount  of  the  tax  when  determined  exceeds  50  per 
centum  of  the  net  income,  any  excess  of  the  correct  installments 
over  the  amounts  actually  paid  shall  on  notice  and  demand  be 
paid  together  with  interest  at  the  rate  of  x/2  of  1  per  centum  per 
month  on  such  excess  from  the  time  the  installment  was  due. 

674  (c)  The  Commissioner  shall  keep  a  record  of  all  cases  in 
852  which  the  tax  is  determined  in  the  manner  prescribed  in  sub- 
division (a),  containing  the  name  and  address  of  each  taxpayer, 
the  business  in  which  engaged,  the  amount  of  invested  capital 
and  net  income  shown  by  the  return,  and. the  amount  of  invested 
capital  as  determined  under  such  subdivision.  The  Commissioner 
shall  furnish  a  copy  of  such  record  and  other  detailed  informa- 
tion with  respect  to  such  cases  when  required  by  resolution 
of  either  House  of  Congress,  without  regard  to  the  restrictions 
contained  iu  section  257  [contents  of  returns  not  to  be  disclosed]. 

PART  VI.— Reorganizations. 
[Reorganizations  after  January  1,  1911.] 

675  Sec.  330.  That  in  the  case  of  the  reorganization,  consolida- 

837  tion,  or  change  of  ownership  after  January  1,  1911,  of  a  trade 
or  business  now  carried  on  by  a  corporation,  the  corporation 
shall  for  the  purposes  of  this  title  be  deemed  to  have  been  in 
existence  prior  to  that  date,  and  the  net  income  and  invested 
capital  of  such  predecessor  trade  or  business  for  all  or  any  part 
of  the  prewar  period  prior  to  the  organization  of  the  corporation 
now  carrying  on  such  trade  or  business  shall  be  deemed  to  have 
been  the  net  income  and  invested  capital  of  such  corporation. 

676  If  such  predecessor  trade  or  business  was  carried  on  by  a 

838  partnership  or  individual  the  net  income  for  the  prewar  period 
shall,  under  regulations  prescribed  by  the  Commissioner  with 
the  approval  of  the  Secretary,  be  ascertained  and  returned  as 
nearly  as  may  be  upon  the  same  basis  and  in  the  same  manner 
as  provided  for  corporations  in  Title  II,  including  a  reasonable 
deduction  for  salary  or  compensation  to  each  partner  or  the 
individual  for  personal  services  actually  rendered. 


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[Incorporating  prior  to  July  1,  1919,  business  of  an  individual  or 
of  a  partnership.] 

577^  In  the  case  of  the  organization  as  a  corporation  before  July  1, 
839  *  1919,  of  any  trade  or  business  in  which  capital  is  a  material  in- 
come-producing factor  and  which  was  previously  owned  by  a 
partnership  or  individual,  the  net  income  of  such  trade  or  busi- 
ness from  January  1,  1918,  to  the  date  of  such  reorganization 
may  at  the  option  of  the  individual  or  partnership  be  taxed  as 
the  net  income  of  a  corporation  is  taxed  under  Titles  II  and  III; 
in  which  event  the  net  income  and  invested  capital  of  such  trade 
or  business  shall  be  computed  as  if  such  corporation  had  been  in 
existence  on  and  after  January  1,  1918,  and  the  undistributed 
profits  or  earnings  of  such  trade  or  business  shall  not  be  sub- 
ject to  the  surtax  imposed  in  section  211,  but  amounts  distributed 
on  or  after  January  1,  1918,  from  the  earnings  of  such  trade  or 
business  shall  be  taxed  to  the  recipients  as  dividends,  and  all  the 
provisions  of  Titles  II  and  III  relating  to  corporations  shall  so 
far  as  practicable  apply  to  such  trade  or  business:  Provided, 
That  this  paragraph  shall  not  apply  to  any  trade  or  business  the 
net  income  of  which  for  the  taxable  year  1918  was  less  than  20 
per  centum  of  its  invested  capital  for  such  year:  Provided 
further,  That  any  taxpayer  who  takes  advantage  of  this  para- 
graph shall  pay  the  tax  imposed  by  section  1000  of  this  Act 
[j[3000]  and  by  the  first  subdivision  of  section  407  of  the  Rev- 
enue Act  of  1916,  as  if  such  taxpayer  had  been  a  corporation 
on  and  after  January  1,  1918,  with  a  capital  stock  having  no 
par  value. 

678  If  any  asset  of  the  trade  or  business  in  existence  both  during  the 
140    taxable  year  and  any  prewar  year  is  included  in  the  invested 

capital  for  the  taxable  year  but  is  not  included  in  the  invested 
capital  for  such  prewar  year,  or  is  valued  on  a  different  basis 
in  computing  the  invested  capital  for  the  taxable  year  and  such 
prewar  year,  respectively,  then  under  rules  and  regulations  to 
be  prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary  such  readjustments  shall  be  made  as  are  necessary 
to  place  the  computation  of  the  invested  capital  for  such  prewar 
year  on  the  basis  employed  in  determining  the  invested  capital 
for  the  taxable  year. 

[Reorganizations  after  March  3,  1917.] 

679  Sec.  331.  In  the  case  of  the  reorganization,  consolidation,  or 
g^j  change  of  ownership  of  a  trade  or  business,  or  change  of  owner- 
ship of  property,  after  March  3,  1917,  if  an  interest  or  control 
in  such  trade  or  business  or  property  of  50  per  centum  or  more 
remains  in  the  same  persons,  or  any  of  them,  then  no  asset  trans- 
ferred or  received  from  the  previous  owner  shall,  for  the  pur- 
pose of  determining  invested  capital,  be  allowed  a  greater  value 
than  would  have  been  allowed  under  this  title  in  computing 
the  invested  capital  of  such  previous  owner  if  such  asset  had 
not  been  so  transferred  or  received:  Provided,  That  if  such 
previous  owner  was  not  a  corporation,  then  the  value  of  any 
asset  so  transferred  or  received  shall  be  taken  at  its  cost  of 
acquisition  (at  the  date  when  acquired  by  such  previous  owner) 

Copyright  1922,  by  The  Corporation  Trust  Company.. 
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with  proper  allowance  for  depreciation,  impairment,  betterment 
or  development,  but  no  addition  to  the  original  cost  shall  be 
made  for  any  charge  or  expenditure  deducted  as  expense  or 
otherwise  on  or  after  March  1,  1913,  in  computing  the  net  income 
of  such  previous  owner  for  purposes  of  taxation. 

PART  VII.— Miscellaneous. 
[Returns  on  fiscal  year  basis.] 

580  Sec.  335.  (a)  That  if  a  corporation  (other  than  a  personal 

842  service  corporation)  makes  return  for  a  fiscal  year  beginning  in 

1917  and  ending  in  1918,  the  tax  for  the  first  taxable  year  under 
this  title  shall  be  the  sum  of :  (1)  the  same  proportion  of  a  tax 
for  the  entire  period  computed  under  Title  II  of  the  Revenue  Act 
of  1917  which  the  portion  of  such  period  falling  within  the  cal- 
endar year  1917  is  of  the  entire  period,  and  (2)  the  same  propor- 
tion of  a  tax  for  the  entire  period  computed  under  this  title  at  the 
rates  specified  in  subdivision  (a)  of  section  301  which  the  por- 
tion of  such  period  falling  within  the  calendar  year  1918  is  of  the 
entire  period. 

58 1  Any  amount  heretofore  or  hereafter  paid  on  account  of  the 
84*  tax  imposed  for  such  fiscal  year  by  Title  II  of  the  Revenue  Act 

of  1917  shall  be  credited  toward  the  payment  of  the  tax  imposed 
for  such  fiscal  year  by  this  title,  and  if  the  amount  so  paid 
exceeds  the  amount  of  the  tax  imposed  by  this  title,  the  excess 
shall  be  credited  or  refunded  to  the  corporation  in  accordance 
with  the  provisions  of  section  252. 

582  (b)  If  a  corporation  makes  return  for  a  fiscal  year  beginning 

843  in  1918  and  ending  in  1919,  the  tax  for  such  fiscal  year  under  this 
title  shall  be  the  sum  of:  (1)  the  same  proportion  of  a  tax  for 
the  entire  period  computed  under  subdivision  (a)  of  section  301 
which  the  portion  of  such  period  falling  within  the  calendar  year 

1918  is  of  the  entire  period,  and  (2)  the  same  proportion  of  a 
tax  for  the  entire  period  computed  under  subdivision  (b)  or  (c) 
of  section  301  which  the  portion  of  such  period  falling  within 
the  calendar  year  1919  is  of  the  entire  period. 

583  (c)  If  a  partnership  or  a  personal  service  corporation  makes 
842   return  for  a  fiscal  year  beginning  in  1917  and  ending  in  1918,  it 

shall  pay  the  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  Title  II  of  the  Revenue  Act  of  1917  which  the  por- 
tion of  such  period  falling  within  the  calendar  year  1917  is  of 
the  entire  period. 

584  Any  tax  paid  by  a  partnership  or  personal  service  corporation 
for  any  period  beginning  on  or  after  January  1,  1918,  shall  be 
immediately  refunded  to  the  partnership  or  corporation  as  a  tax 
erroneously  or  illegally  collected. 

[Returns  and  payment  of  taxes.] 

585  Sec.  336.  That  every  corporation,  not  exempt  under  section  304, 
849  shall  make  a  return  for  the  purposes  of  this  title.   Such  returns 

shall  be  made,  and  the  taxes  imposed  by  this  title  shall  be  paid, 
at  the  same  times  and  places,  in  the  same  manner,  and  subject 
to  the  same  conditions,  as  is  provided  in  the  case  of  returns 

Copyright  1922,  by  Th*  Corporation  Trust  Company. 
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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW.— 1918  ACT. 


and  payment  of  income  tax  by  corporations  for  the  purposes  of 
Title  II,  and  all  the  provisions  of  that  title  not  inapplicable, 
including  penalties,  are  hereby  made  applicable  to  the  taxes 
imposed  by  this  title. 

[Sale  of  mines,  oil  or  gas  wells.] 

686  Sec.  337.  That  in  the  case  of  a  bona  fide  sale  of  mines,  oil  or 
853  gas  wells,  or  any  interest  therein,  where  the  principal  value  of 
the  property  has  been  demonstrated  by  prospecting  or  explora- 
tion and  discovery  work  done  by  the  taxpayer,  the  portion  of 
the  tax  imposed  by  this  title  attributable  to  such  sale  shall  not 
exceed  20  per  centum  of  the  selling  price  of  such  property  or 
interest. 


[Consolidated  Returns.] 
687       Sec.  240  [of  Title  II  of  the  Revenue  Act  of  1918,  of  which 
734    the  War-Profits  and  Excess-Profits  Tax  is  Title  III],  (a)  That 

821  corporations  which  are  affiliated  within  the  meaning  of  this  sec- 
tion shall,  under  regulations  to  be  prescribed  by  the  Commis- 
sioner with  the  approval  of  the  Secretary,  make  a  consolidated 
return  of  net  income  and  invested  capital  for  the  purposes  of 
this  title  and  Title  III,  and  the  taxes  thereunder  shall  be  com- 
puted and  determined  upon  the  basis  of  such  return:  Provided, 
That  there  shall  be  taken  out  of  such  consolidated  net  income 
and  invested  capital,  the  net  income  and  invested  capital  of  any 
such  affiliated  corporation  organized  after  August  1,  1914,  and 
not  successor  to  a  then  existing  business,  50  per  centum  or  more 
of  whose  gross  income  consists  of  gains,  profits,  commissions,  or 
other  income,  derived  from  a  Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive.  In  such  case  the  corporation  so  taken  out  shall  be 
separately  assessed  on  the  basis  of  its  own  invested  capital  and 
net  income  and  the  remainder  of  such  affiliated  group  shall  be 
assessed  on  the  basis  of  the  remaining  consolidated  invested 
capital  and  net  income. 

533  In  any  case  in  which  a  tax  is  assessed  upon  the  basis  of  a 
723  consolidated  return,  the  total  tax  shall  be  computed  in  the  first 
instance  as  a  unit  and  shall  then  be  assessed  upon  the  respective 
affiliated  corporations  in  such  proportions  as  may  be  agreed  upon 
among  them,  or,  in  the  absence  of  any  such  agreement,  then  on 
the  basis  of  the  net  income  properly  assignable  to  each.  There 
shall  be  allowed  in  computing  the  income  tax  only  one  specific 
credit  of  $2,000  (as  provided  in  section  236) ;  in  computing  the 
war-profits  credit  (as  provided  in  section  311)  only  one  specific 
exemption  of  $3,000;  and  in  computing  the  excess-profits  credit 
(as  provided  in  section  312)  only  one  specific  exemption  of  $3,000. 

689       (b)  For  the  purpose  of  this  section  two  or  more  domestic  cor- 

822  porations  shall  be  deemed  to  be  affiliated  (1)  if  one  corporation 
owns  directly  or  controls  through  closely  affiliated  interests  or 
by  a  nominee  or  nominees  substantially  all  the  stock  of  the  other 
or  others,  or  (2)  if  substantially  all  the  stock  of  two  or  more  cor- 
porations is  owned  or  controlled  by  the  same  interests. 

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690  ic)  For  the  purposes  of  section  238  a  domestic  corporation 
which  owns  a  majority  of  the  voting  stock  of  a  foreign  corpora- 
tion shall  be  deemed  to  have  paid  the  same  proportion  of  any 
income,  war-profits  and  excess-profits  taxes  paid  (but  not  includ- 
ing taxes  accrued)  by  such  foreign  corporation  during  the  tax- 
able year  to  any  foreign  country  or  to  any  possession  of  the 
United  States  upon  income  derived  from  sources  without  the 
United  States,  which  the  amount  of  any  dividends  (not  deducti- 
ble under  section  234)  received  by  such  domestic  corporation 
from  such  foreign  corporation  during  the  taxable  year  bears  to 
the  total  taxable  income  of  such  foreign  corporation  upon  or 
with  respect  to  which  such  taxes  were  paid:  Provided,  That  in 
no  such  case  shall  the  amount  of  the  credit  for  such  taxes  exceed 
the  amount  of  such  dividends  (not  deductible  under  section  234) 
received  by  such  domestic  corporation  during  the  taxable  year. 

691  to  595  Blank. 


696    ForH596  see  page  318. 


Copyright  1922,  by  Tht  Corporation  Trust  Company, 
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1  2-^2 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


OFFICIAL  RULINGS,  REGULATIONS,  OPINIONS,  AND  DECISIONS 

UNDER  THE 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW— 1918  ACT 

Including 

All  of  Regulations  45,  Revised,  Part  II-B,  1920  Edition, 
As  amended 
Relating  specifically  to 
The  War-Profits  and  Excess-Profits  Tax  Law— 1918  Act, 
Together  with 
Numerous  explanatory  special  rulings. 


REGULATIONS  45,  PART  II-B  Rev.,  (1920  Edition),  promulgated  January  28,  1921, 

As  amended. 
CONTENTS 

(The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the]regulations.l 

Paragraph 

Section  300.    General  definitions  500  to  509 

Article  701.    War  profits  and  excess  profits  tax   597 

Section  301 .    Imposition  of  tax   510 

Article  711.    Imposition  of  tax   598 

712.  Computation  of  tax  for  1918   602 

713.  Computation  of  tax  for  years  after  1918   60S 

714.  Computation  of  tax  on  income  from  Government  contracts   604 

715.  Allocation  of  net  income  to  particular  source   607 

716.  Illustration  of  computation  of  tax   608 

717.  Illustration  of  computation  where  no  tax  under  third  bracket   618 

718.  Illustration  of  computation  where  excess    profits  credit    not  ex- 

hausted under  first  bracket   621 

719.  Illustration  of  computation  where  net  income  derived  from  Govern- 

ment contract   626 

720.  Illustration  of  computation  where  return  for  period  of  less  than 

12  months   634 

Section  302.    Limitation  of  tax   523 

Article  731.    Short  form  of  computation  of  limitation   639 

732.  Limitation  when  return  for  fractional  part  of  year   643 

733.  Illustration  of  computation  of  limitation   644 

Section  303.    Tax  when  partly  personal  service  business   524 

Article  741.    Aooortionment  of  invested  capital  and  net  income   645 

742.  Computation  of  tax  upon  net  income   646 

743.  Illustration  of  computation  of  tax  where  partly  personal  service 

business   648 

Section  304.    Exemptions   525 

Article  751.    Corporations  exempt  from  tax   666 

752.  Net  income  exempt  from  tax   682 

753.  Illustration  of  computation  of  tax  where  net  income  from  gold 

mining   683 

Section  305.    Apportionment  of  specific  exemption.   528 

Article  761.    Apportionment  of  specific  exemption   684 

Section  310.    Prewar  period   529 

Article  771.    Prewar  period   685 

Section  311.    War  profits  credit   530 

Article  781.    War  profits  credit  ;   686 

782.  War  profits  credit  where  meager  prewar  net  income   688 

783.  War  profits  credit  where  no  prewar  period   690 

784.  War  profits  credit  where  no  prewar  period  in  special  circumstances  722 

785.  War  profits  credit  in  the  case  of  affiliated  corporations   723 

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Paragraph 

Section  312.    Excess  profits  credit   541 

Article  791.    Excess  profits  credit   724 

Section  320.    Net  income   543 

Article  301.    Net  income   723 

802.     Prewar  net  income  of  affiliated  corporations   734 

Section  325.    Terms  relating  to  invested  capital   548 

Article  811.    Intangible  and  tangible  property   738 

812.  Borrowed  capital:    securities   739 

813.  Borrowed  capita!:    amounts  left  in  business   740 

814.  Borrowed  capital:    other  illustrations   742 

815.  Inadmissible  assets   743 

816.  Inadmissible  assets:    government  bonds   748 

817.  Inadmissible  assets:    partial  exception   749 

818.  Admissible  assets   750 

Section  326.    Invested  capital   555 

Article  831.    Meaning  of  invested  capital   751 

832.  Cash  paid  in:    bonus^  stock   753 

833.  Tangible  property  paid  in:    evidences  of  indebtedness   754 

834.  Tangible  property  paid  in:  inadmissible  assets   755 

835.  Tangible  pioperty  paid  in:   mixture  of  tangible  and  intangible 

property   756 

S36.    Tangible  property  paid  in:    value  in  excess  of  par  value  of 

stock  ...                                757;  A,  1288 

837.  Surplus  and  undivided  profits:  paid-in  surplus   760 

838.  Surplus  and  undivided  profits:  earned  surplus   761 

839.  Surplus  and  undivided  profits:  allowance  for  depletion  and  depre- 

ciation.   762 

840.  Surplus  and  undivided  profits:  additions  to  surplus  account   764 

841.  Surplus  and  undivided  profits:  limitation  of  addition*  to  surplus 

account    769 

842.  Surplus  and  undivided  profits:  property  paid  in  and  subsequently 

written  off   773 

843.  Surplus  and  undivided  profits:  patents   776 

844.  Surplus  and  undivided  profits:  reserve  for  depreciation  or  depletion  778 

845.  Surplus  and  undivided  profits:    reserve  for  income  and  excess 

profits  taxes   782 

845a.  Surplus  and  undivided  profits:     Reserve  for  1918  income  and 

excess  profit  taxes  of  corporations  having  a  fiscal  year   783 

846.  Surplus  and  undivided  profits:  insurance  on  officers   787 

847.  Surplus  and  undivided  profits:    property  taken  for  debt  or  in 

exchange   788 

848.  Surplus  and  undivided  profits:  discount  on  sale  of  bonds   790 

849.  Surplus  and  undivided  profits:  miscellaneous   791 

850.  Surplus  and  undivided  profits:  current  profits   803 

851.  Intangible  property  paid  in   804 

852.  Percentage  of  inadmissible  assets   805 

853.  Changes  in  invested  capital  during  year   806 

854.  Computation  of  average  invested  capital   807 

855.  Invested  capital  for  full  year  or  less    808 

856.  Illustration  of  return  for  fractional  part  ot  year   809 

857.  Method  of  determining  available  net  income   810 

858.  Effect  of  ordinary  dividend   813 

859.  Effect  of  stock  dividend   814 

860.  Impairment  of  capital   815 

861.  Surrender  of  stock   816 

862.  Purchase  cf  stock   817 

863.  Invested  capital  and  other  measures  of  capital   820 

864.  Affiliated  corporations:  invested  capital   821 

865.  Affiliated  corporations:  intangible  property  paid  in   823 

866.  Affiliated  corporations:  inadmissible  assets   825 

867.  Affiliated  corporations:  stock  of  subsidiary  acquired  for  cash   826 

868.  Affiliated  corporations:  stock  of  subsidiary  acquired  for  itock   827 

869.  Affiliated  corporations:  invested  capital  for  prewar  period   828 

870.  Insurance  companiei   829 

871.  Foreign  corporations     830 

Section  327.    Special  cases   563 

Article  901.    Treatment  of  special  cases  831 
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Section  328.    Computation  of  tax  in  special  cases   570 

Article  911.    Computation  of  tax  in  special  cases   832 

912.  Determination  of  first  installment  of  lax  in  special  cases   833 

913.  Determination  of  first  installment  of  tax  in  the  case  of  foreign 

corporations   834 

914.  Payment  of  tax  in  special  cases    835 

Section  330.    Reorganizations —    575 

Article  931.    Scope  of  reorganizations   837 

932.  Net  income  and  invested  capital  of  predecessor  partnership  or 

individual   838 

933.  Election  to  be  taxed  as  corporation   839 

934.  Adjustment  for  asset  differently  valued  in  prewar  invested  capital  840 
Section  331.    Valuation  of  assets  upon  reorganization   579 

Article  941.    Valuation  of  asset  upon  change  of  ownership   841 

Section  335.    Fiscal  years  ending  in  1918  or  1919   580 

Article  951.    Fiscal  year  with  different  rates   842 

952.  Fiscal  year  of  corporation  ending  in  1918   843 

953.  Deductions  and  credits  in  the  case  of  fiscal  year  ending  in  1918. . .  S44 

954.  Fiscal  year  of  corporation  ending  in  1919   845 

955.  Illustration  of  computation  of  tax  for  fiscal  year   846 

Section  336.    Returns  .'   585 

Article  961.    Returns    849 

962.    Returns  in  special  cases   852 

Section  337.    Sale  of  mineral  deposits   585 

Article  971.    Tax  on  sale  of  mineral  deposits   853 

972.    Illustration  of  computation  of  tax  where  sale  of  mineral  deposits.  858 


596  Important  Comment. — Appended  to  each  paragraph  or  unit  of 
paragraphs  in  the  compilation,  beginning  at  1f597  below,  is  a  citation 
showing  the  official  source  and  date.  Without  exception  the  Articles  of 
Regulations  45,  Revised,  referring  specifically  to  the  excess-profits  tax  law, 
that  is,  the  7-hundred  (701),  the  8-hundred  (801)  and  the  9-hundred  (901) 
series,  are  printed  in  regular  numerical  order.  Thus  any  particular  Article 
may  be  located  without  difficulty.  The  fact  that  there  are  missing  Article 
numbers  (as  Art.  702  to  710)  in  the  7-,  8-,  and  9-hundred  series,  indicates 
with  certainty  that  on  December  15,  1921,  there  were  no  Articles  bearing 
such  missing  number  designations.  Attention  is  called  to  the  purely  supple- 
mentary Bureau  Rulings,  reproduced  hereinafter  in  full,  as  originally  issued 
by  the  Government,  on  the  pages  following  immediately  after  the  blue 
excess-profits  tax  index.  The  reader  is  earnestly  cautioned  to  read  the  foreword 
to  these  Bureau  Rulings. 


GENERAL  DEFINITIONS.  §3C0 

697  Art.  701.  War  Profits  and  Excess  Profits  Tax.— The  war  profits 
500  and  excess  profits  tax,  like  the  income  tax,  is  a  tax  upon  net  income. 
It  applies  only  to  corporations.  See  section  301  of  the  statute  and 
articles  711-720  ffi598].  The  terms  "taxable  year,"  "fiscal  year,"  "personal 
service  corporation,"  "paid  or  accrued,"  and  "dividends,"  and  in  general 
all  other  terms  used  in  connection  with  the  income  tax,  have  here  the  same 
meaning  as  provided  for  the  purposes  of  the  income  tax.  See  sections  1, 
200,  and  201  and  articles  1501-1510,  1523-1533  and  1541-1549  [for  terms, 
beginning  at  1f50l,  and  1[8099].  For  other  terms  see  sections  310  [1529]  and 
325  [1555]  and  articles  771  [1685]  and  811-818  [beginning  at  1738].  (Art. 
701,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

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WAR  TAX  318  SERVICE 


1-2-22.  §301. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1Q18  ACT. 


IMPOSITION  OF  TAX.  §301 

598  Art.  711.  Imposition  of  tax. — The  tax  is  imposed  upon  the  net 
510      income  of  every  corporation,  domestic  or  foreign,  except  personal 

service  corporations  and  certain  other  classes  of  corporations.  See 
section  "304  of  the  statute  and  articles  751-753  [for  exempt  corporations, 
1f666].  Special  provisions  of  the  statute  deal  with  corporations  deriving 
net  income  from  Government  contracts  (see  section  1  [1f503  for  law  and 
If  604  for  regulations]),  transportation  corporations  (see  article  504  [11599 
below]),  corporations  partly  partaking  of  the  nature  of  personal  service 
corporations  (see  section  303  [1[524  for  law  and  If 645  for  regulations;]), 
corporations  engaged  in  the  mining  of  gold  (see  section  304  [1f527  for  law 
and  1f682  for  regulations]),  foreign  and  abnormal  corporations  (see  section 
327  [H565  for  law  and  1J831  for  regulations]),  reorganized  and  consolidated 
corporations  (see  sections  330  and  331  [1f575  to  1f579  for  law  and  If 837  for 
regulations]),  corporations  making  their  returns  upon  the  basis  of  a  fiscal 
year  (see  section  335  [1f580  for  law  and  If 842  for  regulations]),  and  corporations 
which  have  sold  mines  or  oil  or  gas  wells  (see  section  337  [1f586  for  law  and 
1f853  for  regulations]).  For  the  requirements  as  to  rendering  returns  see 
section  336  [1f585  for  law,  and  1f849  for  regulations]  (Art.  711,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

599  to  601  Blank. 

602  Art.  712.  Computation  of  war-profits  and  excess-profits  tax  for  1918. 

514  — For  the  taxable  year  1918,  (a)  if  the  net  income,  as  denned  in  sec- 
tion 320  (a)  (3)  of  the  statute,  is  not  in  excess  of  20  per  cent  of  the 
invested  capital,  as  defined  in  section  326,  then  under  the  first  bracket  the 
tax  is  30  per  cent  of  the  amount  of  the  net  income  in  excess  of  the  excess 
profits  credit,  as  defined  in  section  312,  and  the  second  bracket  is  not  applic- 
able, (b)  If  the  net  income  is  in  excess  of  20  per  cent  of  the  invested  capital, 
then  under  the  first  bracket  the  tax  is  30  per  cent  of  the  excess  of  an  amount 
of  net  income  equal  to  20  per  cent  of  the  invested  capital  over  the  excess 
profits  credit,  and  under  the  second  bracket  the  tax  is  65  per  cent  of  the 
amount  of  the  remaining  net  income  less  any  excess  profits  credit  not  ex- 
hausted under  the  first  bracket,  (c)  If  the  tax  under  (a)  or  the  aggregate 
tax  under  (b)  equals  or  exceeds  80  per  cent  of  the  amount  of  the  net  income 
in  excess  of  the  war  profits  credit,  as  defined  in  section  311,  then  the  tax 
under  (a)  or  (b)  is  the  amount  of  the  tax  payable.  But  if  such  tax  is  less 
than  such  80  per  cent,  then  the  tax  payable  is  80  per  cent  of  the  amount  of 
the  net  income  in  excess  of  the  war  profits  credit.  But  see  section  302  and 
articles  731-733  [for  maximum  limitation  of  tax  beginning  at  1f639].  (Art. 
712,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

603  Art.  713.  Computation  of  excess-profits  tax  for  1919  and  thereafter. 

510  — For  the  taxable  year  1919  and  subsequent  years,  (a)  if  the  net 
income,  as  defined  in  section  320  (a)  (3)  [1f546]  of  the  statute,  is  not 
in  excess  of  20  per  cent  of  the  invested  capital,  as  defined  in  section  326 
[1f555],  then  under  the  first  bracket  the  tax  payable  is  20  per  cent  of  the 
amount  of  the  net  income  in  excess  of  the  excess  profits  credit,  as  defined 
in  section  312  [1f541],  and  the  second  bracket  is  not  applicable,  (b)  If  the  net 
income  is  in  excess  of  20  per  cent  of  the  invested  capital,  then  under  the  first 
bracket  the  tax  is  20  per  cent  of  the  excess  of  an  amount  of  net  income  equal 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         319  SERVICE 


1-2-22.  §301. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


to  20  per  cent  of  the  invested  capital  over  the  excess  profits  credit,  and  under 
the  second  bracket  the  tax  is  40  per  cent  of  the  amount  of  the  remaining 
net  income  less  any  excess  profits  credit  not  exhausted  under  the  first  bracket. 
The  sum  of  the  taxes  computed  under  the  two  brackets  is  the  tax  payable. 
But  see  the  following  article  [for  war-profits  tax  for  1919  and  subsequent 
taxable  years  in  certain  instances,  ^[604]  and  section  302  [for  maximum 
limitation  of  tax:  law  ^[523  and  regulations  1T641].  (Art.  713,  Reg.  45. 
Rev.,  Jan.  28,  1921.) 

604  Art.  714.    Computation  of  tax  on  income  from  Government  con- 

517  tracts. — In  the  case  of  a  corporation  which  derives  in  any  taxable 
year  after  1918  a  net  income  of  more  than  $10,000  from  any  Govern- 
ment contracts  made  after  April  5,  1917,  and  before  November  12,  1918, 
the  tax  shall  be  such  a  proportion  of  a  tax  computed  at  the  rates  for  1918 
as  the  portion  of  the  net  income  attributable  to  the  Government  contracts 
bears  to  the  entire  net  income,  plus  such  a  proportion  of  a  tax  computed 
at  the  rates  for  1919  as  the  amount  of  the  remaining  net  income  bears  to 
the  entire  net  income.  In  computing  such  taxes,  however,  the  excess  profits 
credit  and  the  war  profits  credit  applicable  to  the  taxable  year  shall  be 
used.  [For  example  of  computation  of  tax  see  11626.]  But  see  section  302 
of  the  statute  [for  maximum  tax  limitation,  1f523;  regulations  1f639].  The 
part  of  the  net  income  attributable  to  such  Government  contracts  shall  be 
determined  in  accordance  with  the  following  article.  See  also  section  1 
[law  1f503]  and  article  1510.    (Art.  714,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

605  and  606  Blank. 

607  Art.  715.    Allocation  of  Net  Income  to  Particular  Source. — When- 

520  ever  it  is  necessary  to  determine  the  portion  of  the  net  income  de- 
rived from  or  attributable  to  a  particular  source,  the  corporation 
shall  allocate  to  the  gross  income  derived  from  such  source,  and  to  the 
gross  income  derived  from  each  other  source,  the  expenses,  losses,  and  other 
deductions  properly  appertaining  thereto,  and  shall  apply  any  general 
expenses,  losses,  and  deductions  (which  can  not  properly  be  otherwise  ap- 
portioned) ratably  to  the  gross  income  from  all  sources.  The  gross  income 
derived  from  a  particular  source,  less  the  deductions  properly  appertaining 
thereto  and  less  its  proportion  of  any  general  deductions,  shall  be  the  net 
income  derived  from  such  source.  The  corporation  shall  submit  with  its 
return  a  statement  fully  explaining  the  manner  in  which  such  expenses,  losses, 
and  deductions  were  allocated  or  distributed.  (Art.  715,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

608  Art.  716.    Illustration  of  Computation  of  Tax. — A  corporation  has 
an  average  prewar  invested  capital  of  $50,000,  an  average  prewar 

net  income  of  $10,000,  an  invested  capital  for  1918  of  $100,000,  a  net  income 
for  1918  of  $40,000,  an  invested  capital  for  1919  of  $110,000,  and  a  net 
income  of  $50,000. 

609  (1)  For  1918  the  excess  profits  credit  is  a  specific  exemption  of 
$3,000,  plus  8  per  cent  of  the  invested  capital  (i.  e.,  8  per  cent  of 

$100,000)  or  $8,000,  making  a  total  of  $11,000.  See  section  312  of  the 
statute  and  article  791  [for  excess  profits  credit,  H724].    The  war  profits 

Copyright  1922,  by  Tht  Corporation  Trust  Company. 
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1-2-22.  §301. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


credit  is  a  specific  exemption  of  $3,000,  plus  the  average  prewar  net  income 
or  $10,000,  plus  or  minus  10  per  cent  of  the  difference  between  the  average 
prewar  invested  capital  and  the  invested  capital  for  1918.  In  this  case 
it  is  plus,  because  the  invested  capital  for  1918  is  greater  than  the  average 
prewar  invested  capital.  The  amount  added  is  10  per  cent  of  the  difference 
between  $100,000  and  $50,000,  i.  e.,  10  per  cent  of  $50,000,  or  $5,000,  making 
a  total  war  profits  credit  of  $18,000.  See  section  311  and  article  781  [for  war 
profits  credit,  1f686]. 

610  First  bracket. — The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  the  excess  profits  credit  ($11,000)  and  not  in  excess  of 

20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $100,000)  or  $20, 
000  is  $9,000.  The  tax  computed  under  this  bracket  is  30  per  cent  of  this 
amount  (i.  e.„  30  per  cent  of  $9,000)  or  $2,700. 

611  Second  bracket. — The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent 

of  $100,000)  or  $20,000  is  $20,000.  The  tax  computed  under  this  bracket 
is  65  per  cent  of  this  amount  (i.  e.,  65  per  cent  of  $20,000)  or  $13,000. 

612  Third  bracket. — Eighty  per  cent  of  the  amount  or  portion  of  the 
net  income  in  excess  of  the  war  profits  credit  (i.  e.,  80  per  cent  of 

the  amount  by  which  $40,000  exceeds  $18,000,  or  $22,000)  is  $17,600.  The 
amount  of  the  tax  computed  under  the  first  and  second  brackets  ($2,700 
plus  $13,000)  is  $15,700.  The  tax  computed  under  this  bracket  is  the 
amount  by  which  $17,600  exceeds  $15,700,  or  $1,900. 

613  Total  tax. — The  total  tax  for  1918  is  the  sum  of  the  taxes  computed 
under  the  three  brackets  (i,  e.,  $2,700  plus  $13,000  plus  $1,900)  or 

$17,600. 

614  (2)  For  1919  the  excess  profits  credit  is  a  specific  exemption  of 
$3,000  plus  8  per  cent  of  the  invested  capital  (i.  e.,  8  per  cent  of 

$110,000)  or  $8,800,  a  total  of  $11,800.  See  section  312  and  article  791 
[for  excess  profits  credit,  1(724]. 

615  First  bracket.  —-The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  the  excess  profits  credit  ($11,800)  and  not  in  excess  of 

20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $110,000)  or  $22,000 
is  $10,200.  The  tax  computed  under  this  bracket  is  20  per  cent  of  this 
amount  (i.  e.,  20  per  cent  of  $10,200)  or  $2,040. 

6 1 6  Second  bracket. — The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of 

$110,000)  or  $22,000  is  $28,000.  The  tax  computed  under  this  bracket  is 
40  per  cent  of  this  amount  (i.  e.,  40  per  cent  of  $28,000)  or  $1 1,200. 

617  Total  tax. — The  total  tax  for  1919  is  the  sum  of  the  taxes  computed 
under  the  two  brackets  (i.  e.,  $2,040  plus  $11,200)  or  $13,240.  (Art. 

716,  Reg.  45,  Rev.,  Jan.  28,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


618  Art.  717.    Illustration  of  computation  where  no  tax  under  third 

bracket. — If  the  corporation  used  as  an  illustration  in  Article  716 
[1f608]  had  an  average  prewar  net  income  of  $20,000  instead  of  $10,000,  the 
excess  profits  credit  and  the  tax  for  1918  computed  under  the  first  and 
second  brackets  would  be  the  same,  but  the  war  profits  credit  and  the  tax 
computed  under  the  third  bracket  would  not  be  the  same.  The  war  profits 
credit  would  be  a  specific  exemption  of  $3,000  plus  the  average  prewar 
net  income,  or  $20,000,  plus  10  per  cent  of  $50,000  (the  difference  in  invested 
invested  capital)  or  $5,000,  making  a  total  war  profits  credit  of  $28,000 

619  Third  bracket. — Eighty  per  cent  of  the  amount  of  the  net  income 
in  excess  of  the  war  profits  credit  (i.  e.,  80  per  cent  of  the  amount  by 

which  $40,000  exceeds  $28,000  or  80  per  cent  of  $12,000)  is  $9,600.  The 
amount  of  the  tax  computed  under  the  first  and  second  brackets  ($2,700 
plus  $13,000)  is  $15,700,  There  is  accordingly  no  tax  under  the  third  bracket, 
as  $9,600  does  not  exceed  $15,700. 

620  Total  tax. — The  total  tax  for  1918  is  the  sum  of  the  taxes  computed 
under  the  three  brackets  (i.  e.,  $2,700  plus  $13,000  plus  nothing)  or 

$15,700.  The  total  tax  for  1919  would,  of  course,  be  the  same  as  in  article 
716  [1f608].    (Art.  717,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

621  Art.  718.   Illustration  of  Computation  where  Excess  Profits  Credit 

521  not  Exhausted  under  First  Bracket.— A  corporation  has  an  average 
prewar  invested  capital  of  $20,000,  an  average  prewar  net  income  of 
$7,000,  and  invested  capital  and  net  income  for  1918  of  the  same  amounts, 
respectively.  The  excess  profits  credit  is  a  specific  exemption  of  $3,000 
plus  8  per  cent  of  the  invested  capital  (i.  e.,  8  per  cent  of  $20,000)  or  $1,600, 
a  total  of  $4,600.  The  war  profits  credit  is  a  specific  exemption  of  $3,000 
plus  the  average  prewar  net  income  of  $7,000,  a  total  of  $10,000.  There 
is  nothing  further  to  be  added  or  deducted  in  this  case,  as  there  is  no  differ- 
ence between  the  average  invested  capital  for  the  prewar  period  and  the 
invested  capital  for  the  taxable  year. 

622  First  bracket. — The  excess  profits  credit  ($4,600)  exceeds  20  per 
cent  of  the  invested  capital  (20  per  cent  of  $20,000)  or  $4,000,  and 

there  is  no  amount  taxable  under  this  bracket. 

623  Second  bracket. — The  portion  of  the  net  income  ($7,000)  in  excess 
of  20  per  cent  of  the  invested  capital  (20  per  cent  of  $20,000)  or 

$4,000  is  $3,000.  In  this  case,  however,  the  full  amount  of  the  excess  profits 
credit  could  not  be  allowed  under  the  first  bracket,  so  that  the  $3,000  which 
would  ordinarily  be  taxable  under  this  bracket  is  reduced  by  the  amount  of 
the  excess  profits  credit  not  allowed  under  the  first  bracket  ($600),  leaving 
only  $2,400  taxable  under  this  bracket.  The  tax  computed  under  this 
bracket  is  65  per  cent  of  this  amount  (i.  e.,  65  per  cent  of  $2,400)  or  $1,560. 

624  Third  bracket. — The  war  profits  credit  ($10,000)  exceeds  the  net 
income  ($7,000),  so  that  there  is  no  tax  under  this  bracket. 

625  Total  tax. — The  total  tax  for  1918  would  be  the  sum  of  the  taxes 
computed  under  the  three  brackets  (i.  e.,  nothing  plus  $1,560  plus 

nothing)  or  $1,560,  were  it  not  that  section  302  [^523]  provides  that  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  322  SERVICE 


1-2-21.  §301. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


maximum  tax  shall  not  in  this  case  exceed  $1,200.  See  articles  731-733 
[for  maximum  tax  limitation,  1f639).  The  total  tax  for  1918  is  therefore 
$1,200.    (Art.  718,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

626  Art.  719.   Illustration  of  Computation  where  Net  Income  Derived 
517     from  Government  Contract. — If  in  the  case  of  the  corporation  used 

as  an  illustration  in  article  716  tf[608]  the  $50,000  net  income  for  1919 
includes  $20,000  of  net  income  from  Government  contracts,  the  tax  for  that 
year  would  be  the  sum  of  the  amounts  computed  under  clauses  (1)  and 
(2)  of  section  301  (c)  of  the  statute  [1f517]. 

627  (1)  Under  clause  (1)  the  excess  profits  credit  is  $11,800,  the  same 
as  under  clause  (2).   The  war  profits  credit  is  a  specific  exemption 

of  $3,000,  plus  the  average  prewar  net  income,  or  $10,000,  plus  10  per  cent 
of  $60,000  (the  difference  in  invested  capital)  or  $6,000,  making  a  total  war 
profits  credit  of  $19,000. 

628  First  bracket. — The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  the  excess  profits  credit  ($11,800)  and  not  in  excess 

of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $110,000),  or 
$22,000,  is  $10,200.  The  tax  computed  under  this  bracket  is  30  per  cent 
of  this  amount  (i.  e.,  30  per  cent  of  $10,200)  or  $3,060. 

629  Second  bracket. — The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of 

$110,000)  or  $22,000,  is  $28,000.  The  tax  computed  under  this  bracket  is 
65  per  cent  of  this  amount  (65  per  cent  of  $28,000)  or  $18,200. 

630  Third  bracket. — Eighty  per  cent  of  the  amount  of  the  net  income 
in  excess  of  the  war  profits  credit  (i.  e.,  80  per  cent  of  the  amount 

by  which  $50,000  exceeds  $19,000,  or  $31,000)  is  $24,800.  The  amount  of 
the  tax  computed  under  the  first  and  second  brackets  ($3,060  plus  $18,200) 
is  $21,260.  The  tax  computed  under  this  bracket  is  the  amount  by  which 
$24,800  exceeds  $21,260,  or  $3,540. 

631  The  portion  of  the  tax  computed  under  clause  (1)  is  the  same 
proportion  of  the  total  amount  computed  under  the  above  brackets 

at  the  rates  for  1918  (i.  e.,  $3,060  plus  $18,200  plus  $3,540)  or  $24,800, 
as  the  part  of  the  net  income  attributable  to  Government  contracts  ($20,000) 
is  of  the  entire  net  income  ($50,000).  This  portion  of  the  tax  is  therefore 
2/5  of  $24,800,  or  $9,920. 

632  (2)  The  portion  of  the  tax  computed  under  clause  (2)  is  the  same 
proportion  of  the  total  amount  computed  at  the  rates  for  1919  or 

$13,240  (for  the  details  see  illustration  for  1919  under  article  716)  as  the 
part  of  the  net  income  not  attributable  to  Government  contracts  ($30,000) 
is  of  the  entire  net  income  ($50,000).  This  portion  of  the  tax  is  therefore 
3/5  of  $13,240  or  $7,944. 

633  (3)  The  total  tax  for  the  year  1919  is  the  sum  of  the  amounts  com- 
puted under  paragraphs  (1)  and  (2)  above  ($9,920  plus  $7,944) 

or  $17,864.    (Art.  719,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  323  SERVICE 


1-2-22.  §301. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


634  Art.  720.    Illustration  of  computation  where  return  for  period  of 
less  than  12  months. — A  corporation  which  has  reported  on  the  basis 

of  the  fiscal  year  ending  March  31,  1918,  later  changes  to  a  calendar  year 
basis  and  files  a  return  covering  the  9  months  from  April  1,  1918,  to  Decem- 
ber 31,  1918.  It  had  an  average  prewar  capital  of  $50,000,  an  average  pre- 
war net  income  of  $3,500,  an  invested  capital  for  the  9  months  ending  Decem- 
ber 31,  1918,  of  $120,000,  and  a  net  income  for  such  period  of  $50,000.  It 
should  be  noted  that  this  is  a  somewhat  different  method  of  arriving  at  the 
same  result  which  would  be  reached  under  a  literal  application  of  sections 
305,  311  (a)  (2)  and  326  (d)  of  the  statute.  The  excess  profits  credit  is  com- 
puted by  adding  the  specific  exemption  of  $3,000  to  8  per  cent  of  the  full 
invested  capital  of  $120,000,  or  $9,600,  a  total  of  $12,600,  and  taking  9/12 
of  this  result,  or  $9,450,  as  the  excess  profits  credit.  The  war  profits  credit 
is  computed  by  adding  the  specific  exemption  of  $3,000  to  10  per  cent  of 
the  full  invested  capital  of  $120,000,  or  $12,000,  a  total  of  $15,000,  and 
taking  9/12  of  this  result,  or  $11,250,  as  the  war  profits  credit.  The  war 
profits  credit  is  computed  in  this  case  under  section  311  (b),  because  the 
amount  computed  under  section  311  (a)  (2)  is  less  than  10  per  cent  of  the 
invested  capital.  The  amount  computed  under  section  311  (a)  (2)  would 
be  the  sum  of  the  average  prewar  net  income,  or  $3,500,  plus  10  per  cent 
of  the  amount  by  which  the  full  invested  capital  of  $120,000  actually  used 
during  the  taxable  period  exceeds  the  average  prewar  invested  capital  of 
$50,000  (i.e.,  10  per  cent  of  $70,000),  or  $7,000,  a  total  of  $10,500.  This 
amount  is  less  than  10  per  cent  of  the  full  invested  capital  for  the  taxabel 
year  as  computed  under  section  311  (b). 

635  First  bracket. — The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  the  excess  profits  credit  ($9,450)  and  not  in  excess  of 

9/12  of  20  per  cent  of  the  invested  capital  (i.  e.,  9/12  of  20  per  cent  of 
$120,000),  or  $18,000,  is  $8,550.  The  tax  computed  under  this  bracket 
is  30  per  cent  of  this  amount  (i.  e.,  30  per  cent  of  $8,550),  or  $2;565. 

636  Second  bracket. — The  amount  or  portion  of  the  net  income  ($50,000) 
in  excess  of  9/12  of  20  per  cent  of  the  invested  capital  (i.  e.,  9/12 

of  20  per  cent  of  $120,000),  or  $18,000,  is  $32,000.  The  tax  computed  under 
this  bracket  is  65  per  cent  of  this  amount  (i.  e.,  65  per  cent  of  $32,000), 
or  $20,800. 

637  Third  bracket. — 80  per  cent  of  the  amount  or  portion  of  the  net 
income  in  excess  of  the  war  profits  credit  (i.  e.,  80  per  cent  of  the 

amount  by  which  $50,000  exceeds  $11,250,  or  $38,750),  is  $31,000.  The 
amount  of  the  tax  computed  under  the  first  and  second  brackets  ($2,565 
plus  $20,800)  is  $23,365.  The  tax  computed  under  this  bracket  is  the  amount 
by  which  $31,000  exceeds  $23,365,  or  $7,635. 

638  Total  tax. — Th;>  total  tax  will  be  the  sum  of  the  taxes  computed  under 
the  three  brackets  (i.e.,  $2,565  plus  $20,800  plus  $7,635)  or  $31,000. 

(Art.  720,  Reg.  45,  Rev.,  Jan.  28,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  324  SERVICE 


1  2  22  §303. 

"WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


,  LIMITATION  OF  TAX.  §302 

639  Art.  731.    Short  Form  of  Computation  of  Limitation.— In  any  case 

523  where  the  net  income  is  at  least  $20,000  the  computation  under  sec- 
tion 302  of  the  statute  ffl523]  may  be  shortened  as  follows : 

640  (1)  The  tax  imposed  by  subdivision  (a)  of  section  301  shall  not 
exceed  $5,100,  plus  80  per  cent  of  the  amount  of  the  net  income 

|    in  excess  of  $20,000;  and 

641  (2)  The  tax  imposed  by  subdivision  (b)  of  section  301  shall  not 
exceed  $3,400,  plus  40  per  cent  of  the  amount  of  the  net  income  in 

excess  of  $20,000. 

642  Where  the  net  income  is  less  than  $20,000  the  tax  shall  not  exceed 
|  30  per  cent  or  20  per  cent,  as  the  case  may  be,  of  the  amount  of  the 

net  income  in  excess  of  $3,000.    (Art.  731,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

643  Art.  732.    Limitation  when  return  for  fractional  part  of  year — 
When  a  return  is  rendered  for  a  fractional  part  of  a  year  the 

limitation  shall  be  computed  in  the  same  manner  as  if  the  period  covered 
by  the  return  were  a  full  taxable  year.  (Art.  732,  Reg.  45,  Rev.,  Jan.  28, 
1921,  as  amended  by  T.  D.  3245,  Nov.  14,  1921.) 

644  Art.  733.    Illustration  of  computation  of  limitation  of  tax.— If  Tin 

the  illustration  used  in  Article  720  the  invested  capital  had  been 
|  $100,000  and  the  net  income  $80,000,  the  tax  computed  under  Section  301  (a) 
of  the  statute  would  be  $56,200.  Section  302  provides,  however,  that  the 
tax  under  Section  301  (a)  shall  not  be  more  than  30  per  cent  of  the  net  income 
in  excess  of  $3,000  and  not  in  excess  of  $20,000  plus  80  per  cent  of  the  net 
income  in  excess  of  $20,000.  The  tax  at  the  30  per  cent  rate  will  be  $5,100 
(Art.  731)  and  the  balance  of  the  tax  will  be  80  per  cent  of  $60,000  (the  net 
income  in  excess  of  $20,000),  or  $48,000.  The  total  tax  will  therefore  be 
$5,100  plus  $48,000  or  $53,100.  The  tax  under  Section  301  (a),  amounting 
to  $56,200,  will  accordingly  be  reduced  to  $53,100.  (Art.  733;  Reg.  45, 
Rev.,  Jan.  28,  1921,  as  amended  by  T.  D.  3245,  Nov.  14,  1921.) 

»  TAX  WHEN  PARTLY  [PERSONAL  SERVICE  BUSINESS.  §303 

64 s      Art.  741.    Apportioument  of  Invested  Capital  and  Net  Income. — 

524  For  the  purpose  of  determining  whether  or  not  a  corporation  partly, 
partaking  of  the  nature  of  a  personal  service  corporation  is  within 

the  scope  of  section  303  ["[[524]  of  the  statute  and  also  for  the  purpose  of 
establishing  the  basis  for  the  computation  of  the  tax,  the  corporation  shall 

|  apportion  or  allocate  its  invested  capital  between  each  trade  or  business 
or  branch  thereof  as  nearly  as  may  be  in  accordance  with  the  actual  facts, 
and  shall  submit  with  its  return  an  explanatory  statement  setting  forth 
the  manner  in  which  the  apportionment  of  the  invested  capital  employed 
in  the  production  of  each  part  of  its  net  income  has  been  determined. 
There  must  be  assigned  to  any  personal  service  trade  or  business  or 
branch  thereof  an  amount  of  invested  capital  at  least  as  great  as  that 

,  which  would  ordinarily  be  employed  by  a  personal  service  corporation 
of  similar  size  and  standing  for  the  payment  of  salaries  and  office  ex- 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         325  SERVICE 


1-2-22.  §303. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


pensesj  maintenance  of  library  and  equipment,  credit  advances  to  client!, 
etc.  For  the  method  of  determining  the  portion  of  the  net  income  de- 
rived from  each  trade  or  business  or  branch  thereof  see  article  715  [^[607]. 
For  the  definition  of  "personal  service  corporation"  see  [law  1f502  and] 
articles  1523-1532.    (Art.  741,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

646  Art.  742.  Computation  of  tax  upon  net  income  when  partly  personal 
service  corporation. — (1)   The  tax  upon  the  non-personal  service 

part  of  the  net  income  is  computed  upon  the  basis  of  (a)  such  part  of  the 
entire  average  net  income  for  the  prewar  period  as  was  derived  from  the  same 
trade  or  business  or  branch  thereof;  (b)  such  part  of  the  entire  average 
invested  capital  for  the  prewar  period  as  was  employed  in  the  production  of 
the  part  of  the  net  income  for  that  period  determined  under  (a);  (c)  such 
part  of  the  entire  invested  capital  for  the  taxable  year  as  has  been  employed 
in  the  production  of  the  net  income  upon  which  the  tax  is  being  computed; 
and  (d)  the  same  proportion  of  the  specif!  •  exemption  as  the  proportion 
which  the  part  of  the  net  income  upon  which  the  tax  is  being  computed 
is  of  the  entire  net  income.  If  the  corporation  was  in  existence  during  the 
prewar  period,  but  did  not  conduct  this  trade  or  business  or  branch  thereof 
during  that  period,  the  war  profits  credit  shall  be  computed  as  provided 
in  section  311  (b)  of  the  statute  [1|533]. 

647  (2)  The  tax  upon  the  personal  service  part  of  the  net  income  is 
the  same  percentage  thereof  as  the  tax  computed  under  (I)  is  of  the 

non-personal  service  part  of  the  net  income.  The  tax  under  this  para- 
graph shall  in  no  case  be  less  than  20  per  cent  of  the  personal  service 
part  of  the  entire  net  income,  unless  the  tax  upon  the  entire  net  income 
if  computed  in  the  ordinary  way  would  be  less  than  20  per  cent  of  such 
-entire  net  income.  In  that  event,  and  in  any  case  in  which  the  amount 
of  the  total  tax  as  computed  under  this  article  is  the  same  as  or  greater 
than  the  tax  as  computed  in  the  ordinary  way,  the  tax  shall  be  computed 
under  section  301  [1f5l0]  of  the  statute.  See  section  302  [law  ^523]  and  articles 
711-720  [for  discussion  on  the  imposition  of  the  tax,  beginning  at  *[598] 
and  731-733  [for  maximum  limitation  of  the  tax,  <|639].  (Art.  742,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

648  Art.  743.  Illustration  of  Computation  of  Tax  Where  Partly  Personal 
Service  Business. — A  corporation  is  engaged   in  contracting  and 

construction  work  (a  non-personal  service  business  in  which  the  employment 
of  capital  is  necessary)  and  also  renders  consulting  engineering  service  (a  per- 
sonal service  business  which  if  constituting  its  sole  business  would  bring  it  with- 
in the  class  of  personal  service  corporations).  It  has  an  average  prewar  invested 
capital  of  £50,000  (of  which  $38,000  was  used  in  contracting  work  and 
$12,000  in  engineering);  an  average  prewar  net  income  of  $52,000  (of 
which  $12,000  was  derived  from  contracting  and  $40,000  from  engi- 
neering); an  invested  capital  for  1918  of  $100,000  (of  which  $8 1,000  is 
used  in  contracting  and  $19,000  in  engineering);  and  a  net  income  for 
1918  of  $90,000  (of  which  $30,000  is  derived  from  contracting  and  $60,000 
from  engineering). 

649  (1)   In  computing  the  tax  upon  the  first  or  non-personal  service 
part  of  the  net  income  (i.  e.,  $30,000  derived  from  contracting)  the 

specific  exemption  is  $1,000  (i.  e.,   the  same  proportion  of  $3,000  which 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  326  SERVICF 


1-2-22.  §304. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


$30,000  is  of  the  entire  net  income  of  $90,000).  The  excess  profits  credit 
is  a  specific  exemption  of  $1,000,  plus  8  per  cent  of  the  invested  capital 
used  in  contracting  (i.  e.,  8  per  cent  of  $81,000)  or  $6,480,  a  total  of  $7,480. 
The  war  profits  credit  is  a  specific  exemption  of  $1,000,  plus  the  average 
prewar  net  income  derived  from  contracting  or  $12,000,  plus  10  per  cent  of 
$43,000  (the  difference  in  invested  capital  used  in  contracting)  or  $4,300, 
making  a  total  of  $17,300. 

S50  First  bracket. — The  amount  of  the  net  income  derived  from  con- 
tracting ($30,000)  in  excess  of  the  excess  profits  credit  ($7,480)  and 
not  in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $81,000) 
or  $16,200  is  $8,720.  The  tax  under  this  bracket  is  30  per  cent  of  this  amount 
(i.  e.,  30  per  cent  of  $8,720)  or  $2,616. 

651  Second  bracket. — The  amount  of  the  net  income  derived  from  con- 
tracting ($30,000)  in  excess  of  20  per  cent  of  the  invested  capital 

used  in  contracting  (i.  e.,  20  per  cent  of  $81,000)  or  $16,200  is  $13,800.  The 
tax  computed  under  this  bracket  is  65  per  cent  of  this  amount  (65  per  cent 
of  $13,800)  or  $8,970. 

652  Third  bracket. — Eighty  per  cent  of  the  amount  of  the  net  income 
derived  from  contracting  in  excess  of  the  war  profits  credit  (i.  e., 

80  per  cent  of  the  amount  by  which  $30,000  exceeds  $17,300  or  80  per  cent 
of  $12,700)  is  $10,160.  The  amount  of  the  tax  computed  under  the  first 
and  second  brackets  ($2,616  plus  $8,970)  is  $11,586.  There  is  no  tax  under 
this  bracket,  as  $10,160  does  not  exceed  $11,586. 

653  Tax. — The  tax  upon  the  first  portion  of  the  net  income  (i.  e.,  $30,000 
derived  from  contracting)  is  the  sum  of  the  taxes  computed  under 

the  three  brackets  (i.  e.,  $2,616  plus  $8,970  plus  nothing)  or  $11,586.  This 
is  38.62  per  cent  of  $30,000  of  the  net  income  from  contracting. 

654  (2)  The  tax  upon  the  second  or  personal  service  part  of  the  net 
income  (i.  e.,  $60,000  derived  from  engineering)  is  the  same  per- 
centage of  such  part  of  the  net  income  (i.  e.,  38.62  per  cent  of  $60,000)  or 
$23,172 

655  (3)  The  total  tax  is  the  sum  of  $11,586  (the  tax  upon  the  first  part 
of  the  net  income  derived  from  contracting)  and  $23,172  (the  tax 

upon  the  second  part  of  the  net  income  derived  from  engineering)  or  $34,758. 
(Art.  743,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

656  to  665  Blank. 

EXEMPTIONS.  §304 

666  Art.  751.  Corporations  exempt  from  tax. — A  corporation  whose 
525  net  income  for  a  full  taxable  year  of  twelve  months  is  less  than 
$3,000  is  exempt  from  the  tax.  [For  return  requirements  in  such 
cases  see  ^[85 1 .]  If  the  taxable  period  is  less  than  twelve  months  the  cor- 
poration is  exempt  from  the  tax  if  its  net  income  for  the  period  is  less  than  the 
same  proportion  of  $3,000  as  the  number  of  months  in  the  period  is  of  twelve 
months,  any  fractional  part  of  a  month  being  counted  as^the  numberpf  days 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  327  SERVICE 


1-2-22.  $304. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


in  such  part  of  a  month  divided  by  30.  Certain  classes  of  corporations,  includ- 
ing personal  service  corporations,  named  in  section  231  [1J667  below]  of  the 
statute  are  also  exempt.  See  articles  511-522  [for  discussion  of  exemption  of 
certain  corporations,  1J667  below,  from  liability  to  income  tax].  [See  1[913.] 
(Art.  751,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

667  Sec.  231  [of  the  Revenue  Act  of  1918,  as  in  effect  prior  to  January  1, 
1921].    That  the  following  organizations  shall  be  exempt  from  tax- 
ation under  this  title — 

(1)  Labor,  agricultural,  or  horticultural  organizations; 

(2)  Mutual  savings  banks  not  having  a  capital  stock  represented  by  shares; 

(3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  operating 
under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a  fraternity 
itself  operating  under  the  lodge  system,  and  (b)  providing  for  the  payment 
of  life,  sick,  accident,  or  other  benefits  to  the  members  of  such  society,  order, 
or  association  or  their  dependents; 

(4)  Domestic  building  and  loan  associations  and  cooperative  banks  without 
capital  stock  organized  and  operated  for  mutual  purposes  and  without  profit; 

(5)  Cemetery  companies  owned  and  operated  exclusively  for  the  benefit  of  their 
members;  m  -.Ztm  »■ 

(6)  Corporations  organized  and  operated  exclusively  for  religious,  charitable, 
scientific,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual; 

(7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  not  organized 
for  profit  and  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual; 

(8)  Civic  leagues  or  organizations  not  organized  for  profit  but  operated  exclu- 
sively for  the  promotion  of  social  welfare; 

(9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recreation,  and 
other  non-profitable  purposes,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  member; 

(10)  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance  companies, 
mutual  ditch  or  irrigation  companies,  mutual  or  cooperative  telephone  com- 
panies, or  like  organizations  of  a  purely  local  character,  the  income  of  which 
consists  solely  of  assessments,  dues,  and  fees  collected  from  members  for  the 
sole  purpose  of  meeting  expenses; 

(11)  Farmers',  fruit  growers',  or  like  associations,  organized  and  operated 
as  sales  agents  for  the  purpose  of  marketing  the  products  of  members  and  turning 
back  to  them  the  proceeds  of  sales,  less  the  necessary  selling  expenses,  on  the 
basis  of  the  quantity  of  produce  furnished  by  them; 

(12)  Corporations  organized  for  the  exclusive  purpose  of  holding  title  to 
property,  collecting  income  therefrom,  and  turning  over  the  entire  amount 
thereof,  less  expenses,  to  an  organization  which  itself  is  exempt  from  the  tax 
imposed  by  this  title; 

(13)  Federal  land  banks  and  national  farm-loan  associations  as  provided 
in  section  26  of  the  Act  approved  July  17,  1916,  entitled  "An  Act  to  provide 
capital  for  agricultural  development,  to  create  standard  forms  of  investment 
based  upon  farm  mortgage,  to  equalize  rates  of  interest  upon  farm  loans,  to 
furnish  a  market  for  United  States  bonds,  to  create  Government  depositaries 
and  financial  agents  for  the  United  States,  and  for  other  purposes"; 

(14)  Personal  service  corporations. 

668  to  681  Blank. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  328  SERVICE 


1-2-22.  §310 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.  -1918  ACT. 


682  Art.  752.  Net  Income  Exempt  from  Tax. — If  a  corporation  is  en- 
52?      gaged  in  the  mining  of  gold,  the  portion  of  its  net  income  derived 

from  that  source  is  exempt  from  tax.  The  tax  on  the  remaining 
portion  of  its  net  income  is  the  proportion  of  the  tax  that  would  have  Deen 
payable,  had  the  entire  net  income  been  derived  from  other  sources  than  the 
mining  of  gold,  which  such  remaining  portion  of  the  net  income  bears  to  the 
entire  net  income.  For  the  method  of  determining  the  net  income  derived 
from  the  mining  of  gold  see  article  71 5  [1|607].  (Art.  752,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

683  Art.  753.  Illustration  of  Computation  of  Tax  where  Net  Income 
from  Gold  Mining. — In  the  case  of  the  corporation  used  as  an  illus- 
tration in  article  716  [^[608]  let  it  be  assumed  that  it  is  engaged  in  the  mining 
both  of  gold  and  of  other  rare  metals;  that  the  Commissioner  finds  under 
article  71 5  [1J607]  that  $35,000  of  its  gross  income  is  properly  attributable 
to  the  mining  of  gold ;  and  that  $20,000  of  the  deductions  allowed  are  properly 
applicable  to  the  gross  income  from  that  source.  The  portion  of  the  net 
income  attributable  to  the  mining  of  gold  and  exempt  from  tax  would  be 
$15,000.  The  remaining  portion  of  the  net  income  is  $25,000  and  the  tax 
thereon  is  the  same  proportion  of  the  tax  computed  on  the  entire  net  income 
without  the  benefit  of  the  exemption  (i.  e.,  a  tax  of  $17,600)  which  the  remain- 
ing portion  of  the  net  income  ($25,000)  bears  to  the  entire  net  income  ($40,000). 
The  tax  will  therefore  be  %  of  the  tax  of  $17,600  computed  without  the 
benefit  of  the  exemption,  or  $11,000.  (Art.  753,  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

APPORTIONMENT  OF  SPECIFIC  EXEMPTION.  §305 

S84     Art.  761.    Apportionment  of  Specific  Exemption. — The  specific  ex- 

528  emption  of  $3,000  is  apportioned  only  in  the  case  where  a  return  is 
made  covering  a  period  of  less  than  twelve  months.    In  such  a  case 

the  specific  exemption  is  the  same  proportion  of  $3,000  as  the  number  of 
months  in  the  period  is  of  twelve  months,  any  fractional  part  of  a  month 
being  counted  as  the  number  of  days  in  such  part  of  a  month  divided  by  30. 
Thus,  in  the  case  of  a  corporation  organized  May  12,  1918,  and  making  a 
return  for  the  period  ending  December  31,  1918,  the  exemption  is  $1,916.67, 
that  is,  the  same  proportion  of  $3,000  as  7  20/30  months  is  of  12  months. 
This  provision  is  inapplicable  where  the  return  is  made  for  a  full  fiscal  year 
beginning  prior  to  January  1,  1918,  and  ending  after  that  date,  even  though 
the  income  for  such  fiscal  year  is  not  subject  to  full  taxation  under  the  present 
statute'.    (Art.  761,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

PREWAR  PERIOD.  §310 

685      Art.  771.    Prewar  Period. — The  prewar  period  in  the  case  of  each 

529  corporation  covers  so  many  of  the  calendar  years  1911,  1912  and 
1913  during  the  whole  of  which  it,  or  a  predecessor  trade  or  busi- 
ness, was  in  existence.  See  section  330  [law  ^[5 75]  of  the  statute  and  articles 
931-934  [for  certain  reorganizations,  beginning  at  If 83 7].  If  a  new  enter- 
prise was  launched  in  corporate  form  in  June,  1912,  its  prewar  period  would 
accordingly  be  the  calendar  year  1913.  The  prewar  period  when  mentioned 
without  reference  to  any  particular  corporation  means  the  calendar  years 
1911,  1912  and  1913.    (Art.  771,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         329  SERVICE 


1-2-22.  H  U/IA  ^TIIOHh  §311. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


WAR  PROFITS  CREDIT.  §311 

686  Art.  781.  War  Profits  Credit. — Ordinarily  the  war  profits  credit 
530     consists  of  the  sum  of  the  specific  exemption  of  $3,000  and  an  amount 

equal  to  the  average  net  income  of  the  corporation  for  the  prewar 
period,  plus  10  per  cent  of  the  excess  of  the  invested  capital  for  the  taxable 
year  over  the  average  invested  capital  for  the  prewar  period,  or  minus  10 
per  cent  of  the  excess  of  the  average  invested  capital  for  the  prewar  period 
over  the  invested  capital  for  the  taxable  year.  If  a  return  is  made  for  a 
period  of  less  than  twelve  months,  the  amount  equal  to  the  average  net 
income  for  the  prewar  period  plus  or  minus  10  per  cent  of  the  difference 
between  the  average  invested  capital  for  the  prewar  period  and  the  invested 
capital  for  the  taxable  year  shall  be  reduced  to  the  same  proportion  thereof 
as  the  number  of  months  in  the  period  is  of  twelve  months.  See  section  305 
[law  11528]  of  the  statute  and  article  761  [for  apportionment  of  specific 
exemption  1f684].  If  at  the  time  a  return  is  made  the  net  income  for  the 
prewar  period  or  the  difference  between  the  average  invested  capital  for 
the  prewar  period  and  the  invested  capital  for  the  taxable  year  can  not 
be  determined,  the  war  profits  credit  shall  be  computed  in  the  first  instance 
as  provided  in  the  following  article  [11688].  If  either  of  these  amounts  can 
not  eventually  be  determined,  the  war  profits  credit  shall  be  finally  deter- 
mined as  provided  in  the  following  article  [lf688].  See  also  section  327  [for 
special  cases  subject  to  special  tax:  law  \\565  and  regulations  TI831]  and 
articles  716-720,  743  and  901  [for  illustrations  of  computation  of  tax,  begin- 
ning at  H608;  1f648,  ^[831].    (Art.  781,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

687  Manner  of  determining  average  prewar  profits  and  invested  capital. 
547  — Reference  is  made  to  your  letter  of  March  8,  1 9l 9,  relative  to 
564      average  net  income  and  invested  capital  as  computed  under  the 

Revenue  Acts  of  1 91 7  and  1 91 8.  ^Assuming  in  each  case  a  full 
prewar  existence,  the  computation  is  similar  under  both  Acts.  The  average 
invested  capital  for  the  prewar  period  is  one-third  of  the  sum  of  the  invested 
capital  determined  for  each  of  the  prewar  years  as  provided  in  the  respective 
Acts.  IIThe  average  net  income  for  the  prewar  period  is  one-third  of  the 
total  net  income  for  the  prewar  years  as  provided  in  the  respective  Acts 
If  any  of  the  prewar  years  showed  a  net  loss,  such  net  loss  may  not  be  offset 
against  the  net  income  of  the  other  years  in  determining  the  average  net 
income.  (Letter  to  Richard  H.  Hart,  Denver,  Col.,  signed  by  J.  H.  Callan. 
Assistant  to  the  Commissioner,  and  dated  March  24,  1 91 9.) 

688  Art.  782.  War  profits  credit  where  meager  prewar  net  income.— 
533      If  a  corporation  had  no  net  income  for  the  prewar  period,  or  if  the 

war  profits  credit  as  ordinarily  computed  (exclusive  of  the  specific 
exemption  of  $3,000)  is  less  than  10  per  cent  of  its  invested  capital  for  the 
taxable  year,  then  the  war  profits  credit  consists  of  the  sum  of  the  specific 
exemption  of  $3,000  and  an  amount  equal  to  10  per  cent  cf  the  corpora- 
tion's invested  capital  for  the  taxable  year.  See  article  720  [for  illustration, 
lf634].    (Art.  782;  Reg.  45,  Rev.,  Jan.  28,  1921.) 

689  Acceptance  of  $3,000  plus  10%  of  invested  capital  for  taxable  year 
as  war-profits  credit. — Read  *,852. 

690  Art.  783.  War  Profits  Credit  where  no  Prewar  Period.— If  a  cor- 
536      poration  had  no  prewar  period,  then  the  war  profits  credit  consists  of 

the  sum  of  the  specific  exemption  of  $3,000  and  an  amount  equal  to 
the  same  percentage  of  the  invested  capital  for  the  taxable  year  as  the  aver- 

CoPy right  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  330  SERVICE 


1-2-22.  §311. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


age  percentage  of  net  income  to  invested  capital  for  the  prewar  period  of 
orporations  engaged  in  a  trade  or  business  of  the  same  general  class  as  that 
conducted  by  the  taxpayer,  but  not  less  than  10  per  cent  of  its  invested 
capital  for  the  taxable  year.  The  war  profits  credit  shall  be  computed 
in  the  first  instance  on  the  basis  of  10  per  cent  of  the  invested  capital,  and 
when  the  average  percentage  of  corporations  engaged  in  the  same  general 
class  of  trade  or  business  has  been  determined  [see  \\69l]  the  amount  of 
the  tax  will  if  necessary  be  recomputed.  See  section  250  of  the  statute 
and  articles  1001  [for  credit,  refund,  or  additional  assessment  on  recomputa- 
tion]  and  784  [for  war-profits  credit  where  no  prewar  period  in  special  cir- 
cumstances, H722].    (Art.  783,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

69 1  The  Average  Percentages  known  as  the  Median. — Reference  is  made 
538       to  your  letter  of  April  4,  1919,  with  respect  to  the  application  of 

Section  3ll  (c)  of  the  Revenue  Act  of  1 9l  8  to  the  returns  of  corpora- 
tions entitled  to  the  benefit  thereof. 

692  In  reply  you  are  advised  that  the  average  percentages  applicable 
to  the  invested  capital  of  corporations  coming  within  Section  311  (c) 

of  the  Revenue  Act  of  1918  are  being  worked  out  by  this  office,  but  it  is  not 
likely  that  such  average  percentages  will  be  ready  for  use  prior  to  the  extended 
date  for  filing  the  complete  tax  returns  for  the  taxable  year  1918.  [For 
the  average  percentages,  i.  e.,  the  "median,"  see  ^694.]  Therefore,  it  will 
be  necessary  to  file  such  returns  and  compute  the  war  profits  credit  on  the 
basis  of  10%  of  the  invested  capital  of  the  taxpayer  for  the  taxable  year 
as  provided  by  the  1918  Act. 

693  Any  adjustments  shown  to  be  necessary  upon  determination  and 
application  of  the  average  percentages,  as  noted  above,  will  be 

made  as  soon  as  practicable  thereafter,  (Letter  to  The  Corporation  Trust 
Company,  signed  bv  Acting  Deputy  Commissioner  P.  S.  Talbert,  and  dated 
May  15,  1919.) 

694  The  median:  Average  percentages  of  pre-war  income  to  pre-war 
538      invested  capital  of  general  classes  of  corporations,  grouped  as  to 

trades  or  businesses,  as  provided  for  in  Section  311  (c)  (2),  Revenue 
Act  of  1918. — Section  311  of  the  Revenue  Act  of  1918  provides  that  a  corpora- 
tion which  was  not  in  existence  during  the  whole  of  at  least  one  calendar  year 
during  the  pre-war  period,  md  therefore  received  no  income  during  the 
pre-war  period,  shall  be  allowed  a  specific  exemption  of  $3,000  and  "an  amount 
equal  to  the  same  percentage  of  the  invested  capital  of  the  taxpayer  for 
the  taxable  year  as  the  average  percentage  of  net  income  to  invested  capital, 
for  the  pre-war  period,  of  corporations  engaged  in  trade  or  business  of  the  same 
general  class  as  that  conducted  by  the  taxpayer;  but  such  amount  shall  in 
no  case  be  less  than  10  per  centum  of  the  invested  capital  of  the  taxpayer 
for  the  taxable  year.  Such  average  percentage  shall  be  determined  by  the 
Commissioner  on  the  basis  of  data  contained  in  returns  made  under  Title 
II  of  the  Revenue  Act  of  1917,  and  the  average  known  as  the  median  shall 
be  used." 

695  In  pursuance  of  this  requirement  of  the  iaw  the  accompanying  table 
of  medians  has  been  compiled  and  will  be  used  in  complying  with 

Section  250  (b),  which  provides,  "As  soon  as  practicable  after  the  return 
is  filed,  the  Commissioner  shall  examine  it.  If  it  then  appears  that  the 
correct  amount  of  the  tax  is  greater  or  less  than  that  shown  in  the  return, 
the  installments  shall  be  recomputed.    If  the  amount  already  paid  exceeds 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  331  SERVICE 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


that  which  should  have  been  paid  on  the  basis  of  the  installments  as  re- 
computed, the  excess  so  paid  shall  be  credited  against  the  subsequent  in- 
stallments; and  if  the  amount  already  paid  exceeds  the  correct  amount 
of  the  tax,  the  excess  shall  be  credited  or  refunded  to  the  taxpayer  in  accord- 
ance with  the  provisions  of  Section  252." 

696  Inasmuch  as  the  examination  of  all  returns  filed  will  not  be  com- 
pleted by  the  due  date  of  the  last  installment  of  1918  taxes,  it  is 
suggested  that  the  taxpayers  entitled  to  credit,  based  on  the  appropriate 
median  shown  in  the  accompanying  tables,  may  recompute  their  tax  using 
a  war  profits  credit  based  on  such  median,  and  file  claim  for  abatement 
[Form  47,  page  1611]  for  as  much  of  the  last  installment  of  the  outstanding 
assessment  as  the  total  tax  assessed  exceeds  the  tax  so  recomputed.  In 
any  case  where  the  amount  already  paid  exceeds  the  amount  due,  with 
the  benefit  of  the  median,  claim  for  refund  should  also  be  filed  on  Form  46 
[page  1609].    [See  f  715.1 


697  Contents  of  "The  Median"— Bulletin  D. 

INDUSTRIAL  GROUPS. 

RAW  MATERIALS.  Paragraph 

Agriculture  and  Dependent  Pursuits   698 

Mining   699 

MANUFACTURING. 

Chemical  Manufacturing  and  Allied  Industries   700 

Foods  and  Food  Preparations  ,   701 

Iron  and  Steel  Industries   702 

Leather  and  Leather  Goods  Industries   703 

Liquors  and  Beverages   704 

Lumber  and  Woodworking  Industries   705 

Metal  and  Metallurgical  Extractions   706 

Paper  Manufacturing,  Printing,  Bookbinding,  Publishing   707 

Stone,  Clay,  and  Glass  Industries   708 

Textile  Industries   709 

Special  Manufacturing  Industries   710 

FINANCIAL. 

Banks,  Insurance  Companies,  Brokerage  Institutions   71 J 

COMMON  CARRIERS  AND  PUBLIC  UTILITIES   712 

TRADING  AND  MISCELLANEOUS   713 

SCHEDULE  OF  AVERAGE  PERCENTAGES. 

698  Agriculture  and  Dependent  Pursuits. 

Subdivisions.  Average  percentages. 

Per  Cent. 

1.  Cotton  Ginning   11.73 

2.  Cotton  Growing  Not  over  10. 

3.  Dairying  and  Dependent  Pursuits,  including  Butter, 

Cheese,  and  Condensed  Milk                                      "      "  10. 

4.  Fisheries                                                                    "      "  10. 

5.  Florists,  Nurserymen  and  Seedmen                                "      "  10. 

6.  Forestry  and  Forestal  Pursuits,  Naval  Stores,  Charcoal 

Burning  and  Grinding   13. 

7.  Fruit   and   Vegetable  Growing,    including  Vineyards, 

Orchards  and  Trucking   10. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  332  SERVICE 


I#2-22.  §311- 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


Subdivisions.  Average  percentages. 

Per  cent. 

8.  Grain  Growing  Not  over  10. 

9.  Poultry  Raising  and  Products  ;                  "      "  10. 

10.  Mixed    Farming,    including    Stock    Breeding,  Stock 

Raising  and  General  Animal  Husbandry.  Agricul- 
tural Pursuits  not  elsewhere  specified                          "      "  10. 

699  Mining. 

1.  Cinnabar  Not  over  10. 

2.  Clay                                                                          "      "  10. 

3.  Coal,  Anthracite                                                         "      "  10. 

4.  Coal,  Bituminous                                                         "      "  10. 

5.  Copper                                                                      "      "  10. 

6.  Gravel  and  Sand                                                         "      "  10. 

7.  Gypsum   11.81 

8.  Iron  Not  over  10. 

9.  Lead  and  Zinc                                                             "      "  10. 

10.  Limestone                                                                  "      "  10. 

11.  Natural  Gas                                                               "      "  10. 

12.  Petroleum                                                                  "      "  10. 

13.  Phosphate                                                                  "      "  10. 

14.  Pipe  Lines   17.24 

15.  Salt  Not  over  10. 

16.  Silver,  Complex  Ores                                                    "      "  10. 

17.  Talc  and  Soapstone                                                     "      "  10. 

700  Chemical  Manufacturing  and  Allied  Industries. 

Per  Cent 

1.  Baking  Powder,  Yeast   14.14 

2.  Blacking,  Bluing,  Whiting,  Stains  and  Dressing,  Dyestuffs,  Ex- 

tracts and  Coloring  Materials,  Inks  (Printing  and  Writing), 

Paints  and  Varnishes   11.44 

3.  Celluloid  and  Products  Not  over  10. 

4.  Cleansing   and   Polishing   Preparations,    Soaps   and  Washing 

Compounds   10.56 

5.  Crude  Chemicals,  including  Leading  Acids,  Fertilizers, 

etc                                                                      .Not  over  10. 

6.  Druggists'  Preparations,  including  Perfumery,  Cosmetics  and 

Patent  Medicine  Compounds   10.98 

7.  Oils,  Vegetable  and  Animal,  including  Seed  Cake  Not  over  10. 

8.  Petroleum  Refining,  Products  and  By-Products   11.27 

9.  Chemicals,  not  elsewhere  specified.  Not  over  10. 

70!  Manufacturing  Foods  and  Food  Preparations. 

II  Bread  and  other  Bakery  Products,  not  including  Confectionery  11.26 

2.  Canning,  Preserving  and  Evaporating — Fruits,  Vegetables,  Fish, 

Oysters  and  Shrimps   10.67 

3.  Chocolate  and  Cocoa  Products,  Candy  and  Confec- 

tionery Not  over  10. 

4.  Coffee-Roasting,  Grinding  Spices,  and  Coffee  Substitutes   10.87 

5.  Flavoring  Extracts,  Syrups  and  Cordials  used  in  Bott- 

ling Industries  Not  over  10. 

Copyright  1922,  by  The  Corporation  Trust  Company, 

WAR  TAX  333  SERVICE 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


Manufacturing  foods  and  food  preparations. — Concluded. 

Subdivisions.  Average  percentages. 

Per  Cent. 

6.  Flour,  Feed  and  Grist  Mills  Not  over  10. 

7.  Meat    Packing,    Packing-House    Products    and  By- 

products                                                              fi      "  10. 

8.  Oleomargarine  and  other  Butter  and  Lard  Substitutes,  including 

both  Animal  and  Vegetable   12.45 

9.  Pickling  Establishments  Not  over  10. 

10.  Rice  Mills,  Cleaning  and  Polishing,  not  including  Rice 

Flour                                                                   "      "  10. 

11.  Special  Package  Foods,  such  as  Cornstarch,  Macaroni,  Tapioca. 

etc.,  Breakfast  Foods  and  other  Cereal  Products   10  79 

12.  Sugar — Beet,  including  Refining,  Molasses  Recovery    Not  over  10. 

13.  Sugar — Cane,  including  Molasses  and  Syrup  in  Bulk.  .  "      "  10. 

14.  Syrups  and  Molasses — Glucose  and  others,  including 

Maple                                                                    "      "  10. 

15.  Vinegar  and  Cider                                                         "      "  10. 

16.  Food  Preparations,  not  elsewhere  specified   10.83 

702  Iron  and  Steel  Industries. 

Per  Cent. 

1.  Agricultural  Implements  Not  over  10. 

2.  Automobiles  and  Auto  Parts,  including  Bicycles  and 

Motorcycles  and  parts.    Motor  Trucks  and  Motor 

Truck  parts                                                              "      "  10. 

3.  Blast  Furnace  Products......                                        "      "  10. 

4.  Boilers,  Evaporating  Pans,  Oil  Tanks  and  Silos                "      "  10. 

5.  Bolts  and  Nuts,  including  Washers  and  Rivets                 "      "  10. 

6.  Engines— Steam,  Gas  and  Oil                                        "      "  10. 

7.  Forging  and   Foundry  Products,  including  Castings, 

Car  Wheels  and  Stoves                                             "      "  10. 

8.  Hardware,  Special  and  General                                      "      "  10. 

9.  Heating,  Cooling  and  Ventilating  Apparatus,  including 

Furnaces   (no  stoves),  Refrigerating  Plants,  Dust 

Collecting  Systems                                                   "      "  10. 

10.  Machinery — Electrical  and  other  Electrical  Apparatus.  "      "  10. 

11.  Machinery— Excavating.  Cars  and  Tools                        "      "  10. 

12.  Machinery — Hoisting,  Cranes,  Derricks  and  Conveyors    "      "  10. 

13.  Machinery— Humidifying,    Air    Moistening    and  Air 

Conditioning                                                             "      "  10. 

14.  Machinery— Laundry                                                   "      "  10. 

15.  Machinery— Mill,  neither  Textile  nor  Woodworking. ..  .  "      "  10. 

16.  Machinery— Mining                                                      "      "  10 

17.  Machinery — Printing  and  Duplicating                            "      "  10. 

18.  Machinery— Saw  Mill  Not  over  10. 

19.  Machinery — Textile,  also  Parts   10.42 

20.  Machinery — Woodworking  Not  over  10. 

21.  Machines— Adding  and  Calculating                                "      "  10. 

22.  Machines— Check-writing,     Slot,     Testing,  Vending, 

Weighing,     including     Addressopraphs,  Balances, 

Scales,  Registering  Devices,  and  Watchman's  Clocks  "      "  10. 

23.  Machines— Sewing                                                         "      "  10. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  334  SERVICE 


^W/R-PKCFITS  AWD  FXCFSS-PE0F1TS  TAX  PFGILATICNS.  -  1918  ACT.'' 


Iron  and  Steel  Industries. — Concluded. 

Subdivisions.  Average  percentages. 

Per  Cent. 

24.  Meters— Gas,  Water,  etc  Not  over  10. 

25.  Plumbing  Supplies,  including  Gas  and  Water  Appar- 

atus, Porcelain  Wares  for  Kitchen  and  Laundry.  ..."      "  10. 

26.  Pumps                                                                       "      "  10. 

27.  Railway    Equipment,   including   Locomotives,  Street 

Railway,  Mining  and  Industrial  Cars                          "      "  10. 

28.  Safes  and  Vaults  "      "  10. 

29.  Shipbuilding                                                                "      "  10. 

30.  Steel  Plants  and  Rolling  Mill  Products,  including  Tin 

and  Terne  Plate  Mill  Products,  Iron  and  Steel  Chains, 

Steel  Doors  and  Shutters                                           "      "  10. 

31.  Structural  Steel                                                           "      "  10. 

32.  Tin  Cans  and  Tin  Ware  #                    "      "  10. 

33.  Tools— Farm,  Garden,  Machine,  Mechanics,  Mining, 

Lumbering,   Railroad   Track   Repairing,  including 

Bench  Lathes,  Shears  and  Saws                                 "      "  10 

34.  Tractors — Farm  and  Highway                                       "      "  10. 

35.  Typewriters  and  Typesetting  Machinery                         "      "  10. 

36.  Wire  Cables,  Fences,  Springs,  Nails  and  Spikes   10.24 

37.  Iron  and  Steel  Products  not  elsewhere  specified  Not  over  10. 

703  Leather  and  Leather  Goods  Industries. 

Per  Cent. 

1.  Boots  and  Shoes   10.94 

2.  Leather  Manufacture   10.69 

3.  Leather  Substitutes   11.82 

4.  Leather  Articles  other  than  Boots  and  Shoes  Not  over  10. 

J  04  Liquors  and  Beverages 

Per  Cent 

1.  Bottling  of  Liquors  and  Soft  Drinks  as  distinct  from 

Manufacturing  Not  over  10. 

2.  Distillers  of  Whiskies  and  Spirits,  Refining  and  Recti- 

fying of  Liquors  and  Beverages   "      "  10. 

3.  Malt  Liquors  (Brewers)   M      "  10. 

4.  Wines........   "      "  10. 

5.  Non-Intoxicating    Beverages — Coca-Cola     and  other 

Special  Drinks,  Mineral,  Soda,  and  Aerated  Waters, 
including  Bottled  Tonic  Drinks,  Soft  Drinks,  Spring 
Waters,  Malting  Grains.  All  others  not  elsewhere 
specified   "      "  10. 

705  Lumber  and  Woodworking  Industries. 

Per  Cent. 

1.  Box  Boards,  Baskets,  Cases  Not  over  10. 

2.  Caskets,  Coffins,  Burial  Cases  of  Wood,  not  including 

Steel  or  Concrete   "      "  10. 

V  Furniture,    all    Classes,    including    Veneering,  Chair 

Seating   "      "  10. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  335  SERVICE 


L-2-22,  §311. 
WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT, 


Lumber  and  Woodworking  Industries — Concluded 

Subdivisions. 


Average  Percentages. 

Per  Cent. 

Mills — Shingle,  Lath  Not  over  10. 


5.  Paper  Pulp  and  Pulp  Board. 

6.  Planing  Mills,  Flooring,  Sash,  Doors,  Partitions  and 

Interior  Work  Generally  

7.  Ready-Made  Houses  

8.  Silos  and  Silo  Materials,  Cooperage  Stock,  Tanks,  not 

including  Steel  or  Concrete  

9.  Timbering,  Logging  and  Saw  Mill  Operations  

10.  Wagons  and  Buggies  

11.  Wood  Fibres,  Leatheroid,  Wood  Composition  in  other 

Commodities  

12.  Woodworking  Industries,  not  elsewhere  specified  


70S 


Metal  and  Metallurgical  Extractions. 


1.  Brass,  Bronze,  Copper  and  Aluminum  Products  Not  over 

2.  Clocks,  Watches,  Chronometers   "  " 

3.  Cooking  Utensils  (other  than  Copper),  Granite  Goods, 

etc  

4.  Cutlery,  Scissors,  Razors  

5.  Galvanized     Materials,     Spouting,     Gutters,  Metal 

Roofing.........  

6.  Gas  and  Electric  Fixtures  

7.  Jewelry  

8.  Lamps  and  Accessories  

9.  Lead  Products  

10.  Needles,  Pins,  Metal  Hair  Pins,  and  Pen  Points 
11. 
12. 


10. 

10. 
10. 

10. 
10. 
10. 

10. 
10. 


Per  Cent 
10. 
10. 


10. 
10. 

10. 
10. 
10. 
10. 
10. 
15.54 
10. 


13. 
14. 
15. 


Plate  Ware,  Electroplate,  etc  Not  over 

Professional  and  Scientific  Instruments,  including 
Dental  Supplies,  and  Optical  Goods,  Surgical  and 
Hospital  Appliances,  Photographic  Apparatus  and 

Materials   10.50 

Silverware  and  Goldware,  other  than  Jewelry  Not  over 

Smelting  and  Refining — Copper,  Lead,  Zinc,  etc   "  " 

Metal    and    Metallurgical    Industries,    not  elsewhere, 

specified   "  " 


3  T 


10. 
10. 

10. 


707       Paper  Manufacturing,  Printing,  Bookbinding,  Publishing. 

Per  Cent. 

1.  Blank  Paper  Not  over  10. 

2.  Book  and  Job  Printing,  Lithographing,  including  Bank 

Note  and  Bond  Printing,  Labels,  Tags  and  Decora- 
tive Paper   "      "  10. 

3.  Book  Binding  and  Blank  Book  Making   "      "  10. 

4.  Cardboard,  Box  Materials,  and  Box  Manufacturer   10.48 

5.  Envelopes   10.28 

6.  Paper  Utensils  Not  over  10. 

7.  Photo-Engraving  and  Printing  Processes   "      "  10. 

^Printing  Materials   "       44  10. 

Copyright  1922,  by  Tht  Corporation  Trust  Company. 

WAR  TAX  336  SERVICE 


1-2-22.  §311 
WAR-PROFITS  AND  EXCESS-PROFITS  TAX  RE GUL ATION S . — 1 918  ACT. 


Paper  Manufacturing,  Printing,  Bookbinding,  Publishing — Concluded. 

Average  Percentages. 

Subdivisions.                                                                        Per  Cent. 

9.  Publishing  Newspapers  and  other  Periodicals  Not  over  10. 

10.  Type  Founding,  Stereotyping  and  Electrotyping   13.17 

11.  Wall  Paper  Not  over  10. 

12.  Wrapping  Paper.                                                       "      "  10. 

13.  Paper  and  Printing,  not  elsewhere  specified                     "      "  10. 

7  08  Stone,  Clay  and  Glass  Industries. 

Per  Cent. 

1.  Abrasive   Products,  including   Emery  Wheels,  Sand- 

paper and  Corundum   12.72 

2.  Building  Brick  Sewer  and  Drainage  Pipe,  Fire  Brick, 

Furnace  Linings,  Pottery,  Terra-Cotta,  Crucibles, 
Tiling,  Laundry  Tubs,  Refractories  and  Earthen- 
ware Not  over  10. 

3.  Cement  #                                             "      "  10. 

4.  Concrete  Construction,  including  Artificial  Stone             "      "  10. 

5.  Glassware,  including  Household,  Hotel,  and  Bar-room 

Supplies,  X-Ray  Tubes,  Thermos  Bottles,  Mirrors, 

Refractors,  Illuminating  Glass,  etc                             "      "  10. 

6.  Glass—Window,  Wire  and  Skylight                               "      "  10. 

7.  Lime  and  Plaster                                                         "      "  10. 

8.  Monuments;  Tombstones,  Burial  Vaults                         "      "  10. 

9.  Porcelain  Goods  and  Ceramic  Products,  not  elsewhere 

•01  specified                                                                 "      "  10. 

709  Textile  Industries. 

Per  Cent. 

1.  Awnings,  Tents,  Tarpaulins,  etc   11.88 

2.  Bags  and  Bagging — Cotton  and  Burlap   17.34 

3.  Batting  Mills  Not  over  10. 

4.  Carpets  and  Rugs,  including  Cotton,  Wool  and  Grass.. .  "      "  10. 

5.  Clothing — Men's  Overcoats,  Suits,  etc                            It      "  10. 

6.  Clothing — Ladies',  Coats,  Suits  and  Dresses                    "      "  10. 

7.  Clothing — Miscellaneous.    Uniforms,  Furriers,  Regalia, 

Belts,  Garters,  etc                                                   "      "  10. 

8.  Corsets  and  Brassiers                                                   "      "  19.90 

9.  Cotton    Converters,    Dyers,    Finishers,  Mercerizers 

Bleachers  and  Prints                                                  "      "  10. 

10.  Cotton  Duck   11.90 

11.  Cotton  Goods  Manufacturing — Colored,  Fancy,  Grey, 

Brown,  Print  Cloth  and  Sheeting  Not  over  10. 

12.  Cotton  Laces,  Curtains,  Quilts,  Embroideries                  "      "  10. 

13.  Cotton  Spinning — Fine  Yarns   10.17 

14.  Cotton  Spinning — Medium  and  Coarse  Yarns  Not  over  10. 

15.  Dyers  of  Furs   11.97 

16.  Hats,  Caps,  Scarfs  and  other  Headwear  and  Neckwear    Not  over  10. 

17.  Hosiery  and  Knit  Goods,  including  Knitted  and  Fabric 

Underwear                                                               "      "  10. 

18.  Millinery  and  Millinery  Goods                                      "      "  10. 

19.  Rope  and  Cordaee   "       "  10 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX         337  SERVICE 


WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  AC?!'1' 


Textile  Industries. — Concluded. 

Subdivisions.  Average  Percentages. 

Per  Cent. 

20.  Shirts,  Collars  and  Cuffs   "      "  10. 

21.  Silk-Dyeing  and  Finishing   12.10 

22.  Silk  Manufacturing — Broad  Not  over  10. 

23.  Silk  Manufacturing — Ribbons,  Woven  Labels   "      "  10. 

24.  Silk— Spinning   "      "  10. 

25.  Silk— Throwing  .  >   "      "  10. 

26.  Thread,  Tapes  and  Braids,  Cotton  and  Silk   "      "  10. 

27.  Towels,  Damask,  Handkerchiefs  (Cotton  and  Linen) ..."      "  10. 

28.  Upholstery  Cloth  and  Trimmings  (Cotton  and  Wool)..  .  "      "  10. 

29.  Waste — Cotton  and  Wool,  Linters  and  Oakum   11. 

30.  Wool  and  Worsted — Dyeing  and  Finishing  Not  over  10. 

31.  Wool  and  Worsted — Spinning  and  Combing   "      "  10. 

32.  Wool  and  Worsted  Weaving   "      "  10. 

33.  Textile  Manufacturing,  not  elsewhere  specified   10. 

7 !  o  Special  Manufacturing  Industries. 

1.  Ammunition,  Explosives  and  Fireworks   11.28 

2.  Artificial  Flowers  Not  over  10. 

3.  Artificial  Limbs   "      "  10. 

4.  Asbestos  Wares,  Magnesia,  Material  for  Insulation   16.88 

5.  Bedding,  Mattresses  and  Undertakers'  Supplies  Not  over  10. 

6.  Brooms  and  Brushes   "      "  10. 

7.  Buttons,  Beads,  Rosaries   "      "  10. 

8.  Coke   "      "  10. 

9.  Combs — Bone,  Ivory,  etc   "      "  10. 

10.  Dairymen's,  Poultrymen's  and  Apiarist's  Supplies   "      "  10. 

11.  Fire  Extinguishers,  including  Mechanical  and  Chemical 

Apparatus,  Automatic  Sprinklers,  Fire  Trucks   "      "  10. 

12.  Hair  Goods   "      "  10. 

13.  Hand  Stamps— Rubber,  Metal,  etc   "      "  10. 

14.  House  Furnishing  Goods,  Screen  Doors  and  Windows, 

Window  Shades   "      "  10. 

15.  Ice   "      "  10. 

16.  Jewelry  and  Instrument  Cases  i  "      "  10. 

17.  Models  and  Patterns  (not  including  Paper  Patterns), 

Molds   "      "  10. 

18.  Mucilage  and  Paste   11.23 

19.  Phonographs  and  all  other  Musical  Instruments  and 

Parts  (not  including  Pianos,  Organs  and  Parts)   11.53 

20.  Pianos,  Organs  and  Parts  Not  over  10. 

21.  Roofing  Materials  other  than  Metal   "      "  10. 

22.  Rubber— Boots,  Shoes  and  Clothing   "      "  10. 

23.  Rubber — Tires,  Belting,  Hose,  Tubing,  including  non- 

Metalic  Conduits   "      "  10. 

24.  Rubber  Goods,  not  elsewhere  specified   "      "  10. 

25.  Shipbuilding — Wooden  Craft  of  all  kinds   10.15 

26.  Signs  and  Advertising  Novelties   14.45 

27.  Small  Metal  Specialties  Not  over  10. 

28.  Soda  Fountain  Apparatus,  Siphons   15.20 

Copyright  1922,  by  Thf  Corporation  Trust  Company. 

WAR  TAX  338  SERVICE 


L-2-22.  Saw.. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


Special  manufacturing  industries. — Concluded. 

Subdivisions.  Average  Percentages. 

Per  Cent. 

29.  Sporting  and  Athletic  Goods  (including  Pleasure  Boats, 

but  not  Yachts),  Amusement  Appliances  Not  over  10. 

30.  Stationery    Goods,    School    Supplies,    Office  System 

Supplies  10.36 

31.  Stencil,  Dye  Sinking,  Seals  Not  over  10. 

32.  Tobacco   12.87 

33.  Toys,  Children's  Tools  and  Vehicles,  including  Baby 

Carriages,  Carts,  Games  and  Christmas  Novelties  Not  over  10. 

34.  Umbrellas  and  Canes  .   "      "  10. 

35.  Washing  Machines  and  Clothes  Wringers   12.22 

36.  Windmills  Not  over  10. 

37.  Special  Products,  not  elsewhere  specified   "      "  10. 


FINANCIAL. 


71  1 


Banks,  Insurance  Companies,  Brokerage  Institut 


ons. 


1.  Banking — International  Not 

2.  Banking— Private,  Money  Lenders  and  Pawnbrokers 

3.  Banking — Saving  

4.  Banking — State  and  National  

5.  Banking — Trust  Companies  

6.  Banking    and    Financial    Operations,    not  elsewhere 

specified  

7.  Building  and  Loan  Associations  

8.  Burglar  Alarm  Systems  

9.  Holding    Companies,    Incorporated    Estates,  Trusts, 

Investment  Concerns  

Insurance  Brokers  

Insurance — Fidelity  and  Surety  

Insurance — Fire,  Mutual  

Insurance — Fire,  Stock  

Insurance— Life,  Mutual  

Insurance — Life,  Stock  

Insurance — Marine  

Insurance — Casualty,  Mutual  

Insurance — Casualty,  Stock  

Insurance — Title  and  Abstract  

Insurance — not  elsewhere  specified  

21.  Safe  Deposit  Vaults  

22.  Stock  Brokers  and 


10. 
11. 
12. 
13. 
14. 
15. 
16. 
17. 
18. 
19. 
20. 


Dealers   in   Securities   on  Com- 


mission 


Per 

over 


Cent. 

10. 

10. 

10. 

10. 

10. 

10. 
10. 
10. 

10. 
10. 
10. 
10. 
10. 
10. 
10 
10. 
10. 
10. 
10. 
10. 
10. 

10. 


7  12  Common  Carriers  and  Public  Utilities. 

Per  Cent 

1.  Cold  Storage  and  Ice  Not  over  10. 

2.  Cotton  Compressors  and  Cotton  Storage   "      "  10. 

3.  Gas  Companies,  Illuminating  and  Fuel   "      "  10. 

4.  Grain  Elevators   "      "  10. 

5.  Irrigation  Water  Works   "       "  10. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  339  SERVICE 


1-2-22.  §311. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


Common  Carriers'and  Public  Utilities — Concluded. 

Subdivisions.  Average  Percentages. 

Per  Cent. 

6.  Light  and  Power,  including  Water  and  Electric,  Hydro- 

electric Lighting  Not  over  10. 

7.  Market  Houses— Public                                                "      "  10. 

8.  Railways — Electric,  City,  Suburban  and  Interurban. . .  .  "      "  10. 

9.  Railway  Express  Companies   13.89 

10.  Railways — Steam  Not  over  10. 

11.  Steamships-— Local,  River,  Lake,  Coastwise  and  Ocean 

Lines                                                                   "      "  10. 

12.  Stock  Yards  #  ;                                     "      "  10. 

13.  Tank  Car  Companies,  Refrigerator,  Ventilator,  and 

Live  Stock  Cars                                                     "      "  10. 

14.  Telephone  and  Telegraph  Companies                              "      "  10. 

15.  Warehouses  and  Storage,  other  than  Cotton  Storage, 

Wharves,  Forwarding,  Teaming,  Stevedoring,  Local 

Express                                                                "      "  10. 

16.  Water  Filtration,  Distribution  for  Domestic  Use              "      "  10 

17.  Common  Carriers  and  Public  Utilities,  not  elsewhere 

specified;  Toll  bridge,  Bridge  Companies,  Ferry. 
Turnpike,  United  Press  Association,  Passenger  Bus 

Line,  Canals,  etc                                                     "      g  10. 

713  Trading  and  Miscellaneous. 

Per  Cent 

1.  Brokers — Freight,   Grain,   Merchandise,   Real  Estate 

and  Ship,  Purchasing  and  Selling  Agents,  Manufac- 
turer's  Agents,   Exporters   and   Importers  (Com- 

mission  only),  Automobiles,  Sales  of  Metals  Not  over  10. 

2.  Garages  and  Livery  Stables                                           "      "  10. 

3.  Jobbers — Merchandise,  General  and  Special                    "      "  10. 

4.  Merchant  Tailoring,  Needlework,  etc   17.14 

5.  Merchants — Retail  Not  over  10. 

6.  Merchants— Wholesale   10.45 

7.  Real  Estate  Operators  and  Promoters  Not  over  10. 

8.  Trading  Concerns  not  elsewhere  specified                        V      "  10. 

9.  Amusements,     Theatres,     Moving     Picture  Shows, 

County  Fairs,  Race  Tracks  and  Clubs                        "      "  10. 

10.  Barbers,  Bathhouses,  etc                                              "      "  10. 

11.  Consulting  Engineers,   Appraisers,   Accountants,  Ad- 

justers, Architects,  Chemists,  Assayers  and  Metal- 
lurgists                                                                "      k'  10. 

12.  Contractors,    Building   Construction,    Street  Paving, 

Machine  Installation,  etc                                          "      "  10. 

13.  Decorators  and  Interior  Designing                                 "      "  10. 

14.  Hospitals,  Sanitariums,  etc                                           "      "  10. 

15.  Hotels                                                                      "      "  10. 

16.  Laundries,  Dry  Cleaning,  Dyeing,  etc                             "      "  10. 

17.  Photographs  and  Art  Portraits   19.66 

18.  Restaurants  Not  over  10. 

19.  Schools,  Colleges,  etc                                                  "      "  10. 

20.  Undertakers                                                                "      "  10. 

Copyright  1922,  by  The  Corporation  Trust  Company: 

WAR  TAX  340  SERVICE 


1-2-22.  §311. 

•  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


Trading  and  Miscellaneous. — Concluded. 

Subdivisions.  Average  Percentage. 

Per  Cent. 

21.  Miscellaneous  Concerns,  not  elsewhere  specified,  in- 
cluding Typewriter  Exchange,  Type-setting,  Ad- 
vertising Services,  Commercial  Agencies  and  De- 
tective Agencies   "      "  10 


7 1 4     Chart— Showing  the  Average  Percentages  of  Net  Income  to  Invest- 
ed Capital  for  the  Prewar  Period,  and  the  Number  of  Industrial 
Groups  of  the  Same  Class  of  Business  Under  Each  Median.  


Medians  or  average  percentages  of  net  income  to  invested  capital. 

Industry 

Total 
number 
of 

£ 

S 

id  under 

ler  12% 

ier  13%. 

er  14%. 

er  15%. 

er  16%. 

er  17%. 

er  18%. 

u 

9 

si 

© 

S3 

industrial 
divisions. 

pun  pi 

3^ 
o 

(3 
3 

a 

3 
tJ 

a 

id  und 

id  und 

id  und 

pun  pi 

pun  pt 

pun  pi 

§ 

1 

OS 

el 

a 

cf 

3 

5 

2 

a 

o 

Over 

CO 

to 

& 
to 

00 

& 

Agriculture  and  depend- 

10 
17 

8 

1 

1 

IT?1"!' 

15 

1 

1 

Financial:  Banks,  insur- 
ance  companies,  brok- 
erage institutions. 

Common   carriers  and 

22 

22 

17 
37 

16 

1 

Iron  and  steel  

35 

2 

Chemical  manufactur- 
ing and  allied  indus- 

9 

4 

2 

2 

1 

Manufacturing  foods 
and  food  products  . . 

Leather  ^  and  leather 
goods  industries  

16 

10 

4 

1 

1 

4 

1 

2 

1 

Liquors  and  beverages  . 
Metal  and  metallurgical 

5 

5 

15 

13 

1 

1 

Paper  manufacturing, 
printing,  bookbinding 
publishing  

13 

10 

2 

1 

Special  manufacturing 
industries  

37 
9 

27 
8 

2 

3 

2 

1 

1 

1 

Stone,   clay  and  glass 
industries  

1 

Textile  industries  

33 

25 

1 

4 

1 

1 

1 

Lumbering  and  wood- 
working industries.  . . 
Trading  and  miscellan- 

12 

12 

21 

18 

1 

1 

1 

Total  

277 

229 

17 

13 

5 

3 

2 

2 

1 

8 

2 

715      Comment:  The  foregoing,  1J694  to  H714,  is  a  reprint  of  the  "median'*" 
and  foreword  prepared  by  the  Bureau  of  Internal  Revenue,  and 
released  for  publication  November  24,  1919,   This  is  designated  as  "Bulletin, 
D." — The  Corporation  Trust  Company. 

71  e  to  721  Blank. 


Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  341  SERVICE 


1-2-22.  §320. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


7 22  Art.  784.   War  Profits  Credit  where  no  Prewar  Period  in  Special 
539     Circumstances. — If  a  corporation  had  no  prewar  period,  but  (a)  if 

a  majority  of  its  stock  at  any  time  during  the  taxable  year  was 
owned  or  controlled  by  a  corporation  which  was  in  existence  during  the 
whole  of  at  least  one  calendar  year  during  the  prewar  period,  or  (b)  if  50 
per  cent  or  more  of  its  gross  income  consisted  of  income  derived  from  Govern- 
ment contracts  made  after  April  5,  1917,  and  before  November  12,  1918. 
then  the  war  profits  credit  is  to  be  determined  as  provided  in  article  782 
[1(688  instead  of  in  the  manner  provided  in  article  783  [^[690].  See  section  1 
of  the  statute  [law  1|503]  and  article  1510  [for  definition  of  government 
contract].    (Art.  784,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

723  Art.  785.   War  Profits  credit  in  the  case  of  affiliated  corporations. 

—In  the  case  of  affiliated  corporations  making  a  consolidated  return 
only  one  specific  exemption  of  $3,000  is  allowed.  See  also  sections  240 
[for  specific  exemption  in  case  of  consolidated  returns,  H588]  and  305  of 
the  statute  [law  1)528]  and  article  761  [regulations  H684,  for  apportionment 
of  specific  exemption].    (Art.  785,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

EXCESS  PROFITS  CREDIT.  §312 

724  Art.  791.    Excess  Profits  Credit. — The  excess  profits  credit  con- 
541      sists  of  the  specific  exemption  of  $3,000  plus  an  amount  equal  to  8 

per  cent  of  the  invested  capital  for  the  taxable  year.  In  the  case  of 
affiliated  corporations  making  a  consolidated  return  only  one  specific  exemp- 
tion of  $3,000  is  allowed.  See  also  sections  240  [for  specific  exemption 
in  case  of  consolidated  returns,  1[588]  and  305  of  the  statute  [law  1f528, 
and  regulations  1f684  for  apportionment  of  specific  exemption]  and  articles 
716-720,  743,  and  761  [for  illustrations,  beginning  at  ^[608,  <[648,  and  1[684]. 
(Art.  791,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

NET  INCOME.  §320 

725  Art.  801.    Net  Income. — The  net  income  of  a  corporation  for  the 
543      purpose  of  the  imposition  of  the  war  profits  and  excess  profits  tax 

is  the  same  net  income  [see  1[726  below]  as  determined  for  the  purpose 

of  the  income  tax.  See  section  232  of  the  statute  and  article  531.  For  the 
prewar  period,  however,  the  net  income  of  a  corporation  is  to  be  ascertained  in 
the  case  of  the  calendar  years  1911  and  1912  as  provided  in  section  38  of  the 
Act  of  August  5,  1909,  and  in  the  case  of  the  calendar  year  1913  as  provided 
in  section  II  of  the  Act  of  October  3,  1913,  except  that  in  either  case  the 
amount  of  any  taxes  imposed  by  section  38  of  the  Act  of  August  5,  1909,  and 
paid  within  the  year  in  question  should  be  included  and  that  in  the  case  of 
the  calendar  year  1913  any  dividends  received  from  other  corporations 
taxed  under  section  II  of  the  Act  of  October  3,  1913,\should  be  deducted. 
(Art.  801,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

726  Interest  on  Liberty  Bonds  and  Victory  Notes,  and  on  War  Finance 
Corporation  Bonds— [Sec.  213  (b)  (4)  of  the  Revenue  Act  of  1918 

reads  in  part  as  follows:] — "In  the  case  of  obligations  of  the  United  States 
issued  after  September  1,  1 91 7,  and  in  the  case  of  bonds  issued  by  the  War 
Finance  Corporation,  the  interest  shall  be  exempt  only  if  and  to  the  extent 
provided  in  the  respective  Acts  authorizing  the  issue  thereof  as  amended 
and  supplemented,  and  shall  be  excluded  from  gross  income  only  if  and  to 
the  extent  it  is  wholly  exempt  from  taxation  to  the  taxpayer  both  under 

Copyright  1922,  by  The  Corporation  Trust  Company.' 
WAR  TAX         342  SERVICE 


1-2-22.  §320. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 

this  title  [Income  Tax]  and  under  Title  III  [excess-profits  tax]."  [Sec.  236  (a) 
of  the  Revenue  Act  of  1918  provides  that  for  the  purpose  of  the  income 
tax  imposed  on  corporations,  there  shall  be  allowed  as  a  credit],  "(a)  The 
amount  received  as  interest  upon  obligations  of  the  United  States  and 
bonds  issued  by  the  War  Finance  Corporation,  which  is  included  in  gross 
income  under  section  233  [which  section  refers  back  to  Sec.  213,  quoted 
above];"  [furthermore  the  Acts  authorizing  the  issue  of  Liberty  bonds  and 
War  Finance  Corporation  bonds,  and  the  Act  authorizing  the  issue  of  Liberty 
notes  (considering  the  series  elected  by  the  Secretary  of  the  Treasury  under 
the  authority  given  to  him  by  the  Act  itself),  exempts  the  interest  from  such 
bonds  and  notes  from  income  tax  in  the  case  of  corporations;  therefore  all 
interest  on  all  Government  obligations  and  interest  on  War  Finance  Corpora- 
tion bonds  is  free  of  income  tax  to  corporations.  The  extent  to  which  such 
interest  was  exempt  for  excess-profits  tax  purposes  prior  to  January  1,  1921, 
is  shown  below.] 


727  Tax  exemptions  of  Liberty  Bonds  and  Victory  Notes  Prior  to  January 
1,  1921. — The  appended  circular,  issued  under  date  of  April  23,  1919 

[as  amended  became  Art.  80  (a),  Reg.  45,  Rev.,  Jan.  28,  1921, 11728],  with  refer- 
ence to  the  tax  exemptions  of  Liberty  Bonds  and  Victory  Notes,  is  published 
for  the  information  of  internal-revenue  officers  and  others  concerned.  (T.  D. 
2836,  May  7,  1919.) 

728  Tax  exemptions  of  Liberty  Bonds  and  Victory  Notes. — Liberty  bonds 
and  Victory  notes  issued  under  authority  of  the  acts  of  Congress 

approved  April  24,  1917,  September  24,  1917,  April  4,  1918,  July  9,  1918, 
September  24,  1918,  and  March  3,  1919,  are  entitled,  respectively,  to  the 
exemptions  from  taxation  set  forth  in  said  acts,  from  which  the  statements 
in  this  article  are  summarized,  and  to  which  they  are  subject. 
I.  4  per  cent  and  434  per  cent  bonds  are  exempt  from  all  Federal,  State  and 

local  taxation,  except  (a)  estate  or  inheritance  taxes  and  (b)  Federal 

income  surtaxes  and  profits  taxes,  as  follows: 

1.  First  Liberty  loan  converted  4  per 

cent  bonds  of  1932-1947  (first  4s). 

2.  First  Liberty  loan  converted  4J4 

per  cent  bonds  of  1932-1947 
(first  434s,  issue  of  May  9,  1918). 

3.  First   Liberty   loan   second  con- 

verted 434  per  cent,  bonds  of 
1932-1947  (first  434s,  issue  of 
October  24,  1918). 

4.  Second  Liberty  loan  4  per  cent. 

bonds  of  1927-1942  (second  4s). 

5.  Second  Liberty  loan  converted  4J4 

per  cent  bonds  of  1927-1942  (sec- 
ond 43^s). 

6.  Third  Liberty  loan  434  per  cent. 

bonds  of  1928  (third  4^s). 

7.  Fourth  Liberty  loan  4)4  per  cent. 

bonds  of  1933-1938  (fourth  434s). 

8.  Victory  Liberty  loan  4%  per  cent. 

convertible  gold 'notes  of  1922- 
1923  (4%  per  cent  Victory  notes). 

Copyright  1922,  by  Tht  Corporation  Trust  Company: 

WAR  TAX  343  SERVICE 


are  exempt,  both  as  to  principal  and 
interest,  from  all  taxation  now  or 
hereafter  imposed  by  the  United 
States,  any  State,  or  any  of  the 
possessions  of  the  United  States,  or 
by  any  local  taxing  authority,  ex- 
cept (a)  estate  or  inheritance  taxes, 
and  (b)  graduated  additional  income 
taxes,  commonly  known  as  sur- 
taxes, and  excess-profits  and  war- 
profits  taxes,  now  or  hereafter 
imposed  by  the  United  States,  upon 
the  income  or  profits  of  individuals, 
partnerships,  associations,  or  cor- 
porations. 


!  1-2-22.  §320. 

$  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


The  exemptions  in  the  tabulation  that  follows,  apply  to  periods  prior^to 

January  1,  1921. 

For  exemptions  applying  on  and  after  January  1,  1921,  see  If  1089. 


[For  periods  prior  to  Jan.  1,  1921.] 


II.  4  per  cent  and  4J4  per  cent  Liberty  bonds  (but  not  4%  per  cent  Victory 
notes)  treasury  certificates,  and  war  savings  certificates  are  entitled 
to  certain  limited  exemptions  from  graduated  additional  income 
taxes,  commonly  known  as  surtaxes,  and  excess-profits  and  war- 
profits  taxes,  now  or  hereafter  imposed  by  the  United  States,  upon 
the  income  or  profits  of  individuals,  partnerships,  associations,  or 
corporations,  in  respect  to  the  interest  on  principal  amounts  thereof, 
as  follows: 

(a)  $5,000  in  the  aggregate  of  first  4s,  first  4}4s  (issues  of  May  9  and  October 

24,  1918),  second  4s  and  434s,  third  434s,  fourth  434s,  Treasury 
certificates,  and  war-savings  certificates. 

(b)  30,000  of  first  4j4s  (issue  of  October  24,  1918,  only),  until  the  expiration 

of  two  years  after  the  termination  of  the  war. 

(c)  30,000  of  fourth  4J4s,  until  the  expiration  of  two  years  after  the  termina- 

tion of  the  war. 

(d)  30,000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9  and  October 

24,  1918),  second  4s  and  434s,  third  4J4s,  and  fourth  434s,  as 
to  the  interest  received  on  and  after  January  1,  1919,  until  the 
expiration  of  five  years  after  the  termination  of  the  war. 

(e)  45,000  in  the  aggregate  of  first  4s,  first  4j4s  (issue  of  May  9,  1918,  only), 

second  4s  and  4J4S,  and  third  434s?  as  to  the  interest  received  after 
January  1,  1918,  until  the  expiration  of  two  years  after  the  termin- 
ation of  the  war;  this  exemption  conditional  on  original  subscrip- 
tion to,  and  continued  holding  at  the  date  of  the  tax  return  of 
two-thirds  as  many  bonds  of  the  fourth  Liberty  loan. 

(f)  20,000  in  the  aggregate  of  first  4s,  first  434s  (issues  of  May  9,  and  October 

24,  1918),  second  4s  and  434s,  third  434s,  and  fourth  434s,  as  to 
the  interest  received  on  and  after  January  1,  1919;  this  exemption 
conditional  upon  original  subscription  to,  and  continued  holding  at 
the  date  of  the  tax  return  of  one-third  as  many  notes  of  the  Vic- 
tory Liberty  loan,  and  extending  through  the  life  of  such  notes  of 
the  Victory  Liberty  loan. 


160,000  total  possible  exemptions  from  Federal  income  surtaxes  and  profits 
taxes,  subject  to  conditions  above  summarized. 
III.  3j^  per  cent  bonds  and  3%  Per  cent  notes  are  exempt  from  all  Federal, 
State,  and  local  taxation,  except  estate  or  inheritance  taxes,  as  follows: 
First     Liberty  loan 

Are  exempt,  both  as  to  principal  and  interest,  from 
all  taxation  (except  estate  or  inheritance  taxes) 
now  oi  hereafter  imposed  by  the  United  States, 
any  State,  or  any  of  the  possessions  of  the  United 
States,  or  by  any  local  taxing  authority. 


2. 


Zy<L  per  cent  bonds  of 
1932-1947. 

Victory  Liberty  loan 
3%  per  cent  con- 
vertible gold  notes  of 
1922-1923. 


(Art.  80(a),  Reg.  45,  Rev.,  Jan.  28,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  344  SERVICE 


i-2-22.  §320. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


729  Income  of  a  corporation  as  such  is  taxable  to  the  corporation  and  it 
^  not  taxable  to  the  stockholders.  The  corporation,  and  not  the  stock- 
holders, is  regarded  as  the  owner  of  the  bonds  held  by  the  corporation  and 
entitled  to  exemption  on  account  of  such  ownership.  When  bonds  of  the 
Fourth  Liberty  Loan  are  subscribed  for  by  the  corporation  it,  and  not  the 
stockholders,  is  the  original  subscriber  and  entitled  to  the  collateral  exemp- 
tion of  interest  on  bonds  of  previous  issues  on  account  of  such  original  sub- 
scription,  (T.  D.  2762,  Oct.  18,  1918.) 

730  Original  subscription  to  Victory  Notes. — For  the  purposes  of  the  addi- 
tional tax  exemption  for  Liberty  Bonds  granted  by  Section  2  (b) 

of  the  Victory  Loan  Act,  approved  March  3,  1919,  Victory  notes  of  either 
series  issued  upon  conversion  of  Victory  notes  of  the  other  series  which 
were  originally  subscribed  for  by  any  taxpayer  will  be  deemed  to  have 
been  originally  subscribed  for  by  such  taxpayer.  (T.  D.  2857,  June  7,  1919 
—Art.  80,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

731  Blank. 


[Not  limited  to  periods  prior  to  Jan.  1,  1921.] 

732  Taxable  status  of  War  Finance  Corporation  Bond  interest. — War 

Finance  Corporation  bonds  are  issued  under  the  authority  of  the  Act 
of- April  5,  1918,  which  provides  that  the  interest  on  the  amount  of  such  bonds, 
the  principal  of  which  does  not  exceed  $5,000,  shall  be  exempt  from  normal 
taxes,  surtaxes,  excess  profits  and  war  profits  taxes,  and  that  the  interest 
received  by  a  taxpayer,  independent  of  the  amount  of  his  holdings,  is  exempt 
from  normal  Federal  tax  [which  includes  the  income  tax  on  corporations]. 
(Official  announcement  by  the  Bureau  of  Internal  Revenue,  April  5,  1919.) 

733  Interest  on  all  United  States  Bonds  and  on  War  Finance  Corporation 
Bonds  entirely  exempt  from  taxation  to  foreign  corporations. — 

Sec.  4  [of  the  Victory  Liberty  Loan  Act].    That  section  3  of  the  Fourth 

Liberty  Bond  Act  is  hereby  amended  to  read  as  follows: 
"Sec.  3.  That,  notwithstanding  the  provisions  of  the  Second  Liberty  Bond 
Act  or  of  the  War  Finance  Corporation  Act  or  of  any  other  Act,  bonds, 
notes,  and  certificates  of  indebtedness  of  the  United  States  and  bonds  of 
the  War  Finance  Corporation  shall,  while  beneficially  owned  by  a  nonresi- 
dent alien  individual,  or  a  foreign  corporation,  partnership,  or  association, 
not  engaged  in  business  in  the  United  States,  be  exempt  both  as  to  principal 
and  interest  from  any  and  all  taxation  now  or  hereafter  imposed  by  the 
United  States,  any  State,  or  any  of  the  possessions  of  the  United  States  or  by 
any  local  taxing  authority."  (Section  4  of  "An  Act  to  amend  the  Liberty 
Bond  Acts  and  the  War  Finance  Corporation  Act,  and  for  other  purposes," 
known  as  the  "Victory  Liberty  Loan  Act,"  approved  by  the  President, 
March  3,  1919.) 

734  Art.  802.  Prewar  net  income  of  affiliated  corporations. — The  con- 
^587      solidated  net  income  of  affiliated  corporations  for  the  prewar  period 

shall  be  the  average  consolidated  net  income  for  the  prewar  years 
t>f  such  of  the  several  corporations  included  in  the  consolidation  for  the 

Copyright  1922,  by  The  Corporation  Trust  Company: 
WAR  TAX  345  SERVICE 


1-2-22.  .  §320. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


taxable  year  as  were  affiliated  during  the  prewar  period,  plus  the  aggregate 
of  the  average  net  income  for  each  of  the  corporations  not  affiliated  during 
the  prewar  period  which  were  in  existence  during  all  of  the  prewar  period  or 
during  at  least  one  full  year  within  the  prewar  period.  The  net  income  of 
a  subsidiary  corporation  organized  during  the  prewar  period  by  an  existing 
corporation  shall  also  be  included.  See  also  sections  240  and  330  of  the  statute 
and  articles  631-638  and  931-934  [for  "Reorganizations,"  beginning  at  11837]. 
(Art.  802,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

[For  average  prewar  income  see  law  1f547  and  1f687.] 

735j     Liberty  Bond  interest  exemption,   consolidated  returns,  bonds 
all  being  owned  by  parent  corporation. — Receipt  is  acknowledged 
of  your  letter  of  March  25,  1919,  in  which  you  state  that  the  Com- 
pany is  affiliated  with  various  subsidiaries  in  which  the  Company  owns 

all  the  stock  directly  or  owns  the  stock  of  the  company  which  does  own  all 

the  stock  of  such  affiliated  company.    The    Company  has  on  hand 

an  investment  in  Liberty  Bonds  amounting  to  $2,345,000  of  the  second, 

third  and  fourth  issues.    ^[You  inquire  if  the    Company  may 

apportion  the  Liberty  Bonds  held  by  it  among  its  several  subsidiaries  in 
order  to  determine  the  total  exemption  allowable  for  purposes  of  a  con- 
solidated return.  1fln  reply  you  are  advised  that  in  cases  of  consolidated 
returns,  affiliated  corporations  are  treated  as  if  they  were  one  corporation 
and  the  tax  is  based  upon  the  consolidated  income  and  the  consolidated 
invested  capital  of  these  corporations.  Whether  the  parent  company  owns 
the  bonds  or  apportions  them  among  its  subsidiaries,  makes  no  difference 
in  the  amount  of  exemption  allowable  in  cases  where  consolidated  returns 
are  required,  as  such  exemption  is  based  upon  the  consolidated  condition. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  April  5,  1919.) 


736  Liberty  Bond  interest  exemption,  consolidated  returns,  bonds 
being  owned  by  each  of  the  affiliated  corporations. — Reference 

is  made  to  your  letter  dated  April  22,  1919,  in  which  you  question  the  validity 
of  a  ruling  in  connection  with  exemptions  to  which  several  affiliated  cor- 
porations included  in  a  consolidated  return  are  entitled  on  account  of  their 
ownership  of  various  issues  of  Liberty  Bonds  appearing  in  a  letter  from  Acting 
Commissioner  J.  H.  Callan  dated  April  16,  1919,  to  The  Corporation  Trust 
Company  and  printed  in  the  War  Tax  Service,  1919,  to  the  effect  that: 
"Whether  each  of  the  subsidiary  companies  owns  the  bonds  or 
whether  the  parent  company,  or  any  one  of  the  companies  alone, 
owns  the  exempt  bonds  makes  no  difference  in   the  amount  of 
exemption  allowable  in  cases  where  consolidated  returns  are  required, 
as  such  exemptions  are  based  upon    the  consolidated  condition." 

737  Upon  further  consideration  this  office  rules  that  each  of  several 
affiliated  corporations   included  in  a  consolidated  return  under 

Section  240  of  the  Revenue  Act  of  1918  is  entitled  to  the  same  full  benefits 
under  the  exemption  provisions  of  the  several  Liberty  Bond  Acts  to  which  it 
would  be  entitled  if  not  affiliated.  (Letter  to  one  of  our  subscribers,  signed# 
by  Commissioner  Daniel  C.  Roper,  and  dated  May  21,  1919.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX         346  SERVICE 


.2-2°  §325. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


TERMS  RELATING  TO  INVESTED  CAPITAL. 

§325 

738  Art.  811.    Intangible  and  Tangible  Property— Intangible  prop- 

549  erty  includes  patents  and  good  will  and  other  like  property.  Tan- 

550  gible  property  includes  all  property  other  than  intangible  property. 
Most  contracts  are  intangible  property  and  in  the  absence  of  a  specific 

ruling  by  the  Commissioner  to  the  contrary  should  be  so  regarded  for  the 
purpose  "of  making  returns.  A  contract  may  be  treated  as  tangible  property 
only  after  the  submisssion  of  a  full  statement  as  to  its  exact  nature,  showing 
to  the  satisfaction  of  the  Commissioner  that  it  relates  to  rights  in  tangible 
property  to  such  an  extent  that  its  value  arises  chiefly  therefrom^  Asso- 
ciated Press,  United  Press,  and  similar  franchises,  and  subscription  lists  and 
mailing  lists,  are  intangible  property.  (Art.  811,  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

739  Art.  812.    Borrowed  Capital:  Securities. — Any  interest  in  a  cor- 

551  poration  represented  by  bonds,  debentures,  or  other  securities,  Jby 
561      whatever  name  called,  including  so-called  preferred  stock,  if  with 

respect  to  the  payment  of  either  interest  or  principal  it  ranks  with 
or  prior  to  the  interest  of  the  general  creditors,  is  borrowed  capital  and 
cannot  be  included  in  computing  invested  capital.  Any  such  preferred 
stock  may,  however,  be  so  included  if  it  is  deferred  with  respect  to  the  pay- 
ment of  both  interest  and  principal  to  the  interest  of  the  general  creditors. 
(Art.  812,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

740  Art.  813.  Borrowed  Capital:  Amounts  Left  in  Business. — Whether 
551  a  given  amount  paid  into  or  left  in  the  business  of  a  corporation  con- 
561      stitutes  borrowed  capital  or  paid-in  surplus  is  largely  a  question  of 

fact.  Thus,  indebtedness  to  stockholders  actually  cancelled  and  left 
in  the  business  would  ordinarily  constitute  paid-in  surplus,  while  amounts 
left  in  the  business  representing  salaries  of  officers  in  excess  of  their  actual 
withdrawals,  or  deposit  accounts  in  favor  of  partners  in  a  partnership  suc- 
ceeded by  the  corporation,  will  be  considered  paid-in  surplus  or.  borrowed 
capital  according  to  the  facts  of  the  particular  case.  The  general  principle 
is  that  if  interest  is  paid  or  is  to  be  paid  on  any  such  amount,  or  if  the  stock- 
holder's or  officer's  right  to  repayment  of  such  amount  ranks  with  or  before 
that  of  the  general  creditors,  the  amount  so  left  with  the  corporation  must 
be  considered  as  borrowed  capital  and  be  so  treated  in  computing  invested 
capital.    (Art.  813,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

7  4 1  Interest-bearing  one-year  loan  to  corporation  by  stockholder  although 
all  other  creditors  are  preferred,  is  not  "Invested  Capital." — Principal 
stockholder  of  X.  Corporation  loans  $35,000  to  Corporation  for  one  year. 
In  order  to  protect  credit  of  Corporation,  agreement  is  signed  that  lender 
shall  be  deferred  to  all  other  creditors,  lender  to  receive  one  per  cent  additional 
interest  in  consideration.  Can  this  $35,000  be  included  in  "invested  capital" 
in  nature  of  preferred  stock,  the  interest  not  being  deducted  as  expense t 
(Answer.)  Your  telegram  April  second.  Question  answered  in  negative. 
(Telegram  of  inquiry  from  Bernhard  Knollenberg,  Richmond,  Indiana,  and 
the  reply  thereto  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
April  4,  1919.) 


Copyright  1922,  by  Tk*  Corporation  Trust  Company; 
WAR  TAX         347  SERVICE 


1-2-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.-  1918  ACT?25' 

742  Art.  814.  Borrowed  Capital:  Other  Illustrations.— Items  such  as 
651  deposits  or  amounts  due  to  other  banks  shown  in  the  balance  sheet 
561      of  a  bank,  unexpired  subscriptions  shown  in  the  balance  sheet  of  a 

publishing  concern,  etc.,  are  deemed  liabilities  and  can  not  be  in- 
1921  )  m  C°mpUtmg  invested  capital.    (Art.^  814,  Reg.  45,  Rev.,  Jan.  28, 

743  Art.  815.  Inadmissible  assets.— Stocks,  bonds  and  other  obliga- 
552      tions  (other  than  obligations  of  the  United  States),  the  dividends 

;  or  interest  from  which  are  not  required  to  be  included  in  computing 
net  income,  are  inadmissible  assets  even  though  no  such  dividends  or  interest 
have  been  actually  paid  or  received  during  the  taxable  year.  The  failure 
to  pay  or  to  receive  dividends  or  interest  does  not  change  the  status  of  such 
securities  as^  inadmissible  assets.  A  corporation  cannot  by  including  the  in- 
come from  inadmissible  assets  as  taxable  income  create  the  right  to  have 
such  assets  considered  admissible  assets.    (Art.  815,  Reg.  45,  Rev.,  Jan.  28, 

744  Federal  Reserve  Bank  Stock  held  to  be  an  inadmissible  asset- 
Reference  is  made  to  office  letter  to  you  dated  March  11,  1919,  in 

qreply  to  your  letter  of  February  25,  1919.  ^Through  an  oversight  an  erron- 
'eous  ruling  was  made  in  the  above  mentioned  office  letter,  relative  to  Federal 
Reserve  Bank  Stock,  in  connection  with  invested  capital.  IfFederal  Reserve 
Bank  Stock,  held  by  a  member  bank,  is  held  to  be  an  inadmissible  asset 
in  determining  invested  capital  for  excess  profits  tax  purposes.  This  ruling 
will  supersede  the  ruling  in  Office  letter  of  March  11,  1919.  (Letter  to  The 
Chase  National  Bank,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel 
C.  Roper,  and  dated  March  13,  1919.) 

745  War  Finance  Corporation  Bonds  as  admissible  and  inadmissible 

assets. — Bonds  of  the  War  Finance  Corporation,  the  principal  of 
which  does  not  exceed  $5,000,  are  inadmissible  assets.  Bonds  of  the  War 
Finance  Corporation,  the  principal  of  which  exceeds  $5,000  are  admissible 
assets.  This  ruling  was  issued  by  the  Bureau  of  Internal  Revenue  today 
in  response  to  numerous  inquiries  as  to  whether  such  bonds  are  admissible 
or  inadmissible  assets. 

746  "Inadmissible  assets"  is  a  term  used  in  the  Revenue  Act  of  1918  to 
indicate  certain  assets  of  a  corporation  which  may  not  be  included 

in  calculating  its  invested  capital. 

747  War  Finance  Corporation  bonds  are  issued  under  the  authority  of 
the  Act  of  April  5,  1918,  which  provides  that  the  interest  on  the 

amount  of  such  bonds,  the  principal  of  which  does  not  exceed  $5,000  shall  be 
exempt  from  normal  taxes,  surtaxes,  excess  profits  and  war  profits  taxes, 
and  that  the  interest  received  by  a  taxpayer,  independent  of  the  amount  of 
his  holdings,  is  exempt  from  normal  Federal  tax.  (Official  announcement 
by  the  Bureau  of  Internal  Revenue,  April  5,  1919.) 

748  Art.  816.    Inadmissible  Assets:  Government  Bonds. — Obligations 
552      of  a  State  or  Territory  or  any  municipal  or  other  political  subdivision 

thereof,  of  the  District  of  Columbia,  or  of  any  possession  of  the 
United  States,  and  Federal  farm  loan  bonds,  not  being  obligations  of  the 
United  States  within  the  meaning  of  the  statute,  are  inadmissible  assets. 
See  Section  213(b)  of  the  Statute  and  Articles  74-82.  (Art.  816,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  348  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


749  Art.  817.   Inadmissible  Assets:  Partial  Exception. — (a)  Where  the 

552  income  derived  froin  inadmissible  assets  consists  in  part  of  profit 
from  the  disposition  thereof,  or  (b)  where  all  or  a  part  of  the  interest 

derived  from  such  assets  is  in  effect  included  in  net  income  because  the 
interest  paid  on  indebtedness  incurred  or  continued  to  purchase  or  carry 
such  assets  may  not  be  deducted  from  gross  income,  in  either  case  a  corres- 
ponding part  of  the  capital  invested  in  such  assets  shall  be  deemed  an  ad- 
missible asset.  This  article  applies  separately  to  each  issue  or  class  of  inad- 
missible securities  held  by  a  corporation.  For  example,  it  may  hold  A  com- 
pany stock  costing  $100,000  and  B  company  stock  costing  $200,000-  During 
the  year  it  receives  $8,000  in  dividends  from  A  company  and  $5,000  from  B 
company,  and  on  September  30  sells  part  of  its  B  company  stock  at  a  profit 
of  $3,000.  For  the  period  from  January  1  to  September  30,  $75,000  of  its 
holdings  of  B  company  stock  became  admissible.  After  September  30  its 
remaining  holdings  of  B  company  stock  are  inadmissible,  but  the  proceeds 
of  the  sale  are  admissible  unless  invested  in  inadmissibles.  See  articles  852 
[for  percentage  of  inadmissible  assets,  1f805]  and  854  [for  computation  of 
average  invested  capital,  11807].     (Art.  817,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

750  Art.  818.    Admissible  Assets. — Admissible  assets  include  all  assets 

553  other  than  inadmissible  assets.  Organization  expenses  and  deferred 
charges  against  future  income  are  admissible  assets.  For  all  pur- 
poses of  computing  invested  capital  admissible  assets  must  be  valued  in 
accordance  with  the  provisions  of  sections  326  [1[555],  330  [1f575],  and  331 
[1[579]  of  the  statute  and  the  articles  thereunde  -.  Thus,  for  example,  in- 
tangible property  paid  in  for  stock  or  shares  is  an  admissible  asset,  but  it 
cannot  be  valued  at  an  amount  in  excess  of  that  at  which  it  may  be  included 
in  computing  invested  capital  under  paragraphs  (4)  f*H559]  and  (5)  [*|560] 
of  section  326(a).    (Art.  818,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

INVESTED  CAPITAL.  §326 

751  Art.  831.    Meaning  of  Invested  Capital. — Invested  capital  within 
555      the  meaning  of  the  statute  is  the  capital  actually  paid  in  to  the  cor- 
poration by  the  stockholders,  including  the  surplus  and  undivided 

profits,  and  is  not  based  upon  the  present  net  worth  of  the  assets,  as  shown 
by  an  appraisal  or  in  any  other  manner.  The  basis  or  starting  point  in  the 
computation  of  invested  capital  is  found  in  the  amount  of  cash  and  other 
property  paid  in,  the  valuation  at  which  such  other  property  may  be  included 
being  determined  in  accordance  with  the  statute  and  the  regulations.  The 
computation  does  not  stop,  however,  wTith  such  original  entries  or  amounts, 
but  also  takes  into  account  the  surplus  and  undivided  profits  of  prior  years 
left  in  the  business.  The  invested  capital  of  a  corporation  includes,  generally 
speaking,  (a)  the  cash  paid  in  for  stock,  (b)  the  tangible  property  paid  in  for 
stock,  (c)  the  surplus  and  undivided  profits,  and  (d)  the  intangible  property 
paid  in  for  stock  (to  a  limited  amount),  less,  however,  the  same  proportion 
of  such  aggregate  sum  as  the  amount  of  inadmissible  assets  bears  to  the 
amount  of  the  admissible  assets  and  the  inadmissible  assets  held  during  the 
taxable  year.  Invested  capital  does  not  included  borrowed  capital.  See 
section  325  of  the  statute  and  articles  811-818  [for  terms  relating  to  invested 
capital,  beginning  at  11738].  The  fair  market  value  of  the  assets  as  of  March  1 , 
1913,  has  no  bearing  on  invested  capital.  (Art.  831,  Reg.  45,  Rev.,  Jan.  28, 
1921.)    [See  1f865  and  1(889.] 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  349  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


762  Original  issue  stock  sold  at  par  on  commission  in  relation  to 
invested  capital. — [Comment:   The  special  ruling  which  appeared 

here,  under  the  above  heading,  in  the  1920  Service,  was  superseded  by  a  special 
ruling  which  was  reproduced  at  ^[870  in  that  Service.  Such  later  ruling, 
holding  that  reasonable  commissions  or  other  forms  of  compensation  law- 
fully paid  by  a  corporation  for  sale  of  its  capital  stock  are  not  to  be  deducted 
in  computing  invested  capital,  appears  as  11-19-391:  T.  B.  R.  40  under 
Section  326,  Article  831,  in  the  subjoined  supplement  containing  the  Bureau 
Rulings. — The  Corporation  Trust  Company.] 

763  Art.  832.   Cash  paid  in:   Bonus  stock. — Capital  stock  issued  as  a 

556  bonus  in  connection  with  the  sale  of  a  corporation's  bonds  may  not 
be  included  in  invested  capital  unless  the  corporation  proves  to 

the  satisfaction  of  the  Commissioner  that  such  stock  bonus  enabled  the 
corporation  to  secure  a  higher  price  for  the  bonds  than  it  could  otherwise 
have  secured.  Wherever  this  fact  is  established  such  stock  shall  be  in- 
cluded in  computing  invested  capital  to  the  extent  of  the  difference  be- 
tween the  selling  price  of  the  bonds  and  the  price  at  which  they  could  have 
been  sold  if  issued  without  such  stock  bonus.  The  excess  of  the  face  value 
of  such  bonds  over  the  price  at  which  they  could  have  been  sold  if  issued 
without  the  stock  bonus  is  deemed  discount  and  is  subject  to  amortization. 
See  Article  39.    (Art.  832,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

764  Art.  833.    Tangible  Property  Paid  in:  Evidences  of  Indebtedness. 

557  — Enforcible  notes  or  other  evidences  of  indebtedness,  either  interest- 
bearing  or  non-interest  bearing,  of  the  subscriber  received  by  a 

corporation  upon  a  subscription  for  stock  may  be  considered  as  tangible 
property  in  computing  its  invested  capital  to  the  extent  of  the  actual  cash 
value  of  such  notes  or  other  evidences  of  indebtedness  at  the  time  when 
paid  in,  but  only  (a)  if  such  notes  or  evidences  of  indebtedness  could  under 
the  laws  of  the  jurisdiction  in  which  the  corporation  was  organized  legally 
be  received  in  payment  for  stock,  and  (b)  if  they  were  actually  received 
by  the  corporation  as  absolute,  and  not  as  conditional,  payment  in  whole  or 
in  part  of  the  stock  subscription.    (Art.  833,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

755  Art.  834.    Tangible  Property  Paid  in:    Inadmissible  Assets.— 

557  Stocks,  bonds  and  other  obligations  (other  than  obligations  of  the 
United  States),  the  dividends  or  interest  from  which  are  not  in- 
cluded in  computing  net  income,  when  bona  fide  paid  in  for  stock  or  shares 
may  like  other  tangible  property  be  included  in  computing  the  invested 
capital  of  the  corporation  at  their  actual  cash  value  when  paid  in.  For 
the  purpose  of  the  reduction  required  in  articles  852  [*[805]  and  854  [?807] 
however,  account  must  be  taken  of  such  assets  in  the  same  manner  as  of  any 
other  inadmissible  assets.    (Art.  834,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

756  Art.  835.  Tangible  Property  Paid  in:  Mixture  of  Tangible  and  In- 
557     tangible  Property. — Where  stock  or  shares  and  bonds  or  other 

obligations  have  been  issued  for  a  mixed  aggregate  of  tangible  and 
intangible  property,  it  will  be  presumed  in  the  absence  of  satisfactory 
evidence  to  the  contrary  that  the  bonds  were  issued  for  tangible  property 
and  that^tht  stock  was  issued  for  the  balance  of  the  tangible  property,  if 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX         350  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


any,  and  for  the  intangible  property.  Where  stock  or  shares  have  been  issued 
for  a  mixed  aggregate  of  tangible  and  intangible  property  and  certain  liabilities 
have  been  assumed  in  connection  with  the  transaction,  it  will  be  presumed 
that  such  liabilities  are  to  be  charged  against  the  tangible  property  and  the 
intangible  property  in  the  order  named,  unless  it  is  shown  by  evidence  satis- 
factory to  the  Commissioner  that  this  presumption  is  not  in  accordance 
with  the  facts.  See  further  section  327  (c)  [law  1(568]  of  the  statute  [and 
regulations  H831].    (Art.  835,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

757  Art.  836.  Tangible  Property  Paid  in :  Value  in  Excess  of  Par  Value 
557     of  Stock. — Evidence  offered  to  support  a  claim  for  a  paid-in  surplus 

must  be  as  of  the  date  of  the  payment,  and  may  consist  among  other 
things  of  (a)  an  appraisal  of  the  property  by  disinterested  authorities  made 
on  or  about  the  date  of  the  transaction;  (b)  certification  of  the  assessed 
value  in  the  case  of  real  estate;  and  (c)  proof  of  a  market  price  in  excess  of 
the  par  value  of  the  stock  or  shares.  The  additional  value  allowed  in  any 
case  is  confined  to  the  value  definitely  known  or  accurately  ascertainable  at 
the  time  of  the  payment.  No  claim  will  be  allowed  for  a  paid-in  surplus  in  a 
case  in  which  the  additional  value  has  been  developed  or  ascertained  subse- 
quently to  the  date  on  which  the  property  was  paid  in  to  the  corporation, 
or  in  respect  of  property  which  the  stockholders  or  their  agents  on  or  shortly 
before  the  date  of  such  payment  acquired  at  a  bargain  price,  as  for  instance, 
at  a  receiver's  sale.  Generally,  allowable  claims  under  this  article  will  arise 
out  of  transactions  in  which  there  has  been  no  substantial  change  of  beneficial 
interest  in  the  property  paid  in  to  the  corporation,  and  in  all  cases  the  proof 
of  value  must  be  clear  and  explicit.    (Art.  836,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

758  Tangible  property  paid  in:  Value  in  excess  of  par  value  of  stock. — 
Reference  is  made  to  your  letter  of  March  3,  1919,  in  regard  to  the 

  Coal  Company,   ,  Kentucky,  and  it  is  noted  that 

you  desire  a  ruling  as  to  the  following  facts:  Mr.   secured  a 

lease  on  a  coal  mine  near  ,  Kentucky.   It  appeared  that  from  the 

development  and  geographical  condition  of  the  country  that  the  amount 
of  coal  this  mine  would  produce  would  not  exceed  500,000  tons.  The 

 Coal  Company  was  organized  with  a  capital  stock  of  $75,000 

and  the  lease  secured  by  Mr.  was  transferred  to  the  corporation. 

Subsequent  developments  have  proven  that  the  mine  will  produce  approxi- 
mately 2,000,000  tons  of  coal.  At  the  time  of  organization,  the  company 
was  capitalized  on  the  basis  of  the  value  of  the  coal  known  to  be  contained  in 
the  property.  The  company,  therefore,  desires  to  include  in  invested 
capital  the  increase  in  value  of  the  property  due  to  the  discovery  of  the 
extraordinary  large  deposits  of  coal.  In  this  connection  your  attention  is 
called  to  Art.  836  [1(757]  of  Reg.  No.  45.  (Letter  to  The  Corporation  Trust 
Company,  signed  by  Commissioner  Daniel  C.  Roper,  dated  March  11,  1919.) 

759  Depreciation  of  tangible  property,  added  to  invested  capital  "as 
paid-in  surplus,  to  be  reflected  in  adjustment  of  earned  surplus 

or  undivided  profits. — Reference  is  made  to  your  letter  of  March  18th, 
relative  to  paid-in  surplus  representing  value  of  property  in  excess  of  the 
consideration  paid  therefor,  fin  reply  you  are  informed  that  paid-in  surplus 
representing  tangible  property  need  not  be  reduced  by  reason  of  depreciation 
of  the  property  in  question.  All  adjustments  necessary  on  account  of  in- 
adequate or  excessive  depreciation  si  ould  be  made  in  connection^with^earned 

Copyright  1922,  by  Tk*  Corporation  Trust  Company. 

WAR  TAX         35 1  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


surplus  or  undivided  profits.  ^Therefore,  if  a  corporation  is  properly  entitled 
to  add  to  its  invested  capital  in  the  form  of  paid-in  surplus  an  amount  re- 
presenting excess  in  value  of  property,  over  the  consideration  paid  therefor, 
either  under  Article  63  of  Regulations  No.  41,  relative  to  the  Revenue 
Act  of  1917,  pr  under  Articles  836  [1J757]  and  837  [1f760]  of  Regulations 
No.  45,  relative  to  the  Revenue  Act  of  1918,  such  paid-in  surplus  need 
not  be  reduced  on  account  of  depreciation  of  the  property  on  which  the  excess 
value  is  claimed.  Kit  should  be  borne  in  mind,  however,  that  while  paid-in 
surplus  as  indicated  above,  need  not  be  reduced  on  account  of  depreciation, 
such  adjustment  must  be  made  in  earned  surplus  or  undivided  profits,  and 
the  computation  must  be  based  not  on  the  cash  paid  or  stock  issued  for  the 
property  but  on  its  actual  value  at  the  time  acquired  for  the  purpose  of  com- 
puting the  allowable  addition  to  paid-in  surplus.  (Letter  to  Leslie,  Banks 
&^Company,  New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  April  14,  1919.) 

760  Art.  837.    Surplus  and  Undivided  Profits:   Paid-in  Surplus. — 

558  Where  it  is  shown  by  evidence  satisfactory  to  the  Commissioner 
that  tangible  property  has  been  paid  in  by  a  stockholder  to  a  cor- 
poration as  a  gift  or  at  a  value  definitely  known  or  accurately  ascertain- 
able as  of  the  date  of  such  payment  clearly  and  substantially  in  excess  of 
the  cash  or  other  consideration  paid  by  the  corporation  therefor,  then  the 
amount  of  the  excess  shall  be  deemed  to  be  paid-in  surplus.  Substantially 
the  same  kind  of  evidence  will  be  required  under  this  article  as  under  article 
836  [1f757],  See  further  article  813  [for  amounts  left  in  business  by  stock- 
holders, as  invested  capital  or  borrowed  capital,  1(740].  (Art.  837,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

761  Art.  838.   Surplus  and  Undivided  Profits:  Earned  Surplus. — Only 

558  true  earned  surplus  and  undivided  profits  can  be  included  in  the 
computation  of  invested  capital,  and  if  for  any  reason  the  books  do 
not  properly  reflect  the  true  surplus  such  adjustments  must  be  made  as 
are  necessary  in  order  to  arrive  at  the  correct  amount.  In  the  computation 
of  earned  surplus  and  undivided  profits  full  recognition  must  first  be  given 
to  all  expenses  incurred  and  losses  sustained  from  the  original  organization 
of  the  corporation  down  to  the  taxable  year,  including  among  such  expenses 
and  losses  reasonable  allowances  for  depreciation,  obsolescence,  or  depletion 
of  property  (irrespective  of  the  manner  in  which  such  property  was  originally 
acquired),  and  for  the  amortization  of  any  discount  on  its  bonds.  There  can, 
of  course,  be  no  earned  surplus  or  undivided  profits  until  any  deficit  or  impair- 
ment of  paid-in  capital  due  to  depletion,  depreciation,  expense,  losses,  or 
any  other  cause  has  been  made  good.  Where  adequate  evidence  is  presented 
that  the  amounts  written  off  or  deducted  in  previous  returns  of  net  income 
are  in  the  aggregate  incorrect  or  unreasonable,  adjustments  must  be  made, 
and,  if'not  barred  by  the  statute  of  limitations,  the  taxpayer  will  be  allowed 
a  refund  in  respect  of  any  taxes  overpaid  in  prior  years,  or  in  the  case  of  an 
underpayment  of  taxes  will  be  additionally  assessed.  (Art.  838,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

762  Art.  839.   Surplus  and  Undivided  Profits:  Allowance  for  Depletion 
558      and  Depreciation. — Depletion,  like  depreciation,  must  be  recog- 
nized in  all  cases  in  which  it  occurs.    Depletion  attaches  to  each 

unit  of  mineral  or  other  property  removed,  and  the  denial  of  a  deduction 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  352  SERVICE 


1-2-22.  §32e. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


in  computing  net  income  under  the  Act  of  August  5,  1909.  or  the  limitation 
upon  the  amount  of  the  deduction  allowed  under  the  Act  of  October  3,  1913, 
does  not  relieve  the  corporation  of  its  obligation  to  make  proper  provision 
for  depletion  of  its  property  in  computing  its  surplus  and  undivided  profits. 
Adjustments  in  respect  of  depreciation  or  depletion  in  prior  years  will  be  made 
or  permitted  only  upon  the  basis  of  affirmative  evidence  that  as  at  the  begin- 
ning of  the  taxable  year  the  amount  of  depreciation  or  depletion  written  oE 
in  prior  years  was  insufficient  or  excessive,  as  the  case  may  be.  Where  deduc- 
tions for  depreciation  or  depletion  have  either  on  the  books  of  the  corporation 
or  in  its  returns  of  net  income  been  included  in  the  past  in  expense  or  other 
accounts,  rather  than  specifically  as  depreciation  or  depletion, or  where  capital 
expenditures  have  been  charged  to  expense  in  lieu  of  depreciation  or  depletion, 
a  statement  indicating  the  extent  to  which  this  practice  has  been  carried 
should  accompany  the  return.  (Art.  839,  Reg.  45,  Rev.,  Jan.  28,  1921.) 
[In  connection  with  the  foregoing  read  at  If 877.] 

763  Allowance  for  amortization  under  the  Munitions  Manufacturer's 
Tax  Law  will  not  affect  computation  of  invested  capital  for  taxable 
year  1918. — Reference  is  made  to  your  letter  in  which  you  request  a  ruling 
on  behalf  of  your  client,  with  regard  to  whether  amounts  deducted  as  allow- 
ances for  amortization  on  munitions  tax  returns  for  1916  and  1917  should  be 
included  in  the  computation  of  invested  capital  for  1918,  or  should  be  made 
the  subject  of  adjustments  in  the  nature  of  deductions  from  invested  capital. 
Tfln  reply  you  are  advised  that  the  Munition  Manufacturer's  tax  was  laid 
"upon  the  entire  net  profits  actually  received  or  accrued,"  from  the  sale  or 
disposition  of  specific  munitions,  and  it  was  provided  in  Section  302  "That 
in  computing  net  profits  under  the  provisions  of  this  title,  for  the  purpose 
of  the  tax  there  shall  be  allowed  as  deductions  from  the  gross  amount  received 
or  accrued  for  the  taxable  year  from  the  sale  or  disposition  of  such  articles 
manufactured  within  the  United  States,  the  following  items:  *  *  * 
(f)  A  reasonable  allowance  according  to  the  conditions  peculiar  to  each 
concern,  for  amortization  of  the  values  of  building  and  machinery,  account 
being  taken  of  the  exceptional  depreciation  of  special  plants."  5flt  is  ap- 
parent from  this  language  that  the  amortization  allowance  in  question  was 
authorized  for  the  purpose  of  computing  "net  profits,"  not  net  "income." 
The  right  to  make  a  deduction  for  amortization  in  computing  net  income  for 
the  income  tax  did  not  exist  and  was  repeatedly  denied  by  the  Bureau  prior 
to  the  passage  of  the  Revenue  Act  of  1918.  It  is  to  be  noted  further  that 
the  taxes  imposed  by  Title  II  of  the  Revenue  Act  of  1917  and  Title  III  of  the 
Revenue  Act  of  1918  were  explicitly  laid  upon  "net  income,"  and  were  in  a 
variety  of  ways  impressed  with  the  stamp  and  character  of  an  income  rather 
than  a  munition  manufacturer's  tax.  They  are  in  no  sense  mere  continu- 
ations or  expansions  of  the  tax  imposed  by  Title  III  of  the  Revenue  Act  of 
1916.  It  follows,  therefore,  that  the  deduction  for  amortization  under  the 
Munition  Manufacturer's  Tax  law  was  not  allowed  for  income  tax  purposes 
and  should  not  now  be  permitted  to  affect  the  surplus  or  any  other  element 
entering  into  the  "invested  capital"  employed  for  purposes  of  the  war- 
profits  and  excess-profits  taxes.  ^fThis  conclusion  is  supported  by  the  char- 
acter of  the  amortization  allowance  in  question.  It  was  in  many  respects 
quite  dissimilar  from  the  depreciation  and  depletion  allowances.  It  was  not 
based  upon  the  fact  that  plant  and  equipment  acquired  in  the  year  1916  or 
earlier  for  the  manufacture  of  munitions,  actually  depreciated  in  use  or  market 
value  during  the  taxable  year  1916.  There  was  in  general  no  such  depreci- 
ation in  value  or  impairment  of  useful  life.    Account  was  taken  "of  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  353  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


exceptional  depreciation  of  special  plants"  but  the  principal  allowance  was 
"for  the  amortization  of  the  values  of  buildings  and  machinery,"  whether 
those  values  increased  or  decreased  in  the  immediate  future.  The  principal 
amortization  allowance  looked  to  the  establishment  of  a  special  fund  to  re- 
coup exceptional  war  costs  when  war  uses  had  ceased;  it  did  not  imply  that 
there  had  been  or  would  be  any  immediate  impairment  of  physical  assets, 
iuch  as  is  covered  by  the  depletion  allowance,  or  any  immediate  exhaustion, 
wear,  tear  or  obsolescence  in  excess  of  the  amount  covered  by  the  deprecia- 
tion allowance.  It  was,  as  stated,  a  special  allowance  peculiar  to  this  tax, 
designed  possibly  to  moderate  the  (then)  exceptionally  high  rates,  of  the 
Munition  Manufacturer's  Tax.  ^Reference  has  been  made  in  this  con- 
nection to  the  wording  of  Section  214  (a)  (9)  and  Section  234  (a)  (8)  authoriz- 
ing a  deduction  for  amortization  under  the  Revenue  Act  of  1918;  but  upon 
careful  examination  these  paragraphs  are  found  to  have  no  bearing  upon  the 
present  case.  \lt  is  held,  therefore,  that  the  amount  deducted  as  an  allow- 
ance for  amortization  under  the  Munitions  Manufacturer's  Tax  Law  will 
not  affect  the  computation  of  invested  capital  for  the  taxable  year  1918. 
(Letter  to  a  subscriber,  signed  by  Commissioner  Daniel  C.  Roper,  and  dated 
August  13,  1919.) 

764  Art.  840.    Surplus  and  Undivided  Profits:  Additions  to  Surplus 
558      Account. — A  corporation's  books  of  account  will  be  presumed  to  show 

the  facts.  If  it  claims  that  its  capital  or  surplus  account  is  under- 
stated the  burden  of  proof  will  rest  upon  it.  Additions  to  such  accounts  will 
be  accepted  to  the  following  extent: 

765  (1)  Excessive  depreciation  heretofore  charged  off  on  property  still 
owned  and  in  use,  if  it  is  now  shown  by  satisfactory  proof  to  have  been 

excessive  and  such  excess  is  substantial  in  amount,  whether  or  not  dis- 
allowed by  the  Commissioner  as  a  deduction  from  net  income,  may  be 
restored  to  the  surplus  account.  No  such  amount  shall  be  restored,  however, 
unless  it  is  shown  that  adequate  depreciation  has  been  deducted  upon  all 
other  property  of  the  corporation  still  in  use,  nor  in  any  case  in  which  such 
amount  has  been  allowed  as  a  deduction  for  amortization  under  section  234 
(a)  (8)  of  the  statute,  or  in  which  the  cost  of  the  property  has  been  recovered 
through  being  included  in  the  price  of  goods  or  services,  as  for  example, 
in  the  case  of  patterns,  dies,  plates,  special  tools,  etc.,  or  under  a  munition 
contract  with  a  foreign  government. 

766  (2)  Amounts  which  have  been  expended  before  January  1,  1917, 
for  the  acquisition  of  plant,  equipment,  tools,  patterns,  furniture, 

fixtures,  or  like  tangible  property,  having  a  useful  life  extending  substantially 
beyond  the  year  in  which  the  expenditure  was  made,  and  which  have  been 
charged  as  current  expense,  may  (less  proper  deductions  for  depreciation  or 
obsolescence)  be  added  to  the  surplus  account  when  such  assets  are  still  owned 
and  in  active  use  by  the  corporation  during  the  taxable  year.  Special  tools, 
patterns,  and  similar  assets  shall  not  be  assigned  any  value  if  their  cost  has 
been  recovered  through  having  been  included  in  the  price  of  goods.  If 
their  cost  has  not  been  so  recovered  and  they  are  held  for  only  occasional 
use,  they  shall  not  be  assigned  a  value  in  excess  of  the  fair  value  based  upon 
the  earnings  actually  arising  from  their  current  use,  and  in  no  case  shall  such 
value  be  more  than  the  cost  less  depreciation.  Assets  of  this  kind  not  in 
current  use  shall  not  be  valued  at  more  than  their  nominal  or  scrap  value. 

767  (3)  Amounts  which  have  been  expended  in  the  past  for  intangible 
property  of  any  kind  can  be  restored  to  capital  or  surplus  account 

only  to  the  extent  that  the  corporation  specifically  paid  such  amounts  for 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  354  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


the  intangible  property  as  such.  For  provisions  relating  to  patents  see  article 
843. 

768]     (4)  Adjustments  necessary  to  correct  other  errors  found  in  the  books 
of  account  may  be  made.    But  see  the  following  article.    (Art.  840, 
Reg.  45,  Rev.,  Jan.  28,  1921.) 

769  Art.  841.   Surplus  and  Undivided  Profits:  Limitation  of  Additions 
558      to  Surplus  Account. — Additions  to  surplus  which  a  corporation 

may  desire  to  make  under  the  preceding  article  fall  broadly  into  two 

classes  : 

770  (1)  To  correct  returns  of  net  income  for  prior  years  in  which  actual 
errors  have  been  made,  as  for  example  where  excessive  depreciation 

has  been  deducted,  additions  to  plant  and  equipment  or  other  capital  charges 
have  been  charged  off  as  an  expense,  inventories  have  been  taken  upon  a  wrong 
basis  of  valuation,  etc 

771  (2)  To  reinstate  in  surplus  deductions  from  income  which  are  as 
a  matter  of  good  accounting  to  some  extent  optional,  such  as  experi- 
mental expenses,  patent  litigation,  development  of  good  will  through  advertis- 
ing or  otherwise,  etc.    ]See  1J926.] 

772  Adjustments  falling  in  class  (1)  will  be  permitted  for  all  years  whether 
before  or  after  March  1,  1913,  provided  amended  returns  of  net  in- 
come are  filed  for  each  year  in  which  an  erroneous  return  has  been  made. 
Due  consideration  will  be  given  to  the  assessment  of  penalties  in  any  case 
in  which  a  fraudulent  return  has  been  made.  Adjustments  falling  in  class  (2) 
cannot  be  permitted,  as  in  such  cases  it  is  considered  that  the  corporation 
has  exercised  a  binding  option  in  deducting  such  expenses  from  income.  An 
election  of  this  sort  which  was  made  concurrently  with  the  transaction 
cannot  now  be  revised,  and  amended  returns  in  respect  thereof  cannot  be 
accepted.  The  corporation  shall  submit  whh  its  return  a  statement  of  the 
additions  proposed,  specifying  the  kinds  and  amounts  of  property  involved, 
the  years  in  which  the  expenditures  were  made,  and  the  method  followed 
in  distinguishing  between  capital  outlays  and  current  expenses,  and  showing 
that  adequate  provision  has  been  made  for  depreciation,  obsolescence  and 
depletion  of  such  of  the  assets  affected  by  the  additions  as  are  subject  to 
recognized  depreciation,  obsolescence  or  depletion.  In  any  case  in  which 
there  is  an  operating  deficit  amounts  restored  must  first  be  set  off  against 
the  deficit  and  only  the  excess  can  be  actually  included  in  the  computation 
of  invested  capital    (Art.  841,  Reg.  45,  Rev.,  Jan.  28,  1921.)   [See  U"926j 

773  Art.  842.    Surplus  and  Undivided  Profits:  Property  Paid  in  and 
Subsequently  Written  off. — Where  tangible  or  intangible  property 

has  been  paid  in  to  a  corporation  for  stock  or  shares  or  as  paid-in  surplus 
and  has  subsequently  been  in  whole  or  in  part  written  off  the  books,  the 
amount  so  written  off  may  upon  evidence  satisfactory  to  the  Commissioner 
be  restored  to  the  capita!  or  surplus  account  subject  to  the  following  limita- 
tions : 

774  (1)  The  amount  restored  must  be  reduced  by  a  proper  deduction 
for  any  depreciation,  obsolescence,  or  depletion;  and 

775  (2)  The  aggregate  amount  included  in  computing  invested  capital 
on  account  of  such  property  shall  not  exceed  the  amount  which 

might  have  been  included  if  such  property  had  not  been  written  off.  (Art. 
842,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  355  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  FXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


776  Art.  843.    Surplus  and  Undivided  Profits:   Patents. — From  the 
558      standpoint  of  assets  a  patent,  or  more  particularly  a  group  of  patents, 

is  closely  analogous  to  good  will.  Their  value  is  contingent  upon 
and  measured  by  their  earning  power.  While  patents  have  a  definite  life, 
there  is  a  common  tendency  to  extend  that  life  by  improvements  upon 
the  original,  and  in  a  successful  business  the  patent  value  merges  more  or 
less  completely  into  a  trade  name  or  other  form  of  good  will.  Therefore, 
while  deductions  in  respect  to  the  depreciation  of  patents  based  upon  a 
normal  life  period  of  seventeen  years  are  allowable  in  computing  net  income 
for  the  purpose  of  the  income  tax,  such  deductions  are  not  obligatory,  but 
are  optional  with  each  taxpayer.  Where  since  January  1,  1909,  a  corporation 
has  exercised  that  option  to  its  own  benefit  in  computing  its  taxable  net  income 
the  amount  so  deducted  can  not  now  be  restored  in  computing  invested 
capital.  Where,  however,  the  cost  of  patents  has  been  charged  against  surplus 
or  otherwise  disposed  of  in  such  a  manner  as  not  to  benefit  the  corporation 
in  computing  its  taxable  net  income  since  January  1,  1909,  any  amount  so 
written  off  may  be  restored  in  computing  invested  capital,  if  it  be  shown  to 
the  satisfaction  of  the  Commissioner  that  the  amount  so  written  off  repre- 
sented a  mere  book  entry  ascribable  to  a  conservative  policy  of  manage- 
ment or  accounting  and  did  not  represent  a  realized  shrinkage  in  the  value 
of  such  assets.  Any  amount  so  restored  may  not  be  written  off  by  way 
of  deductions  from  taxable  net  income  in  any  subsequent  year  or  years. 
Where  a  corporation  has  charged  to  current  expenses  the  cost  of  developing 
or  protecting  patents,  no  amount  in  respect  thereof  expended  since  January  1, 
1909,  can  be  restored  in  computing  invested  capital.  In  respect  of  expendi- 
tures made  before  January  1,  1909,  a  corporation  now  seeking  to  restore 
them  must  be  prepared  to  show  to  the  satisfaction  of  the  Commissioner  that 
all  such  items  are  proper  capital  expenditures.  It  can  not  be  said  that  the 
correct  computation  of  surplus  and  undivided  profits  necessarily  requires 
a  deduction  in  respect  of  the  expiration  of  patents.  It  follows,  therefore, 
that  where  a  corporation  in  the  exercise  of  its  option  has  not  written  down  the 
cost  of  patents,  it  is  not  ordinarily  necessary  to  reduce  the  surplus  and  un- 
divided profits  in  computing  invested  capital,  whether  the  patents  have  been 
acquired  for  stock  or  shares  or  for  cash  or  other  tangible  property.  Due 
consideration  will  be  given  to  the  facts  in  any  case  in  which  this  rule  seems 
obviously  unreasonable.  See  article  167.  (Art.  843,  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

777  Blank. 

778  Art.  844.  Surplus  and  Undivided  Profits :  Reserve  for  Depreciation 
558     or  Depletion. — If  any  reserves  for  depreciation  or  for  depletion  are 

included  in  the  surplus  account  it  should  be  analyzed  so  as  to  separate 
such  reserves  and  leave  only  real  surplus.  Reserves  for  depreciation  or 
depletion  can  not  be  included  in  the  computation  of  invested  capital,  except 
to  the  following  extent: 

779  (1)  Excessive  depletion  or  depreciation  included  therein  and  which 

if  charged  oft  could  be  restored  under  article  840  [1j764]  may  be 
included  in  the  computation  of  invested  capital;  and 

780  (2)  Where  depreciation  or  depletion  is  computed  on  the  value  as 
of  March  1,  1913,  or  as  of  any  subsequent  date,  the  proportion 

of  depreciation  or  depletion  representing  the  realization  of  appreciation  of 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         356  SERVICE 


1  2  22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.-  -1918  ACT. 


value  at  March  L  1913,  or  such  subsequent  date,  may  if  undistributed 
and  used  or  employed  in  the  business  be  treated  as  surplus  and  included 
in  the  computation  of  invested  capital. 

781  For  the  purpose  of  computing  invested  capital  depreciation  or 
depletion  computed  on  the  value  as  of  March  1,  1913,  or  as  of  any 
subsequent  date  shall,  if  such  value  exceeded  cost,  be  deemed  a  pro  rata 
realization  of  cost  and  appreciation  and  be  apportioned  accordingly.  Ex- 
cept as  above  provided  value  appreciation  (even  though  evidenced  by  an 
appraisal)  which  has  not  been  actually  realized  and  in  respect  of  amounts 
accrued  since  March  1,  1913,  reported  as  income  for  the  purpose  of  the  income 
tax,  can  not  be  included  in  the  computation  of  invested  capital,  and  if  already 
reflected  in  the  surplus  account  it  must  be  deducted  therefrom.  (Art.  844, 
Reg.  45,  Rev.,  Jan.  28,  1921.) 

78a  Art.  845.  Surplus  and  Undivided  Profits:  Reserve  for  Income  and 
558  Excess  Profits  Taxes. — For  the  purpose  of  computing  invested  capi- 
tal federal  income  and  war  profits  and  excess  profits  taxes  are 
deemed  to  have  been  paid  out  of  the  net  income  of  the  taxable  year  for 
which  they  are  levied.  It  is  immaterial,  therefore,  whether  reserves  for 
the  payment  of  such  taxes  for  the  preceding  year  have  been  set  up  or  not, 
or  if  set  up  whether  such  taxes  when  paid  have  actually  been  charged  against 
such  reserves.  Amounts  payable  on  account  of  such  taxes  for  the  preceding 
year  may  be  included  in  the  computation  of  invested  capital  only  until 
such  taxes  become  due  and  payable.  A  deduction  from  the  invested  capital 
as  of  the  beginning  of  the  taxable  year  must  therefore  be  made  for  such 
taxes  or  any  installment  thereof,  averaged  for  the  proportionate  part  of  the 
taxable  year  after  date  when  the  tax  or  the  installment  is  due  and  payable 
Where  as  a  result  of  an  audit  by  the  Commissioner,  or  the  acceptance  of 
an  amended  return,  or  for  any  other  reason,  the  amount  of  any  such  tax 
for  the  preceding  year  is  subsequently  changed,  a  corresponding  adjust- 
ment will  be  made  in  the  invested  capital  for  the  taxable  year  upon  the  same 
basis  as  if  the  corrected  amount  of  the  tax  for  the  preceding  year  had  been  used 
in  the  original  computation  of  the  invested  capital  for  the  taxable  year. 
(Art.  845,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

783     Art.  845  (a).    Surplus  and  undivided  profits:    Reserve  for  1918 
income  and  excess  profits  taxes  of  corporations  having  a  fiscal  year. 

— In  case  of  corporations  having  a  fiscal  year,  the  Federal  income  and 
profits  taxes  for  the  taxable  year  1918  shall,  for  the  purpose  of  computing 
invested  capital  for  the  taxable  year  1919  be  deemed  to  become  due  and 
payable  as  follows:  (a)  As  to  such  amounts  as  became  due  and  payable 
prior  to  February  25,  1919,  under  the  provisions  of  Section  14  (a),  Revenue 
Act  of  1916,  such  law  shall  govern;  (b)  in  all  other  respects  the  provisions 
of  Section  250  of  the  Revenue  Act  of  1918  shall  govern  except  that  the 
installments  which  would  become  due  prior  to  February  25,  1919,  shall  be 
deemed  to  become  due  and  payable  on  that  date;  (c)  Any  amounts  which 
became  due  and  payable  under  said  Section  14  (a)  prior  to  February  25 
shall,  so  far  as  possible,  be  deemed  to  cancel  earlier  installments  payable 
under  said  section  250.  For  example,  a  corporation  whose  fiscal  year  ended 
August  31,  1918,  is  assessed  a  total  income  and  profits  tax  under  the  1917 
law  of  $250,000  and  an  additional  tax  under  the  1918  law  of  $110,000.  The 
total  tax  of  $360,000  would,  for  the  purpose  of  computing  invested  capital, 
be  deemed  to  become  due  and  payable  as  follows:   February  12,  1919, 

Copyright  1922,  by  Tht  Corporation  Trust  Company, 
WAR  TAX  .  ;     357  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.-   1918  ACT. 


$250,000;  May  15,  1919,  $20,000;  August  15,  1919,  $90,000.  If, 
assuming  the  same  taxes,  the  fiscal  year  ended  September  30,  1918,  the 
total  tax  would  for  the  purpose  of  computing  invested  capital,  be  deemed 
to  become  due  and  payable  as  follows:  February  25,  1919,  $90,000;  March  15, 
1919,  $90,000;  June  15,  1919,  $90,000;  September  15,  1919,  $90,000.  The 
provisions  of  this  article  apply  solely  for  the  purpose  of  computing  invested 
capital  and  do  not  affect  the  provisions  of  T.  D.  2797  in  regard  to  the  time 
and  manner  of  paying  taxes  where  corporations  have  filed  returns  for  fiscal 
years  ending  in  1918.    (Art.  845  (a),  Reg.  45,  Rev.,  Jan.  28,  1921.) 

784  Blank. 

785  Installment  due-and-payable  dates  govern  in  apportioning  reserves 
for  taxes  for  invested  capital  purposes. — "Tfln  the  preparation  of 

1919  corporation  tax  returns  we  would  like  to  know  if  we  will  be  permitted 
in  the  computation  of  invested  capital  under  schedule  "H,"  Form  1120,  to 
compute  our  taxes  as  having  been  paid  in  quarterly  installments,  or,  will 
we  be  forced  to  deduct  from  invested  capital  the  full  amount  of  taxes  paid 
on  the  date  remitted  to  the  collector?" 

786  In  reply  you  are  advised  that  the  date  when  the  1918  taxes  were 
actually  paid  has  no  bearing  on  the  computation  of  the  invested 

capital  of  the  corporation  for  the  year  1919,  inasmuch  as  the  controlling 
factor  is  the  date  when  such  taxes  were  "due  and  payable,"  and  not  the 
date  when  they  were  actually  paid.  In  other  words,  the  amount  of  each 
installment  of  the  tax  for  1918  will  remain  a  part  of  tiie  invested  capital 
for  1919  until  such  installment  is  due  and  payable,  and  when  such  install- 
ment is  due,  an  adjustment  should  be  made  in  the  nature  of  a  deduction 
from  invested  capital  under  Schedule  H  (d),  on  page  5,  of  Form  1120-A. 
(Letter  to  Simon  Bros.,  Ltd.,  Alexandria,  La.,  signed  by  P.  S.  Talbert,  Acting 
Assistant  to  the  Commissioner,  by  C.  R.  Trobridge,  Acting  Head  of  Divi- 
sion, and  dated  September  22,  1919,  made  available  through  the  courtesy 
of  Cox  and  Flournoy,  Alexandria,  La.) 

787  Art.  846.   Surplus  and  undivided  profits:  Insurance  on  officers. — 

558  Where  insurance  is  carried  by  the  corporation  on  the  life  of  an  officer 
or  employee,  the  policy  may  be  included  as  an  admissible  asset  and 
reflected  in  the  surplus  account  at  the  cash  surrender  value  as  of  the  begin- 
ning of  the  taxable  year.  The  whole  amount  of  premiums  paid  on  such 
insurance  can  not  be  included  in  surplus,  but  the  surplus  will  be  considered 
as  increased  as  of  the  beginning  of  each  taxable  year  by  the  amount  added 
to  the  cash  surrender  value  of  the  policy.  (Art.  846,  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

788  Art.  847.   Surplus  and  undivided  profits:  Property  taken  for  debt 
558      or  in  exchange. — Real  or  personal  property  taken  by  a  corporation 

in  payment  or  satisfaction  of  a  debt,  or  property  received  in  exchange 
for  other  property,  will  be  an  admissible  asset  at  its  fair  market  value  upon 
receipt.  The  profit  or  loss,  if  any,  resulting  from  the  transaction  will  not  be 
reflected  in  invested  capital  until  the  succeeding  taxable  year.  But  see  as^to 
the  foreclosure  of  a  mortgage  article  153.  See  also  section  202  of  the  statute 
and  articles  1561-1570.    (Art.  847,  Reg.  45,  Rev.,  Jan  28,  1921.) 

789  Blank. 

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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


700     Art.  848.  Surplus  and  undivided  profits :  Discount  on  sale  of  bonds. 

558  — Discount  allowed  on  the  sale  of  bonds  is  in  effect  an  advance  on 
account  of  interest,  so  that  the  effective  rate  of  interest  in  such  a 
case  is  equal  to  the  sum  of  the  nominal  rate  plus  the  rate  necessary  to  amortize 
the  discount  over  the  life  of  the  bonds.  Where,  under  incorrect  accounting 
practices,  the  discount  on  bonds  has  been  charged  to  a  property  account 
or  otherwise  carried  as  an  asset,  and  is  so  reflected  in  the  surplus  account, 
it  is  necessary  in  computing  invested  capital  to  make  an  adjustment  in  respect 
of  such  discount.    See  article  563.    (Art.  848,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

781      Art.  849.    Surplus  and  undivided  profits:   Miscellaneous.— Only 

558  the  amount  of  discount  which  has  actually  been  reported  by  a  bank 
in  a  prior  year  as  taxable  income  and  credited  to  surplus  account 
may  be  included  in  surplus  as  of  the  beginning  of  the  taxable  year.  For 
the  treatment  of  surplus  arising  out  of  sales  on  the  installment  plan  see 
articles  42-46,  and  from  compensation  for  property  lost,  damaged,  or  con- 
demned, see  articles  49  and  50.    (Art.  849,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

792  to  302  Blank. 

803  Art.  850.   Surplus  and  Undivided  Profits:  Current  Profits.— Profits 

558  earned  during  any  year  can  not  be  included  in  the  computation  of 
invested  capital  for  that  year,  even  though  during  the  year  such 

profits  are  set  up  as  surplus  on  the  books  or  assumed  to  be  distributed  in 
the  form  of  stock  dividends.  If  a  dividend  is  declared  and  paid  during 
any  year  out  of  the  profits  of  that  year  and  the  stockholders  pay  back  into 
the  corporation  all  or  a  substantial  part  of  the  amount  of  such  dividends, 
the  amount  so  paid  back  can  not  be  included  in  the  computation  of  invested 
capital  unless  the  corporation  shows  by  evidence  satisfactory  to  the  Commis- 
sioner that  the  dividends  were  paid  in  good  faith  and  without  any  understand- 
ing, express  or  implied,  that  thev  were  to  be  paid  back.  (Art.  850,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

804  Art.  851.  Intangible  Property  Paid  In. — The  actual  cash  value  of 

559  intangible  property  paid  in  for  stock  or  shares  must  be  determined 

560  in  the  light  of  the  facts  in  each  case.   Among  the  factors  to  be  con- 
s:dered  are  (a)  the  earnings  attributable  to  such  intangible  assets 

while  in  the  hands  of  the  predecessor  owner;  (b)  the  earnings  of  the  cor- 
poration attributable  to  the  intangible  assets  after  the  date  of  their  acquisi- 
tion; (c)  representative  sales  of  the  stock  of  the  corporation  at  or  about  the 
date  of  the  acquisition  of  the  intangible  assets;  and  (d)  any  cash  offers  for 
the  purchase  of  the  business,  including  the  intangible  property,  at  or  about 
the  time  of  its  acquisition.  A  corporation  claiming  a  value  for  intangible 
property  paid  in  for  stock  or  shares  should  file  with  its  return  a  full  state- 
ment of  the  facts  relating  to  such  valuation.  See  also  article  835  [for  mix- 
ture of  tangible  and  intangible  property  paid  in,  If 756].  (Art.  851,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

805  Art.  852.   Percentage  of  Inadmissible  Assets. — For  the  purpose  of 
562      ascertaining  the  deductible  percentage  the  amount  of  inadmissible 

assets  held  during  the  year  may  ordinarily  be  determined  by  dividing 
by  two  the  sum  of  the  amount  of  such  assets  held  at  the  beginning  of  the 
year  and  the  amount  held  at  the  end  of  the  year.   The  total  amount  of  ad- 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


missibleand  in  admissible  assets  held  during  the  year  may  ordinarily  be  de- 
termined by  dividing  by  two  the  sum  of  the  amount  of  such  assets  held 
at  the  beginning  of  the  year  and  the  amount  at  the  end  of  the  year.  If 
at  any  time  a  substantial  change  has  taken  place  either  in  the  amount  of 
inadmissible  assets  or  in  the  total  amount  of  admissible  and  inadmiss'ble 
assets,  the  effect  of  such  change  shall  be  averaged  exactly  from  the  date  on 
which  it  occurred.  In  any  case  where  the  Commissioner  finds  that  either 
amount  determined  as  above  provided  does  not  substantially  reflect  the  aver- 
age situation  throughout  the  year,  and  that  the  amount  of  each  kind  of  as- 
sets held  on  a  given  day  of  each  month  throughout  the  year  or  at  more  fre- 
quent regular  intervals  can  be  determined,  the  amount  of  inadmissible  assets 
and  the  amount  of  both  kinds  of  assets  held  during  the  year  shall  be  de- 
termined by  averaging  the  amounts  held  at  such  several  times.  In  making 
the  computations  under  this  article  the  valuation  at  which  each  asset  is 
carried  shall  be  adjusted  in  accordance  with  the  provisions  of  the  statute 
and  of  the  regulations  relating  to  the  valuation  of  assets  for  the  purpose 
of  computing  invested  capital,  including  in  such  adjustment  the  amount  of 
reserves  for  depreciation,  depletion,  amortization  and  other  reserves  which 
represent  the  valuation  of  assets.  It  is  immaterial  whether  any  asset  was 
acquired  out  of  invested  capital  or  out  of  profits  earned  during  the  year 
or  borrowed  capital.    (Art.  852,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

806  Art.  853.   Changes  in  Invested  Capital  During  Year. — The  invested 
563      capital  as  of  the  beginning  of  any  period  of  one  year  or  less  should 

be  adjusted  by  an  appropriate  addition  or  deduction  for  each  change 
in  invested  capital  during  the  period.  The  amount  so  added  or  deducted  in 
each  case  is  the  amount  of  the  change  averaged  for  the  time  remaining  in 
the  period  during  which  it  is  in  effect.  The  fraction  used  in  finding  such 
average  is  the  number  of  days  remaining  in  the  period  (including  the  day 
on  which  the  change  occurs)  over  the  number  of  days  in  the  period.  Thus 
if  a  return  is  made  for  the  calendar  year  ending  December  31,  1918,  and  if 
$100,000  of  additional  capital  was  paid  in  on  February  17,  1918,  this  addi- 
tion to  invested  capital  is  in  effect  for  318  days,  and  the  amount  to  be  added 
to  the  invested  capital  as  of  the  beginning  of  the  year  would  be  318/365 
of  $100,000,  or  $87,123.29.  If  $50,000  of  this  amount  was  withdrawn  cn 
October  31,  1918,  the  amount  to  be  deducted  would  be  62/365  of  $50,000, 
or  $8,493.15.    (Art.  853,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

807  Art.  854.   Computation  of  Average  Invested  Capital. — For  the  pur- 
pose of  computing  invested  capital  for  any  period  of  one  year  or  less 

each  corporation  shall  add  together  its  paid-in  capital  and  its  paid-in  or 
earned  surplus  and  undivided  profits  (under  whatever  name  it  may  be  called) 
as  shown  by  its  books  at  the  beginning  of  the  period.  The  total  so  obtained 
shall  be  adjusted  (a)  for  any  property  paid  in,  or  for  any  asset  reflected 
in  surplus  and  undivided  profits,  which  is  not  carried  on  the  books  at  the 
valuation  prescribed  by  the  statute  or  by  the  regulations,  and  (b)  for  any 
changes  in  paid-in  capital  or  in  paid-in  or  earned  surplus  and  undivided 
profits  (not  including  surplus  and  undivided  profits  earned  during  the  period) 
occurring  during  the  period,  averaged  for  the  time  for  which  such  changes 
are  effective.  See  article  853  [for  changes  in  invested  capital  during  year, 
^[806].  The  total  so  obtained  and  adjusted  is  the  average  invested  capital 
for  the  period,  unless  the  corporation  at  any  time  during  the  period  held  any 

Copyright  1922,  by  Tht  Corporation  Trust  Company: 
WAR  TAX  360  SERVICE 


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inadmissible  assets,  in  which  case  such  total  must  be  reduced  by  a  percentage 
thereof  equal  to  the  percentage  which  the  amount  of  inadmissible  assets 
held  during  the  period  is  of  the  total  amount  of  admissible  and  inadmissible 
assets  held  during  the  period.  See  article  852  [1(805].  The  invested  capital 
for  any  year  during  the  prewar  period  is  determined  in  the  same  manner  as 
for  the  taxable  year.  The  invested  capital  can  not  be  determined  by  adding 
the  amounts  of  the  assets  of  a  corporation.  |.(Art.  854.  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

808  Art.  855.  Invested  Capital  for  Full  Year  or  Less. — In  the  case  of 
a  corporation  making  a  return  for  a  full  year  of  12  months,  its  in- 
vested capital  for  the  year  is  the  average  invested  capital  for  the  year.  In 
the  case  of  a  corporation  making  a  return  for  a  fractional  part  of  a  year,  its 
invested  capital  for  such  period  is  the  same  fractional  part  of  the  average 
invested  capital  for  such  period,  except  that  for  the  purpose  of  section  311 
(a)  (2)  [computation  of  war-profits  credit,  1(532]  of  the  statute  it  is  the  full 
average  invested  capital  for  the  period.  In  computing  the  tax  under  a  return 
for  a  fractional  part  of  a  period  the  same  purpose  may  sometimes  be  more 
readily  effected  by  using  the  full  average  invested  capital  and  taking  a 
fractional  part  of  the  result,  as  in  schedule  III  of  form  1120,  used  for  1918. 
In  schedule  IV  of  the  same  form,  however,  the  fractional  part  of  the  full 
average  invested  capital  for  the  period  should  be  used.  See  articles  720 
[for  illustration  of  computation,  1(634]  and  853  [for  changes  in  invested  capital 
during  year,  1(806].    (Art.  855,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

809  Art.  856.  Illustration  of  Invested  Capital  for  Fractional  Part  of  Year. 

— A  corporation  was  organized  July  1,  1918,  and  makes  a  return  for 
the  six  months  ending  December  31,  1918.  The  invested  capital  consists  of 
$100,000  paid  in  on  July  1  and  $100,000  paid  in  on  October  1.  The  average 
invested  capital  for  such  period  would  be  $100,000  plus  92/184  (not  92/365) 
of  $100,000,  or  $50,000,  a  total  of  $150,000.  The  invested  capital  for  the 
period  for  the  purpose  of  the  tax  would,  however,  be  6/12  of  $150,000,  or 
$75,000.  But  see  section  311  (a)  (2)  of  the  statute  [for  computation  of  war- 
profits  credit,  1(532].    (Art.  856,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

810  Art.  857.     Method  of  Determining  Available  Net  Income. — 

558  Whether  at  the  time  of  any  payment  made  during  the  taxable  year 
there  is  sufficient  income  of  the  taxable  year  available  for  such  pay- 
ment, or  whether  the  surplus  or  undivided  profits  as  of  the  beginning  of  the 
taxable  year  must  be  reduced  by  the  amount  of  such  payment  shall  be 
determined  according  to  the  following  principles: 

811  (1)  The  aggregate  amount  of  earnings  of  the  taxable  year  avail- 
able for  all  purposes  up  to  any  given  date  will  be  determined  upon 

the  basis  of  the  same  proportion  of  the  net  income  for  the  taxable  year  (as 
finally  determined  for  the  purpose  of  income  and  war  profits  and  excess 
profits  taxes)  as  the  part  of  the  year  already  elapsed  is  of  the  entire  year 
(determined  in  the  manner  provided  in  article  853  [1(806]),  unless  the  cor- 
poration shows  from  its  books  or  other  records  that  a  greater  proportion  of 
its  earnings  for  the  year  was  available  on  such  date. 

812  (2)  The  aggregate  amount  available  will  be  deemed  to  be  applied 
for  the  following  purposes  in  the  order  in  which  they  are  stated: 

(a)  accrued  federal  income  and  war  profits  and  excess  profits  taxes  for  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         361  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


taxable  year  (see  article  845  [1J782]),  and  (b)  dividends  paid  after  the  expira- 
tion of  the  first  sixty  days  of  the  taxable  year  (see  section  201  of  the  statute 
[law  1|505]  and  article  1541  [Income  Tax  Service])  and  other  corporate  pur- 
poses, including  the  purchase  of  outstanding  stock  of  the  corporation  pre- 
viously issued  (see  article  862  [1|817]).  In  any  case  where  the  above  computa- 
tion would  be  indeterminate  because  of  the  effect  of  the  provisions  of  this 
article  upon  the  invested  capital  for  the  year,  the  amount  of  such  invested 
capital  for  the  purpose  of  this  computation  may  be  deemed  to  be  the  invested 
capital  as  of  the  beginning  of  the  taxable  year,  plus  any  additional  capital 
paid  in  during  such  year  and  minus  any  specific  withdrawal  or  liquidation 
of  capital  during  such  year.    (Art.  857,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

813  Art.  858.    Effect  of  Ordinary  Dividend, — A  dividend  other  than  a 
558      stock  dividend  affects  tfre  computation  of  invested  capital  from  the 

date  when  the  dividend  is  payable  and  not  from  the  date  when  it  is 
declared,  except  that  where  no  date  is  set  for  its  payment  the  date  when 
declared  will  be  considered  also  the  date  when  payable  for  the  purpose  of  this 
article.  For  the  purpose  of  computing  invested  capital  a  dividend  paid  after 
the  expiration  of  the  first  sixty  days  of  the  taxable  year  will  be  deemed  to  be 
paid  out  of  the  net  income  of  the  taxable  year  to  the  extent  of  the  net  income 
available  for  such  purpose  on  the  date  when  it  is  payable.  See  article  857. 
[1[810].  The  surplus  and  undivided  profits  as  of  the  beginning  of  the  tax- 
able year  will  be  reduced  as  of  the  date  when  the  dividend  is  payable  by  the 
entire  amount  of  any  dividend  paid  during  the  first  sixty  days  of  the  taxable 
year  and  by  the  amount  of  any  other  dividend  in  excess  of  the  current  net 
income  available  for  its  payment.  In  the  case  of  a  dividend  paid  during  the 
first  sixty  days  of  a  taxable  year  which  exceeds  in  amount  the  surplus  and 
undivided  profits  as  of  the  beginning  of  the  taxable  year  the  excess  will  be 
deemed  to  be  paid  out  of  earnings  of  the  taxable  year  available  at  the  date 
when  the  dividend  is  payable,  and  to  the  extent  that  such  earnings  are  insuf- 
ficient it  will  be  deemed  to  be  a  liquidation  of  paid-in  capital  or  surplus. 
From  the  date  when  any  dividend  is  payable  the  amount  which  the  several 
stockholders  are  entitled  to  receive  will  be  treated  as  if  actually  paid  to  them, 
whether  or  not  it  is  so  paid  in  fact,  and  the  surplus  and  undivided  profits, 
either  of  the  taxable  year  or  of  the  preceding  years,  will  in  accordance  with 
the  foregoing  provisions  be  deemed  to  be  reduced  as  of  that  date  by  the  full 
amount  of  the  dividend.  Amounts  paid  to  stockholders  in  anticipation  of 
dividends,  or  amounts  withdrawn  by  stockholders  in  excess  of  dividends 
declared,  will  in  computing  invested  capital  have  the  same  effect  as  if  actually 
paid  as  dividends.  See  also  article  813  [for  amounts  left  in  business  by  stock- 
holders, 1f740],  and  see  generally  section  201  [for  dividends,  ^[505]  and  articles 
1541-1549  [for  taxable  status  of  dividends  generally].  (Art.  858,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

814  Art.  859.   Effect  of  Stock  Dividend. — Neither  the  payment  nor  the 
receipt  of  a  true  stockjiividend  has  any  effect  upon  the  amount  of 

invested  capital.  Such  items^as  appraised  value  of  good /will,  appreciation 
in  valueaof  real  estate  or  other  tangible  property,  etc.,  although  carried  to 
surplus  and  distributed  as  stock  dividends,  can  not  in  this  manner  be  capit- 
alized and  included  in  computing  invested  capital.  If  a  corporation  has 
paid  a  stock  dividend  in  excess  of  its  true  surplus,  it  can  not  be  deemed 
to  have  any  greater  invested  capital  than  could  have  been  computed  had 

Copyright  1922,  by  Tim  Corporation  Trust  Company. 
WAR  TAX  362  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


no  such  stock  dividend  been  paid.  (Art.  859.  Reg.  45,  Rev.,  Jan.  28,  1921.) 
[See  1f889.] 

815  Art.  860.    Impairment  of  Capital. — Capital  or  surplus  actually  paid 
556      in  is  not  required  to  be  reduced  because  of  an  impairment  of  capital 

in  the  nature  of  an  operating  deficit,  except  where  there  has  been 
directly  or  indirectly  a  liquidation  or  return  of  their  investment  to  the  stock- 
holders, in  which  case  full  effect  must  be  given  to  any  liquidation  of  the 
original  capital.    (Art.  860,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

816  Art.  861.    Surrender  of  Stock. — Where  stock  which  has  originally 
556      been  issued  or  exchanged  by  the  corporation  for  property  (tangible 

or  intangible)  is  returned  to  the  corporation  as  a  gift  or  for  a  con- 
sideration substantially  less  than  its  par  value,  the  stock  so  returned  shall 
not  be  treated  as  a  part  of  the  stock  issued  or  exchanged  for  such  property. 
The  proceeds  derived  in  cash  or  its  equivalent  from  the  resale  of  the  stock 
so  returned  shall,  however,  be  included  in  computing  invested  capital.  See 
article  542.    (Art.  861,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

8 1 7  Art.  862.    Purchase  of  Stock. — Where  a  corporation  either  di- 
556      rectly  or  indirectly,  as  for  example  through  a  trustee,  has  prior  to 

the  taxable  year  bought  its  own  stock,  either  for  the  purpose  of 
retirement  or  of  holding  it  in  the  treasury  or  for  other  purposes,  the  entire 
cost  of  such  stock  must  be  deducted  from  the  aggregate  invested  capital  as 
of  the  beginning  of  the  taxable  year,  if  such  deduction  has  not  already  been 
made.  Where  such  stock  is  purchased  during  the  taxable  year  a  deduction 
from  the  invested  capital  as  of  the  beginning  of  the  taxable  year  and  effective 
from  the  date  of  such  purchase  is  required  only  to  the  extent  that  such  stock 
has  not  been  purchased  out  of  the  undivided  profits  of  the  taxable  year. 
See  article  857  [for  method  of  determining  available  net  income,  H810J. 
The  full  amount  derived  in  cash  or  its  equivalent  from  the  resale  of  such 
stock  may  be  included  in  the  invested  capital  from  the  date  of  such  resale, 
unless  such  stock  had  been  purchased  out  of  earnings  of  the  taxable  year. 
See  article  542.    (Art.  862,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

818  and  819  Blank. 

820  Art.  863.  Invested  Capital  and  other  Measures  of  Capital. — (a)  The 
invested  capital  as  here  defined  may  differ  from  the  capital  as  shown 
on  the  books  of  the  corporation.  In  such  event  no  changes  should  be  made 
in  the  books  themselves.  The  corporation  should,  however,  in  all  cases 
keep  a  permanent  record  of  the  adjustments  which  are  made  in  computing 
invested  capital,  (b)  Section  1000  of  the  statute  imposes  a  tax  on  the  fair 
value  of  the  capital  stock  of  corporations  [Capital  Stock  Tax,  1J3000  herein]. 
As  in  the  case  of  the  war  profits  and  excess  profits  tax  the  invested  capital 
is  based  upon  the  actual  investment  of  the  stockholders  in  the  corporation, 
irrespective  of  the  present  value  of  its  assets,  and  in  the  case  of  the  capital 
stock  tax  the  fair  value  looks  to  the  present  value  of  the  corporation's  assets, 
irrespective  of  the  amount  of  the  investment  of  the  stockholders  therein, 
the  amount  determined  as  the  fair  value  of  the  capital  stock  for  the  purpose 
of  the  capital  stock  tax  can  have  no  bearing  upon  the  determination  of  in- 
vested capital.  See  also  article  1561  [or  articles  831,  ^1 75 1,  for  statement 
that  "the  fair  market  value  of  the  assets  as  of  March  1,  1913,  has  no  bearing 
on  invested  capital"].    (Art  863,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         363  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


821  Art.  864.   Affiliated  corporations:  Invested  capital. — The  invested 

587  capital  of  affiliated  corporations,  as  denned  in  section  240  (b)  of  the 
statute  [law  Tf589]  and  article  633  for  the  taxable  year  is  the 
invested  capital  of  the  entire  group  treated  as  one  unit  operated  under 
a  common  control.  As  a  first  step  in  the  computation  a  consolidated  balance 
sheet  should  be  prepared  in  accordance  with  standard  accounting  practices, 
which  will  reflect  the  actual  assets  and  liabilities  of  the  affiliated  group. 
In  preparing  such  a  balance  sheet  all  intercompany  items,  such  as  inter- 
company notes  and  accounts  receivable  and  payable,  should  be  eliminated 
from  the  assets  and  the  liabilities,  respectively,  and  proper  adjustments 
should  be  made  in  respect  of  intercompany  profits  or  losses  reflected  in  in- 
ventories which  at  the  beginning  or  end  of  the  taxable  year  contain  mer- 
chandise exchanged  between  the  corporations  included  in  the  affiliated  group 
at  prices  above  or  below  cost  to  the  producing  or  original  owner  corporation. 
Such  consolidated  balance  sheet  will  then  show  (a)  the  capital  stock  of  the 
parent  or  principal  company  in  the  hands  of  the  public;  (b)  the  consolidated 
surplus  belonging  to  the  stockholders  of  the  parent  or  principal  company; 
and  (c)  the  capital  stock,  if  any,r  of.  subsidiary  companies  of  which  substan- 
tially all  the  capital  stock  is  not  owned  or  controlled^by  the  parent  or  prin- 
cipal company,  together  with  the  surplus,  if  any,  belonging  to  such  minority 
interest.  In  computing  consolidated  invested  capital  the  starting  point  is 
furnished  by  the  total  of  the  amounts  shown  under  (a),  (b),  and  (c)  above. 
This  total  must  be  increased  or  diminished  by  any  adjustments  required 
to  be  made  under  the  provisions  of  sections  325,  326,  330,  and  331  of  the 
statute  and  articles  811-818,  831-869,  931-934,  and  941  of  the  regulations, 
except  as  otherwise  provided  in  articles  865-868.  (Art.  864,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

822  Blank. 

823  Art.  865.    Affiliated  Corporations:   Intangible  Property  Paid  In. — 

587  (1)  In  respect  of  corporations  whose  affiliation  is  in  the  nature  of 
parent  and  subsidiary  companies :  {a)  in  the  case  of  intangible  prop- 
erty bona  fide  paid  in  for  stock  or  shares  prior  to  March  3,  1917,  there  may 
be  included  in  invested  capital  an  amount  not  exceeding  the  actual  cash 
value  of  such  property  at  the  time  paid  in,  or  the  par  value  of  the  stock  or 
shares  issued  therefor,  or  in  the  aggregate  25  per  cent  of  the  par  value  of 
the  total  stock  or  shares  of  the  consolidation  outstanding  on  March  3,  1917 
(determined  as  indicated  in  items  (a)  and  (c)  in  article  864  [,,f821]),  or  in  the 
aggregate  25  per  cent  of  the  par  value  of  the  total  stock  or  shares  shown  on 
the  consolidated  balance  sheet,  being  the  amount  of  the  capital  stock  included 
in  items  (a)  and  (c)  in  article  864  [1|821]  at  the  beginning  of  the  taxable  year, 
whichever  is  lowest;  and  (b)  in  the  case  of  intangible  property  bona  fide  paid 
in  for  stock  or  shares  on  or  after  March  3,  1917,  there  may  be  included  in 
invested  capital  an  amount  not  exceeding  the  actual  cash  value  of  such 
property  at  the  time  paid  in,  or  the  par  value  of  the  stock  or  shares  issued 
therefor,  or  in  the  aggregate  25  per  cent  of  the  par  value  of  the  total  stock  or 
shares  shown  by  the  consolidated  balance  sheet,  being  the  amount  of  the 
capital  stock  included  in  items  (a)  and  (c)  in  article  864  [1j82l]  outstanding 
at  the  beginning  of  the  taxable  year,  whichever  is  lowest,  (c)  When  intangible 
property  has  been  acquired  in  part  before  and  in  part  after  March  3,  1917, 
the  amounts  shall  be  ascertained,  respectively,  under  (a)  and  (b)  above 
and  in  the  aggregate  shall  in  no  case  exceed  25  per  cent  of  the  par  value  of 
the  total  stock  or  shares  outstanding  at  the  beginning  of  the  taxable  year 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         364  SERVICE 


1-2-22.  §326. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.    1918  ACT. 


shown  in  the  consolidated  balance  sheet,  being  the  amount  of  the  capital 
stock  included  in  items  (a)  and  (c)  in  article  864  [1182 1]. 

824  (2)  In  respect  of  corporations  affiliated  by  reason  of  stock  ownership 
587       or  control  by  the  same  interests,  the  limitations  set  forth  in  paragraphs 

.  (4)  [1|559]  and  (5)  [H560]  of  subdivision  (a)  of  section  326  of  the  statute 
shall  be  applied  to  each  corporation  separately  and  the  aggregate  of  the 
intangible  property,  so  valued,  shall  be  included  in  invested  capital  in  the 
consolidated  return.  In  respect  of  each  of  the  affiliated  corporations  the 
aggregate  of  the  amounts  ascertained  under  the  provisions  of  paragraphs 
(4)  [1|559]  and  (5)  [U560]  shall  in  no  case  exceed  25  per  cent  of  the  outstanding 
capital  stock  of  such  corporation  at  the  beginning  of  the  taxable  year.  (Art. 
865,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

825  Art.  866.     Affiliated  Corporations:   Inadmissible  Assets.— Where 
587      adjustment  is  required  in  respect  of  inadmissible  assets  in  accord- 
ance with  the  provisions  of  subdivision  (c)  [H562]  of  section  326  of 

the  statute,  such  adjustment  shall  be  made  on  the  basis  of  the  consolidated 
balance  sheet  with  due  regard  to  the  adjustments  and  eliminations  set  forth 
in  articles  864  [H821]  and  865  [1[823]  and  to  the  provisions  of  articles  815- 
818  [beginning  at  1(743].    (Art.  866,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

826  Art.  867.  Affiliated  Corporations:  Stock  of  Subsidiary  Acquired 
587      for  Cash. — When  all  or  substantially  all  of  the  stock  of  a  subsidiary 

corporation  was  acquired  for  cash,  the  cash  so  paid  shall  be  the 
basis  to  be  used  in  determining  the  value  of  the  property  acquired.  (Art. 
867,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

827  Art.  868.  Affiliated  Corporations :  Stock  of  Subsidiary  Acquired  for 
587      Stock. — Where  stock  of  a  subsidiary  company  was  acquired  with  the 

stock  of  the  parent  company,  the  amount  to  be  included  in  the  con- 
solidated invested  capital  in  respect  of  the  company  acquired  shall  be  com- 
puted in  the  same  manner  as  if  the  net  tangible  assets  and  the  intangible 
assets  had  been  acquired  instead  of  the  stock.  If  in  accordance  with  such 
acquisition  a  paid-in  surplus  is  claimed,  such  claim  shall  be  subject  to  the 
provisions  of  article  837  [1[760].    (Art.  868,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

828  Art.  869.    Affiliated  Corporations:   Invested  Capital  for  Prewar 
587     Period. — The  invested  capital  of  affiliated  corporations  for  the  pre- 
war period  shall  be  computed  on  the  same  basis  as  the  invested  capital 

for  the  taxable  year,  except  that  where  any  one  or  more  of  the  corporations 
included  in  the  consolidation  for  the  taxable  year  were  in  existence  during 
the  prewar  period,  but  were  not  then  affiliated  as  herein  defined,  then  the 
average  consolidated  invested  capital  for  the  prewar  period  shall  be  the 
average  invested  capital  of  the  corporations  which  were  affiliated  in  the  pre- 
war period  plus  the  aggregate  of  the  average  invested  capital  for  each  of  the 
several  corporations  which  were  not  affiliated  during  the  prewar  period.  Full 
recognition,  however,  must  be  given  to  the  provisions  of  section  330  of  the 
statute  [H575],  particularly  the  last  paragraph  thereof  [1J578],  and  of  articles 
931-934  [beginning  at  1(837:  all  having  to  do  with  reorganizations].  (Art. 
869,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

829  Art.  870.  Insurance  Companies. — The  reserve  funds  of  life  insurance 
551  companies,  the  net  additions  to  which  are  deductible  from  gross  in- 
561       come  under  the  provisions  of  Section  234  of  the  statute,  can^not  be 

included  in  computing  invested  capital.    The  like  reserve  funds  of 

Copyright  1922,  by  Tht  Corporation  Trust  Company: 
WAR  TAX         365  SERVICE 


1-2-21.  §328. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1913  ACT. 


insurance  companies,  other  than  life  insurance  companies,  may  be  included 
in  computing  invested  capital.  See  Sections  325  and  326  (a)  (3)  and  (b) 
and  Articles  569  and  814  [If 742].  (Art.  870,  Reg.  45,  Rev.,  Jan.  28,  1921, 
as  amended  by  T.  D.  3153,  April  9,  1921.) 

830  Art.  871.   Foreign  Corporations.— Inasmuch  as  the  war  profits  and 
565       excess  profits  tax  in  the  case  of  a  foreign  corporation  is  not  based  on 
567      the  invested  capital  of  the  corporation,  but  is  computed  in  accord- 
ance with  section  328  of  the  statute  [See  <t|832],  the  provisions  of 

section  326  [law  ^555]  and  of  articles  831-870  [having  to  do  with  invested 
capital,  beginning  at  %75l]  have  no  application  to  foreign  corporations.  For 
the  same  reason,  when  rendering  a  return  of  income  on  form  1 120  for  a  foreign 
corporation,  no  entry  of  invested  capital  should  be  made  thereon.  See  article 
962  [for  returns  by  foreign  corporations,  ^[852].  (Art.  871,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

SPECIAL  CASES.  §327 

831  Art.  901.  Treatment  of  special  cases. — In  the  cases  specified  in 
565       section  327  [1(565]  of  the  statute  the  tax  will  be  specially  determined 

under  the  provisions  of  section  328  [*|570],  but  the  tax  will  not  ordin- 
arily be  computed  under  section  328  merely  because  the  corporation's  form 
or  manner  of  organization,  or  the  limitations  imposed  by  section  326  [invested 
capital,  1f555],  result  in  a  greater  tax  than  would  otherwise  be  payable. 
A  corporation  which  comes  within  the  provisions  of  subdivision  (d)  H|569 
of  section  327  may  make  application  for  assessment  under  the  provisions  of 
section  328,  which  application  shall  be  attached  to  its  return  in  the  form  of 
a  statement  setting  forth  in  full:  (a)  the  reasons  why  the  tax  should  be  so 
determined;  (b)  the  facts  upon  which  such  reasons  are  based;  (c)  an  exact 
description  of  each  trade  or  business  or  important  branch  of  a  trade  or  business 
carried  on  by  it;  (d)  a  statement  of  the  invested  capital  and  net  income  for 
each  year  since  the  beginning  of  the  prewar  period;  and  {e)  a  statement 
showing  the  amount  of  gains,  profits,  commissions,  or  other  income  derived 
on  a  cost-plus  basis  from  Government  contracts"  made  after  April  5,  1917, 
and  before  November  12,  1 91 8,  and  showing  the  per  cent  which  such  income 
is  of  the  total  income  of  the  corporation.  See  section  1  and  article  15 10 
[for  definition  of  Government  contract,  law  *j503]  and  section  326  [*|555j 
and  articles  831-871  [beginning  at  1f751,  all  ha  vine  to  do  with  invested 
capital].    (Art.  901,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

COMPUTATION  OF  TAX  IN  SPECIAL  CASES.  *328 

832  Art.  911.  Computation  of  tax  in  special  cases. — In  the  cases  specified 
570      in  section  327  [1f565]  of  the  statute  the  tax  is  to  be  computed  by 

comparison  with  representative  corporations  whose  invested  capital 
can  be  satisfactorily  determined  under  section  326  and  which  are  engaged 
in  a  like  or  similar  trade  or  business  and  similarly  circumstanced.  The 
provisions  of  section  328  [^f 570]  do  not  permit  the  determination  of  a  general 
average  for  any  trade  or  business.  In  each  case  which  comes  under  the 
provisions  of  section  327  the  Commissioner  will  determine,  as  nearly  as  may 
be,  the  group  or  class  of  corporations  with  which  the  corporation  should 
be  compared  and  the  amount  which  bears  the  same  ratio  to  the  net  income 


Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX  366  SERVICE 


1-2-22.  §328. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


of  the  corporation  (in  excess  of  the  specific  exemption  of  $3,000)  for  the  tax- 
able year  as  the  average  tax  of  such  representative  corporations  bears  to 
their  average  net  income  (in  excess  of  the  specific  exemption  of  $3,000)  for 
such  year.  The  comparison  will  take  account  of  similarity  with  respect  to 
gross  income,  net  income,  profit  per  unit  of  business  transacted  and  capital 
employed,  the  amount  and  rate  of  war  profits  or  excess  profits,  and  all  other 
relevant  facts  and  circumstances.    (Art.  911,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

833  Art.  912.  Determination  of  first  installment  of  tax  in  special  cases. 
I         573      — In  the  case  of  any  corporation,  other  than  a  foreign  corporation, 

where  absolutely  no  data  are  available  for  the  determination  of  in- 
vested capital  for  the  taxable  year,  the  installments  of  the  tax  shall  in  the 
first  instance  be  determined  upon  the  basis  of  a  war  profits  and  excess 
profits  tax  equal  to  50%  of  the  net  income,  except  that  for  1919  and  subse- 
quent taxable  years,  in  the  case  of  any  corporation  other  than  a  foreign  corpo- 
ration, such  installments  shall  be  determined  upon  the  basis  of  an  excess 
profits  tax  equal  to  20%  of  the  net  income  in  excess  of  $3,000.00,  but  not  in 
excess  of  $20,000.00,  plus  40%  of  the  net  income  in  excess  of  $20,000.00.  In 
any  other  case  under  Section  328  of  the  statute  other  than  the  case  of  a  foreign 
corporation,  but  including  a  case  where  the  invested  capital  for  the  taxable 
year  cannot  be  accurately  determined,  but  where  a  minimum  amount  of  in- 
vested capital,  as  to  which  there  is  no  question,  can  be  determined,  the 
installments  shall  in  the  first  instance  be  determined  upon  the  basis  of  a  war 
profits  and  excess  profits  tax  computed  by  using  the  minimum  invested  capital, 
the  tax  in  any  such  case  not  to  exceed  an  amount  equal  to  50%  of  the  net 
income,  and  for  1919  and  subsequent  taxable  years  not  to  exceed  20%  of  the 
net  income  in  excess  of  $3,000.00,  but  not  in  excess  of  $20,000.00,  plus  40% 
of  the  net  income  in  excess  of  $20,000.00.  [See  If 861.]  (Art.  912,  Reg.  45, 
Rev.,  Jan.  28,  1921,  as.  amended  by  T.  D.  3235,  Oct.  6,  1921.) 

834  Art.  913.  Determination  of  first  installment  of  tax  in  the  case  of 
foreign  corporation. — In  the  case  of  a  foreign  corporation  the  install- 
ments of  the  tax  shall  in  the  first  instance  be  determined  upon  the  basis  of  a 
war  profits  and  excess  profits  tax  computed  by  using  its  invested  capital  for 
the  taxable  year  1917,  such  tax  for  any  taxable  year  not  to  exceed  an  amount 
equal  to  50%  of  the  net  income,  and  for  1919  and  subsequent  taxable  years 
not  to  exceed  20%  of  the  net  income  not  in  excess  of  $20,000.00,  plus  40%  of 
the  net  income  in  excess  of  $20,000.00.  For  the  purpose  of  this  Article  the 
invested  capital  for  1917  shall  be  adjusted  for  any  subsequent  changes  in  its 
amount  due  to  cash  or  property  paid  in  or  withdrawn  or  to  surplus  or  un- 
divided profits  of  prior  years  retained  in  the  business  and  properly  attributable 
to  its  business  within  the  United  States.  If  the  tax  for  1917  was  determined 
under  Section  210  of  the  Revenue  Act  of  1917,  the  constructive  capital 
which  would  result  in  a  tax  equivalent  to  the  tax  determined  under  that  section 
shall  be  used.  In  the  case  of  a  foreign  corporation  which  was  organized 
subsequent  to  the  taxable  year  1917,  or  which  had  no  income  from  sources 
within  the  United  States  during  1917,  the  installments  of  the  tax  shall  in  the 
first  instance  be  determined  upon  the  basis  of  a  war  profits  and  excess  profits 
tax  equal  to  50%  of  the  net  income,  except  that  for  1919  and  subsequent 
taxable  years  such  installments  shall  be  determined  upon  the  basis  of  an 
excess  profits  tax  equal  to  20%  of  the  net  income  not  in  excess  of  $20  000.00, 
plus  40%  of  the  net  income  in  excess  of  $20,000.00.  (Art.  913,  Reg.  45, 
Rev.,  Jan.  28,  1921,  as  amended  by  T.  D.  3235,  Oct.  6,  1921.) 

Copyright  1922,  by  Tht  Corporation  Trust  Company. 
WAR  TAX         367  SERVICE 


1-2-22.  §330. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.-  1918  ACT. 


835  Art.  914.  Payment  of  tax  in  special  cases. — In  any  case  falling 
573      under  the  last  two  articles  the  installments  shall  be  paid  upon  the 

basis  therein  provided  until  the  Commissioner  notifies  the  corpora- 
tion of  the  amount  of  tax  computed  under  section  328.  The  installments  shall 
then  be  recomputed  upon  the  basis  of  a  war  profits  and  excess  profits  tax 
of  such  amount,  and  if  the  amount  already  paid  is  less  than  the  amount  which 
would  have  already  become  due  if  the  installments  had  originally  been  com- 
puted upon  that  basis,  the  additional  amount  shall  be  due  and  payable  ten 
days  after  notice  and  demand  from  the  collector.  (Art.  914,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

836  Blank.   

REORGANIZATIONS.  §330 

837  Art.  931.    Scope  of  Reorganizations. — The  first  two  paragraphs  of 

575  section  330  [1)575  and  H576J  of  the  statute  relate  only  to  the  prewar 
period  and  not  to  the  invested  capital  or  net  income  for  the  taxable 

year.  Under  their  provisions  in  the  case  of  a  reorganization,  consolidation 
or  change  of  ownership,  the  corporation  is  regarded  as  having  been  in  exist- 
ence prior  to  the  date  of  such  reorganization,  consolidation  or  change  in 
ownership,  and  the  net  income  and  invested  capital  of  the  predecessor  trade 
or  business  for  all  or  any  part  of  the  prewar  period  prior  to  the  organization 
of  the  present  corporation  are  deemed  to  have  been  the  net  income  and 
invested  capital  of  such  corporation.    (Art.  931,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

838  Art.  932.   Net  Income  and  Invested  Capital  of  Predecessor  Part- 

576  nership  or  Individual. — If  the  predecessor  trade  or  business  was 
carried  on  by  a  partnership  or  individual,  the  corporation  shall  make 

its  return  of  the  net  income  and  invested  capital  of  such  trade  or  business 
as  nearly  as  may  be  in  the  same  manner  as  if  such  trade  or  business  had 
been  carried  on  by  a  corporation.  It  shall  submit  with  its  return  a  state- 
ment setting  forth  (a)  the  manner  in  which  such  trade  or  business  was  carried 
on  and  (b)  the  points,  if  any,  in  which  the  provisions  of  the  statute  and  of  the 
regulations  are  not  fully  applicable  to  the  determination  of  the  net  income 
or  invested  capital  of  the  predecessor  trade  or  business  for  the  prewar  period. 
In  no  case  shall  the  deduction  from  gross  income  for  salary  or  compensation 
for  personal  services  exceed  the  salaries  or  compensation  customarily  paid 
at  that  time  by  corporations  or  partnerships  of  similar  size  and  standing 
engaged  in  similar  trades  or  businesses  for  similar  services  under  like  respon- 
sibilities.   (Art.  932,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

839  Art.  933.   Election  to  be  Taxed  as  Corporation. — A  business  enter- 

577  prise  (a)  which  is  organized  as  a  corporation  before  July  1,  1919, 
(b)  in  which  capital  is  and  has  been  a  material  income-producing  fac- 
tor, and  (c)  which  was  previously  owned  by  a  partnership  or  individual, 
may  elect  to  be  taxed  as  a  corporation  on  its  net  income  from  January  1, 
1918,  to  the  date  of  organization  of  the  corporation.  In. such  event  the 
corporation  shall  be  treated  as  if  in  existence  since  January  1,  1918,  for 
the  purposes  of  the  income  tax,  the  war  profits  and  excess  profits  tax,  and 
the  capital  stock  tax.  The  adoption  of  any  other  date  than  January  1, 
1918,  for  such  purpose  is  not  permissible.  But  this  option  is  not  extended 
to  a  business  enterprise  with  a  net  income  for  the  taxable  year  1918  less 

Copyright  1922,  by  Tht  Corporation  Trust  Company. 
WAR  TAX         368  SERVICE 


1  2  22.  §335. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.    1918  ACT. 


than  20  per  cent  of  its  invested  capital.  (Art.  933,  Reg.  45,  Rev.,  Jan.  28, 
1921.) 

840  Art.  934.    Adjustment  for  Asset  Differently  Valued  in  Prewar  In- 

578  vested  Capital.— In  any  case  in  which  as  a  result  of  a  reorganiza- 
tion or  for  any  other  reason  any  asset  in  existence  both  during  the 

taxable  year  and  any  prewar  year  is  included  in  computing  the  invested 
capital  for  the  taxable  year,  but  is  not  included  in  computing  the  invested 
capital  for  such  prewar  year,  or  is  valued  on  a  different  basis  in  computing 
the  invested  capital  for  the  two  years,  the  difference  resulting  therefrom 
shall  not  be  included  in  determining  the  difference  10  per  cent  of  which 
is  added  to  or  deducted  from  the  war  profits  credit  under  section  311  (a) 
(2)  of  the  statute  f1f532].  In  any  such  case  the  corporation  shall  make  the 
readjustment  required  by  the  statute,  and  shall  submit  with  its  return  a 
full  statement  of  the  difference  in  such  valuations  and  of  the  facts  which  give 
rise  to  such  difference.  See  also  section  331  [law  ^[579]  and  article  941  [regula- 
tions 11841.  for  reorganizations  after  March  3,  191 7.]  (Art.  934,  Reg.  45,  Rev., 
Jan.  28,  1921.) 

VALUATION  OF  ASSETS  UPON  REORGANIZATION.  §331 

841  Art.  941.    Valuation  of  Asset  upon  Change  of  Ownership. — Where 

579  a  business  is  reorganized,  consolidated  or  transferred,  or  property  is 
transferred,  after  March  3,  1917,  and  an  interest  or  control  of  fifty 

per  cent  or  greater  in  such  business  or  property  remains  in  the  same  persons 
or  any  of  them,  then  for  the  purpose  of  determining  invested  capital  each  asset 
so  tranferred  is  valued  (a)  at  an  amount  representing  its  actual  cash  value, 
subject  to  the  limitations  imposed  by  section  326,  but.  not  exceeding  its 
allowable  value,  for  invested  capital  purposes,  in  the  possession  of  the 
previous  owner,  if  a  corporation,  or,  if  not  a  corporation,  (b)  at  its  cost  to  such 
previous  owner,  with  proper  adjustments  for  losses  and  improvements. 
This  provision  is  accordingly  concerned  with  the  computation  of  invested 
capital  for  the  taxable  year,  while  section  330  of  the  statute  is  chiefly  con- 
cerned with  the  determination  of  invested  capital  for  the  prewar  period. 
See  articles  931  [for  reorganizations  after  January  1,  1911,  ^837],  932  [for  net 
income  and  invested  capital  of  predecessor  partnership  or  individual,  ^838] 
and  1561-1570  [for  basis  for  determining  gain  or  loss  in  connection  with  the 
sale,  exchange  or  other  disposition  of  property].  (Art.  941,  Reg.  45,  Rev., 
as  amended  by  T.  D.  3259,  Dec.  7,  1921.) 

FISCAL  YEARS  ENDING  IN  1918  OR  1919.  §335 

842  Art.  951.    Fiscal  year  with  different  rates. — Section  335  [^580]  of 

580  the  statute  applies  to  the  war  profits  and  excess  profits  tax.  For 
583      provisions  with  respect  to  the  income  tax  see  section  205  of  the 

statute  and  articles  1621-1625.  Subdivision  (a),  which  deals  with 
fiscal  years  beginning  in  1917  and  ending  in  1918,  and  subdivision  (b)  which 
dea  s  with  fiscal  years  beginning  in  1918  and  ending  in  1919,  apply  to  cor- 
porations other  than  personal  service  corporations.  Subdivision  (c),  which 
deals  with  fiscal  years  beginning  in  1917  and  ending  in  1918,  applies  to  part- 
nerships and  to  personal  service  corporations.  See  as  to  partnerships  articles 
321-327  and  as  to  personal  service  corporations  articles  328-335.    See  also 

Copyright  1922,  by  Th*  Corporation  Trust  Company. 
WAR  TAX  369  SERVICE 


1-2-22.  §33f». 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS. — 1918  ACT. 


section  252  of  the  statute  and  articles  1034-1036.  Partnerships  and  personal 
service  corporations  having  fiscal  years  beginning  in  1918  and  ending  in  1919 
are  not  subject  to  the  war  profits  and  excess  profits  tax.  (Art.  951,  Reg.  45, 
Rev.,  Jan.  28,  1921.) 

843  Art.  952.    Fiscal  Year  of  Corporation  Ending  in  1918. — The  method 

580  provided  for  computing  the  tax  for  a  fiscal  year  beginning  in  1917 
and  ending  in  1918  is  as  follows:    (a)  the  tax  attributable  to  the 

calendar  year  1917  is  found  by  computing  the  income  of  the  taxpayer  and 
the  tax  thereon  in  accordance  with  Title  II  of  the  Revenue  Act  of  1917 
as  if  the  fiscal  year  was  the  calendar  year  1917,  and  determining  the  propor- 
tion of  such  tax  which  the  number  of  months  falling  within  the  calendar  year 
1917  is  of  the  number  of  months  in  the  entire  period;  (b)  the  tax  attributable 
to  the  calendar  year  1918  is  found  by  computing  the  income  of  the  taxpayer 
and  the  tax  thereon  in  accordance  with  the  present  statute  as  if  the  fiscal 
year  was  the  calendar  year  1918,  and  determining  the  proportion  of  such  tax 
which  the  number  of  months  falling  within  the  calendar  year  is  of  the  number 
of  months  in  the  entire  period;  and  (c)  the  tax  for  the  fiscal  year  is  found  by 
adding  the  tax  attributable  to  the  calendar  year  1917  and.  the  tax  attributable 
to  the  calendar  year  1918.    (Art.  952,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

844  Art.  953.    Deductions  and  Credits  in  the  Case  of  Fiscal  Year  Ending 

581  in  1918. — Net  losses  deductible  from  net  income  of  the  fiscal  year 
under  the  provisions  of  section  204  of  the  statute  shall  be  deductible 

in  computing  the  tax  attributable  to  the  calendar  year  1917  as  well  as  in 
computing  trie  tax  attributable  to  the  calendar  year  1918.  See  articles 
1601-1603.  Amounts  previously  paid  by  the  taxpayer  on  account  of  the 
excess  profits  tax  for  its  fiscal  year  ending  in  1918  shall  be  credited  towards 
the  payment  of  the  war  profits  and  excess  profits  tax  imposed  for  such  fiscal 
year  by  the  present  statute.  Any  excess  shall  be  credited  or  refunded  in 
accordance  with  the  provisions  of  section  252  of  the  statute.  For  credits 
for  foreign  taxes  see  section  238  of  the  statute  and  article  611.  (Art.  953, 
Reg.  45,  Rev.,  Jan.  28,  1921.) 

845  Art.  954.    Fiscal  Year  of  Corporation  Ending  in  1919. — The  method 

582  provided  for  computing  the  tax  for  a  fiscal  year  beginning  in  1918 
and  ending  in  1919  is  as  follows:    (a)  the  tax  attributable  to  the 

calendar  year  1918  is  found  by  computing  the  income  of  the  taxpayer  and 
the  tax  thereon  in  accordance  with  the  statute  as  if  the  fiscal  year  was  the 
calendar  year  1918,  and  determining  the  proportion  of  such  tax  which  the 
number  of  months  falling  within  the  calendar  year  1918  is  of  the  number  of 
months  in  the  entire  period;  (b)  the  tax  attributable  to  the  calendar  year 
1919  is  found  by  computing  the  income  of  the  taxpayer  and  the  tax  thereon 
in  accordance  with  the  statute  as  if  the  fiscal  year  was  the  calendar  year 
1919,  and  determining  the  proportion  of  such  tax  which  the  number  of  months 
falling  within  the  calendar  year  1919  is  of  the  number  of  months  in  the  entire 
period;  and  (c)  the  tax  for  the  fiscal  year  is  found  by  adding  the  tax  attri- 
butable to  the  calendar  year  1918  and  the  tax  attributable  to  the  calendar 
year  1919.  For  credits  for  foreign  taxes  see  section  238  of  the  statute  and 
article  611.    (Art.  954,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  370  SERVICE 


1-2-22.  §336. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


84 s     Art.  955.    Illustration  of  Computation  of  Tax  for  Fiscal  Year. — A 

corporation  makes  its  return  on  the  basis  of  a  fiscal  year  ending 
March  31.    It  had  an  average  prewar  invested  capital  of  $50,000 
and  an  average  prewar  net  income  of  $3,500.  For  the  fiscal  year  ending 
March  31,  1918,  its  invested  capital  and  net  income  are  $100,000  and 

$75,000,  respectively,  as  computed  under  Title  II  of  the  Revenue  Act  of 
1917,  and  $125,000  and  $70,000,  respectively,  as  computed  under  the  present 
statute.  Such  a  difference  in  these  amounts  as  computed  under  the  two 
acts  may  readily  occur  where,  for  example,  a  corporation  is  allowed  under 
the  present  statute  a  deduction  for  interest,  amortization,  etc.,  which  it 
was  not  allowed  under  the  Revenue  Act  of  1917,  or  where,  under  the  present 
statute,  it  is  allowed  a  greater  amount  of  invested  capital  on  account  of 
intangible  property  paid  in  for  stock  or  shares  than  allowed  under  the  Revenue 
Act  of  1917.  For  the  fiscal  year  ending  March  31,  1919,  its  invested  capital 
and  net  income  are  $125,000  and  $60,000,  respectively. 

847  (1)  A  war  excess  profits  tax  for  the  year  ending  March  31,  1918, 
as  computed  under  the  provisions  of  Title  II  of  the  Revenue  Act 

of  1917,  and  upon  the  basis  of  an  invested  capital  of  $100,000  and  a  net 
income  of  $75,000  as  computed  under  that  Act,  is  $32,800.  For  the  details 
of  this  computation  see  illustration  (1)  under  article  16  of  Regulations  41.  A 
war  profits  and  excess  profits  tax  for  the  entire  period  as  computed  under 
subdivision  (a)  of  section  301  of  the  present  statute,  and  upon  the  basis 
of  an  invested  capital  of  $125,000  and  a  net  income  of  $70,000  as  computed 
under  the  statute,  is  $43,600.  Section  335  provides  that  the  tax  for  this 
period  is  the  sum  of  9/12  of  the  tax  of  $32,800  as  computed  under  the  Revenue 
Act  of  1917,  or  $24,600,  plus  3/12  of  the  tax  of  $43,600  as  computed  under 
the  present  statute,  or  $10,900,  making  a  total  war  excess  profits  tax  for  the 
fiscal  year  ending  March  31,  1918,  of  $35,500. 

848  (2)  A  war  profits  and  excess  profits  tax  for  the  year  ending  March 
31,  1919,  as  computed  under  subdivision  (a)  of  section  301  of  the 

statute  is  $35,600.  A  war  profits  and  excess  profits  tax  for  the  entire  period 
as  computed  under  subdivision  (b)  of  section  301  is  $16,400  Section  335 
provides  that  the  tax  for  this  period  is  the  sum  of  9/12  of  the  tax  of  $35,600, 
as  computed  under  subdivision  (a)  of  section  301,  or  $26,700,  plus  3/12  of 
the  tax  of  $16,400,  as  computed  under  subdivision  (b)  of  section  301,  or  $4,100, 
making  a  total  war  profits  and  excess  profits  tax  for  the  fiscal  year  ending 
March  31,  1919,  of  $30,800.    (Art.  955,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

RETURNS.  §336 

849  Art.  961.  Returns. — Every  corporation,  domestic  or  foreign,  not 
585       exempt  under  section  304  [1f525]  of  the  statute   and  article  751 

[^[ 666]  shall  make  a  return  for  the  purpose  of  the  war  profits  and  excess 
profits  tax  on  form  1120.  The  return  shall  be  made  and  the  tax  shall  be  paid 
as  provided  in  the  case  of  a  return  for  and  payment  of  the  income  tax  by 
corporations.  See  generally  Parts  IIA  and  III  of  the  regulations,  and  par- 
ticularly sections  239,  240,  241,  250  and  253  of  the  statute  and  the  articles 
thereunder.    (Art.  961,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

850  Blank. 

851  Corporation  with  no  taxable  income  not  required  to  fill  out  profits- 
tax  schedules  on  Form  1120. — Reference  is  made  to  the  following 

telegram  of  March  19,  1919: 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  371  SERVICE 


1-2-22.  5337. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


"Where  computation  shows  that  a  corporation  has  no  taxable 
net  income  must  it  go  to  expense  of  preparing  and  filling  out  the 
schedules  relating  to  excess  profits  war  profits  on  Form  1120?  Is  an- 
swer any  different  if  the  return  is  a  consolidated  return?  Kindly- 
wire  reply." 

In  reply  you  are  advised  that  corporations  which  have  no  taxable  in- 
come for  the  year  are  required  to  fill  out  only  Schedules  A  and  B  [A,  K, 
and  L,  for  1920]  and  the  Schedules  in  support  thereof,  on  their  (separate  or 
consolidated)  corporate  income  tax  returns  (Form  1120),  and  are  not  re- 
quired to  furnish  the  other  information  called  for  on  these  returns.  (Let- 
ter to  Van  Vorst,  Marshall  and  Smith,  New  York,  N.  Y.,  signed  by  J.  H. 
Callan,  Assistant  to  the  Commissioner,  and  dated  March  24,  1919.) 

852  Art.  962.  Returns  in  special  cases. — Where  a  corporation  computes 
its  war  profits  credit  upon  the  basis  of  the  sum  of  (a)  the  specific 

exemption  and  (b)  an  amount  equal  to  10  per  cent  of  the  invested  capital 
for  the  taxable  year,  the  items  on  form  1120  which  relate  solely  to  the  net 
income  or  to  the  invested  capital  for  the  prewar  period  need  not  be  filled  in. 
Where  a  corporation  enters  on  its  return  a  war  profits  and  excess  profits 
tax  equal  to  the  amount  of  the  maximum  tax  determined  under  section  302 
[1(523]  of  the  statute,  the  items  on  form  1120  which  relate  solely  to  the  net 
income  for  the  prewar  period  and  the  items  which  relate  to  the  invested 
capital  for  the  prewar  period  and  for  the  taxable  year  need  not  be  filled  in. 
Likewise  in  the  case  of  a  foreign  corporation  the  same  items  may  be  disre- 
garded, except  that  balance  sheets  as  of  the  beginning  and  the  end  of  the 
taxable  year  for  the  entire  business  of  the  corporation  both  within  and  with- 
out the  United  States  shall  be  submitted.  See  article  871  [for  foreign  corpora- 
tions, 11830].  The  Commissioner  may  at  any  time  specifically  call  for  all 
or  any  part  of  the  information  which  under  this  article  is  not  required  to  be 
entered  on  the  return.  In  any  case,  however,  where  a  claim  is  made  under 
sections  327  [1(565]  and  328  [1f570]  of  the  statute,  other  than  in  the  case  of  a 
foreign  corporation,  the  corporation  should  fill  out  all  items  of  the  return 
so  far  as  possible  and  submit  a  statement  explaining  why  it  is  impracticable 
to  fill  out  the  entire  return.    (Art.  962,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

SALE  OF  MINERAL  DEPOSITS.  §337 

853  Art.  971.  Tax  on  Sale  of  Mineral  Deposits. — In  the  case  of  a  sale 
586      of  mines,  oil  or  gas  wells,  or  any  interest  therein,  as  described  in 

article  13  [thirteen],  the  portion  of  the  war  profits  and  excess  profits 
tax  attributable  to  such  a  sale  shall  not  exceed  20  per  cent  of  the  selling  price. 
To  determine  the  application  of  this  provision  to  a  particular  case  the  cor- 
poration should  compute  the  war  profits  and  excess  profits  tax  in  the  ordinary 
way  upon  its  net  income,  including  its  net  income  from  any  such  sale.  The 
proportion  of  the  total  tax  indicated  by  the  ratio  which  the  taxpayer's  net 
income  from  the  sale  of  the  property,  computed  as  prescribed  in  article  715, 
bears  to  its  total  net  income  is  the  portion  of  the  tax  attributable  to  such  sale, 
and  if  it  exceeds  20  per  cent  of  the  selling  price  of  the  property  such  portion 
of  the  tax  shall  be  reduced  to  that  amount.  See  articles  219,  220,  220(a\ 
and  221.    (Art.  971,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

854  to  857  Blank. 


Copyright  1922,  by  Tht  Corporation  Trust  Company. 
WAR  TAX  372  SERVICE 


1-2-22 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS.— 1918  ACT. 


858  Art.  972.  Illustration  of  Computation  of  Tax  Where  Sale  of  Mineral 
Deposits. — In  the  case  of  the  corporation  used  as  an  illustration  in 

article  716,  let  it  be  assumed  that  its  gross  income  for  1918  included  $15,000 
derived  from  a  bona  fide  sale  of  an  oil  well,  the  principal  value  of  which  had 
been  demonstrated  by  exploration  and  discovery  work  done  by  the  corpora- 
tion, and  that  the  Commissioner  finds  under  article  715  that  only  $800  of 
the  deductions  allowed  are  properly  applicable  to  the  gross  income  derived 
from  the  sale.  The  portion  of  the  net  income  attributable  to  the  sale 
would  be  $14,200,  which  is  35.5  per  cent  of  the  entire  net  income  of 
$40,000,  and  the  portion  of  the  tax  for  that  year  attributable  to  the  sale 
will  be  35.5  |jer  cent  of  the  entire  tax  of  $17,600,  or  $6,248.  But  this 
portion  of  the  tax  can  not  exceed  20  per  cent  of  the  selling  price  ($15,000) 
and  is  accordingly  reduced  to  $3,000.  The  total  tax  will  be  $11,352  (the 
portion  of  the  tax  not  affected)  plus  $3,000,  or  $14,352  (instead  of  $17,600). 
(Art.  972/Reg.  45,  Rev.,  Jan.  28,  1921.) 

§1309 

859  Promulgation  of  Regulations  No.  45,  Revised. — In  pursuance  of  the 
statute  [see  1(860]  the  foregoing  regulations  are  hereby  made  and 

promulgated  and  all  rulings  inconsistent  herewith  are  hereby  revoked. 
Art.  1800,  Reg.  45,  Rev.,  Jan.  28,  1921.) 

860  Sec.  1309  [of  the  Revenue  Act  of  1918].    That  the  Commissioner, 
with  the  approval  of  the  Secretary,  is  hereby  authorized  to  make 

all  needful  rules  and  regulations  for  the  enforcement  of  the  provisions  of  this 
Act. 


861  Estimate  of  amount  of  excess  payment  on  account  of  any  expected 
833      but  undetermined  relief  under  Section  328  for  prior  year  not  to  be 

credited  against  first  installment  of  tax  for  succeeding  year  which 
tax  is  to  be  computed  in  first  instance  without  regard  to  former 
claim. — Reference  is  made  to  your  letter  of  March  8,  1921,  relative  to  cor- 
poration returns  to  be  filed  for  1920  under  the  provisions  of  Sections  327 
and  328  of  the  Revenue  Act  of  1918. 

862  You  state  that  it  is  your  understanding  that  in  filing  returns  for  1920 
under  the  above-mentioned  sections,  claim  for  credit  may  be  applied 

against  the  amount  of  the  first  installment  of  tax  due  thereon  to  the  extent 
that  it  is  estimated  the  amount  of  tax  paid  was  in  excess  of  the  amount  due 
as  computed  under  the  provisions  of  Section  328.  You  inquire  as  to  a  justi- 
fiable percentage  of  tax  on  income  for  1919  to  be  used  as  the  basis  for  a  claim 
for  credit  against  the  first  installment  of  the  tax  for  1920. 

863  In  reply  your  attention  is  invited  to  Section  328(a)  which  provides 
in  part  that  "In  the  cases  specified  in  section  327  the  tax  shall  be  the 

amount  which  bears  the  same  ratio  to  the  net  income  of  the  taxpayer  (in 
excess  of  the  specific  exemption  of  $3,000)  for  the  taxable  year,  as  the  average 
tax  of  representative  corporations  engaged  in  a  like  or  similar  trade  or  business 
bears  to  their  average  net  income  (in  excess  of  the  specific  exemption  of  $3,000) 
for  such  year."  The  special  relief  afforded  by  Sections  327  and  328  is  based 
upon  the  merits  of  the  individual  case,  and  the  provisions  of  Section  328  to  not 
permit  the  determination  of  a  general  average  for  any  trade  or  business. 

864  Claim  for  credit  may  not  under  any  circumstances  be  applied  against 
taxes  due  until  the  Bureau  has  definitely  determined  that  the  amount 

of  the  claim  is  actually  in  excess  of  the  amount  of  taxes  due  on  the  previous 

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return.  Until  complete  audit  comparatives  are  available  for  use  in  computing 
under  Section  328  the  taxes  due  on  1919  returns,  the  exact  amount  of  tax 
due  thereon  can  not  be  determined,  and,  consequently,  claims  for  credit 
in  the  amounts  believed  to  be  in  excess  of  tax  due  for  the  previous  year  may 
not  be  applied  against  the  amount  of  the  first  installment  of  the  1920  taxes. 
(Letter  to  The  Corporation  Trust  Company,  signed  by  Commissioner  Wm. 
M.  Williams,  and  dated  March  23,  1921.) 


865  Use  of  appreciated  or  inflated  values  in  determining  invested  capital 
555  shown  in  income  and  excess  profits  tax  returns  for  191?  and  subse- 
751       quent  years. — An  examination  of  income  and  excess  profits  tax 

returns  for  1917  and  subsequent  years  has  disclosed  that  many  tax- 
payers have  used  appreciated  and  inflated  values  in  determining  invested 
capital  shown  in  such  returns  contrary  to  Section  207  of  the  Revenue 
Act  of  1917  and  Section  326  of  the  Revenue  Act  of  1918. 

866  This  office  has  held  consistently  that  the  use  of  appreciated  or  in- 
flated values  in  determining  invested  capital  is  not  permissible  and 

this  ruling  has  been  sustained  by  the  United  States  Supreme  Court  in  the 
case  of  the  La  Belle  Iron  Works  v.  The  United  States  (41  Sup.  Ct.  528; 
T.  D.  3051  ffl889  herein]). 

867  All  taxpayers  who,  in  the  preparation  of  their  income  and  excess 
profits  tax  returns  for  1917  and  subsequent  years,  have  used  appre- 
ciated or  inflated  values  in  determining  the  amount  of  their  invested  capital 
are  required  to  file  with  the  Collector  of  Internal  Revenue  within  90  days 
from  date  of  this  decision  amended  returns*  for  each  of  such  years,  in  which 
the  invested  capital  shall  be  computed  strictly  in  accordance  with  the  law 
and  regulations  and  without  the  use  of  appreciated  or  inflated  values.  It 
is  not  required  that  such  amended  returns  shall  include  the  figures  shown 
in  the  original  returns  which  are  unaffected  by  this  decision.  Only  such 
figures  as  are  necessary  to  show  the  correct  values  used  in  the  computation 
of  invested  capital  and  such  totals  as  are  necessary  to  a  redetermination  of 
the  tax  need  be  shown.  Payment  of  the  additional  tax  shown  to  be  due  on 
such  amended  returns  must  also  be  made  at  the  time  the  returns  are  filed. 

868  Failure  to  file  amended  returns  within  the  time  specified  will  subject 
taxpayers  to  the  penalties  provided  for  in  Section  3176  [^[8071],  United 

States  Revised  Statutes,  as  amended.  (T.  D.  3220,  signed  by  Commissioner 
D.  H.  Blair,  and  dated  August  26,  1921.) 

*Amended  returns  required  though  no  further  tax  due.  See  O.  D.  1131  (Ruling  No, 
29,  at  Sec.  326.    Art.  831.-20,  in  Supplementary  Bulletin  Rulings,  post.) 

869  Interpretation  of  T.  D.  3220  requiring  amended  returns  in  cases  where 
appreciated  or  inflated  values  have  been  used  in  determining  amount 

of   invested   capital  under  the  Revenue   Act  of   1917   and   1918. — 

1.  Attention  is  directed  to  T.  D.  3220  [1J865]  dated  August  26,  1921,  in  which 
amended  income  and  excess  profits  tax  returns  are  required  for  1917  and  sub- 
sequent years  in  cases  where  appreciated  or  inflated  values  have  been  used 
in  determining  the  amount  of  invested  capital.  This  decision  was  based  on 
the  decision  of  the  United  States  Supreme  Court  in  the  case  of  the  La  Belle 
Iron  Works  v.  The  United  States  (41  Sup.  Ct.  528)  ffi889]. 


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870  2.  Numerous  inquiries  have  reached  this  office  in  regard  to  the  mean- 
ing of  that  Treasury  Decision  and  it  is  possible  that  the  Collectors  of 

Internal  Revenue  will  be  asked  whether  certain  cases  fall  within  its  provisions. 
It  should  be  clearly  understood  that  the  purpose  of  that  Treasury  Decision 
was  to  have  amended  returns  filed  and  tax  paid  to  the  Government  in  cases 
where  returns  were  filed  contrary  to  the  regulations,  Section  207  of  the 
Revenue  Act  of  1917  and  Section  326  of  the  Revenue  Act  of  1918. 

871  3.  It  was  the  intention  that  the  tax  due  the  Government  as  the  result 
of  the  use  of  appreciated  values  should  be  paid  into  the  Treasury  im- 
mediately rather  than  waiting  until  the  returns  are  finally  reached  in  the 
regular  course  of  audit.  The  fact  that  a  field  investigation  has  been  made  or 
that  the  return  is  in  the  process  of  audit  in  the  Bureau  is  not  sufficient  to  waive 
the  filing  of  amended  returns.  Where  the  taxpayer  has  received  a  letter  from 
the  Bureau  notifying  him  of  an  additional  assessment  as  the  result  of  the 
elimination  from  his  original  return  of  such  appreciated  or  inflated  values,  it 
will  not  be  necessary  to  file  amended  returns  referred  to  in  that  decision. 
In  each  case  where  a  taxpayer  in  your  district  is  in  doubt  as  to  whether 
amended  returns  should  be  filed  a  complete  statement  of  facts  should  be 
submitted  to  this  office  for  a  ruling. 

872  4.  It  is  possible  that  certain  taxpayers,  on  account  of  unusual  condi- 
tions, can  not  comply  with  the  provisions  of  T.  D.  3220  and  file  their 

returns  by  November  24,  the  due  date  of  the  amended  returns  under  that 
decision.  If,  prior  to  November  24,  1921,  conditions  seem  to  warrant,  the 
Bureau  will  give  consideration  to  the  question  of  a  supplemental  Treasury 
Decision  extending  the  due  date  beyond  November  24,  1921,  for  the  filing  of 
amended  returns  required  by  that  decision.    [See  ^[875 .] 

873  5.  Collectors  of  Internal  Revenue  are  not  authorized  to  grant  any 
extension  of  time  in  this  respect  and  taxpayers  should  be  so  advised. 

You  will,  therefore,  refer  to  this  office  all  cases  which  require  special  consider- 
ation. 

874  You  are  requested  to  acknowledge  receipt  of  this  mimeograph. 
(IT.  Mim.  Coll.  No.  2848,  signed  by  Commissioner  D.  H.  Blair,  and 

dated  October  19,  1921.) 

875  Extension  of  time  for  filing  amended  returns  required  by  Treasury 
Decision  3220  in  cases  in  which  appreciated  or  inflated  values  have 

been  used  in  determining  invested  capital. — Under  the  provisions  of 
Treasury  Decision  3220  [11865],  approved  August  26,  1921,  all  tax- 
payers who,  in  the  preparation  of  their  income  and  profits  tax  returns  for 
1917  and  subsequent  years,  have  used  appreciated  or  inflated  values  in 
determining  the  amount  of  their  invested  capital,  are  required  to  file  amended 
returns  within  ninety  days  from  the  date  of  that  decision  and  make  pay- 
ment of  the  additional  tax  shown  to  be  due. 

876  In  view  of  the  fact  that  many  taxpayers  are  unable  to  complete  their 
returns  by  November  24,  1921,  the  last  date  under  which  amended 

returns  may  be  filed,  as  provided  by  Treasury  Decision  3220,  an  extension 
of  time  up  to  and  including  January  15,  1922,  is  hereby  granted  within 
which  to  file  such  amended  returns  and  make  payment  of  the  additional  tax 
due.  (T.  D.  3243,  signed  by  Commissioner  D.  H.  Blair,  and  dated  November 
14,  1921.) 


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Adjustments  in  surplus  and  undivided  profits  account  because  of  alleged 
failure  to  charge  off  depreciation. 

MEMORANDUM  NO.  106. 
COMMITTEE  ON  APPEALS  AND  REVIEW. 

February  26,  1921. 

Mr.  Commissioner: 

(For  Mr.  Newton) 

877      The  Committee  is  in  receipt  of  a  request  for  advice  relative  to  the 
762       practice  of  field  agents  in  reducing  earned  surplus  by  deductions  for 
depreciation  where  none  had  been  claimed  in  the  past,  or  where  a 
lower  rate  has  been  claimed  than  is  ordinarily  allowable  with  respect  to  the 
depreciable  assets  in  question. 

873  It  is  the  judgment  of  the  Commitee  that  there  is  no  warrant  for 
reducing  earned  surplus  because  of  alleged  failure  to  charge  off 
sufficient  depreciation  in  the  past,  unless  the  depreciable  assets  of  the  cor- 
poration are  valued  on  its  books  at  the  beginning  of  the  taxable  year  at  an 
amount  in  excess  of  their  actual  value  at  that  time.  This  is  particularly 
true  where  the  corporation  in  prior  years  earned  positive  income  from  which 
larger  deductions  for  depreciation  might  have  been  taken,  if  in  the  opinion 
of  the  officers  and  directors  of  the  corporation  such  larger  charges  had  been 
justified.  Nothing  herein  is  to  be  construed  as  precluding  the  Income  Tax 
Unit  from  adjusting  depreciation,  either  by  way  of  increase  or  decrease, 
•where  there  is  at  hand  affirmative  evidence  that  as  at  the  beginning  of  a 
taxable  year  the  amount  of  depreciation  written  off  in  prior  years  was  in- 
sufficient or  excessive.  The  correct  attitude  of  the  Bureau  and  the  proper 
conduct  of  its  field  agents,  in  particular,  are  plainly  set  forth  in  that  part 
of  Art.  839  of  Reg.  45,  which  reads: 

"Adjustments  in  respect  of  depreciation  or  depletion  in  prior  years 
will  be  made  or  permitted  only  upon  the  basis  of  affirmative  evi- 
dence that  as  at  the  beginning  of  the  taxable  year  the  amount  of 
depreciation  or  depletion  written  off  in  prior  years  was  insufficient 
or  excessive,  as  the  case  may  be." 

(Signed)  N.  T.  Johnson, 
Chairman, 
Committee  on  Appeals  and  Review. 

Noted: 

(Signed)  Carl  A.  Mapes,  Solicitor  of  Internal  Revenue. 
Accepted  for  the  guidance  of  the  Income  Tax  Unit: 

(Signed)  M.  F.  West,  Acting  Commissioner  of  Internal  Revenue 

879     Adjustments  in  surplus  and  undivided  profits  account  because  of 
762      alleged  failure  to  charge  off  depreciation. — Specific  inquiry  has 
been  made  as  to  the  meaning  of  the  words  "actual  value"  as  used 
in  Committee  on  Appeals  and  Review  memorandum  No.   106  [^[877]. 
For  the  purposes  of  taxation  depreciation  is  based  upon  cost.  Accordingly, 
the  words  "actual  value"  mean  "sound  value",  which  is  "original  cost" 
(or  value  as  of  March  1,  1913,  if  applicable),  including  additions  and  better- 
ments charged  to  capital  account,  less  depreciation  sustained. 
880j     Article  161,  Regulations  45  (1920  edition)  defines  the  proper  allow- 
ance for  depreciation  as  "that  amount  which  should  be  set  aside 
for  the  taxable  year  in  accordance  with  a  consistent  plan  by  which  the 
aggregate  of  such  amounts  for  the  useful  life  of  the  property  in  the  business 

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will  suffice,  with  the  salvage  value,  at  the  end  of  such  useful  life  to  provide 
in  place  of  the  property  its  cost,  or  its  value  as  of  March  1,  1913,  if  acquired 
by  the  taxpayer  before  that  date." 

881  It  follows  from  this  definition  that  any  action  on  the  part  of  a  par- 
ticular taxpayer  which  extends  the  useful  life  of  a  depreciable  asset 

beyond  the  normal  or  usual  term,  and  any  circumstance  which  serves  to 
increase  the  salvage  value  of  a  depreciable  asset,  operates  to  justify  a  reduc- 
tion in  the  normal  rate  of  depreciation.  The  depreciation  of  an  asset  is 
arrested  where  it  is  maintained  at  a  high  standard  of  efficiency  either  by  the 
exercise  of  unusual  care  in  its  use  or  by  unusual  maintenance  expenditures. 

882  Invested  capital,  as  defined  in  the  Excess  Profits  Tax  Law,  is  a 
statutory  concept  and  is  composed  of  two  elements:   (a)  original 

contribution,  and  (b)  earnings  of  the  corporation  available  for  distribution 
but  not  distributed  and  not  dissipated  by  subsequent  operating  losses. 
The  exhaustion  of  this  capital  through  use,  wear  and  tear  has,  for  the  purpose 
of  computing  invested  capital,  the  same  effect  as  an  operating  loss  and  unless 
this  loss  is  properly  taken  care  of  out  of  earnings  in  one  way  or  another, 
earned  surplus  must  be  adjusted  in  accordance  with  the  provisions  of  the 
regulations.  There  are  two  ways  of  taking  care  of  this  loss  out  of  income. 
One  is  by  charging  ordinary  repairs  directly  to  expense  and  setting  up  a 
depreciation  reserve  against  which  are  properly  chargeable  all  renewals 
and  replacements;  the  other  is  where  renewals  and  replacements,  as  well 
as  repairs,  have  been  charged  directly  against  gross  income.  Either  way  has 
the  effect  of  reducing  the  amount  added  during  the  year  Unearned  surplus. 
Consequently,  the  mere  fact  that  no  depreciation,  or  a  minimum  depreciation, 
has  been  charged  as  such,  is  not  sufficient  reason  for  reducing  the  earned 
surplus,  where  renewals  and  replacements  sufficient  to  care  for  the  decrease 
in  value  of  capital  assets  have  been  charged  directly  to  expense,  or  where  for 
any  of  the  other  reasons  hereinbefore  suggested  less  than  the  normal  rate  of 
depreciation  is  properly  chargeable.  When  a  taxpayer  makes  this  claim 
there  are  two  methods  of  verifying  it.  One  is  by  determining  the  plant 
efficiency  and  the  other  is  by  determining  the  value  of  the  capital  assets 
remaining.  From  an  administrative  standpoint  the  latter  is  probably  more 
practical  even  though  it  may  be  said  that  the  former  is  more  accurate. 

883  Many  cases  have  been  brought  to  the  attention  of  the  Committee 
where  corporations  have  been  in  existence  for  a  long  period  of  years, 

some  of  which  corporations  have  been  in  existence  several  times  the  ordinary 
estimated  life  of  the  depreciable  assets,  and  yet  those  assets  are  today  in 
first-class  condition  and  worth  the  figure  at  which  they  are  carried  on  the 
books,  although  no  depreciation  has  been  charged  as  such  and  no  additions 
to  capital  account  have  been  made.  In  such  cases  it  is  obvious  that  depre- 
ciation has  been  adequately  cared  for  by  charges  to  expense,  although  it 
frequently  happens  that  it  is  impossible  at  this  late  date  to  segregate  and 
specify  such  charges  and  there  is  no  warrant  in  the  law  or  the  regula- 
tions for  requiring  the  depreciable  assets  in  such  cases  to  be  written 
down  below  the  figure  at  which  they  are  carried  on  the  books,  since  to  do  so 
is  to  reduce  earned  surplus  twice,  once  through  the  original  charge  to  expense 
(whether  proper  or  improper),  and  again  through  an  arbitrary  depreciation 
charge  required  by  the  Bureau  to  be  set  up  against  earned  surplus  for  the 
purpose  of  computing  invested  capital. 

884  The  controlling  rule  in  this  matter  is  found  in  that  part  of  Article 
839  of  Regulations  45,  which  reads:  "Adjustments  in  respect  of  de- 
preciation or  depletion  in  prior  years  will  be  made  or  permitted  only  upon  the 

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basis  of  affirmative  evidence  that  as  at  the  beginning  of  the  taxable  year 
the  amount  of  depreciation  or  depletion  written  off  in  prior  years  was  in- 
sufficient or  excessive,  as  the  case  may  be."  Mere  failure  in  prior  years  to 
have  written  off  on  the  books  the  maximum  or  ordinary  rate  of  depreciation, 
is  not  in  itself  "affirmatize  evidence"  There  is  no  warrant  for  reducing 
earned  surplus  because  of  alleged  failure  to  charge  off  sufficient  depreciation 
in  the  past,  unless  the  depreciable  assets  of  the  corporation  are  valued  on 
its  books  at  the  beginning  of  the  taxable  year  at  an  amount  in  excess  of  their 
sound  value  at  that  time.  (Statement  by  the  Committee  on  Appeals  and 
Review,  signed  by  N.  T.  Johnson,  Chairman,  and  dated  July  6,  1921  (released 
for  publication  July  15,  1921).  Noted  by  Carl  A.  Mapes,  Solicitor  of  Internal 
Revenue.) 

885  Adjustments  in  surplus  and  undivided  profits  account  because  of 
762      alleged  failure  to  charge  off  depreciation. — Reference  is  made  to 

Committee  on  Appeals  and  Review  Memorandum  106  [*|877]  and 
explanatory  memorandum  of  the  Committee  dated  July  6,  1921  [879]. 

886  The  attention  of  the  Commissioner's  office  has  been  called  to  the  fact 
that  Article  839  [If  762]  of  Regulations  45  as  interpreted  by  Committee 

Memorandum  106  and  the  memorandum  of  July  sixth,  has  not  been  properly 
followed. 

887  When  the  Regulation  (Article  839  of  Regulations  45)  was  being 
drafted  it  was  the  intention  of  the  draftsmen  that  a  corporate  surplus 

account  was  not  to  be  disturbed  lightly  and  that  no  change  should  be  made 
in  it  either  by  the  Government  or  by  the  taxpayer  except  upon  adequate 
evidence  that  the  surplus  account  was  incorrect.  It  was  the  view  of  the 
draftsmen  that  unless  the  taxpayer  could  show  a  state  of  error,  the  Govern- 
ment should  deny  a  claim  for  an  increase  in  the  surplus  shown  by  the  tax- 
payer's books;  conversely,  before  a  deduction  could  be  made  from  the 
taxpayer's  surplus  account,  the  Government  must  show  that  such  an  adjust- 
ment is  necessary  to  correct  the  account.  The  view  was  also  held  that  such 
proof  must  be  in  the  form  of  affirmative  evidence — that  it  could  not  rest  upon 
mere  assertion  of  the  working  out  of  the  theoretical  formula. 

888  It  is  my  opinion  that  no  doubt  ever  should  have  existed  as  to  the 
correct  interpretation  of  Article  839.    A  taxpayer's  corporate  surplus 

should  not  be  reduced  by  the  arbitrary  adjustment  of  depreciation  and 
depletion  for  past  years.  Surplus  accounts  should,  however,  always  be  care- 
fully scrutinized  and  checked  up  for  the  purpose  of  preventing  the  inclusion 
therein  of  appreciated  values  of  property.  In  case  of  doubt  in  such  case  the 
burden  should  be  cast  upon  the  taxpayer  to  prove  that  no  appreciative  values 
were  included  in  the  surplus.  A  presumption  should  always  exist  that  a  tax- 
payer's books  of  account  reflect  actual  facts.  The  burden  of  proof  is  upon 
any  one  who  attempts  to  impugn  the  correctness  of  the  books  of  account — 
upon  the  Government  if  it  seeks  to  reduce  its  surplus  account  by  charging 
off  depreciation  and  depletion  which  have  not  been  claimed  by  the  taxpayer 
and  upon  the  taxpayer  where  he  claims  that  too  much  depreciation  and 
depletion  have  been  charged  off  in  prior  years.  (Memorandum,  signed  by 
Commissioner  D.  H.  Blair,  and  dated  November  1,  1921.) 


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EXCESS-PROFITS  TAX. — SUPREME  COURT  DECISION. 


(Decision.) 
Revenue  Act  of  1917. 

The  excess  of  actual  value  of  property  over  its  cost  in  cash,  subsequently 
capitalized,  a  stock  dividend  being  declared,   all  prior  to  inci- 
dence of  tax,  is  not  to  be  included  as  invested  capital  either  as  paid- 
in  surplus,  or,  because  of  the  stock  dividend  involving  the  sur- 
render and  cancellation  of  the  original  stock,  on  account  of 
"the  actual  cash  value  of  tangible  property  paid  in  other 
than  cash,  for  stock.'' — The  Act  is  constitutional. 

Supreme  Court  of  the  United  States. 
La  Belle  Iron  Works,  Appellant,) 

vs.  \  Appeal  from  the  Court  of  Claims. 

The  United  States.  j 

(41  Sup.  Ct.  528) 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

889  The  Court  of  Claims  dismissed  appellant's  petition  which  claimed 
555  a  refund  of  $1,081,184.61,  alleged  to  have  been  erroneously  assessed 
751       and  exacted  as  an  "excess  profits  tax"  under  Title  II  of  the  Revenue 

Act  of  1917  (Act  of  October  3,  1917,  Ch.  63,  40  Stat.  300,  302,  et  seq.). 
The  case  involves  the  construction  and  application  of  those  provisions 
by  which  the  deduction  from  income,  for  the  purposes  of  the  tax,  is  measured 
by  the  "invested  capital"  of  the  taxpayer;  and  a  question  is  raised  as  to  the 
constitutionality  of  the  Act  as  construed  and  applied. 

890  Title  I  of  the  Act  imposed  "War  Income  Taxes"  upon  individuals 
and  corporations  in  addition  to  those  imposed  by  Act  of  September 

8,  1916  (Ch.  463,  39  Stat.  756).  Title  II  provided  for  the  levying  of  "War 
Excess  Profits  Taxes"  upon  corporations,  partnerships,  and  individuals.  As 
applied  to  domestic  corporations,  the  scheme  of  this  Title  was  that,  after 
providing  for  a  deduction  from  income  (sec.  203,  p.  304)  equal  to  the  same 
percentage  of  the  invested  capital  for  the  taxable  year  which  the  average 
amount  of  the  annual  net  income  of  the  trade  or  business  during  the  prewar 
period  (the  years  1911,  1912,  and  1913)  was  of  the  invested  capital  for  that 
period,  but  not  less  than  7  nor  more  than  9  per  cent.,  plus  $3,000,  it  imposed 
(sec.  201,  p.  303),  in  addition  to  other  taxes,  a  graduated  tax  upon  the  net 
income  beyond  the  deduction,  commencing  with  20  per  centum  of  such  net 
income  above  the  deduction  but  not  above  15  per  centum  of  the  invested 
capital  for  the  taxable  year,  and  running  as  high  as  60  per  centum  of  the 
net  income  in  excess  of  33  per  centum  of  such  capital.  It  applied  to  "all 
trades  or  businesses,"  with  exceptions  not  now  material  (p.  303). 

891  What  should  be  deemed  "invested  capital"  was  defined  by  sec.  207 
(p.  306),  which,  so  far  as  pertinent,  is  set  forth  in  the  margin.* 

*Sec.  207.  That  as  used  in  this  title,  the  term  "invested  capital"  for  any  year  means 
the  average  invested  capital  for  the  year,  as  defined  and  limited  in  this  title,  averaged 
monthly. 

As  used  in  this  title  "invested  capital"  does  not  include  stocks,  bonds  (other  than  obli- 
gations of  the  United  States),  or  other  assets,  the  income  from  which  is  not  subject  to  the 
tax  imposed  by  this  title,  nor  money  or  other  property  borrowed,  and  means,  subject  to 
the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  (2)  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash,  for  stock  or  shares  in  such  corpora- 

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892  The  case  was  decided  upon  a  demurrer  to  the  petition,  in  which  the 
facts  were  stated  as  follows:  Appellant  is  a  domestic  corporation 

and,  prior  to  the  year  1904,  acquired  ore  lands  for  which  it  paid  the  sum  of 
$190,000.  Between  that  time  and  the  year  1912  extensive  explorations  and 
developments  were  carried  on  (the  cost  of  which  is  not  stated),  and  it  was 
proved  that  the  lands  contained  large  bodies  of  ore  and  had  an  actual  cash 
value  not  less  than  $10,105,400;  and  at  all  times  during  the  years  1912  to 
1917,  inclusive,  their  actual  cash  value  was  not  less  than  the  sum  last  men- 
tioned. In  the  year  1912  the  company  increased  the  valuation  of  said  lands 
upon  its  books  by  adding  thereto  the  sum  of  $10,000,000,  which  it  carried 
to  surplus,  and  thereupon,  in  the  same  year,  declared  a  stock  dividend  in 
the  sum  of  $9,915,400,  representing  the  increase  in  value  of  the  ore  lands. 
Theretofore  appellant's  capital  stock  had  consisted  of  shares  issued,  all  of 
one  class,  having  a  par  value  of  $9,915,400.  The  declaration  of  the  stock 
dividend  was  carried  out  by  the  surrender  to  the  company  of  all  the  out- 
standing stock,  and  its  cancellation,  and  the  exchange  of  one  share  of  new 
common  and  one  share  of  new  preferred  stock  for  each  share  of  the  original 
stock. 

893  In  returning  its  annual  net  income  for  the  year  1917  the  company 
stated  its  invested  capital  to  be  $26,322,904.14,  in  which  was  included 

the  sum  of  $10,105,400  as  representing  the  value  of  its  ore  lands.  The  Com- 
missioner of  Internal  Revenue  caused  a  reassessment  to  be  made,  based  upon 
a  reduction  of  the  invested  capital  to  $16,407,507.14;  the  difference  ($9,915,- 
400)  being  the  increase  in  the  value  of  the  ore  lands  already  mentioned.  The 
result  was  an  additional  tax  of  $1,081,184.61,  which,  having  been  paid,  was 
made  the  subject  of  a  claim  for  refund;  and  this  having  been  considered  and 
rejected  by  the  Commissioner,  there  followed  a  suit  in  the  Court  of  Claims, 
with  the  result  already  mentioned. 

894  Appellant's  contentions,  in  brief,  are,  first,  that  the  increased  value 
of  the  ore  lands,  placed  upon  the  company's  books  in  1912,  ought  to 

be  included  in  invested  capital  under  sec.  207  (a)  (3),  as  "paid  m  or  earned 
surplus  and  undivided  profits."  Second,  that  within  the  meaning  of  clause 
(2),  which  provides  that  invested  capital  shall  include  "the  actual  cash  value 


lion  or  partnership,  at  the  time  of  such  payment  (but  in  case  such  tangible  property  was 
paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of  such 
property  as  of  January  first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed  the 
par  value  of  the  original  stock  or  shares  specifically  issued  therefor),  and  (3)  paid  in  or 
earned  surplus  and  undivided  profits  used  or  employed  in  the  business,  exclusive  of  un- 
divided profits  earned  during  the  taxable  year:  Provided,  That  (a)  the  actual  cash  value 
of  patents  and  copyrights  paid  in  for  stock  or  shares  in  such  corporation  or  partnership,  at 
the  time  of  such  payment,  shall  be  included  as  invested  capital,  but  not  to  exceed  the  par 
value  of  such  stock  or  shares  at  the  time  of  such  payment,  and  (b)  the  good  will,  trade- 
marks, trade  brands,  the  franchise  of  a  corporation  or  partnership,  or  other  intangible 
property,  shall  be  included  as  invested  capital  if  the  corporation  or  partnership  made 
payment  bona  fide  therefor  specifically  as  such  in  cash  or  tangible  property,  the  value  of  such 
good  will,  trade-mark,  trade  brand,  franchise,  or  intangible  property,  not  to  exceed  the  actual 
cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such  payment; 
but  good  will,  trade-marks,  trade  brands,  franchise  of  a  corporation  or  partnership,  or  other 
intangible  property,  bona  fide  purchased,  prior  to  March  third,  nineteen  hundred  and 
seventeen,  for  and  with  interests  or  shares  in  a  partnership  or  for  and  with  shares  in  the 
capital  stock  of  a  corporation  (issued  prior  to  March  third,  nineteen  hundred  and  seventeen), 
in  an  amount  not  to  exceed,  on  March  third,  nineteen  hundred  and  seventeen,  twenty  per 
centum  of  the  total  interests  or  shares  in  the  partnership  or  of  the  total  shares  of  the  capital 
stock  of  the  corporation,  shall  be  included  in  invested  capital  at  a  value  not  to  exceed  the 
actual  cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue  of  stock  therefor  not  to 
exceed  the  par  value  of  such  stock;    *    *  * 


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of  tangible  property  paid  in  other  than  cash,  for  stock  or  shares  in  such  cor- 
poration," the  stock  of  the  company  issued  in  1912,  consisting  of  $9,915,400 
of  preferred  stock  and  an  equal  amount  of  common,  was  fully  paid  for:  either 
(a)  by  the  tangible  assets,  including  the  ore  properties  at  their  increased 
value,  or  (b)  by  the  surrender  of  all  the  certificates  representing  the  old 
common  stock,  which,  it  is  said,  had  an  actual  cash  value  equal  to  double  its 
par.  And,  third,  that  the  construction  put  upon  the  Act  by  the  Treasury 
Department,  based  as  it  is  said  not  upon  value  but  upon  the  single  feature 
of  cost,  disregarding  the  time  of  acquisition,  would  render  the  Act  unconsti- 
tutional as  a  deprivation  of  property  without  due  process  under  the  Fifth 
Amendment,  because  so  arbitrary  as  to  amount  in  effect  to  confiscation; 
and  hence  that  this  construction  must  be  avoided. 

895  Reading  the  entire  language  of  Section  207  in  the  light  of  the  cir- 
cumstances that  surrounded  the  passage  of  the  Act,  we  think  its 

meaning  as  to  "invested  capital"  is  entirely  clear.  The  great  war  in  Europe 
had  been  in  progress  since  the  year  1914,  and  the  manufacture  and  export 
of  war  supplies  and  other  material  for  the  belligerent  powers  had  stimulated 
many  lines  of  trade  and  business  in  this  country,  resulting  in  large  profits 
as  compared  with  the  period  before  the  war,  and  as  compared  with  ordinary 
returns  upon  the  capital  embarked.  The  United  States  had  become  directly 
involved  in  the  conflict  in  the  Spring  of  1917,  necessitating  heavy  increases 
in  taxation;  at  the  same  time  manufactures  and  trade  of  every  description 
were  rendered  even  more  active,  and  in  certain  lines  more  profitable,  than 
before,  so  that  the  unusual  gains  derived  therefrom  formed  a  natural  subject 
for  special  taxation. 

896  On  the  eve  of  our  entry,  and  in  order  to  provide  a  "Special  Pre- 
paredness Fund"  for  army,  navy,  and  fortification  purposes,  an 

Act  (March  3,  1917;  Ch.  159,  39  Stat.  1000)  was  passed,  which,  in  Title  II, 
provided  for  an  excess  profits  tax  on  corporations  and  partnerships  equal 
to  8  per  centum  of  the  amount  by  which  their  net  income  exceeded  $5,000 
plus  8  per  centum  of  the  "actual  capital  invested";  and,  in  sec.  202  (p.  1001), 
defined  this  term  to  mean  "(1)  actual  cash  paid  in,  (2)  the  actual  cash  value, 
at  the  time  of  payment,  of  assets  other  than  cash  paid  in,  and  (3)  paid  in 
or  earned  surplus  and  undivided  profits  used  or  employed  in  the  business," 
but  not  to  include  money  or  other  property  borrowed. 

897  The  Revenue  Act  of  October  3,  1917,  passed  after  we  had  become 
engaged  in  the  war,  took  the  place  of  the  Act  of  March  3,  and  em- 
bodied a  "War  Excess  Profits  Tax,"  with  higher  percentages  imposed  upon 
the  income  in  excess  of  deductions  and  a  more  particular  definition  of  terms. 
A  scrutiny  of  the  particular  provisions  of  Section  207  shows  that  it  was  the 
dominant  purpose  of  Congress  to  place  the  peculiar  burden  of  this  tax  upon 
the  income  of  trades  and  businesses  exceeding  what  was  deemed  a  normally 
reasonable  return  upon  the  capital  actually  embarked.  But  if  such  capital 
were  to  be  computed  according  to  appreciated  market  values  based  upon 
the  estimates  of  interested  parties  (on  whose  returns  perforce  the  Govern- 
ment must  in  great  part  rely),  exaggerations  would  be  at  a  premium,  correc- 
tions difficult,  and  the  tax  easily  evaded.  Section  207  shows  that  Congress 
was  fully  alive  to  this  and  designedly  adopted  a  term — "invested  capital" — 
and  a  definition  of  it,  that  would  measurably  guard  against  inflated  valuations. 
The  word  "invested"  in  itself  imports  a  restrictive  qualification.  When 
speaking  of  the  capital  of  a  business  corporation  or  partnership,  such  as  the 
Act  deals  with,  "to  invest"  imports  a  laying  out  of  money,  or  money's  worth, 
either  an  an  individual  in  acquiring  an  interest  in  the  concern  with  a  view 

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to  obtaining  income  or  profit  from  the  conduct  of  its  business,  or  by  the 
concern  itself  in  acquiring  something  of  permanent  use  in  the  business; 
in  either  case  involving  a  conversion  of  wealth  from  one  form  into  another 
suitable  for  employment  in  the  making  of  the  hoped-for  gains.  See  Webster's 
New  Internat.  Diet.,  "Invest",  8;  Century  Diet.,  "invest",  7;  Standard 
Diet.,  "invest",  1. 

898  In  order  to  adhere  to  this  restricted  meaning  and  avoid  exaggerated 
valuations,  the  draftsman  of  the  Act  resorted  to  the  test  of  including 

nothing  but  money,  or  money's  worth,  actually  contributed  or  converted 
in  exchange  for  shares  of  the  capital  stock,  or  actually  acquired  through  the 
business  activities  of  the  corporation  or  partnership  (involving  again  a 
conversion)  and  coming  in  ab  extra,  by  way  of  increase  over  the  original 
capital  stock.  How  consistently  this  was  carried  out  becomes  evident  as  the 
section  is  examined  in  detail.  Cash  paid  in,  and  tangible  property  paid  in 
other  than  cash,  are  confined  to  such  as  were  contributed  for  stock  or 
shares  in  the  corporation  or  partnership;  and  the  property  is  to  be  taken 
at  its  actual  cash  value  "at  the  time  of  such  payment" — distinctly  negativing 
any  allowance  for  appreciation  in  value.  There  is  but  a  single  exception: 
tangible  property  paid  in  prior  to  January  1,  1914,  may  be  taken  at  its  actual 
cash  value  on  that  date,  but  in  no  case  exceeding  the  par  value  of  the  original 
stock  or  shares  specifically  issued  for  it;  a  restriction  in  itself  requiring  the 
valuation  to  be  taken  as  of  a  date  prior  to  the  war  period,  and  in  no  case  to 
exceed  the  stock  valuation  placed  upon  it  at  the  time  it  was  contributed. 
The  provision  of  clause  (3)  that  includes  "paid  in  or  earned  surplus  and  un- 
divided profits  used  or  employed  in  the  business"  recognizes  that  in  some 
cases  contributions  are  received  from  stockholders  in  money  or  its  equi- 
valent for  the  specific  purpose  of  creating  an  actual  excess  capital  over 
and  above  the  par  value  of  the  stock;  and,  in  view  of  the  context,  surplus 
"earned"  as  well  as  that  "paid  in"  excludes  the  idea  of  capitalizing  (for 
the  purposes  of  this  tax)  a  mere  appreciation  of  values  over  cost. 

899  The  same  controlling  thought  is  carried  into  the  proviso,  which 
relates  to  the  valuation  of  patents,  copyrights,  trade-marks,  good 

will,  franchises,  and  similar  intangible  property.  Every  line  shows  evidence 
of  a  legislative  purpose  to  confine  the  account  to  such  items  as  were  paid  in 
for  stock  or  shares,  and  to  their  values  "at  the  time  of  such  payment"; 
but,  with  regard  to  those  bona  fide  purchased  prior  to  March  3,  1917,  there  is 
a  special  provision,  limiting  the  effect  of  any  adjustments  that  might  have 
been  made  in  view  of  the  provisions  of  the  Act  of  that  date. 

900  It  is  clear  that  clauses  (1)  and  (2)  refer  to  actual  contributions  of 
cash  or  of  tangible  property  at  its  cash  value  contributed  in  exchange 

for  stock  or  shares  specifically  issued  for  it;  and  that  neither  these  clauses, 
nor  clause  (3)  which  relates  to  surplus,  can  be  construed  as  including  within 
the  definition  of  invested  capital  any  marking  up  of  the  valuation  of  assets 
upon  the  books  to  correspond  with  increase  in  market  value,  or  any  paper 
transaction  by  which  new  shares  are  issued  in  exchange  for  old  ones  in  the 
same  corporation,  but  which  is  not  in  substance  and  effect  a  new  acquisition 
of  capital  property  by  the  company. 

901  It  is  clear  enough  that  Congress  adopted  the  basis  of  "invested 
capital"  measured  according  to  actual  contributions  made  for  stock 

or  shares  and  actual  accessions  in  the  way  of  surplus,  valuing  them  according 
to  actual  and  bona  fide  transactions  and  by  valuations  obtaining  at  the  time 
of  acquisition,  not  only  in  order  to  confine  the  capital,  the  income  from  which 
was  to  be  in  part  exempted  from  the  burden  of  this  special  tax,  to  something 

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approximately  representative  of  the  risks  accepted  by  the  investors  in  em- 
barking their  means  in  the  enterprise,  but  also  in  order  to  adopt  tests  that 
would  enable  returns  to  be  more  easily  checked  by  examination  of  records, 
and  make  them  less  liable  to  inflation  than  if  a  more  liberal  meaning  of 
"capital  and  surplus"  had  been  adopted;  thus  avoiding  the  necessity  of 
employing  a  special  corps  of  valuation  experts  to  grapple  with  the  many 
difficult  problems  that  would  have  ensued  had  general  market  values  been 
adopted  as  the  criteria. 

902  In  view  of  the  special  language  employed  in  Section  207,  obviously 
for  the  purpose  of  avoiding  appreciated  valuations  of  assets  over  and 

above  cost,  the  argument  that  such  value  is  as  real  as  cost  value,  and  that  in 
the  terminology  of  corporation  and  partnership  accounting  "capital  and 
surplus"  mean  merely  the  excess  of  all  assets  at  actual  values  over  outstanding 
liabilities,  and  "surplus"  means  the  intrinsic  value  of  all  assets  over  and  above 
outstanding  liabilities  plus  par  of  the  stock,  is  beside  the  mark.  Nor  has  the 
distinction  between  capital  and  income,  discussed  in  Doyle  v.  Mitchell  Bros. 
Co.,  247  U.  S.  179,  187;  Hays  v.  Gauley  Mtn.  Coal  Co.,  247  U.  S.  189,  193; 
and  Southern  Pacific  Co.  v.  Lowe,  247  U.  S.  330,  334-335,  any  proper  bearing 
upon  the  questions  here  presented. 

903  Upon  the  strength  of  an  administrative  interpretation  contained  in  a 
Treasury  Regulation  pertaining  to  the  Revenue  Act  of  1917,  under 

which  "stocks"  were  to  be  regarded  as  tangible  property  when  paid  in  for 
stock  or  shares  of  a  corporation,  it  is  insisted  that  appellant's  stock  dividend 
distribution  of  1912  ought  to  be  treated  as  paid  for  in  tangible  property, 
the  old  stock  surrendered  being  regarded  as  tangible  for  the  purpose.  But 
that  distribution,  in  substance  and  effect,  was  an  internal  transaction,  in  which 
the  company  received  nothing  from  the  stockholders  any  more  than  they 
received  anything  from  it  (see  Eisner  v.  Macomber,  252  U.  S.  189,  210-211); 
and  the  old  shares  cannot  be  regarded  as  having  been  "paid  in  for"  the  new 
ones  within  the  meaning  of  Section  207  (a)  (2),  even  were  they  "stocks" 
within  the  meaning  of  that  Regulation,  which  is  doubtful. 

904  It  is  said  that  the  admitted  increase  in  the  value  of  appellant's  ore 
lands  is  properly  to  be  characterized  as  earned  surplus,  because  it 

was  the  result  of  extensive  exploration  and  development  work.  We  assume 
that  a  proper  sum,  not  exceeding  the  cost  of  the  work,  might  have  been  added 
to  earned  surplus  on  that  account;  but  none  such  was  stated  in  appellant's 
petition,  nor,  so  far  as  appears,  in  its  return  of  income.  In  the  absence  of 
such  a  showing  it  was  not  improper  to  attribute  the  entire  $9,915,400,  added 
to  the  book  value  of  the  ore  property  in  the  year  1912,  to  a  mere  appreciation 
in  the  value  of  the  property;  in  short,  to  what  is  commonly  known  as  the 
"unearned  increment,"  not  properly  "earned  surplus"  within  the  meaning 
of  the  statute. 

905  The  foregoing  considerations  ^dispose  of  the  contention  that  either 
the  increased  value  of  appellant's  ore  lands,  or  the  surrender  of  the 

old  stock  in  exchange  for  the  new  issues  based  upon  that  value,  can  be  re- 
garded as  "tangible  property  paid  in  other  than  cash,  for  stock  or  shares  in 
such  corporation"  within  the  meaning  of  sec.  207  (a)  (2);  and  of  the  further 
contention  that  such  increased  value  can  properly  be  regarded  as  "paid  in  or 
earned  surplus  and  undivided  profits"  under  sec.  207  (a)  (3). 

906  It  is  urged  that  this  construction,  defining  invested  capital  according 
to  the  original  cost  of  the  property  instead  of  its  present  value, 

has  the  effect  of  rendering  the  Act  "glaringly  unequal"  and  of  doubtful 
constitutionality;   the  insistence  being  that,  so  construed,  it  operates  to 

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produce  baseless  and  arbitrary  discriminations,  to  the  extent  of  rendering 
the  tax  invalid  under  the  due  process  of  law  clause  of  the  Fifth  Amendment. 
Reference  is  made  to  cases  decided  under  the  equal  protection  clause  of  the 
Fourteenth  Amendment  (Southern  Ry.  Co.  v.  Greene,  216  U.  S.  400,  418; 
Gast  Realty  Co.  v.  Schneider  Granite  Co.,  240  U.  S.  55);  but  clearly  they  are 
not  in  point.  The  Fifth  Amendment  has  no  equal  protection  clause;  and 
the  only  rule  of  uniformity  prescribed  with  respect  to  duties,  imposts,  and 
excises  laid  by  Congress  is  the  territorial  uniformity  required  by  Art.  I, 
sec.  8.  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  557;  Knowlton 
v.  Moore,  178  U.  S.  41,  98,  106;  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  150; 
Billings  v.  United  States,  232  U.  S.  261,  282;  Brushaber  v.  Union  Pacific 
R.  R.,  240  U.  S.  1,  24.  That  the  statute  under  consideration  operates  with 
territorial  uniformity  is  obvious  and  not  questioned. 

907  Appellant  cites  Looney  v.  Crane  Co.,  245  U.  S.  178,  188,  and  Inter- 
national Paper  Co.  v.  Massachusetts,  246  U.  S.  135,  145,  but  these 

cases  also  are  inapplicable,  being  based  upon  the  due  process  clause  of  the 
Fourteenth  Amendment,  with  which  state  taxing  laws  were  held  in  conflict 
because  they  had  the  effect  of  imposing  taxes  on  the  property  of  foreign 
corporations  located  and  used  beyond  the  jurisdiction  of  the  taxing  State. 
There  is  no  such  infirmity  here. 

908  Nor  can  we  regard  the  Act — in  basing  "invested  capital"  upon  actual 
costs  to  the  exclusion  of  higher  estimated   values — as  productive  of 

arbitrary  discriminations  raising  a  doubt  about  its  constitutionality  under  the 
due  process  clause  of  the  Fifth  Amendment.  The  difficulty  of  adjusting  any 
system  of  taxation  so  as  to  render  it  precisely  equal  in  its  bearing  is  proverbial, 
and  such  nicety  is  not  even  required  of  the  States  under  the  equal  protection 
clause,  much  less  of  Congress  under  the  more  general  requirement  of  due 
process  of  law  in  taxation.  Of  course  it  will  be  understood  that  Congress 
has  very  ample  authority  to  adjust  its  income  taxes  according  to  its  descretion, 
within  the  bounds  of  geographical  uniformity.  Courts  have  no  authority  to 
pass  upon  the  propriety  of  its  measures;  and  we  deal  with  the  present  criticism 
only  for  the  purpose  of  refuting  the  contention,  strongly  urged,  that  the  tax  is 
so  wholly  arbitrary  as  to  amount  to  confiscation. 

909  The  Act  treats  all  corporations  and  partnerships  alike,  so  far  as  they 
are  similarly  circumstanced.    As  to  one  and  all,  Congress  adjusted 

this  tax,  generally  speaking,  on  the  basis  of  excluding  from  its  operation  in- 
come to  the  extent  of  a  specified  percentage  (7  to  9  per  cent)  of  the  capital 
employed,  but  upon  condition  that  such  capital  be  valued  according  to  what 
actually  was  embarked  at  the  outset  or  added  thereafter,  disregarding  any 
appreciation  in  values.  If  in  its  application  the  tax  in  particular  instances 
may  seem  to  bear  up  on  one  corporation  more  than  upon  another,  this  is  due  to 
differences  in  their  circumstances,  not  to  any  uncertainty  or  want  of  generality 
in  the  tests  applied. 

910  Minor  distinctions — such  as  those  turning  upon  the  particular  dates 
of  January  1,  1914,  and  March  3,  1917 — are  easily  explained,  as 

we  have  seen.  The  principal  line  of  demarcation — that  based  upon  actual 
costs,  excluding  estimated  appreciation — hnds  reasonable  support  upon 
grounds  of  both  theory  and  practice,  in  addition  to  the  important  consider- 
ation of  convenience  in  administration,  already  adverted  to.  There  is  a 
logical  incongruity  in  entering  upon  the  books  of  a  corporation  as  the  capital 
value  of  property  acquired  for  permanent  employment  in  its  business  and 
still  retained  for  that  purpose,  a  sum  corresponding  not  to  its  cost  but  to 
what  probably  might  be  realized  by  sale  in  the  market.    It  is  not  merely 

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that  the  market  value  has  not  been  realized  or  tested  by  sale  made,  but  that  sale 
cannot  be  made  without  abandoning  the  very  purpose  for  which  the  property 
is  held,  involving  a  withdrawal  from  business  so  far  as  that  particular  property 
is  concerned.  Whether  in  a  given  case  property  should  be  carried  in  the 
capital  account  at  market  value  rather  than  at  cost  may  be  a  matter  of 
judgment,  depending  upon  special  circumstances  and  the  local  law.  But 
certainly  Congress,  in  seeking  a  general  rule,  reasonably  might  adopt  the  cost 
basis,  resting  upon  experience  rather  than  anticipation. 

911  In  organizing  corporations,  it  is  not  unusual  to  issue  different  classes 
of  securities,  with  various  priorities  as  between  themselves,  to  repre- 
sent different  kinds  of  contribution  to  capital.  In  exchange  for  cash,  bonds 
may  be  issued;  for  fixed  properties,  like  plant  and  equipment,  preferred  stock 
may  be  given;  while  more  speculative  values,  like  good-will  or  patent  rights, 
may  be  represented  by  common  stock.  In  the  present  case,  for  instance, 
when  appellant  took  the  estimated  increase  in  value  of  its  ore  lands  as  a  basis 
for  increased  capitalization,  it  issued  preferred  stock  to  the  amount  of  the 
former  total,  carrying  those  lands  at  cost,  and  issued  a  like  amount  of  common 
stock  to  represent  the  appreciation  in  their  market  value.  It  does  not 
appear  that  in  form  the  new  issues  were  thus  allocated;  but  at  least  there  was 
a  recognition  of  a  higher  claim  in  favor  of  one  part  of  the  book  capital  than  of 
the  other.  Upon  like  grounds,  it  was  not  unreasonable  for  Congress,  in 
adjusting  the  "excess  profits  tax,"  to  accord  preferential  treatment  to  capital 
representing  actual  investments,  as  compared  with  capital  representing  higher 
valuations  based  upon  estimates,  however  confident  and  reliable,  of  what 
probably  could  be  realized  were  the  property  sold  instead  of  retained. 

912  From  every  point  of  view,  the  tax  in  question  must  be  sustained. 
We  intimate  no  opinion  upon  the  effect  of  the  Act  with  respect  to 

deductions  from  cost  values  of  capital  assets  because  of  depreciation  or  the 
like;  no  question  of  that  kind  being  here  involved. 

Judgment  affirmed. 

Mr.  Justice  McReynolds  concurs  in  the  result. 

[T.  D.  3181.] 


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(Decision.) 

kenue  Act  of  1917 — War  Excess- Profits  Tax. 

A  corporation  whose  entire  income  is  derived  from  royalties  on  patents 
in  which  it  has  no  investment  is  entitled  to  assessment  under 
Section  209  as  being  engaged  in  a  trade  or  business  having 
no  invested  capital  or  not  more  than  a  nominal 
capital. 

United  States  District  Court,  District  of  New  Jersey. 

De  Laski  &  Thropp  Circular  Woven  Tire  Co. 
vs.  Iredell,  Collector. 
(268  Fed.  377.) 

{Note  Supplementary  Bulletin  Rulings  at  Sec.  327,  Art.  901-13,  Ruling 
No.  17,  and  particularly  the  matter  quoted  there  from  T.  B.  M.  9.) 

913  BODINE,  District  Judge.  The  plaintiff,  a  New  Jersey  corporation, 
666      has  brought  suit  against  the  collector  of  internal  revenue  for  the  First 

district  of  New  Jersey  to  recover  an  excess  profits  tax  for  the  year 
1917,  alleged  to  have  been  improperly  levied,  assessed,  and  collected,  and  the 
defendant  has  moved  to  strike  out  the  complaint,  for  the  reason  that — 

"A  corporation  whose  sole  income  is  received  from  licensed  patents  is  a  corporation 
having  more  than  a  nominal  capital,  within  the  meaning  of  section  209  of  the  Revenue 
Act  of  October  3,  1917." 

914  The  complaint  discloses  that  the  plaintiff  was  incorporated  in  1903, 
with  an  authorized  capital  stock  of  $100,000.  At  the  time  of  its  in- 
corporation its  officers  contemplated  engaging  in  the  business  of  manu- 
facturing pneumatic  vehicle  tires  of  a  peculiar  and  unusual  construction. 
The  Company  experimented  at  great  expense  over  a  period  of  years,  until  it 
was  determined  that  the  manufacture  of  its  tires  was  not  commercially  pos- 
sible. One  of  the  officers  of  the  Company  during  the  period  of  experimenta- 
tion developed  a  new  form  of  mold  for  vulcanizing  pneumatic  tires,  which 
mold  was  of  general  utility,  and  a  patent  was  secured,  which  was  assigned 
to  the  Company  for  $1,  together  with  other  patents  relating  to  tire-manu- 
facturing apparatus. 

915  In  1911  the  Company  ceased  conducting  any  other  business  than 
that  of  granting  licenses  under  its  patents.    Its  capital  was  reduced  to 

$10,000.  During  the  year  1917  the  capital  and  surplus  were  $10,000  and 
$2,000,  respectively,  or  a  total  invested  capital  of  $12,000,  which  capital  was 
used  as  a  fund  from  which  to  advance  salaries,  wages,  etc.,  and  to  provide 
office  furniture,  accommodations,  and  equipment.  The  Company  was  in 
much  the  same  position  as  an  individual  who,  having  invented  a  machine 
desired  by  others,  received  royalties  for  the  use  of  his  invention  and  kept 
sufficient  money  on  hand  to  provide  for  his  needs  during  periods  when  roy- 
alties would  not  be  received.  The  Company's  net  income  during  the  year 
1917  was  $105,650.29.  It  is  clear,  therefore,  that,  the^patents^had^real 
value. 

916  The  plaintiff  concluded  that  it  was  entitled  to  be  assessed  under 
section  209  of  the  Revenue  Act  of  1917,  on  the  theory  that  it  was  a 


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corporation  "having  no  invested  capital  or  not  more  than  a  nominal  capital." 
The  Treasury  Department,  however,  acting  under  section  210  of  the  act, 
on  the  theory  that  it  was  unable  to  satisfactorily  determine  the  invested 
capital  of  the  plaintiff,  assessed  an  additional  tax,  which  Was  paid  by  the 
plaintiff  under  protest,  and  for  the  recovery  of  which  this  action  is  brought. 

917  Section  201  of  the  Revenue  Act  of  1917  provides  that,  in  addition  to 
an  income  tax,  every  corporation,  except  those  specifically  exempted, 

of  which  the  plaintiff  is  not  one,  shall  pay  the  additional  tax  upon  its  net 
income.  The  tax  was  graduated,  and  was  a  certain  percentage  of  the  net 
income,  not  in  excess  of  certain  fixed  percentages  of  the  invested  capital. 
Under  section  207  of  the  act  the  term  "invested  capital"  is  defined.  It 
appears  from  this  section  that  the  plaintiff's  patents  would  not  be  included 
in  the  term  "invested  capital,"  for  the  reason  that  no  stock  of  the  plaintiff 
Company  was  issued  therefor,  nor  were  these  patents  specifically  paid  for 
in  cash  or  tangible  property.  The  only  invested  capital  of  the  plaintiff 
was  the  $12,000  of  capital  and  surplus,  which  was  not  used  in  the  production 
of  the  net  income  of  the  plaintiff,  but  merely  for  the  purpose  of  advancing 
salaries,  wages,  and  providing  office  accommodations  and  equipment,  and 
which  in  itself,  under  treasury  ruling,  would  not  bring  the  Company  under 
section  201  of  the  act. 

918  In  determining  the  question  whether  such  a  corporation,  deriving  its 
income  solely  from  royalties  or  licenses  from  patents,  can  be  said  to 

be  a  corporation  "having  no  invested  capital  or  not  more  than  a  nominal 
capital,"  within  the  meaning  of  section  209,  reference  is  made  in  behalf  of 
the  collector  to  the  Congressional  Record  of  October  6,  1917,  containing  a 
statement  by  Hon.  Claude  Kitchin,  who  was  at  that  time  chairman  of  the 
Ways  and  Means  Committee.  It  appears  from  this  statement  that  the 
Excess  Profits  Tax  Law,  as  contained  in  the  House  Bill,  applied  only  to  cor- 
porations and  partnerships,  and  not  to  individuals.  The  Senate  brought 
within  the  scope  of  the  law  individuals  in  trade  or  business,  but  excluded 
lawyers,  doctors,  professional  men,  and  officers  of  corporations, as  well  as 
governmental  officers.  The  House  conferees,  it  would  seem  from  Mr. 
Kitchin's  statement,  opposed  the  inclusion  of  individuals,  unless  they  were 
all  brought  in.  The  Senate  insisted  upon  the  exemptions,  and  section  209 
of  the  act  resulted,  which,  it  is  the  claim  of  the  collector,  was  intended  to 
apply  to  a  definite  class  of  persons;  i.e.,  lawyers,  doctors,  professional  men, 
and  high-salaried  officers  of  corporations  and  the  government. 

919  If  this  idea  of  providing  especially  for  those  rendering  a  personal 
service  was  all  that  was  in  the  minds  of  the  conferees,  there  seems 

to  be  no  reason  why  they  should  not  have  used  more  exact  language  to  convey 
their  meaning,  and  further  there  is  no  reason  at  all  why  Congress  should  have 
specifically  provided  that,  in  a  case  of  a  trade  or  business  "having  no  invested 
capital  or  not  more  than  a  nominal  capital,"  there  should  be  assessed  a  tax 
other  than  the  tax  to  which  such  trade  or  business  would  otherwise  be  liable 
under  section  201,  unless  there  was  to  be  a  distinction  between  those  employ- 
ing "invested  capital"  and  those  employing  "nominal  capital."  These 
terms  admit  of  exact  definitions. 

920  The  determination  of  this  case  must,  as  already  indicated,  depend 
upon  the  meaning  of  the  words  "not  more  than  a  nominal  capital." 

It  is  clear  from  section  207  that  the  patents  from  which  the  plaintiff  derived 
its  revenue  cannot  be  regarded  as  "invested  capital."  Counsel  for  the 
plaintiff,  in  a  most  exhaustive  and  painstaking  brief,  has  shown  that  the 
treasury  rulings  indicate  that  the  word  "invested"  was  omitted  in  the  act 

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by  oversight  in  the  phrase  "not  more  than  a  nominal  (invested)  capital. " 
This  suggestion,  however,  is  not  well  taken,  for  the  reason  that,  whatever  the 
treasury  rulings  may  have  been,  they  can  be  given  no  force  to  modify  or  add 

to  the  clearly  expressed  language  of  Congress. 

921  It  does  not  follow,  however,  that  the  word  "capital"  embraces 
patents.    The  following  definitions  of  "capital"  are  in  point: 

"Wealth  employed  in  or  available  for  production."    Funk  &  Wagnalls  New  Standard 

Dictionary. 

"That  part  of  the  production  of  industry  which,  in  the  form  either  of  national  or  of 
individual  wealth,  is  available  for  further  production."  The  Century  Dictionary  and 
Cyclopedia. 

922  The  late  J.  S.  Mill,  the  eminent  economist,  defines  "capital"  as 
follows : 

"What  capital  does  for  production  is  to  afford  shelter,  protection,  tools,  and  materials 
which  the  work  requires,  and  to  feed  and  otherwise  maintain  the  laborers  during  the 
process.  Whatever  things  are  destined  for  this  use,  destined  to  supply  productive  labor 
with  these  various  prerequisites,  are  capital."  Political  Economy,  i,  iv,  §  I.  (The  italics 
are  mine.) 

923  Taking  this  last  definition,  which  embodies  the  thought  of  all  the 
others,  it  seems  clear  that  patents  do  not  fall  within  the  term 

"capital;"  and  it  also  seems  to  be  clear  that  this  is  what  was  in  mind  when 
Congress  made  the  distinction  between  "invested  capital,"  which  is  defined 
under  section  207  to  include  the  actual  cash  value  of  patents  paid  for  in  stock 
or  shares,  and  also  such  other  intangible  property,  which  had  been  paid 
for  in  money  or  stock,  and  also  what  was  in  mind  when  the  word  "capital" 
is  used  alone  in  section  209,  preceded  by  the  word  "nominal;"  that  is,  in  the 
sense  of  something  in  name  only  employed  in  or  available  for  production. 
The  distinction  is  between  those  employing  those  stored-up  concrete  things, 
essential  to  productive  labor,  and  those  employing  these  things  existing  in 
name  only.  Patents  were  never  capital  in  an  economic  sense.  Congress 
included  them  within  the  term  "invested  capital"  to  the  extent  only  of  the 
investment  in  them;  if  no  investment  in  them,  then  they  remain  in  the  same 
class  as  that  intangible  something  which  makes  for  the  wealth  of  the  pro- 
fessional man,  the  broker,  or  others  engaged  in  a  personal  service,  which 
could  never  be  "capital,"  except  in  name  only. 

924  The  decision  of  this  case,  however,  need  not  depend  solely  upon 
the  meaning  of  the  word  "capital,"  to  be  found  in  the  distinction  be- 
tween "invested  capital"  and  "nominal  capital,"  as  used  in  the  act.  The 
patents  which  the  plaintiff  owned  were  the  concrete  embodiment  of  the 
skill  which  the  plaintiff  possessed  in  its  field  of  activity.  This  skill  or  service 
it  bartered  for  a  consideration.  Such  skill  or  service  is  like  the  service  a 
lawyer  in  large  practice  renders  for  an  annual  retainer,  and  is  very  nearly 
akin  to  the  service  which  a  commission  house  renders  to  those  who  buy  and 
sell  through  it,  or  the  service  of  a  concern  engaged  in  selling  or  leasing  real 
estate,  and  in  writing  insurance.  The  plaintiff's  source  of  income  was  that 
which  certain  persons  were  willing  to  pay  it  for  the  use  of  its  skill  and  knowl- 
edge. It  is  true  that  skill  and  knowledge  had  been  reduced  to  concrete 
form;  but  the  payment  was  for  the  use  of  the  skill  and  knowledge,  and  not 
for  any  part  or  parcel  of  the  form  to  which  the  skill  and  knowledge  had  been 
reduced.  Hence  it  would  seem  that  in  a  very  real  sense  the  plaintiff  was 
engaged  in  rendering  a  personal  service,  and  was  not  employing  "capital," 
and  certainly  no  more  than  a  "nominal  capital. " 

925  The  motion  to  strike  is  dismissed. 

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{Decision.) 
Revenue  Act  of  1917. 

Additions  to  surplus  account;  Earned  surplus  expended  in  developing  and 
improving  a  secret  process,  or  used  to  repay  borrowed  money  so 

expended. 

United  States  District  Court,  Southern  District  of  New  York. 
Lincoln  Chemical  Company,  Plaintiff, 
against 

William  H.  Edwards,  as  Collector,  etc. 
(272  Fed.  142.) 

926  Action  by  a  taxpayer  against  the  Collector  for  refund  of  a  part  of 

771  the  excess  profits  tax  for  1917.   The  plaintiff,  a  domestic  corporation, 

772  filed  its  return  for  1917  and  calculated  its  capital  upon  the  basis  of 
Section  209  of  the  law  of  October  3,  1917;  that  is  to  say,  it  assumed 

that  it  had  "no  invested  capital  or  not  more  than  a  nominal  capital."  The 
Treasury  officials  reassessed  the  tax  at  a  larger  figure  upon  a  basis  not  now 
necessary  to  set  forth,  because  it  is  conceded  that  the  propriety  of  their 
action  depends  upon  the  correctness  of  the  plaintiff's  reading  of  Section  209- 
If  that  is  right,  the  plaintiff  wins;  if  it  is  wrong,  the  defendant. 

927  The  case  was  tried  before  a  jury  of  one,  and  at  the  conclusion  of  the 
evidence  both  sides  moved  for  the  direction  of  a  verdict.  The  evi- 
dence, which  was  undisputed,  showed  the  following  state  of  facts:  The 
plaintiff  was  organized  in  April,  1909,  under  the  laws  of  New  York,  with  a 
capital  stock  of  ten  thousand  dollars.  There  were  but  two  persons  financially 
interested  in  it,  Loeb  and  Riddle.  Riddle  was  an  inventor,  and  before  the 
incorporation  came  to  Loeb  with  a  process  for  extracting  cocoa  butter  out 
of  cocoa  shells,  a  by-product.  This  process  proved  worthless,  and  Riddle 
thereupon  suggested  to  Loeb  the  possibility  of  converting  the  process  into 
one  from  which  he  could  extract  from  cocoa  shells  a  chemical  substance, 
known  as  theobromine,  allied  to  caffeine.  Loeb,  having  some  money,  con- 
tinued to  advance  it  in  defraying  Riddle's  further  experiments,  until  he 
became  fearful  of  two  wide  involvement,  and  determined  to  incorporate  the 
venture.  Riddle  agreed  to  work  for  the  corporation  for  five  years  at  a  salary 
of  eighteen  hundred  dollars  and  to  convey  his  process,  still  unperfected, 
both  for  twenty-four  hundred  dollars  par  value  of  the  plaintiff's  stock.  Loeb 
agreed  to  convey  the  machinery  and  supplies  par  for  par  in  stock,  seventy- 
four  hundred  dollars,  and  two  hundred  dollars  was  paid  in  cash. 

928  During  the  year  1910  the  company  borrowed  nearly  twenty  thou- 
sand dollars,  which  it  spent  in  Riddle's  further  experiments  upon  the 

process,  which  was  then  complete.  During  that  year  it  got  one  Schaefer,  a  man- 
ufacturing chemist,  to  make  a  contract  for  the  exploitation  of  the  process  on  a 
royalty  basis,  but  the  sales  of  theobromine  were  so  few  that  the  royalty  was 
never  earned.  In  1912  they  got  Schaefer  to  give  them  better  terms;  he 
agreed  to  pay  two  thousand  dollars  a  year  for  the  process  over  a  period  pf 
fifteen  years  and  to  furnish  theobromine  to  the  plaintiff  at  $2.50  a  pound, 
or  less.  This  gave  the  plaintiff  control  of  a  supply  without  manufacturing. 
At  the  time  of  the  first  contract  in  1910,  the  plaintiff  sold  all  its  machinery 
and  pjant  to  Schaefer  for  $1,155,  and  its  supplies  for  $407,  and  this  money 
was  either  used  in  development  or  upon  the  indebtedness.  In  any  event, 
it  had  all  disappeared  before  1914.  The  plaintiff  never  manufactured  any 
theobromine  after  1910. 

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EXCESS-PROFITS  TAX.— COURT  DECISION. 


929  The  plaintiff's  profits  on  the  sale  of  theobromine  made  by  Schaefer 
under  the  process  were  not  large  throughout  the  year  1911,  but  they 

began  to  increase  in  1912  and  1913,  and  the  company  thus  made  a  small 
income  besides  the  royalty  paid  by  Schaefer.  The  advent  of  the  Great  War 
in  1914  greatly  increased  the  demand,  and  the  business  became  very  profit- 
able, so  that  by  January  1,  1917,  all  its  debts  were  paid  and  it  had  a  surplus 
of  thirteen  thousand  dollars  after  writing  off  a  depreciation  of  seven  thou- 
sand seven  hundred  dollars  upon  the  process. 

930  The  business  was  done  as  follows:  There  were  but  three  purchasers 
of  theobromine,  all  large  manufacturing  chemists,  who  bought  at 

ten  days'  cash.  The  plaintiff  necessarily  bought  all  its  theobromine  (made 
under  the  process),  from  Schaefer  at  fifteen  days  cash,  and  was  therefore 
in  a  position  to  pay  Schaefer  out  of  the  moneys  which  its  customers  paid 
to  it.  As  these  were  of  high  financial  responsibility  it  had  no  need  to  hold  a 
reserve  in  its  treasury,  in  order  to  finance  its  purchases,  though  at  times, 
when  in  ample  funds,  it  did  use  its  surplus  to  pay  Schaefer  before  the  cus- 
tomers paid  for  their  consignments. 

931  During  the  year  1917  the  assets  of  the  plaintiff,  therefore,  consisted 
only  of  its  cash  on  hand,  the  contract  with  Schaefer,  and  the  secret 

process  finally  perfected  by  Riddle.  Its  stock  was  ten  thousand  dollars,  and 
its  surplus  as  stated,  thirteen  thousand  dollars,  of  which  over  seven  thousand 
dollars  was  in  cash.  It  necessarily  followed  that  its  other  assets  were  valued 
at  sixteen  thousand  dollars. 

932  The  case  depends  upon  the  meaning  of  the  phrase  "invested  capital" 
and  "nominal  capital"  as  used  in  Section  209  and  as  defined  in  Sec- 
tion 207.  The  plaintiff  asserts  that  there  was  only  two  hundred  dollars  of 
•cash  paid  in,  no  tangibles  remaining  after  1913,  no  surplus  "used  and  em- 
ployed" in  the  business,  and  that  the  secret  process  was  an  "intangible" 
which  must  be  taken  at  its  "actual  cash  value"  in  April,  1909,  which  is  shown 
to  be  nothing.  The  defendant  argues  that  the  sums  spent  upon  the  process 
which  did  in  fact  increase  its  value  by  nineteen  thousand  dollars  should  be 
taken  as  a  surplus  "used  and  employed"  in  the  business. 


933  LEARNED  HAND,  D.  J.:  I  shall  decide  this  case  upon  the  as- 
sumption that  "nominal  capital"  in  Section  209  means  "nominal 
invested  capital,"  without  of  course  passing  upon  that  question.  I  shall 
further  assume — and  indeed  on  this  point  both  sides  agree — that  the  secret 
process  of  Riddle  was  "intangible  property"  within  the  meaning  of  Section 
207  (a)  (3)  (b).  I  shall  finally  assume  that  the  process  had  only  a  nominal 
value  in  April,  1909,  when  it  was  sold  to  the  plaintiff  for  twenty-four  hundred 
dollars  of  stock.  With  these  assumptions  the  question  arises  whether  the 
money  used  to  develop  the  process  can  be  regarded  as  "paid  in  or  earned 
surplus  and  undivided  profits  used  or  employed  in  the  business"  under 
Section  209  (a)  (3).  On  the  trial  I  thought  that  the  plaintiff  was  right  on 
this  point,  and  for  clarity  I  shall  therefore  state  its  argument  as  strongly  as 
I  can.  The  statute,  it  says,  prescribes  that  "intangible  property"  of  this 
kind  "shall  be  included  in  invested  capital  at  a  value  not  to  exceed  the 
actual  cash  value  at  the  time  of  such  purchase."  Disregarding  "paid  in 
surplus,"  of  which  there  is  none  here,  the  "earned  surplus"  is  the  only  item 
into  which  the  supposed  added  value  of  the  process  can  be  placed.  Now 
surplus,  or  at  least  "earned  surplus"  is  merely  an  accountant's  way  of  saying 
that  the  value  of  the  assets  are  greater  than  the  liabilities.    When  the  statute 

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EXCESS-PROFITS  TAX.— COURT  DECISION. 


speaks  of  "invested  capital,"  it  must  be  understood  to  refer  to  existing 
property,  i.  e.  "means  of  production,"  and  to  use  accountant's  language, 
not  because  accounts  can  ever  of  themselves  be  the  basis  of  taxation,  but 
because  they  are  the  most  convenient  record  of  actual  values,  embodied  in 
property  which  is  alone  the  proper  basis  of  taxation.  "Earned  surplus" 
must  therefore  represent  the  value  of  existing  property. 
034  This  being  true,  continues  the  plaintiff,  the  only  asset  of  value  in 
1917  was  the  perfected  process  and  we  may  assume  that  it  had  enough 
value  to  give  more  than  a  "nominal"  "earned  surplus"  above  the  capital 
stock,  which  was  the  only  liability.  Therefore,  if  the  asset  could  be  taken  at 
its  true  value  in  1917,  Section  209  of  the  statute  would  not  apply.  The 
difficulty  with  the  Collector's  position,  however,  is  that  Section  207  directed 
us  to  include  the  process  at  no  more  than  its  "actual  cash  value"  in  1909, 
and  at  that  time  it  had  none.  The  money  spent  in  improving  and  perfecting 
the  process  had,  in  1917,  no  existence  at  all,  save  in  the  process  itself.  It 
was  spent  in  machinery  or  supplies  or  Riddle's  living  expenses,  or  salaries. 
So  far  as  our  treasury  was  concerned  there  was  nothing  now  left  except  the 
process.  That  was  therefore  the  only  asset  which  could  figure  on  the  credit 
side  of  our  account  to  establish  any"  earned  surplus,"  and  the  statute  forbade 
its  inclusion  at  anything  but  a  nominal  value.  Therefore,  we  had  no  "earned 
surplus,"  and  only  a  "nominal  invested  capital." 

935  This  argument  appears  to  me  unanswerable  if  the  incompleted  process 
be  regarded  as  the  same  asset  for  all  purposes  when  finally  developed 

as  when  first  acquired.  The  statute  must  of  course  mean  something,  and  the 
least  that  it  can  mean  must  be,  I  think,  that  any  automatic  increase  in  value 
of  a  process  or  "other  intangible  property,"  must  be  disregarded.  The 
"unearned  increment,"  as  economists  would  call  it,  will  be  ignored.  There- 
fore, I  should  altogether  disregard  any  increase  in  the  value  of  this  process 
dependent  upon  general  conditions  of  industry,  as  for  example  the  rise  in  the 
price  of  theobromine  due  to  the  Great  War.  Furthermore,  for  the  purposes  of 
this  case,  anyway,  I  may  assume  that  an  increase  in  the  value  of  the  process, 
resulting  from  spending  money  in  advertising  or  the  like,  which  leaves  it 
unchanged  in  itself,  will  fall  into  the  same  category.  That  question  can  await 
decision  till  it  arises;  I  say  nothing  about  it  here.  The  case  at  bar  is,  how- 
ever, one  where  money  has  been  spent  in  changing  the  property  itself,  so  that 
in  place  of  a  formula  which  prescribed  one  sequence  of  steps,  there  emerged 
another  which  prescribed  a  different  sequence.  Fair  analogies  appear  to  me, 
for  example,  cattle  fed  for  market,  or  houses  rebuilt  or  enlarged.  It  is  true 
that  for  convenience  we  speak  of  such  property  as  always  remaining  the  same, 
though  in  fact  it  is  not  only  different  in  value,  but  that  difference  results 
from  a  change  in  the  objective  character  of  the  property  itself,  but  that 
convenience  should  not  disguise  the  substantial  fact  that  it  is,  economically 
speaking,  new  property  which  appears. 

936  When  such  changes  have  resulted  from  the  expenditure  of  new 
capital,  I  see  no  reason  why  the  statute  should  be  construed  as  per- 
emptorily directing  that  they  should  be  disregarded.  It  is  quite  true  still,  as 
the  plaintiff  argues,  that  the  "earned  surplus"  must  be  found  in  some  assets 
and  that  the  only  asset  in  the  case  at  bar  still  remains  the  process,  but  it  is  a 
different  process.  The  limitation  of  Section  207  may  be  confined,  without 
undue  violence  to  the  sense  of  the  words,  to  such  increases  in  value  as  arise 
without  the  addition  of  new  capital,  and  it  may  be,  to  such  others  also  as 
involve  no  objective  change  in  the  thing  itself. 

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EXCESS-PROFITS  TAX. — COURT  DECISION. 


937  Indeed,  it  can  scarcely  be  supposed  that  Congress  could  have  had 
any  other  purpose  than  to  prevent  the  taxpayer  from  crediting  his 

capital  account  with  increases  which  he  had  done  nothing  to  produce.  If 
they  meant  to  include  also  new  outlays  upon  existing  capital,  no  matter 
how  providently  made,  the  statute  provides  a  direct  incentive  to  extrava- 
gance. Often,  perhaps  generally,  it  is  a  sound  industrial  policy  to  improve 
existing  capital,  rather  than  to  scrap  it,  and  invest  anew.  Yet  if  the  plaintiff 
be  right,  no  such  investment  can  ever  do  more  than  meet  depreciation,  and 
this  would  apply  as  well  to  "tangibles"  as  to  "intangibles."  The  only  new 
values  which  could  be  recognized  would  be  in  property  bought  outright 
after  incorporation,  and  those  investments  which  may  have  been  the  means  of 
changing  the  industrial  character  and  value  of  existing  property,  would  be 
totally  lost  for  purposes  of  taxation.  When  taxes  can  be  as  high  as  the  excess 
profits  tax  may  be,  such  inducements  may  become  a  patent  influence  upon 
industrial  conduct,  and  it  cannot  be  supposed  that  the  result  of  the  plain- 
tiff's construction  was  within  the  purposes  of  Congress. 

938  Again,  it  should  be  a  weighty  consideration  with  me  that  the  Tax 
Bureau  has  made  these  allowances  in  the  past  in  the  case  of  thousands 

of  taxpayers  and  has  drafted  its  regulations  upon  the  assumption  that  the 
statute  permits  them.  I  therefore  hold  that  when  money  has  been  earned 
and  spent  in  improving  a  process  such  as  this,  its  increased  value  due  only  to 
that  expenditure  may  figure  as  an  asset  in  estimating  under  Section  207 
"earned  surplus,"  if  any,  as  an  element  of  "invested  capital." 

939  It  does  not  follow,  of  course,  in  the  case  at  bar  that  the  value  of  the 
process  so  improved  was  enough  to  cause  any  "earned  surplus"  to 

emerge.  That  depends  upon  whether  the  assets,  so  estimated,  were  greater 
than  the  stock,  ten  thousand  dollars,  by  more  than  a  "nominal"  amount. 
Now  the  value  of  the  "tangibles"  must  under  Section  207  be  taken  as  of  Jan- 
uary 1,  1914,  at  which  time  they  had  disappeared.  Therefore,  the  process 
must  have  increased  from  its  nominal  value  in  1909  to  more  than  ten  thousand 
dollars  before  any  "earned  surplus"  could  begin  to  appear  at  all.  The  value 
at  which  the  plaintiff  carried  the  process  does  not  definitely  appear  on  its 
books.  On  January  1,  1917,  it  had  a  surplus  of  $13,088.59  and  therefore  assets 
of  $23,088.59.  Of  this,  $7,367.64  was  in  cash,  leaving  $15,720.95  for  other 
assets  which  must  be  the  process  and  the  contract.  The  contract  got  its 
value  only  from  the  process  and  may  be  disregarded.  The  value  of  the 
process  as  of  that  year  would  therefore  appear  to  be  this  sum. 

940  This  figure,  it  is  true,  does  not  correspond  with  other  evidence  and 
apparently  is  incorrect.    In  its  income  tax  return  for  1916  it  valued 

the  process  as  of  March  1,  1913,  at  $19,716.84,  and  claimed  a  deduction  for 
depreciation  to  date  of  $7,761.42,  leaving  a  value  of  about  $12,000  as  of  Jan- 
uary 1,  1917.  The  discrepancy  of  some  $3,700  I  have  been  unable  to  account 
for  except  upon  the  hypothesis  that  there  were  other  assets  not  shown. 
Perhaps  the  cash  was  greater,  because  the  cash  book  showed  a  balance  on 
January  2,  1917,  of  $11,000  which  just  about  makes  up  the  difference.  As- 
suming that  this  is  the  proper  explanation,  still  on  the  plaintiff's  own  admis- 
sion it  had  an  "earned  surplus"  of  $2,000  which  in  view  of  the  size  of  the  busi- 
ness I  should  not  consider  "nominal." 

941  But  the  defendant  was  not  bound  by  the  plaintiff's  admission.  It 
was  for  the  plaintiff  to  prove  that  it  had  only  a  nominal  capital. 

The  process  was  clearly  of  very  substantial  value.  The  contract  had  ten 
years  more  to  run  and  there  was  a  minimum  royalty  of  - $2,000.  .  Besides 
this  the  plaintifTcould  call  for  at  least  three  thousand  pounds  of  theobromine 

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EXCESS-PROFITS  TAX.— COURT  DECISION. 


yearly  at  not  more  than  $2.50  a  pound,  a  right  which  had  been  of  substantial 
value  in  the  years  before  the  war  began  to  affect  the  price.  In  1914  this  right 
was  worth  $525  and  the  royalty  apparently  $2,854.  Moreover,  when  the 
contract  terminated  the  process  would  not  necessarily  become  worthless. 
Indeed  it  may  have  a  very  substantial  value  for  an  indefinite  time.  The 
plaintiff  has  certainly  failed  to  prove  that  its  value  in  1917  over  $10,000  was 
"not  more  than  nominal." 

942  I  therefore  conclude  that  the  case  is  not  proved  and  will  direct  a 
verdict  for  the  defendant.    (The  foregoing  is  reproduced  in  T.  D. 

3183  not  as  a  ruling,  but  for  information.  The  case  is  reported  at  272  Fed. 
142.) 

943  tO  999  Blank. 

1000    For  If  1000,  at  which  the  Excess-Profits  Tax  Title  of  the  Revenue 
Act  of  1921  begins,  see  page  401,  immediately  following  the  Sup- 
plementary Bulletin  Rulings. 


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OOOi 


i-2-22. 

INDEX  TO  THE  EXCESS  PROFITS  TAX. — 1918  ACT. 

[The  references  are  to  paragraph  numbers.] 

Accounts  receivable.  .550,  7381 
Administrative  provisions.  .  860 

Claim  for  refunds.  .  8022 

Payment  of  taxes.  .585,  833-835,  849,  861 
Admissible  assets.  .553,  750 

Affiliated  corporations,  consolidated  returns.  .587,  821 
Excess  profits  credits.  .  588,  724 
Invested  capital,  in  general.  .587,  821-828 

Inadmissible  assets.  .  825 

Intangible  property  paid  in.  .  823 

Prewar  period.  .  828 

Stock  of  subsidiary  acquired  for  cash.  .  826 
Stock  of  subsidiary  acquired  for  stock.  .  827 

Liberty  bond  holdings.  .  735,  736 

Prewar  net  income.  .587,  734 

War  profits  credits.  .  588,  723 
Agricultural  organizations,  exemption.  .  667 
Allocation,  net  income  to  particular  source.  .  520,  607 

Stock  dividends.  .508 
Amortization: 

Munition  manufacturer's  tax  law.  .  763 

Restoration  of  depreciation  allowance  to  surplus  account.  .  765 
Apportionment  of  specific  exemption  from  excess-profits  tax.  .528,  684 
Appreciated  values,  use  of  in  determining  invested  capital.  .  865,  889 
Assessment,  excess  profits  tax  in  special  cases.  .565,  570,  831 
Assets,  transfer  of.  .579,  841 

Valuation  of,  upon  reorganization.  .579,  841 
Associated  Press  franchises,  intangible  property.  .  738 
Associations,  exemption.  .  666 
Authority  for  regulations.  .  859 
Average  invested  capital.  .  563,  687,  806 
Average  percentages:  "the  median".  .694 
Bank  deposits,  invested  capital.  .  742 

Discounts,  invested  capital.  .791 
Beneficiary  societies,  exemption.  .  667 
Bills  receivable.  .  550,  738 
Bonds,  Discount  on,  deduction.  .  790 

Invested  capital.  .  790 

Liberty  bonds.  .  726,  735,  736 

United  States,  Security.  .  8075 

War  Finance  Corporation.  .726,  732,  745 
Bonus,  Stock,  invested  capital.  .  753  _ 
Borrowed  capital,  amount  left  in  business.  .  740 

Bank  deposits.  .  742 

Invested  capital  in  general.  .551,  561,  739,  751,  865,  889 

Securities.  .  739 

Unexpired  subscriptions.  .  742 
Building  and  loan  association,  exemption.  .  667 
Burden  of  proof: 

Understatement  of  capital  or  surplus  account.  .  764 
Business  leagues,  exemption.  .  667 

Cancelled  indebtedness  to  stockholders,  borrowed  capital.  .  740 
Capital: 

Impairment  of.  .  815 
Cash  paid  in,  invested  capital.  .556,  753,  815 
Cemetery  companies,  exemption.  .  667 

Certificates  of  indebtedness,  medium  of  payment  of  tax.  .  8020 

Change  in  ownership  during  taxable  year,  return  by  affiliated  corporations.  .571,  579; 
837-841 

Charitable  corporations,  exemption.  .  667 
Chautauqua  association,  exemption.  .  667 
Citation  of  act.  .  8082 
Civic  leagues,  exemption.  .  667 

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INDEX  TO  EXCESS-PROFITS  TAX.— 1918  ACT. 


The  references  are  to  paragraph  numbere. 

Claims  of  refund.  .  8022 
Clubs,  exemption.  .667 

Collectors  of  Internal  Revenue,  List  of.  .see  page  1711 
Commissions,  selling  securities:  invested  capital.  .752 
Compensation,  deduction  of  expenditures.  .  838 
Computation: 

Excess  profits  tax,  fiscal  year.  .580,  842 

Foreign  corporations.  .567,  830,  831-835,  852,  861 

Government  contracts.  .604 

Illustrations.  .608,  648,  683 

Sale  of  mineral  deposits.  .586,  853,  858 

Special  cases.  .565,  570,  831-835,  861 

Year  1918.  .510,  602 

Years  after  1918.  .514,  517,  603,  604 
Invested  capital.  .555,  751,  807,  820,  828,  865,  889 
Limitation  of  excess  profits  tax.  .  523,  639,  643 
Conditional  exemptions.  .667 

Conditional  sales,  personal  property,  gross  income.  .  792 
Consolidated  returns,  affiliated  corporations.  .587,  821 
Consolidated,  excess  profits  tax.  .575,  579,  837-841 
Constitutionality.  .  889 
Contracts: 

Government.  .503,  604 

Intangible  property.  .738 
Copyrights.  .549,  738 
Corporations,  affiliated.  .580,  842 

Apportionment  of  specific  exemption.  .  528,  634,  684 

Conditional  and  other  exemptions.  .525,  667 

Exemption.  .525,  667 

Foreign.  .540,  542,  565,  570,  830,  852 
Liberty  bond  exemptions.  .  733 

Gold  mining.  .527,  682 

Net  income.  .543,  725 

Returns.  .  585,  849 

Consolidated.  .587,  821 

Transportation.  .522 
County  fairs,  exemption.  .667 
Courts,  jurisdiction  of.  .  8003 
Court  decisions: 

De  Laski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell.  .913 

La  Belle  Iron  Works  vs.  U.  S..  .  889 

Lincoln  Chemical  Co.  vs.  Edwards.  .  926 
Credits: 

Excess  profits.  .541,  724 

Foreign  corporations.  .540,  542,  830 

War  profits,  in  general.  .530,  686 

Affiliated  corporations.  .  588,  723 
Foreign  corporation.  .  830 
Meager  prewar  net  income.  .533,  688 
No  prewar  net  income.  .533,  536,  690,  722 
Deductions: 

Compensation.  .  838 

Vessels;  net  earnings  of  certain.  .  869 
Defaulted  payments  on  sale  of  real  estate.  .799 

Personal  services,  compensation  for.  .838 
Definitions: 

"Admissible  assets".  .553,  750 

"Affiliated  corporations".  .589,  821 

"Borrowed  capital".  .551,  739 

"Collector".  .8092. 

"Commissioner".  .8091 

"Corporation".  .  8086 

"Dividends".  .505,  597 

"Domestic  corporation".  .  8087 

"Excess  profits  tax".  .  500 

Copyright  1922,  by  The  Corporation  Trust  Company, 

WAR  TAX  SERVICE 
Excess  Profits  Tax— 1918  Act— Index  Page  2. 


1-2-22. 


INDEX  TO  EXCESS-PROFITS  TAX. — 1918  ACT. 


The  references  are  to  paragraph  numbers. 

Definitions: — Concluded. 

"First  taxable  year".  .501 
"Fiscal  year".  .501,  597 
"Foreign  corporation".  .  8088 
"Government  contract.  .  503 
"Inadmissible  assets".  .552,  743 
"Intangible  property".  .549,  738 
"Invested  capital".  .555,  751,  865,  869 
"Military  or  naval  forces".  .  8094 
"Net  income".  .  543,  725 
"Paid".  .504 

"Paid  or  accrued".  .  504,  597 
"Person".  .  8085 

"Personal  service  corporation".  .  502,  597 
"Prewar  income".  .  544,  545 
"Prewar  period".  .  529,  685 
"Revenue  act  of  1916".  .8078 
"Revenue  act  of  1917".  .8080 
"Secretary".  .  8090 
"Tangible  property".  .  550,  738 
"Taxable  year".  .501,  597 
"Taxpayer".  .8093 

"Terms  relating  to  invested  capital".  .  548 

"United  States".  .  8089 
Depletion  allowance,  invested  capital.  .761,  762,  877,  879 
De  Laski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell.  .913 
Depletion  reserve,  invested  capital.  .  778 
Deposit  of  United  States  bonds  as  security.  .  8075 
Deposits,  bank,  invested  capital.  .  742 
Depreciation  adjustments.  .877,  879,  885 

Depreciation  allowance,  invested  capital.  .761-764,  877,  879,  885 
Depreciation  reserve,  invested  capital.  .778 
Discount,  banks,  invested  capital.  .791 

Bonds,  Invested  capital.  .  790 
District  courts,  jurisdiction  of.  .8003 

District  of  Columbia,  obligations,  invested  capital.  .  748,  755 
Dividends.  .  505 

Invested  capital.  .803,  813,  814,  889 

Stock  dividends.  .814,  889 
Earned  surplus,  invested  capital.  .558,  761,  877 
Educational  corporations,  exemption.  .  667 

Election  of  business  enterprise  to  be  taxed  as  corporation.  .577,  839 
Evidence: 

Understatement  of  capital  or  surplus  account.  .  764 
Evidences  of  indebtedness,  invested  capital.  .  754 
Excess  payments  under  section  328.  .861 
Excess  profits  tax: 

Affiliated  corporations,  credits.  .  588,  723,  724 
Invested  capital.  .587,  821-828 

Allocation  of  net  income  to  particular  source.  .  520,  607 

Application  for  assessment.  .569,  831 

Apportionment  of  specific  exemption.  .  528,  684 

Assessment.  .831 

Associated  Press  franchises,  intangible  property.  .  738 
Change  of  ownership  .575,  837-841 
Computation,  fiscal  year.  .  580,  842-846 

Foreign  corporation.  .567,  831,  832,  834 

Fractional  part  of  year.  .  634,  666,  684 

Government  contracts.  .  604 

Illustrations.  .  608-634,  648,  683 

Limitation.  .  523,  639,  643 

Sale  of  mineral  deposits.  .586,  853,  858 

Special  cases.  .565,  831,  832,  834 

Year  1918.  .510,  602 

Year  1919  .514,  517,  603,  604,  626 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess  Profits  Tax— -1918  Act—Index  Page  3. 


1-2-22. 


INDEX  TO  EXCESS-PROFITS  TAX. — 1918  ACT. 


The  references  are  to  paragraph  numbers. 
Excess  profits  tax: — Concluded. 
Consolidations.  .575,  837-841 
Credits.  .541,  724 

War  profits.  .530,  686-723 
Definitions.  .500,  597 
Exemptions.  .  525,  528,  666-667,  684,  870 
Fiscal  year  1917-1918.  .580,  843,  844 

1918-1919.  .582,  845 

Different  rates.  .  580,  842 

Illustration  of  computation  of  tax.  .  846 
Foreign  corporations.  .567,  830,  831-835,  852 
Gas  wells,  sale  of.  .586,  853,  858 
Gold  mining,  computation  of  tax.  .  683 
Illustrations,  computation.  .608-634,  648,  683 

Computation  of  limitation.  .643 
Imposition.  .510,  598 
Intangible  property,  definition.  .549,  738 
Installment  payments.  .833,  861 
Invested  capital.    See  Invested  capital. 
Limitation  of  tax.  .523,  639,  643 
Mailing  lists,  intangible  property.  .  738 
Mineral  deposits,  sale  of.  .586,  853,  858 
Net  income.  .543,  587,  725,  734 
Oil  wells,  sale  of.  .  586,  853,  858 
Partnership.  .583,  842 
Payment.  .585,  833-835,  849,  861 

Personal  service  corporation,  apportionment  of  invested  capital  and  net  income.  .  524, 
645 

Computation  of  tax  on  net  income.  .  646,  648 
Making  return  for  fiscal  year  1917-1918.  .583,  842 
Prewar  period,  adjustment,  etc.  .578  840 
Credits.  .  530,  686-723 
Definition.  .  529,  685 

Net  income  of  affiliated  corporations.  .  587,  734 

Refunds.  .581,  584,  844,  8022 

Reorganizations.  .575-579,  837-841 

Returns.  .585,  849 

Special  cases.  .565,  852 

Subscription  lists,  intangible  property.  .  738 

Tangible  property,  definition.  .550,  738 

Transportation  corporations.  .522 

United  Press  franchises,  intangible  property.  .  738 

Vessels;  income  from  and  sale  of  certain.  .  869 
Exemption.  .525,  667,  913 

Apportionment.  .528,  634,  684 

Royalties  on  patents.  .913 
Expenses,  computation  of  earned  surplus.  .761,  926 
Extension  of  existing  statutes.  .  8000 
Fairs,  exemption.  .667 

Farm  loan  bonds,  invested  capital.  .552,  557,  748,  755 
Farmers,  cooperative  association,  exemption.  .  667 

Farm  loan  bonds,  invested  capital.  .  748,  755 

Reserve  bank  stock.  .  744 
Fire  insurance,  exemption  of  association  or  mutual  company.  .  680 
Fiscal  year,  definition.  .501 

1917-  1918,  different  rates.  .580,  581,  843,  844 

1918-  1919,  different  rates.  .582,  845 
Different  rates  of  tax.  .580,  583,  842-845 
Illustration  of  computation  of  excess-profits  tax.  .846 

Fixtures,  addition  to  surplus  account  of  amounts  expended  for.  .  764 


Copyright  1922,  by  I  he  Corporation  lrust  Comfy 

WAR  TAX  SERVICE 
Excess  Profits  Tax— 1918  Act— Index  Page  4. 


INDEX  TO  EXCESS-PROFITS  TAX.— 1918  ACT. 


The  references  are  to  paragraph  numbers. 
Foreign  corporations,  computation  of  excess-profits  tax.  .567,  830,  831,  834 
Credits,  excess  profits.  .  540,  542,  830 
Definition.  .  8088 

First  installment  of  excess-profits  tax.  .  834 

Invested  capital.  .  830 

Liberty  bond  exemptions.  .  733 

War  profits  credits.  .  830 
Fractional  part  of  year,  computation  of  excess-profits  tax.  .  634,  666,  684 

Invested  capital.  .  808,  809 
Franchises,  intangible  property.  .  738 
Fraternal  beneficiary  societies,  exemption.  .  667 

Furniture,  addition  to  surplus  account  of  amounts  expended  for.  .  764 

Gas  wells,  excess  profits  tax  on  sale.  .  853 

Gifts  to  corporations,  invested  capital.  .760,  816 

Gold  mining,  computation  of  excess  profits  tax.  .  527,  683 

Exemption  from  excess  profits  tax.  .  682 
Good  will,  intangible  property.  .  549,  738 
Good  will,  invested  capital.  .549,  738,  769,  776 

Government  contracts,  computation  of  excess  profits  tax.  .520,  569,  604,  831 
Horticultural  organizations,  exemption.  .  667 

Illustrations,  computation  of  excess  profits  tax.  .  608,  648,  683,  846,  858 

Computation  of  limitation  of  excess  profits  tax.  .  643 
Impairment  of  capital.  .815 
Improvement  of  secret  process.  .  926 
Inadmissable  assets.'. 552,  562,  743,  805 
Income  and  excess  profits  taxes;  reserves  for.  .782,  783 

Installment  due-and-payable  dates  govern.  .  785 
Income.  .543,  725 

Inflated  values,  use  of  in  determining  invested  capital.  .  865,  889 

Installments,  payment  of  tax.  .573,  833,  861 

Insurance: 

Companies  invested  capital.  .  829 

Premiums,  corporation  officer,  invested  capital.  .  787 
Intangible  property,  definition.  .  549,  738 

Paid  in,  invested  capital.  .  559,  560,  804 
Interest: 

Invested  capital.  .  739,  740,  743,  749 
Liberty  bonds.  .  726 
United  States  obligations.  .  726 
War  F  inance  Corporation  bonds,  credits.  .  726 
Invested  capital: 

Admissible  assets.  .553,  750 
Aliiliated  corporations.  .587,  821-828 
Appreciated  values.  .  865,  889 
Bank  deposits.  .  742 
Bonus  stock.  .  753 

Borrowed  capital.  .551,  561,  739-742,  751,  865,  889 
Cancelled  indebtedness  to  stockholders.  .  740 
Cash  paid  in,  bonus  stock.  .  753 
Changes  during  year.  .  806 

Computation.  .555,  570,  751,  807,  820,  865,  889 

Average  invested  capital.  .  563,  634,  806 
Definition.  .555,  751,  865,  871,  889 
Dividends.  .803,  813,  814,  889 
District  of  Columbia  obligations.  .  748,  755 
Effect  of  ordinary  dividend.  .813 

Stock  dividend.  .814,  889 
Exemptions.  .570,  832,  861 
Expenses  of  organization.  .  750 
Federal  farm  loan  bonds.  .  748,  755 
Foreign  corporations.  .  567,  830 
Fractional  part  of  year.  .809,  810 
Good  will.. 549,  738 
Impairment  of  capital.  .815 
Inadmissible  assets.  .552,  562,  743-749,  755,  805 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  SERVICE 
Excess  Profits  Tax— 1918  Act— Index  Page  5. 


1-2-22. 


INDEX  TO  EXCESS-PROFITS  TAX. — 1918  ACT. 


The  references  are  to  paragraph  numbers. 
Invested  capital: — Concluded.j 
Inflated  values.  .865,  889j 
Insurance  companies.  .  829 
Intangible  property  defined.  .549,  738 

Paid  in.  .559,  560,  804 
Interest.  .  739,  740,  743,  749 
Measures  of  capital.  .  820 

Method  of  determining  available  net  income.  .810 

Nominal,  under  1917  Act.  .913 

Organization  expenses.  .  750 

Patents.  .549,  738,  913 

Percentage  of  inadmissible  assets.  .  562,  805 

Possessions  of  United  States  obligations.  .748,  755 

Preferred  stock.  .  739 

Purchase  of  stock.  .817 

Reorganizations.  .575,  577,  579,  837-840,  841 
Return  for  fractional  part  of  year.  .  809 
Securities.  .  552,  739,  743 
Special  cases.  .565,  570,  831,  832,  913 
State  obligations.  .  748,  755 
Subscriptions  of  publishing  concerns.  .  742 
Surplus.    See  Surplus  and  undivided  profits. 
Surrender  of  stock.  .  816 

Tangible  property  paid  in,  evidences  of  indebtedness.  .  557,  754 
Inadmissible  assets.  .557,  755 

Mixture  of  tangible  and  intangible  property.  .  557,  756 
Value  in  excess  of  par  value.  .557,  757 
Territorial  obligations.  .  748,  755 

Undivided  profits.    See  Surplus  and  undivided  profits. 
Jurisdiction  of  district  courts.  .8003 
La  Belle  Iron  Works  vs.  U.  S..  .  889 
Leaseholds.  .550,  738 
Liberty  bonds: 

Affiliated  corporations.  .  735,  736 

Interest,  taxability.  .  726 
Life  insurance,  corporation  officers,  invested  capital.  .  787 
Limitation,  excess  profits  tax.  .523,  639,  643 
Lincoln  Chemical  Co.  vs.  Edwards.  .926 
Loans  as  invested  capital.  .551,  739 

Location  of  mining  claims,  effect  as  to  tax  on  sale  of  mineral  deposits.  .853 

Lodges,  exemption.  .667 

Losses,  computation  of  earned  surplus.  .  761 

Mailing  lists,  intangible  property.  .  738 

Median:  average  percentages.  .538,  694 

Medium  of  payment  of  tax.  .  8020 

Mines,  depletion.  .  762 

Excess  profits  taxes  in  case  of  depletion.  .  762 
Sale  of  minerals.  .  586,  853,  858 
Munition  manufacturer's  tax:  amortization  allowance.  .763 
Net  income: 

Definition.  .543,  725 

War  profits  and  excess  profits  taxes.  .  527,  543,  682,  725,  734 
Nominal  capital  under  1917  Act.  .913 
Notes,  invested  capital.  .557,  754 

Obsolescence,  losses  from,  computation  of  earned  surplus.  .761 
Oil  wells: 

Excess  profits  tax  on  sale.  .586,  853,  858 
Ore,  depletion.  .558,  762 
Original  subscription  to  Victory  notes.  .730 
Paid-in  surplus,  invested  capital.  .558,  760 

Impairment  of.  .815 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  SERVICE 
Excess  Profits  Tax— 1918  Act—Index  Page  6. 


1-2-22. 


INDEX  TO  EXCESS-PROFITS  TAX.— 1918  ACT. 


The  references  are  to  paragraph  numbers. 

Partnership: 

Election  to  be  taxed  as  corporation.  .577,  839 

Net  income  and  invested  capital  of  predecessor.  .576,  838 

Returns.  .583,  842 

Taxability — tax  applies  to  corporations  only.  .510,  598 
Patents: 

Intangible  property.  .549,  738 

Invested  capital.  .549,  558,  769,  776,  913 
Patterns,  addition  to  surplus  account  of  amounts  expended  for.  .764 
Payment  of  taxes.  .716,  833-835,  849,  861 

Certificates  of  indebtedness  as  medium.  .8020 

Fractional  part  of  cent.  .8019 

Installments.  .716,  833-835,  861 

Medium.  .8020 
Personal  property  taken  for  debt,  invested  capital.  .788 
Personal  services,  compensation.    See  Compensation. 
Personal  service  corporations.  ..502,  524,  645 

Definition.  .502 

Excess  profits  tax.  .524,  645,  646 
Possessions  of  United  States,  obligations,  invested  capital.  .552,  748,  755 
Preferred  stock,  invested  capital.  .739 

Premiums,  insurance,  corporation  officers,  invested  capital.  .787 
Prewar  period,  definition.  .529,  685 
Income  of.  .544,  547,  687,  725 

Invested  capital  of  affiliated  corporation.  .587,  828 

Net  income  of  affiliated  corporation.  .587,  734 

No  income  for.  .533,  688 

Not  in  existence  during.  .536,  690,  694 

War  profits  credit.  .530,  686-723 
Promissory  notes,  invested  capital.  .557,  754 
Rates  of  tax,  corporations.  .510,  598,  603 

Real  estate,  exemption  of  corporation  organized  to  buy  and  sell.  .667 

Taken  for  debt,  invested  capital.  .788 
Refunds.  .761,  8022 
Regulations,  authority  for.  .859 

Regulations  45,  Revised,  (Part  II-B  (1918  Act),  .page  316 
Religious  corporations,  exemption.  .667 
Reorganization.  .575,  577,  579,  837-840,  841 
Reserves,  depletion  or  depreciation,  invested  capital.  .778 

Income  and  excess  profits  taxes,  invested  capital.  .782,  783 
Installment  due-and-payable  dates  govern.  .785 
Returns.  .585,  849 

Affiliated  corporations.  .587,  734,  821 

Amended  where  inflated  values  used  in  determining  invested  capital.  .865 
Consolidated  returns  of  corporations.  .587,  734,  821 
Foreign  corporations.  .852 
Forms.  .849 

No  taxable  income.  .851 
Sales:  Mineral  deposits,  excess  profits  tax.  .586,  853,  858 
Savings  bank,  exemption.  .667 
Scientific  corporations,  exemption.  .667 
Secret  formulae  or  processes.  .549,  738 
Securities,  invested  capital.  .551,  552,  739,  743 
Social  clubs,  exemption.  .667 
Social  welfare  organization,  exemption.  .667 
Specific  exemption.  .526,  666 

Apportionment.  .528,  634,  684 
State  obligations,  invested  capital.  .552,  748,  755 
Stock: 

Bonus,  invested  capital.  .753 
Dividends,  invested  capital.  .814 
Purchase,  invested  capital.  .817 
Surrender,  invested  capital.  .816 
Tangible  property.  .550,  738 
Valuation  .  .557,  559,  560,  754,  804 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  SERVICE 
Excew  Profit*  Tax— 1918  Act— Index  Page  7. 


1-2-22 

INDEX  TO  EXCESS-PROFITS  TAX.— 1918  ACT. 


The  references  are  to  paragraph  numbers. 

Subscriptions,  publishing  concern,  invested  capital .  v742 

Lists,  intangible  property.  .738 
Surplus  and  undivided  profits.  .558,  760,  810,  926 
Additions  to  surplus  account.  .764,  769,  926 
Current  profits.  .803 
Depletion  allowance.  .762,  877,  879 

Reserve. . 778 
Depreciation  allowance.  .762,  877,  879 

Reserve.  .778 
Discount  reported  by  bank.  .791 

Sale  of  bonds.  .790 
Earned  surplus.  .761,  926 
Insurance  on  corporation  officers.  .787 
Paid-in  surplus.  .760 
Patents.  .776 

Property  paid  in  and  subsequently  written  off.  .773 
Taken  for  debt.  .788 

Reserve  for  depletion  or  depreciation.  .778 
Income  and  excess  profits  taxes.  .782 
Surrender  of  stock,  invested  capital.  .816 
Tangible  property,  definition.  .550,  738 

Paid  in,  invested  capital.  .557,  754-757,  865,  889 
Tax.  .510,  598 

Computation  of,  in  special  cases.  .570,  832 
Telephone  clearing  association,  exemption.  .667 
Territories,  obligations,  invested  capital.  .552,  557,  748,  755 
Time: 

Filing  returns.  .585,  849 

Payment  of  taxes.  .585 
Tools,  addition  to  surplus  account  of  amounts  expended  for.  .764 
Trade  brands.  .549,  738 
Trademarks.  .549,  738 
Trade  names.  .549,  738 

Transportation  corporations  under  Federal  control.  .522 
Uncertified  checks,  payment  of  tax.  .8020 
Undivided  profits.    See  Surplus  and  undivided  profits. 
United  Press  franchises,  intangible  property.  .738 
United  States: 

Possessions,  obligations,  invested  capital.  .552,  557,  748,  755 
Taxability  and  exemption  of  interest  upon  obligations.  .726 

Valuation  of  assets  upon  reorganization  of  business  enterprise.  .579,  841 
Stock.  .555,  575,  579,  751,815,  820,  837,  865,  889 

Victory  notes.  .727,  730 

War  Finance  Corporation,  interest  on  bonds.  .726,  732 

As  admissible  and  inadmissible  assets.  .745 
War  profits  tax.    See  Excess  profits  tax. 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  SERVICE 
Exccm  Profits  Tax— 1918  Act— Index  Page  8 


Reprints  of  Profits-Taxes  Special  Rulings  From 
The  Bureau  of  Internal  Revenue  Bulletins. 


FOREWORD 

Early  in  1920  the  Government  published  its  1919  Cumulative  Bulletin 
of  Special  Rulings,  which  rulings  had  been  issued  confidentially  during  1919 
for  the  exclusive  use  of  the  Bureau's  employees.  During  1920  by  a 
change  of  policy,  continued  in  1921,  rulings  were  made  public  week  by  week. 

So  far  as  appears,  the  weekly  Bulletins  will  continue  to  issue  during  1922. 

On  the  pages  following  are  reproduced  in  full,  verbatim  as  originally 
published  by  the  Government  in  the  Bulletins  mentioned  above,  those  rulings 
having  specific  application  to  the  War-Profits  and  Excess-Profits^Tax  Title 
of  the  Revenue  Act  of  1918.*  This  Supplement  (and  that  it  is  a  supplement 
must  be  borne  in  mind  constantly)  will  be  up-to-date  at  all  times. 

Rulings  based  on  the  1917  Acts  are  included  to  the  extent  that  they  are 
applicable,  directly  or  indirectly,  to  the  provisions  of  the  1918  and  1921  Acts, 
but  not  otherwise.  Excluded  rulings  relate  in  very  large  measure  to  the 
former  tax  on  individuals. 

Rulings  bearing  on  provisions  of  the  1918  law  applicable  now  to  a  restricted 
degree  only,  or  entirely  inapplicable  now,  are  nevertheless  included. 

The  table  below  is  explanatory  of  the  abbreviations  used  by  the  Bureau. 

A,  B,  C,  etc.=The  names  of  individuals. 

A.  R.  M. — Committee  on  Appeals  and  Review  Memorandum. 
A.  R.  R. — Committee  on  Appeals  and  Review  Recommendation, 
C.  B. — Cumulative  Bulletin. 
Ct.  D. — Court  Decision. 

M,  N,  X,  Y,  Z,  etc.=The  names  of  corporations,  places,  or  businesses, 
according  to  context. 

Mim  ==Mimeograph  Letter. 

O.  or  L.  0.=Solicitor's  Law  Opinion, 

O.  D  =-Office  Decision. 

Op.  A.  G.=Opinion  of  Attorney  General. 

S.=Solicitor's  Memorandum. 

Sol.  Op. — Solicitor's  Opinion. 

T.  B.  M.=Advisory  Tax  Board  Memorandum. 

T.  B.  R.=Advisory  Tax  Board  Recommendation. 

T.  D.=Treasury  Decision. 

x  is  used  to  represent  a  certain  number,  and  when  used  with  the  word 
"dollars"  represents  a  sum  of  money. 

Each  Special  Bulletin  ruling  is  cited  to  its  source  as  (29-20-1081:  A.  R.  M. 
71).  This  particular  ruling,  then,  is  the  71st  memorandum  of  the  Com- 
mittee on  Appeals  and  Review,  is  the  1081st  ruling  made,  and  was  first 
published  in  Bulletin  No.  29,  of  the  1920  Series. 

Each  special  ruling  when  originally  published  is  assigned  to  a  particular- 
Article  of  Regulations  45.* 

We  continue  this  assignment  in  the  Supplement,  giving  to  each  Article 
its  separate  page  or  series  of  pages,  where  the  special  rulings  assigned  to  it 
are  reproduced  in  the  order  of  their  issue,  as  12-20-799,  22-20-979,  38-20- 
1200. 

The  rulings  appearing  under  each  Article  are  numbered  serially,  by  us, 
in  bold  face  type,  as  1,  2,  3,  etc.,  the  serial  number  appearing  in  each  case, 
at  the  end  of  the  ruling,  on  the  left. 

The  Articles  of  Regulations  45,*  referring  to  the  1918  profits-tax  law,  as- 
the  reader  knows,  are  grouped  under  the  respective  Law  Sections.  The 
grouping  is  clearly  shown  in  the  Table  of  Contents,  beginning  on  page  316. 

In  the  compilation,  beginning  cn  page  318,  the  Articles  are  reproduced 
in  their  numerical  sequence.    The  numbers  and  captions  of  all  profits-tax 


articles  are  shown  in  bold  face  type,  unmistakably  distinguishing  them  from 
the  interpolated  Treasury  Decisions  and  special  rulings.  At  the  top  of  each 
page  in  the  compilation  on  the  right  is  shown  the  number  of  the  Law  Section 
(as  "§326"  [see  page  350]),  to  which  Law  Section  the  Articles  on  that  page 
directly  apply.  If  the  first  Article  assigned  to  a  Law  Section  begins  else- 
where than  at  the  top  of  the  page,  its  Law  Section  number  is  shown  at  the 
top  of  the  Article  (as  "§326"  [at  1[751,  page  349]).  If,  as  happens  in  one  or 
two  instances,  related  matters  are  printed  on  a  page  to  the  exclusion  of 
profits-tax  Articles,  the  immediately  preceding  Article,  designated  by  a  bold 
face  number  and  caption,  under  which  such  related  subjects  are  grouped, 
is  the  guide  to  the  supplementary  special  rulings.  Thus  is  the  reader  enabled 
to  turn  direct  to  the  Special  Rulings  in  the  Supplement  relating  to  the  sub- 
ject matter  then  under  his  eye. 

The  Supplementary  Bulletin  Rulings  Pages  are  not  numbered.  As  stated 
before  each  Article  has  its  page  or  series  of  pages — as  Sec.  326,  Art.  850.-1,  or 
2,  -3,  -4,  etc.,  and  each  special  ruling  is  numbered  serially.  On  the  last 
page  of  the  Supplement,  immediately  preceding  the  blue  pages  on  which  is 
printed  the  Excess-Profits  Tax  Law  for  1921  (Revenue  Act  of  1921),  is  an 
always-up-to-date  table,  giving  a  complete  list  of  existing  Article  numbers, 
showing,  by  serial  number,  either  the  last  published  Special  Ruling  assigned 
to  that  Article  number,  or  stating  by  use  of  the  word  "none"  that  there 
have  been  no  Special  Rulings  assigned  to  certain  articles.  Thus  is  there  a 
perpetual,  automatic  check  on  the  completeness  of  the  Supplement. 


*We  shall  have  to  await  developments  to  see  to  what  extent  (if  at  all) 
our  present  method  of  placing  the  Bulletin  rulings  before  our  subscribers 
will  require  adjustment  to  bring  it  into  harmony  with  the  numbering  of  the 
Articles  of  the  regulations  to  be  issued  on  the  provisions  of  the  1921  Act, 
and  with  whatever  change  may  be  made  (if  any)  by  the  Government  in  its 
scheme  of  assigning  rulings  to  Law  Sections  and  Regulation  Articles,  by 
numbers,  in  its  Bulletins,  after  the  new  regulations  are  issued.  However, 
unless  otherwise  noted,  all  rulings  are  based  on  the  provisions  of  the  1918 
Act  and  the  formal  regulations  relating  thereto. 

Very  Important  Caution. 

The  following  is  printed  on  the  front  cover  of  every  Bulletin  of  Special 
Rulings  published  by  the  Government. 

"The  Income  Tax  Rulings  [The  Bureau  so  designates  all  of  its  Bulletin  Rul- 
ings} constitute  a  service  of  information  from  which  taxpayers  and  their  counsel 
may  obtain  the  best  available  indication  of  the  trend  and  tendency  of  official 
opinion  in  the  administration  of  the  income  and  profits  tax  provisions  of  the 
Revenue  Acts.  The  rulings  have  none  of  the  force  or  effect  of  Treasury  Deci- 
sions and  do  not  commit  the  Department  to  any  interpretation  of  law  which  has 
not  been  formally  approved  and  promulgated  by  the  Secretary  of  the  Treasury. 
Each  ruling  embodies  the  administrative  application  of  the  Law  and  Treasury 
Decisions  to  the  entire  state  of  facts  upon  which  a  particular  case  arises.  It  is 
especially  to  be  noted  that  the  same  result  will  not  necessarily  be  reached  in 
another  case  unless  all  the  material  facts  are  identical  with  those  of  the  reported 
case.  As  it  is  not  always  feasible  to  publish  a  complete  statement  of  the  facts 
underlying  each  ruling,  there  can  be  no  assurance  that  any  new  case  is  identical 
with  the  reported  case.  As  bearing  out  this  distinction,  it  may  be  observed  that 
the  rulings  published  from  time  to  time  may  appear  to  reverse  rulings  previously 
published. 

"Officers  of  the  Bureau  of  Internal  Revenue  arc  especially  cautioned  against 
reaching  a  conclusion  in  any  case  merely  on  the  basis  of  similarity  to  a  published 
income  Tax  Ruling,  and  should  base  their  judgment  on  the  application  of  all  perti- 
nent provisions  of  the  law  and  Treasury  Decisions  to  all  of  the  facts  in  each  case. 
The  Income  Tax  Rulings  should  be  used  merely  as  aids  in  studying  the  law  and 
the  Treasury  Decisions." 


2-20-22. 

Sec.  301.   Art.  711— 1. 

Law  Section  301— Imposition  of  Tax  (1918  Act— 1f5l0  ante):  (1921  Act— 
If  1011,  post). 

Article  711— Imposition  of  Tax  (Reg.  45— If 598,  ante):  (Reg.  62— 
If  1135,  post). 

21-21-1655:  O.  D.  928. 

When  a  corporation  may  deduct  the  amount  of  its  net  operating  loss  for 
the  calendar  year  1919,  which  is  in  excess  of  the  net  income  for  the  calendar 
year  1918,  in  computing  net  income  for  the  calendar  year  1920  in  accordance 
with  section  204  of  the  Revenue  Act  of  1918,  the  excess  profits  tax  imposed 
by  section  301  and  limited  by  section  302  is  upon  the  net  income  so  determined. 

1 


Supplementary  Bulletin  Ruling*. 


2-20-22. 

Sec.  301.    Art.  714.— 1. 

Law  Section  301 —Imposition  of  Tax  (1918  Act— H510  ante):  (1921  Act — 
IflOll,  post). 

Article  714. — Computation  of  Tax  on  Income  from  Government  Con- 
tracts (Reg.  45— H604,  ante):  (Reg.  62 — H1137,  post). 

1-19-113:  T.  B.  M.  4. 

In  the  case  of  a  fiscal-year  corporation  the  computation  under  section  301  (c) 
(1)  should  be  based  on  the  entire  net  income  for  the  fiscal  year  even  though  no 
part  of  the  income  from  Government  contracts  was  derived  after  January  1,  1919. 

The  following  question  has  been  submitted: 

In  the  case  of  a  fiscal-year  corporation  should  the  excess  tax  for  1919  based  on  income 
from  a  Government  contract  be  prorated  to  apply  only  to  income  attributable  to  that 
contract  in  1919,  or  should  the  tax  be  computed  on  the  basis  that  the  income  was  received 
throughout  the  fiscal  year? 

The  computation  under  section  301  (c)  (1)  of  the  Revenue  Act  of  1918 
should  be  based  on  the  entire  net  income  for  the  taxable  year,  or,  in  other 
words,  should  be  on  the  basis  that  the  income  was  received  throughout 
the  fiscal  year.  In  the  judgment  of  the  board  any  other  ruling  would  be  in 
conflict  with  the  express  provisions  of  the  statute.  It  is  a  fundamental 
principle  of  the  application  of  the  provisions  of  the  several  acts  relating  to 
fiscal  years  that  no  adjustment  should  be  made  even  though  it  can  be  def- 
initely shown  what  proportion  of  the  income  was  derived  during  each  portion 
of  the  fiscal  year. 
1  f 


24-19-557:  O.  D.  295. 

A  Government  contract  entered  into  in  1917,  amended  as  to  some  of  its 
provisions  in  1918,  and  further  modified  in  1919,  is  in  effect  the  same  contract 
as  entered  into  in  1917  if  the  original  contract  has  not  been  revoked  or  sup- 
planted by  a  new  contract.  Therefore,  income  derived  from  the  contract 
should  be  computed  in  accordance  with  the  provisions  of  subdivision  (c) 
of  section  301. 
2 


ni  D9firt3D  s&  nni>j  jb/ij  io  griias^ffi  9iu  niiljiw    jOBYnioo  Jiiammavoty    b  Jon 

28-19-620:  A.  R.  M.  5. 

If  a  corporation  has  a  net  income  from  a  Government  contract  and  sustains 
a  net  loss  from  other  operations  in  the  submission  of  a  fiscal  year  return  for 
a  period  ending  in  1919,  the  loss  may  be  deducted  from  the  income  from  the 
Government  contract. 

Inquiry  is  as  to  the  amount  of  net  income  to  be  taxed  in  the  case  of  a 
fiscal-year  corporation  submitting  a  return  for  a  period  ending  in  1919  if 
there  is  profit  from  a  Government  contract  and  loss  from  other  operations. 

Section  301  (c)  of  the  Revenue  Act  of  1918  provides: 

For  the  taxable  year  1919  and  each  taxable  year  thereafter  there  shall  be  levied,  collected,, 
and  paid  upon  the  net  income  of  every  corporation  which  derives  in  such  a  year  a  net  income 
of  more  than  $10,000  from  any  Government  contract  or  contracts  made  between  April  6, 
1917,  and  November  11,  1918,  both<iates  inclusive,  a  tax  equal  to  the  sum  of  the  follow- 
ing:   *    *  * 

It  is  to  be  noted  that  the  tax  is  upon  the  net  income  of  the  corporation. 
The  prorating  in  parts  1  and  2  of  paiagraph  (c)  of  this  section  is  purely  for 
computation  purposes.  Accordingly,  it  is  recommended  that  a  corporation 
having  a  net  loss  from  operations  other  than  those  relating  to  Government 


Supplementary  Bulletin  Rulings. 


Sec.  301.    Art.  714.— 2. 


contracts,  and  a  profit  from  Government  contracts,  be  permitted  to  deduct 
the  loss  in  order  to  ascertain  the  net  income  upon  which  the  tax  is  to  be 
computed. 

3 


2-20-666:  O.  D.  359. 

A  corporation  which  contracted  with  another  corporation  to  manufacture 
and  deliver  machinery  to  be  used  in  manufacturing  ammunition,  but  did  not 
produce  or  furnish  ammunition  or  any  component  part  thereof,  nor  perform 
any  direct  service  in  connection  with  the  production  of  ammunition  manufac- 
tured by  another  corporation  under  contract  for  the  United  States  Govern- 
ment, is  not  a  subcontractor  within  the  meaning  of  section  1,  Revenue  Act  of 
1918. 
4 


3-20-695:  O.  D.  378. 

The  excess  profits  credit  and  the  war  profits  credit,  as  provided  in  section 
301  (c)  1,  Revenue  Act  of  1918,  and  article  714  of  Regulations  45,  are  com- 
puted on  the  basis  of  the  invested  capital  for  the  taxable  year,  not  on  the 
invested  capital  for  1918. 
B 


12-20-791:  O.  D.  412. 

A  contract  between  the  Government  and  a  corporation  which  was  entered 
Into  and  enforceable  against  the  corporation  prior  to  April  6,  1917,  but  which 
was  not  executed  in  the  form  prescribed  by  section  3744,  Revised  Statutes, 
•so  as  to  become  enforceable  against  the  Government  until  after  that  date,  is 
not  a  "Government  contract"  within  the  meaning  of  that  term  as  defined  in 
the  Revenue  Act  of  1918,  and  the  corporation  will  not  be  required  to  compute 
its  tax  upon  the  profits  arising  therefrom  in  accordance  with  section  301(c) 
of  that  Act, 


12-20-799:  O.  D.  4J5 

The  income  of  affiliated  corporations  which  is  derived  from  Government 
contracts  is  taxable  (except  as  provided  in  sec.  240(a)  of  the  Revenue  Act  of 
1918)  upon  the  basis  of  the  total  sum  received  from  that  source  by  the  group 
and  not  upon  the  basis  of  the  separate  amount  received  by  each  corporation. 

7 


Supplementary  Bulletin  Rulings. 


1-17-22. 

Sec.  301.    Art.  714.— 3. 
22-20-979:  O.  D.  532. 

In  1919  a  corporation  derived  a  profit  in  excess  of  $10,000  from  Govern- 
ment contracts,  but  sustained  a  net  loss  on  other  operations.  Held,  that  it 
may  deduct  the  amount  of  such  loss  in  ascertaining  its  net  income  subject 
to  tax.  If  the  amount  of  the  excess  profits  credit  exceeds  the  company's 
total  net  income  from  all  sources  for  1919  no  tax  will  be  imposed  upon  the 
portion  of  its  net  income  for  that  year  which  was  derived  from  Government 
contracts. 

Since  the  company's  net  income  included  an  item  of  net  profit  from  Gov- 
ernment contracts  in  excess  of  $10,000,  it  will  be  required  to  supply  fully  all 
of  the  data  called  for  by  the  supporting  schedules  of  Form  1120-S. 
8 


38-20-1200:  O.  D.  662. 

A  subcontract  entered  into  subsequent  to  November  11,  1918,  based 
on  a  principal  contract  to  furnish  a  product  for  the  benefit  of  the  United 
States,  entered  into  between  April  6,  1917,  and  November  11,  1918,  both 
dates  inclusive,  constitutes  a  Government  contract  within  the  definition  of 
section  1  of  the  Revenue  Act  of  1918,  but  the  tax  liability  under  section  301(c) 
of  the  Act  attaches  only  where  such  subcontract  was  made  between  April  6, 
1917,  and  November  11,  1918. 
9 


42-21-1867:  O.  D.  1063, 

Income  arising  from  a  contract  entered  into  subsequent  to  November  11. 
1918,  which  is  supplementary  to  an  original  contract  entered  into  with  the 
Government  between  April  6,  1917,  and  November  11,  1918,  is  taxable  under 
section  301  (c)  of  the  Revenue  Act  of  1918. 
10 


I('22)-2-16:  Sol.  Op.  128. 

War  Excess  Profits  Tax — Sections  1  and  301(c),  Revenue  Act  of  1918 — 
Government  Contracts 
Supplemental  contracts  made  with  a  department,  of  the  United  States  Gov- 
ernment after  November  11,  1918,  modifying  original  contracts  entered  into 
between  April  6,  1917,  and  November  11,  1918,  between  the  same  parties,  arc 
"Government  contracts"  entered  into  between  April  6,  1917,  and  November  11, 
1918,  within  the  meaning  of  the  Revenue  Act  of  1918  and  the  income  therefrom 
is  taxable  under  section  301(c)  of  the  above  Act. 

Reference  is  made  to  the  proposed  letter  to  the  internal-revenue  agent  in 
charge,  which  raises  the  question  whether  the  income  from  certain  contracts 
between  the  M  Company  and  the  United  States,  affecting  original  contracts 
entered  into  June  — ,  1918,  between  the  same  parties,  is  income  from  "Gov- 
ernment contracts"  entered  into  between  April  6,  1917,  and  November  11, 
1918,  within  the  meaning  of  the  Revenue  Act  of  1918  and  taxable  under  section 
301  (c)  of  that  Act. 

Section  1  of  the  Revenue  Act  of  1918  reads  in  part  as  follows : 
The  term  "Government  contract"  means  (a)  a  contract  made  with  the  United  States, 
or  with  any  department,  bureau,  officer,  commission,  board,  or  agency,  under  the  United 
States  and  acting  in  its  behalf,  or  with  any  agency  controlled  by  any  of  the  above  if  the 
contract  is  for  the  benefit  of  the  United  States,    *    *  *. 


Supplementary  Bulletin  Rulings. 


Sec,  301.    Art.  714 — 4. 


Section  301(c)  of  the  above  Act  provides  in  part  as  follows: 
For  the  taxable  year  1919  and  each  taxable  year  thereafter  there  shall  be  levied,  col- 
lected, and  paid  upon  the  net  income  of  every  corporation  which  derives  in  such  a  year  a 
net  income  of  more  than  $10,000  from  any  Government  contract  or  contracts  made  between 
April  6,  1917  and  November  11,  1918,  both  dates  inclusive,  a  tax  equal  to  the  sum  of  the 
following:    *    *  * 

The  facts  are  as  follows:  In  January,  1918,  a  department  of  the  United 
States  Government  entered  into  a  contract  jointly  with  the  O  Company  and 
the  P  Company  for  the  construction  of  certain  vessels  at  an  agreed  price  of 
40a;  dollars.  At  the  same  time  another  contract  was  entered  into  with  the 
above-named  companies  for  the  construction  of  a  certain  number  of  vessels 
of  another  type  at  an  agreed  price  of  153*  dollars.  Subsequently,  the  O 
Company  and  the  P  Company  were  merged  and  the  name  changed  to  the 
M  Company. 

The  original  contracts  contained  a  provision  that  the  Government  reserved 
the  right  to  make  changes  in  the  minor  details  of  the  plans  or  specifications, 
and  such  changes  would  not  invalidate  the  contract;  the  amount  to  be  added 
or  deducted  from  the  contract  price  by  reason  of  such  changes  to  be  agreed 
upon  in  writing  by  the  contractor  or  contractors  and  the  officer  in  charge,  who 
was  also  the  responsible  officer  for  directing  such  changes.  Many  minor 
changes  were  made  in  the  specifications  by  the  officer  in  charge,  and  those 
under  his  direction,  but  no  formal  contract  was  ever  executed  covering  such 
items.  Certain  contracts  were  entered  into,  however,  which  were  formally 
executed  on  behalf  of  the  Government.  The  first  of  those  contracts,  dated 
December  — ,  1919,  involving  y%x  dollars,  related  to  the  construction  and 
equipment  of  the  first-mentioned  vessels  and  provided  for  an  additional 
lavatory,  windlass  chain,  locker,  chain  stoppers,  blinds  for  officers'  quarters, 
screens  for  air  ports,  extension  of  frame  No.  34  athwartships,  booby  hatch, 
entrance,  omission  of  syphons,  changing  whistle,  difference  in  steel,  difference 
in  furniture,  and  additional  drafting  due  to  boiler  change.  The  second  con- 
tract, dated  May  — ,  1920,  involving  2-5x  dollars,  provided  for  additional 
skags,  filler  pieces,  under  decking,  and  additional  riveting  on  these  vessels. 
The  third  contract,  dated  March  — ,  1920,  involving  12^*  dollars,  related 
to  the  construction  and  equipment  of  the  stated  number  of  the  other  type  of 
vessels.  Many  changes  were  made  in  the  specifications,  both  as  to  these 
vessels  and  the  machinery  and  equipment.  Some  items  originally  specified 
were  omitted  entirely.  Additional  machinery  and  furniture  and  equipment 
were  added,  and,  in  some  instances,  changes  were  made  to  secure  a  better 
quality  of  material  and  equipment.  The  fourth  contract,  dated  March  — , 
1920,  involving  6x  dollars,  provided  for  many  changes  in  the  construction 
and  material  for  these  vessels. 

Parties  to  an  unperformed  contract  may  by  mutual  consent  modify  it  by 
altering  or  adding  provisions,  provided  the  modifications  do  not  make  it 
illegal  or  violative  of  public  policy.  Whether  such  alterations  constitute  a 
new  contract,  thus  doing  away  with  the  obligations  of  the  former  contract, 
or  are  merely  supplementary  thereto,  depends  upon  the  nature  of  the  later 
agreements  and  the  intentions  of  the  contracting  parties.  Nourse  v.  United 
States  (25  Ct.  Cls.,  7);  Mensfee  v.  Rankins  (Ky.,  164  S.  W.,  365);  Uhlig  v. 
Barnum  (Neb.,  61  N.  W.,  749);  Pulpwood  Company  v.  Perry  (Mich.,  122  N. 
\\\,  552). 

One  written  contract  complete  in  itself  will  supersede  another  one  made 
prior  thereto  in  relation  to  the  same  subject  matter.  It  is  contended  by  the 
taxpayer  that  the  subsequent  contracts  in  the  instant  case  are  complete  in 
themselves.  They  provide  chiefly,  however,  for  changes  and  additions  that 
go  toward  the  completion  of  the  construction  and  equipment  covered  by  the 

Supplementary  Bulletin  Rulings. 


Sec.  301.    Art.  714.— 5. 


original  contracts,  which  in  itself  makes  them  dependent  upon  those  con- 
tracts. The  contracts  of  December  — ,  1919,  and  March  — ,  1920,  provide 
that  the  "payment  of  the  amount  stipulated  herein  for  each  vessel  shall  be 
made  on  a  percentage  basis  in  accordance  with  the  terms  of  the  original  con- 
tract." The  subsequent  contracts  have  entirely  omitted  certain  essential 
obligations  imposed  on  those  who  enter  into  contracts  with  the  Government 
which  are  clearly  set  forth  in  the  original  contracts,  such  as  sufficient  insurance 
on  work  as  completed;  liability  of  contractor  for  all  damages  that  may  occur 
during  the  course  of  construction;  necessary  police  protection;  suspension  of 
8-hour  law;  nonviolation  of  child-labor  law;  prohibition  against  employment 
of  convict  labor;  protection  of  United  States  against  patent  infringement; 
forfeiture  in  case  satisfactory  progress  is  not  made  on  the  work;  and  non- 
assignability of  contract.  That  the  later  agreements  are  not  complete  in 
themselves  is  further  evidenced  by  the  fact  that  there  is  no  express  cancellation 
of  the  original  contracts.  On  the  contrary,  each  of  the  subsequent  contracts 
contains  the  following  provision: 

And,  whereas,  it  is  found  advantageous  and  in  the  best  interests  of  the  service  of  the 
United  States  to  modify  the  provisions  of  said  contract  as  specified  below;  now,  there- 
fore, It  is  hereby  agreed  *  *  *  that  the  provisions  of  the  original  contract  dated 
June — ,  1918,  shall  be  changed  in  the  following  particulars,  and  in  these  respects  only    *    *  *• 

The  above  provision,  together  with  the  fact  that  the  directors  of  the  cor- 
poration in  the  resolutions  ratifying  the  subsequent  contracts  referred  to  and 
accepted  them  as  supplementary  contracts  is  indicative  of  the  intention  of 
the  parties. 

The  department,  with  the  approval  of  this  office,  has  already  ruled  upon 
a  similar  question  in  the  case  of  the  R  Company  (O.  D.  295,  C.  B.  1,  p.  12 
[Ruling  No.  2  of  this  series.]).  This  company,  on  September  — ,  1917, 
entered  into  a  contract  with  the  commanding  officer  for  the  handling  of 
certain  supplies.  In  July,  1918,  a  supplementary  agreement  was  entered  into 
changing  the  basis  of  computation  of  profit.  In  March,  1919,  a  second 
supplementary  contract  was  made  which  materially  changed  certain  pro- 
visions of  the  original  contract.  The  taxpayer  contended,  as  in  the  instant 
case,  that  the  second  supplementary  contract  constituted  a  new  contract, 
the  income  from  which  was  not  taxable  under  section  301(c)  of  the  Revenue 
Act  of  1918.   That  contention  was  answered  in  the  following  language: 

This  office  holds  that  the  agreement  entered  into  in  March,  1919,  is  in  effect  the  same 
contract  as  that  entered  into  in  September,  1917,  since  the  contract  as  of  the  latter  date 
has  never  been  revoked  and  supplanted  by  a  new  contract,  but  has  only  been  modified 
by  amending  some  of  its  provisions.  Therefore,  the  income  derived  from  the  contract 
as  of  September — ,  1917,  as  amended  in  July,  1918;  and  further  amended  in  March,  1919, 
should  be  computed  in  accordance  with  the  provisions  of  subdivision  (c)  of  section  301. 

In  view  of  the  foregoing,  this  office  is  of  the  opinion  that  the  subsequent 
contracts  between  the  United  States  Government  and  the  M  Company  are 
supplementary  to  those  of  June  — ,  1918,  and  that  the  income  therefrom  is 
income  from  "Government  contracts"  entered  into  between  April  6,  1917,  and 
November  11,  1918,  as  defined  by  section  1  of  the  Revenue  Act  of  1918  and 
therefore  taxable  under  section  301(c)  of  the  above  Act. 

Carl  A.  Mapes, 
Solicitor  of  Internal  Revenue. 

1  1 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  301.    Art.  715.— I. 

Law  Section  301.— Imposition  of  Tax  (1918  Act— 1f510,  ante):  (1921  Act — 
1(1011,  post). 

Article  715. — Allocation  of  New  Income  to  Particular  Source  (Reg.  45 — 
^607,  ante) :  (Reg.  62— 1fll38,  post). 

26-19-597:  A.  R.  M.  I. 

If  exact  determination  of  income  arising  from  Government  contracts  distinctively  from 
other  income  is  impossible,  an  approximation  based  on  the  proportion  which  sales  to  the 
Government  bears  to  other  sales  should  be  used  only  in  case  approximations  based  on  the 
respective  cost  and  selling  price  are  inapplicable.  The  approximation  should  be  based 
upon  the  allocation  of  costs  and  allocation  of  selling  price,  in  the  most  accurate  manner 
possible  from  available  records. 

Amortization  is  not  to  be  charged  exclusively  against  income  from  Government  con- 
tracts, and  selling  and  administrative  expenses  not  applicable  to  the  Government  contract* 
should  not  be  so  charged. 

Representatives  of  the  M  Company  state  that  it  is  impossible  to  ascertain 
profits  from  Government  orders  separately  from  profits  on  civilian  orders, 
and  ask: 

(a)  What  method  of  apportionment  of  these  profits  is  to  be  used  in  sub- 
mitting a  return  for  fiscal  year  ending  June  30,  1919? 

(b)  What  disposition  is  to  be  made  of  an  amount  claimed  for  amortization  f 
The  answer  to  the  first  is  that  when  profits  can  not  be  definitely  allocated 

as  to  a  Government  contract,  the  proportion  which  the  sales  from  the  Govern- 
ment contract  bears  to  the  total  sales  is  the  proportion  of  income  which  is 
deemed  to  have  arisen  from  the  Government  contract. 

This  answer  presents  a  fair  approximation  under  the  following  circum- 
stances: 

(a)  If  all  articles  made  are  of  the  same  size,  or  grade,  or  if  not,  if  the 
proportion  sold  to  civilian  trade  of  each  kind  is  the  same  as  the  proportion 
sold  to  the  Government. 

(b)  If  the  articles  on  hand  at  the  beginning  of  the  year  cost  the  same  as 
those  manufactured  during  the  year,  or  if  the  same  proportion  were  sold  out 
of  those  on  hand  at  the  beginning  to  civilians  as  were  sold  to  the  Government, 
or  if  all  orders  were  filled  exclusively  either  out  of  the  ones  on  hand  at  the 
beginning  or  out  of  the  ones  manufactured  during  the  year. 

(c)  If  the  prices  charged  the  Government  are  identical  with  the  prices 
charged  the  civilian  trade. 

The  presence  of  all  of  these  elements  is  so  improbable  that  the  Committee 
deems  that  the  method  proposed  should  be  utilized  only  in  case  other  methods 
likely  to  afford  a  closer  approximation  are  inapplicable. 

There  is  a  probability  that  the  inquiry  was  prompted  by  the  fact  that  it  is 
impossible  to  determine  the  exact  cost  of  lots  of  articles  made  on  Government 
contracts  as  distinguished  from  the  exact  cost  of  lots  of  articles  made  for 
civilian  trade.  Records  may  be  available  to  an  extent  which  will  enable  an 
approximation  of  the  unit  costs  and  selling  prices  from  which  an  allocation 
may  be  determined.  By  working  from  the  costs  standpoint  a  method  of 
1    closer  approximation  may  be  found. 

In  taking  inventories  of  the  stock  on  hand  there  should  have  been  some: 
method  of  ascertaining  the  unit  price  of  articles  that  is  reasonably  accurate.. 
This  would  apply  as  to  articles  of  different  kinds  and  grades,  as  well  as  to  a 
condition  in  which  the  articles  were  all  of  the  same  kind  and  grade. 

It  is  likely  that  articles  made  during  the  year  were  not  made  at  the  same 
costs  as  those  on  hand  at  the  beginning.    Accordingly,  the  first  step  would 
|    be  to  ascertain  which  of  the  articles  on  hand  at  the  beginning  were  sold  to 
the  Government  and  which  to  civilian  trade.    If  not  otherwise  accurately 
ascertainable,  it  is  suggested  that  this  be  determined  by  assuming  that  the 
Supplementary  Bulletin  Rulings. 


Sec.  301.    Art.  715.— 2. 


first  articles  delivered  during  the  fiscal  year  were  delivered  out  of  inventory, 
by  taking  the  dates  of  delivery,  respectively,  to  the  Government  and  to  the 
civilian  trade^and  apportioning  these  articles  accordingly,  having  in  mind,  of 
course,  the  different  grades  and  sizes.  The  selling  price  of  these  articles 
would  be  offset  by  the  value  at  which  inventoried,  so  that  the  profit  could  be 
determined. 

If  the  records  are  as  incomplete  as  the  letter  of  inquiry  indicates,  it  is  hardly 
likely  that  the  costs  of  finishing  the  articles  in  process  of  manufacture  at  the 
beginning  of  the  year  can  be  determined  separately  from  the  costs  of  articles 
which  were  placed  in  manufacture  and  completed  during  the  year.  Never- 
theless, the  ordinary  manufacturing  and  trading  statement  usually  gives  the 
costs  of  goods  completed  during  the  year.  Inasmuch  as  it  is  essential  that 
these  costs  be  allocated,  if  the  proper  inventory  is  made  as  to  grades  and  sizes 
it  is  likely  that  the  records  will  contain  sufficient  information  to  show  the 
^otal  manufacturing  costs  of  each  kind  and  grade  of  articles  completed  during 
the  year.  The  value  of  the  articles  sold,  as  to  kind  and  grade,  is  then  easily 
ascertainable  by  deducting  the  closing  inventory.  The  proportion  sold  to  the 
Government  to  the  total  sold,  as  to  each  kind,  affords  basis  for  determining 
the  costs  of  each  kind  sold  to  the  Government.  These  costs,  deducted  from 
the  selling  price  of  each  kind,  would  give  the  gross  profit  on  Government  con- 
tracts as  to  articles  manufactured  during  the  year,  which,  added  to  the  gross 
profit  from  those  delivered  out  of  opening  inventory  should  give  the  total 
gross  profit. 

Assuming  other  expenses  can  not  be  properly  apportioned  as  to  each  source 
of  income,  then  the  proportion  which  the  gross  income  from  the  Government 
contracts  bears  to  the  gross  income  from  other  sources  determines  the  basis 
of  apportionment. 

In  answering  the  second  query,  it  is  believed  that  the  taxpayer's  repre- 
sentatives should  be  informed  that  amortization  is  not  exclusively  chargeable 
against  the  profits  made  on  the  Government  contract,  and  that  part  of  this 
amortization  is  probably  applicable  to  the  fiscal  year  ending  June  30,  1918. 
As  to  selling  and  administrative  expenses,  it  should  be  borne  in  mind  that 
part  of  these  may  be  exclusively  applicable  to  articles  sold  to  civilian  trade — 
as,  for  example,  costs  of  selling  organization  and  of  advertising,  which  are 
not  ordinarilv  essential  to  the  procurement  of  Government  contracts. 
I 


5-20-721:  O.  D.  394. 

Procurement  orders  issued  after  November  11,  1918,  in  confirmation  of 
informal  orders  entered  into  prior  to  November  12,  1918,  are  Government 
contracts  made  between  April  6,  1917,  and  November  11,  1918,  within  the 
meaning  of  the  Revenue  Act  of  1918  and  whether  fulfilled  in  1918  or  1919 
will  be  taxed  at  rates  applicable  to  Government  contracts. 

In  so  far  as  stock  purchased  for  Government  contracts  is  used  or  useful 
ior  commercial  purposes  no  separate  inventory  thereof  need  be  made  for 
Government  contract  accounting,  such  inventories  being  treated  as  com- 
mercial inventories  in  the  ordinary  course  at  the  close  of  the  taxable  year 
1919.  If,  however,  a  portion  of  such  goods  purchased  is  useful  only  for 
Government  contracts  and  is  still  on  hand  at  the  close  of  the  taxable  year  1919, 
;such  goods  should  be  inventoried  at  the  then  value  if  lower  than  cost  and 
.assigned  to  the  Government  contract  section  of  the  income  statement  for 
&hat  year. 

Advertising  and  sales  promotion  are  not  a  part  of  the  necessary  expenses 

Supp'ementary  Bulletin  Rulings. 


Sec.  301.    Art.  715.— 3. 


of  Government  contracts,  except  as  relating  to  such  contracts,  and  are  not 
proper  deductions  from  the  gross  income  derived  from  Government- sales. 

Such  expenditures,  if  entered  into  on  a  large  scale  at  a  time  when  the 
Government  was  doing  practically  no  commercial  business,  may  be  treated 
either  as  an  expense  of  the  year  in  which  incurred  and  deducted  from  the 
commercial  income  only,  or  they  may  be  treated  as  deferred  items  in  the 
balance  sheet  and  set  up  as  good  will  thereon,  being  in  the  nature  of^expendi- 
tures  for  the  building  up  of  future  business  and  not  for  the  business  secured 
during  the  taxable  year  in  which  such  expenditures  were  incurred. 
2 


Supplementary  Bulletin  Rulings. 


< 


2-20-22. 

Sec.  301.    Art.  719— 1. 

Law  Section  301— Imposition  of  Tax  (1918  Act— T[510,  ante):  (1921  Act— 
1T1011,  post). 

Article  719. — Illustration  of  Computation  Where  Net  Income  Derived 
From  Government  Contract  (Reg.  45 — H626,  ante) :  (Reg.  62 — 
H1144,  post). 

20-19-517:  O.  D.  281. 

Method  of  computing  the  war  profits  and  excess  profits  taxes  in  the  case  of  a 
corporation  which  has  income  during  a  fiscal  year  ended  in  1919  in  excess  of 
$10,000  from  Government  contracts  made  between  April  6,  1917,  and  November 
11,  1918. 

(1)  The  tax  for  the  full  fiscal  year  shall  first  be  computed  at  the  1918 
rates  as  if  the  fiscal  year  were  the  calendar  year  1918.  The  same  proportion 
of  the  tax  so  computed,  which  the  income  derived  from  Government  contracts 
is  of  the  total  income  from  all  sources,  represents  the  tax  due  on  the  income 
from  the  Government  contracts. 

(2)  To  compute  the  tax  at  the  1918  rates  on  the  net  income  derived 
from  sources  other  than  Government  contracts,  the  tax  attributable  to 
Government  contracts  is  first  deducted  from  the  total  tax  computed  at  the 
1918  rates,  and  the  difference  is  reduced  to  the  proportionate  part  thereof  that 
the  number  of  months  of  the  fiscal  year  falling  within  1918  is  of  the  full 
fiscal  year. 

(3)  The  tax  must  then  be  computed  on  the  entire  income  from  all  sources 
for  the  full  fiscal  year  at  the  1919  rates.  The  same  proportionate  part  of  this 
tax  is  taken  as  the  net  income  from  sources  other  than  Government  contracts 
is  of  the  total  net  income.  This  amount  is  then  reduced  to  the  same  pro- 
portionate part  thereof  that  the  number  of  months  of  the  fiscal  year  falling 
within  1919  is  of  the  full  fiscal  year. 

The  sum  of  the  results  obtained  in  following  the  procedure  outlined  in  the 
three  preceding  paragraphs  will  be  the  total  tax. 

For  example:  Assume  a  corporation  having  a  total  net  income  of  $120,000 
for  the  full  fiscal  year  ended  March  31,  1919,  $48,000  of  which  was  derived 
from  Government  contracts.  Assume  further  that  the  total  war  profits  and 
excess  profits  tax  computed  at  the  1918  rates  is  $60,000,  and  the  total  war 
profits  and  excess  profits  at  the  1919  rates  is  $30,000. 

The  tax  attributable  to  Government  contracts  would  be  two-fifths  of 
$60,000,  or  $24,000.  Deducting  this  amount  from  $60,000  leaves  $36,000. 
The  tax  on  the  remaining  net  income  at  1918  rates  would  be  three-fourths  of 
$36,000,  or  $27,000. 

Applying  the  1919  rates  to  the  income  not  attributable  to  Government 
contracts  would  result  in  a  tax  of  three-fifths  of  $30,000,  or  $18,000;  but 
since  only  three  months  of  the  return  period  falls  within  1919,  the  tax  would 
be  one-fourth  of  $18,000,  or  $4,500.  The  total  war  profits  and  excess  profits 
tax  would,  therefore,  be  the  sum  of  $24,000,  $27,000,  and  $4,500,  or  $55,500. 

The  computation  necessary  to  arrive  at  this  result  should  be  shown 
in  a  supplementary  statement  attached  to  the  return.  These  computations 
will  not  apply  to  the  income  tax,  which  will  be  computed  on  the  entire  net 
income,  as  provided  in  section  205(b)  of  the  Act.  In  the  illustration  given, 
the  amount  of  war  profits  and  excess  profits  tax  to  be  credited  against  net 
income,  in  computing  the  income  tax  at  both  the  12  per  cent  and  10  per  cent 
rates,  would  be  $55,500,  as  computed  above. 
1 


Supplementary  Bulletin  Rulings. 


nidi  gflbouboG  .(X 


2-20-22. 

Sec.  302.    Art.  731— 1. 

Law  Section  302.— Limitation  of  Tax  (1918  Act— 1f523,  ante):  (1921  Act— 
1fl0l9,  post). 

Article  731— Limitation  of  Tax  (Reg.  45— 1J639,  ante):  (Reg.  62— 
fl  158/  post). 

1-19-115:  0.  D.  80. 
The  tax  limitation  prescribed  in  section  302,  Revenue  Act  of  1918,  is 
applied  to  the  consolidated  net  income  and  may  not  be  construed  to  apply 
separately  to  the  net  income  of  each  unit  included  in  the  return. 
1 


Supplementary  Bulletin  Ruling. 


,(teoq\82II]? 


9-8-22. 


Sec.  302.   Art.  732.— 1. 

Law  Section  302.— Limitation  of  Tax  (1918  Act— 11523,  ante):  (1921  Act— 
111019,  post). 

Article  732. — Limitation  of  Tax  where  return  for  fractional  part  of  year 
(Reg.  45— H643,  ante):  (Reg.  62— fll61,  post). 

I  ('22)-36-493:  I.  T.  1439 

Revenue  Act  of  1921 

A  taxpayer  made  a  return  for  seven  months  under  the  Revenue  Act  of 
1921,  which  disclosed  an  actual  net  income  of  less  than  $25,000.  The  ques- 
tion was  submitted  as  to  the  proper  method  of  computing  the  income  and 
excess  profits  taxes  of  the  taxpayer  when  section  302  of  that  Act  is  applied 
in  determining  the  excess-profits  tax. 

Held,  that  in  order  for  a  corporation  whose  return  covers  a  period  of 
less  than  one  year  to  have  the  full  benefit  of  section  302,  which  allows  an 
exemption  of  $3,000  in  all  cases  irrespective  of  whether  the  return  is  for  an 
entire  year  or  only  for  a  fractional  part  of  a  year,  it  is  necessary  to  compute 
the  excess-profits  tax  upon  the  actual  amount  of  the  income  shown  by  the 
return,  less  $3,000.  In  computing  the  income  tax,  however,  the  credit  of 
$2,000  must  be  reduced  to  such  a  proportion  of  the  full  credit  as  the  number 
of  months  in  the  period  for  which  the  return  is  made  bears  to  12  months. 
This  amount  should  be  added  to  the  amount  of  the  excess-profits  tax  and 
the  sum  deducted  from  the  net  income  shown  by  the  return.  The  net  income 
should  then  be  placed  on  an  annual  basis  and  the  income  tax  computed. 
The  income  tax  should  then  be  reduced  to  the  basis  of  the  period  covered 
by  the  return  and,  when  added  to  the  excess-profits  tax,  will  give  the  total 
tax  liability  of  the  corporation. 

Held  also,  that  although  the  taxpayer's  net  income  when  raised  to  an 
annual  basis  exceeded  $25,000,  that  fact  did  not  destroy  its  right  to  the 
proportionate  part  of  the  $2,000  credit  in  computing  the  income  tax,  as  the 
right  to  such  credit  is  determined  by  the  actual  amount  of  the  net  income 
shown  by  the  return  and  not  by  the  amount  which  is  disclosed  when  the  net 
income  is  placed  on  an  annual  basis. 

Applying  this  method  of  computation  to  a  fictitious  case  will  give  the 


following  results: 

Net  income  (without  deduction  for  credits)   #19,190.51 

Exemption   3,000.00 

Amount  subject  to  excess-profits  tax   $16,190.51 

Excess-profits  tax  at  20  per  cent,  (under  sec.  302)   3,238.10 

Net  income   $19,190.51 

Profits  tax   $3,238.10 

Proportionate  part  of  $2,000   1,116.67 

—   4,354.77 

Balance  subject  to  income  tax.   $14,835.74 

Balance  raised  to  annual  basis   $25,432.70 

Income  tax  on  annual  basis   2,543.27 


Income  tax  reduced  to  basis  of  return   $1,483.57 

Add:  Excess-profit  tax   3,238.10 

Total  tax  for  the  period   $4,721.67 


1 

Supplementary  Bulletin  Rulings. 


r 
(* 

C 


2-20-22. 

Sec.  303.    Art.  741.— 1. 

Law  Section  303. — Tax  When  Partly  Personal  Service  Business  (1918  Act — 
H524,  ante):  (1921  Act— 1f 1020). 
Article  741. — Apportionment  of  Invested  Capital  and  Net  Income  (Reg. 
45— If 645,  ante):  (Reg.  62— J 1163,  post). 

1-19-114:  O.  D.  79. 
Section  303  of  the  law  will  apply  in  the  case  of  partial  personal-service 
corporations  until  the  point  is  reached  where  the  nonpersonal-service  element 
becomes  negligible,  under  which  conditions  such  corporations  would  make 
returns  as  personal-service  corporations,  as  set  out  in  section  218  of  the  law. 

1 


12-19-410:  T.  B.  M.  50 
Where  a  corporation  doing  a  commission  and  brokerage  business  satisfies 
the  requirements  of  a  personal-service  corporation,  except  that  it  in  part 
employs  capital,  surplus,  and  borrowed  funds  to  make  large  advances  to 
customers  and  receives  more  interest  than  it  pays  as  a  result  of  such  trans- 
actions, it  should  be  assessed  under  section  303.  The  income  from  com- 
missions and  brokerage  should  be  considered  as  arising  from  personal  service, 
and  the  remainder  of  the  income  as  derived  from  the  use  of  capital. 
2 


Supplementary  Bulletin  Rulings. 


- 


Sec,  310.    Art.  771  .—1 


Law  Section  310 —Prewar  Period  fl[529). 
Article  771.— Prewar  Period  (1f685). 

(See  39-21-1849;  Section  331,  Article  941.)  When  year  1913  was  one 
extraordinary  depression. 
1 


Supplementary  Bulletin  Rulingi. 


)ie  .038 


Sec.  311.    Art.  781.— 1 


Law  Section  311.— War  Profits  Credit  (H530). 
Article  781.— War  Profits  Credit  (1f686). 

5-19-264:  T.  B.  R.  16. 

Method  of  ascertaining  a  corporation's  average  net  income  and  average  invested 
capital  for  the  prewar  period  where  corporation  closes  its  books  on  the  basis  of  a 
fiscal  year  which  differs  from  the  calendar  year. 

The  Income  Tax  Unit  has  requested  a  ruling  as  to  the  method  by  which 
a  corporation  is  to  ascertain  the  average  net  income  and  the  average  invested 
capital  for  the  prewar  period  as  called  for  in  section  311  (2)  in  cases  where  a 
corporation  closes  its  books  on  the  basis  of  a  fiscal  year  differing  from  the 
calendar  year.  The  prewar  period  is  defined  in  section  310  of  the  Revenue 
Act  of  1918,  which  reads:  "That  as  used  in  this  title  the  term  'prewar  period' 
means  the  calendar  years  1911,  1912,  and  1913,  or,  if  a  corporation  was  not  in 
existence  during  the  whole  of  such  period,  then  as  many  of  such  years  during  the 
whole  of  such  period,  then  as  many  of  such  years  during  the  whole  of  which 
the  corporation  was  in  existence."  The  problenr  presented  by  the  inquiry  of 
the  Income  Tax  Unit  is  as  to  how  the  fiscal  year  periods  are  to  be  made  to 
conform  to  the  calendar  years  specified  for  the  prewar  period. 

It  is  recommended  that  the  computation  be  made  as  follows: 

The  starting  point  for  each  year  is  the  beginning  of  the  fiscal  year  ending 
in  1911,  1912,  and  1913,  respectively,  and  the  invested  capital  should  be 
ascertained  as  at  those  dates.  To  these  sums  should  be  added  any  con- 
tributions of  capital  between  the  beginning  of  each  such  fiscal  year  and 
January  1,  1911,  1912,  and  1913,  respectively,  and  corresponding  deductions 
should  be  made  in  respect  of  any  dividends  and  any  refunds  of  capital  during 
those  respective  periods.  To  these  balances  should  be  added  a  pro  rata  share 
of  the  earnings  of  the  respective  fiscal  years,  and  the  totals  thus  arrivedfat 
will  be  deemed  to  be  the  invested  capital  of  the  taxpayer  at  January  1,  1911, 
1912,  and  1913,  respectively.  Taxpayers  should  file  with  their  returns  copies 
of  their  balance  sheets  at  the  beginning  of  each  fiscal  year  and  a  schedule  for 
each  year  showing  the  adjustments  made  in  computing  the  invested  capital  as 
at  the  beginning  of  each  calendar  year  during  the  prewar  period. 

Where  a  taxpayer  has  such  accounting  records  as  will  enable  him  to  prepare 
an  accurate  balance  sheet  showing  the  true  surplus  and  undivided  profits  at 
the  beginning  of  each  one  of  the  prewar  calendar  years  and  an  accurate 
income  account  for  such  years,  he  may  make  the  computation  upon  this  basis 
and  explain  the  method  used  in  such  detail  as  will  enable  the  Commissioner  of 
Internal  Revenue  to  determine  whether  such  basis  is  proper. 

Where  a  taxpayer  has  not  been  in  business  during  the^whole  of  the  prewar 
period  the  above  methods  will  be  applicable  to  such  full  calendar  years  during 
the  whole  of  which  years  the  taxpayer  was  in  business. 

1 


8-19-319:  O.  D.  184 

Corporations  are  not  allowed  at  this  late  date  to  adjust  salaries  paid 
during  the  prewar  period  when  such  adjustment  is  made  solely  for  the  purpose 
of  increasing  the  war  profits  credit  for  the  taxable  year. 
2 


Supplementary  Bulletin  Rulings. 


Sec.  311.    Art.  781.— 2. 


32-20-1124:  A.  R.  R.  221. 

REVENUE  ACT  OF  1917. 
Recommended  in  the  appeal  of  the  M  Company  that  the  action  of  thejlncome 
Tax  Unit  fixing  the  deduction  to  be  used  in  computing  the  tax  at  7  per  cent  be 
affirmed. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  fixing  the  deduction  at  7  per  cent, 
for  the  purpose  of  computing  the  excess  profits  tax  instead  of  8  per  cent  claimed 
by  the  corporation.  A  number  of  adjustments  have  been  made  by  the  Unit, 
all  of  which  have  been  conceded  by  the  corporation  except  the  adjustment 
with  respect  to  the  percentage  deduction. 

This  corporation  was  organized  in  July,  1915,  under  the  laws  of  the 
State  of  New  York,  with  an  authorized  capital  stock  of  5x  dollars  and  suc- 
ceeded a  corporation  known  as  the  N  Company. 

It  appears  that  prior  to  1910,  the  corporation  known  as  the  N  Company 
owned  a  frame  mill  building,  some  real  estate  and  some  water  power  rights. 
The  majority  of  the  stock  of  this  corporation  was  owned  by  one,  A,  and  his 
brother,  B,  the  latter  owning  10  per  cent  of  the  stock.  The  corporation 
had  outstanding  two  issues  of  bonds — first  mortgage  bonds  in  the  sum  of  4# 
dollars  and  second  mortgage  bonds  in  the  sum  of  6x  dollars  which  were  largely 
held  by  creditors  of  the  corporation. 

Sometime  in  June,  1914,  the  corporation  became  insolvent  and  stopped 
operations.  Bankruptcy  proceedings  were  instituted  and  in  September, 
1914,  the  corporation  was  declared  by  legal  proceedings  to  be  a  bankrupt. 
Proceedings  were  started  to  foreclose  the  first  mortgage.  In  March,  1915, 
a  sale  under  the  first  mortgage  was  held  at  which  time  the  property  was 
acquired  on  behalf  of  the  first  mortgage  bondholders  at  a  price  of  5x  dollars, 
which  represented  the  face  of  the  first  mortgage  bonds  and  accrued  interest. 
In  June,  1915,  steps  were  taken  to  form  a  new  corporation  and  in  July  of 
that  year  the  new  corporation  came  into  existence  and  took  over  the  water 
power  rights,  real  estate  and  buildings  of  the  old  corporation  from  the  trustee. 
Stock  of  the  new  corporation  was  divided  among  the  first  mortgage  bond- 
holders in  proportion  to  their  ownership  of  bonds. 

The  newly  organized  corporation  made  extensive  changes  in  the  water 
power  and  in  the  machinery.  The  machinery  which  had  been  left  at  the 
plant  in  1914,  when  the  old  corporation  closed  down  was  practically  worthless. 
The  new  corporation  installed  at  a  considerable  expense  some  new  machinery 
and  changed  practically  the  entire  system  of  production.  New  banking 
connections  were  formed  and  additional  funds  were  acquired  through  these 
connections  for  the  purpose  of  securing  additional  working  capital. 

The  only  points  of  similarity  between  the  M  Company  and  the  N  Com- 
pany are  that  the  product  manufactured  is  sold  under  the  same  trade  name  and 
is  produced  on  the  same  location. 

The  attorney  for  this  corporation  contends  in  a  memorandum  brief  sub- 
mitted that  it  would  not  be  fair  and  equitable  to  say  that  the  trade  or  business 
carried  on  by  the  new  corporation  was  substantially  a  continuation  of  the 
trade  or  business  carried  on  by  the  N  Company  and  that  the  N  Company  had 
no  good  will  to  continue  for  the  reason  that  it  became  bankrupt  in  1914,  and 
was  closed  for  a  period  of  approximately  one  year  before  the  new  corporation 
came  into  existence.  The  attorney  submits  that  the  Income  Tax  Unit  was  in 
error  in  fixing  the  deduction  at  7  per  cent  for  the  purpose  of  computing  the 
tax,  rather  than  at  8  per  cent  claimed  by  the  corporation,  for  the  reason  that 
the  new  corporation  did  not  succeed  to  the  trade  or  business  of  the  N  Company 
since  it  had  become  bankrupt  and  had  not  been  in  operation  since  the  early 
part  of  1914.    In  this  connection  it  is  contended  that  since  the  N  Company 


Supplementary  Bulletin  Rulings. 


Sec.  311.    Art.  781.— 3. 


had  not  been  operating  for  a  period  of  over  one  year  there  was  no  trade  or 
business  in  existence  at  the  time  the  new  corporation  was  organized  for  the 
purpose  of  acquiring  the  assets  formerly  owned  by  the  N  Company;  there- 
fore, since  no  business  was  in  existence  it  was  impossible  for  the  business  of 
the  new  corporation  to  be  considered  a  continuation  of  the  business  of  the 
bankrupt  corporation. 

Section  204  of  the  Revenue  Act  of  1917  deals  with  the  percentage  deduction 
allowed  to  corporations  or  partnerships  not  in  existence  during  the  whole  of 
any  one  calendar  year  during  the  prewar  period  and  provides  in  part  as 
follows: 

A  trade  or  business  carried  on  by  a  corporation,  partnership,  or  individual,  although 
formally  organized  or  reorganized  on  or  after  January  second,  nineteen  hundred  and 
thirteen,  which  is  substantially  a  continuation  of  a  trade  or  business  carried  on  prior  to  that 
date,  shall,  for  the  purposes  of  this  title,  be  deemed  to  have  been  in  existence  prior  to  that 
date,  and  the  net  income  and  invested  capital  of  its  predecessor  prior  to  that  date  shall  be 
deemed  to  have  been  its  net  income  and  invested  capital. 

Article  22  of  Regulations  41  reads  as  follows: 

If  a  trade  or  business  carried  on  by  a  corporation,  partnership  or  individual  was  formally 
organized  or  reorganized  on  or  after  January  2,  1913,  but  is  substantially  a  continuation  of 
a  trade  or  business  carried  on  prior  to  that  date,  then  the  corporation  or  partnership  shall 
be  deemed  to  have  been  in  existence,  or  the  individual  shall  be  deemed  to  have  been  en- 
gaged in  the  trade  or  business,  prior  to  that  date,  and  for  the  purpose  of  computing  the 
deduction  the  net  income  and  invested  capital  of  the  predecessor  shall  be  deemed  to  have 
been  the  net  income  and  invested  capital  of  the  present  owner  for  the  prewar  period. 

The  Income  Tax  Unit  has  held  in  a  specific  case  where  an  individual  was 
engaged  in  the  hardware  business  during  the  prewar  period  and  made  more 
than  9  per  cent  on  his  invested  capital,  but  subsequent  to  the  prewar  period 
the  hardware  business  was  sold  and  the  individual  established  a  furniture 
store  and  made  over  9  per  cent  on  his  invested  capital  in  that  business,  that 
the  deduction  should  be  8  per  cent  since  he  is  now  carrying  on  a  business  in 
which  he  was  not  engaged  during  the  prewar  period.  The  Unit  has  also  held 
in  the  case  of  an  individual  buying  a  hotel  business  in  1914,  which  had  been 
in  existence  during  the  prewar  period  that  the  deduction  should  be  computed 
at  7  per  cent,  but  since  no  records  were  available  so  that  the  average  invested 
capital  for  that  period  could  be  ascertained  a  claim  for  final  assessment  under 
the  provisions  of  section  210  and  articles  18,  24  and  52  of  Regulations  41 
would  be  in  order  provided  the  Secretary  of  the  Treasury  is  unable  to  satis- 
factorily determine  the  invested  capital  for  the  prewar  period. 

In  the  instant  case,  the  M  Company  came  into  existence  in  1915,  after 
its  predecessor,  the  N  Company,  had  ceased  to  operate  as  a  going  concern  and 
had  not  operated  for  a  period  of  one  year  or  more  prior  to  the  organization  of 
the  new  company.  However,  it  appears  that  this  corporation  acquired  the 
assets  of  the  bankrupt  corporation  and  that  even  though  a  considerable 
amount  was  invested  in  new  machinery,  etc.,  the  plant  of  the  new  corporation 
is  located  in  the  same  place  as  the  old  corporation  and  that  the  product 
of  the  new  corporation  is  sold  under  the  same  trade  name  as  the  product 
of  the  predecessor  corporation  was  sold. 

The  facts  presented  in  this  case  clearly  indicate  to  the  Committee  that 
the  business  now  carried  on  by  the  M  Company  is  substantially  a  continuation 
of  the  trade  or  business  carried  on  by  its  predecessor,  the  N  Company,  and  that 
this  view  is  substantiated  by  the  fact  that  the  new  corporation  is  operating 
on  the  same  location  as  its  predecessor  and  the  product  of  the  new  corporation 
is  sold  under  the  same  trade  name. 

In  view  of  the  foregoing  the  Committee  is  clearly  of  the  opinion  that  the 
action  of  the  Income  Tax  Unit  in  holding  that  the  new  business  is  substantially 
a  continuation  of  the  trade  or  business  carried  on  by  the  N  Company  is  correct, 


Supplementary  Bulletin  Rulings. 


Sec.  311.    Art.  781.— 4. 

and,  therefore,  recommends  that  its  action  in  fixing  the  deduction  for  the 
purpose  of  computing  the  tax  at  7  per  cent,  rather  than  8  per  cent  claimed  by 
the  corporation,  was  uroper. 
3 


Supplementary  Bulletin  Rulings^J 


Sec.  311.    Art.  783.— 1. 


Law  Section  311— War  Profits  Credit  (1T530). 

Article  783— War  Profits  Credit  Where  No  Prewar  Period  fl[690). 

10-20-783:  A.  R.  R.  36. 

Held,  that  the  median  as  determined  under  the  provisions  of  paragraph 
(c)  (2)  of  section  311  of  the  Revenue  Act  of  1918  is  final  and  shall  be  used  in  com- 
puting the  war  profits  credit  of  the  M  Company.  Relief  can  not  be  granted  under 
section  328  of  the  Act  merely  for  the  reason  that  the  application  of  the  median 
does  not  give  the  relief  to  which  taxpayers  think  they  are  entitled. 

The  M  Company  claims  that  inequity  and  hardship  are  imposed  upon  it 
through  the  application  of  the  "median''  in  determining  its  war  profits  credit 
under  the  Revenue  Act  of  1918  and  requests  the  Commissioner  to  determine 
its  tax  liability  under  the  provisions  of  section  328  for  the  reason  that  the 
median  as  determined  allows  the  taxpayer  a  war  profits  credit  of  slightly  in 
excess  of  10  per  cent. 

It  is  contended  that  this  percentage  is  not  a  representative  percentage 
earned  by  corporations  in  the  same  general  class  of  business  during  the  prewar 
period.  The  taxpayer  has  made  an  independent  investigation  and  apparently 
has  taken  into  consideration  only  a  few  concerns  similarly  situated  and  claims 
that  these  concerns  earned  over  20  per  cent  during  the  prewar  period.  The 
Bureau  has  computed  the  median  by  using  the  returns  of  all  corporations 
in  same  general  class  of  business  as  that  conducted  by  the  M  Company. 

On  account  of  this  discrepancy  the  Commissioner  is  urged  to  ascertain  and 
assess  the  tax  in  this  case  as  provided  in  section  328  of  the  statute. 

Sectionpl  1(c)  of  the  Revenue  Act  of  1918  provides  in  part: 

If  the  corporation  was  not  in  existence  during  the  whole  of  at  least  one  calendar  year 
during  the  prewar  period,  then,  except  as  provided  in  subdivision  (d),  the  war  profit! 
credit  shall  be  the  sum  of:  (1)  A  specific  exemption  of  $3,000;  and  (2)  an  amount  equal 
to  the  same  percentage  of  the  invested  capital  of  the  taxpayer  for  the  taxable  year  as  the 
average  percentage  of  net  income  to  invested  capital  for  the  prewar  period,  of  corporations 
engaged  in  a  trade  or  business  of  the  same  general  class  as  that  conducted  by  the  taxpayer; 
but  such  amount  shall  in  no  case  be  less  than  10  per  centum  of  the  invested  capital  of  the 
taxpayer  for  the  taxable  year.  Such  average  percentage  shall  be  determined  by  the 
Commissioner  on  the  basis  of  data  contained  in  returns  made  under  Title  II  of  the  Revenue 
Act  of  1917;  and  the  average  known  as  the  median  shall  be  used. 

Article  783  of  Regulations -45  interpreting  the  above-quoted  provision  of 
law  provides  in  part  as  follows: 

If  a  corporation  has  no  prewar  period,  then  the  war  profits  credit  consists  of  the  sum 
of  the  specific  exemption  of  $3,000  and  an  amount  equal  to  the  same  percentage  of  the  in- 
vested capital  for  the  taxable  year  as  the  average  percentage  of  net  income  to  invested 
capital  for  the  prewar  period  of  corporations  engaged  in  a  trade  or  business  of  the  same 
general  class  as  that  conducted  by  the  taxpayer,  but  not  be  less  than  10  per  cent,  of  its 
'invested  capital  for  the  taxable  year.  The  war  profits  credit  shall  be  computed  in  the  first 
instance  on  the  basis  of  10  per  cent  of  the  invested  capital,  and  when  the  average  percent- 
age of  corporations  engaged  in  the  same  general  class  of  trade  or  business  has  been  deter- 
mined the  amount  of  the  tax  will  if  necessary  be  recomputed. 

Section  327  of  the  Revenue  Act  of  1918  provides  that  in  certain  cases  the 
tax  shall  be  determined  as  provided  in  section  328.  In  the  instant  case  it 
can  not  be  said  that  the  Commissioner  is  unable  to  determine  the  invested 
capital,  that  the  taxpayer  is  a  foreign  corporation,  that  a  mixed  aggregate  of 
tangibles  and  intangibles  has  been  paid  in  for  stock,  etc.,  nor  that  the  tax  if 
determined  without  the  benefit  of  this  section  would,  owing  to  abnormal 
conditions  affecting  the  capital  or  income  of  the  corporation,  work  an  excep- 
tional hardship  evidenced  by  a  gross  disproportion  between  the  tax  computed 
without  the  benefit  of  section  327  and  the  tax  computed  by  reference  to 
I        representative  corporations  as  provided  in  section  328. 

Section  327  does  not  apply  to  any  case  in  which  the  tax  is  high  merely 


Supplementary  Bulletin  Rulings. 


Sec.  311.    Art.  783.-2. 


because  the  corporation  earned  within  the  taxable  year  a  high  rate  of  profit 
upon  a  normal  invested  capital. 

After  analyzing  the  situation  presented  in  the  instant  case  the  Committee 
is  of  the  opinion  and  recommends  (1)  that  the  median  established  as  provided 
by  law  and  published  by  the  Bureau  be  considered  final  and  that  the  taxpayer 
is  not  entitled  to  consideration  under  the  provisions  of  section  328  of  the 
statute;  (2)  that  there  is  no  warrant  in  law  or  the  regulations  which  author- 
izes the  Commissioner  to  allow  a  larger  percentage  in  this  class  of  cases  than 
that  established  by  the  median  for  the  purposes  of  computing  the  war  profits 
credit;  and  (3)  that  the  instant  case  does  not  fall  within  any  class  of  casei 
enumerated  in  section  327,  therefore,  relief  can  not  be  granted  under  section 
328. 
1 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  312.    Art.  791.— 1. 

.IQV  .ttA    .Sit  .098 

Law  Section  312— Excess  Profits  Credit  (1918  Act— H541,  ante) :  (1921  Act 
H1025,  post). 

Article  791— Excess  Profits  Credit  (Reg.  45—^724,  ante):  (Reg.  62— 
^[1177,  post). 

20-21-1644:  A.  R.  R.  499 

REVENUE  ACT  OF  1917. 
Recommended  in  the  case  of  the  M  Company  that  the  action  of  the  Income 
Tax  Unit  in  limiting  the  deduction  to  8  per  cent,  as  provided  in  section  204  of  the 
Revenue  Act  of  1917  be  sustained. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  disallowing  claim  for  percentage 
deduction  under  section  205  of  the  Revenue  Act  of  1917. 

The  M  Company  is  a  foreign  corporation  organized  September  — ,  1914, 
and,  accordingly,  was  not  in  existence  during  any  of  the  prewar  years  de- 
termined by  section  203  of  the  Revenue  Act  and  article  6  of  Regulations  41. 
The  company,  however,  contends  that  the  application  of  8  per  cent,  on  in- 
vested capital,  in  accordance  with  section  204  of  the  Revenue  Act,  works 
an  undue  hardship  on  the  company  since  the  Commissioner  has  determined 
a  "median"  rate  in  excess  of  9  per  cent,  for  representative  companies  engaged 
in  the  particular  business  of  the  corporation. 

Section  204  of  the  Revenue  Act  reads,  in  part,  as  follows: 

That  if  a  corporation  or  partnership  was  not  in  existence,  or  an  individual  was  not 
engaged  in  the  trade  or  business,  during  the  whole  of  any  one  calendar  year  during  the 
prewar  period,  the  deduction  shall  be  an  amount  equal  to  eight  per  centum  of  the  invested 
capital  for  the  taxable  year,  plus  in  the  case  of  a  domestic  corporation  $3,000  and  in  the 
case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United  States  $6,000. 

Section  205  of  the  Revenue  Act  reads,  in  part,  as  follows: 
(a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint  finds  either  (1)  that  during 
the  prewar  period  a  domestic  corporation  or  partnership,  or  a  citizen  or  resident  of  the 
United  States,  had  no  net  income  from  the  trade  or  business,  or  (2)  that  during  the  pre- 
war period  the  percentage,  which  the  net  income  was  of  the  invested  capital,  was  low  as 
compared  with  the  percentage,  which  the  net  income  during  such  period  of  representative 
corporations,  partnerships,  and  individuals,  engaged  in  a  like  or  similar  trade  or  business, 
was  of  their  invested  capital,  then  the  deduction  shall  be  the  sum  of     *    *  *. 

In  the  instant  case,  the  Committee  has  no  discretion  but  must  construe 
the  law  in  accordance  with  its  plain  language.  Section  204  expressly  provides 
for  a  deductible  rate  when  a  corporation  was  not  in  existence  during  the 
whole  of  any  one  calendar  year  of  the  prewar  period  while  section  205  recog- 
nizes the  existence  of  the  corporation  during  the  prewar  year  but,  under  such 
existence,  having  no  income  or  having  income  that  was  low  compared  with 
the  percentage  of  income  to  invested  capital  of  similar  representative  cor- 
porations. Furthermore  it  should  be  noted  that  section  205  is  applicable 
only  to  a  domestic  corporation,  partnership,  or  citizen. 

In  the  instant  case,  it  is  admitted  by  the  taxpayer  that  the  M  Company, 
a  foreign  corporation,  was  not  in  existence  during  the  prewar  years  and 
accordingly  this  Committee  recommends  that  the  action  of  the  Income 
Tax  Unit  in  limiting  the  deduction  to  8  per  cent.,  as  provided  in  section  204 
of  the  Revenue  Act,  be  sustained. 


I  (,22)-2-24:  A.  R.  R.  716 

REVENUE   ACT  OF  1917 

Recommended,  in  the  appeal  of  the  M  Company  that  the  action  of  the  In- 
come Tax  Unit  in  determining  the  "average  deduction"  under  section  205  of  the 
Act  of  October  3,  1917,  by  averaging  the  deductions  allowed  to  representative 
concerns  after  the  limitations  provided  in  section  203  of  the  Act  had  been  applied, 
be  affirmed  and  the  appeal  denied. 


Supplementary  Bulletin  Rulings. 


Sec.  312.    Art.  791.— 2. 


The  Committee  has  considered  the  appeal  of  the  M  Company!  in  which 
it  is  contended  that  the  method  employed  in  determining  the  "average 
deduction"  under  section  205  of  the  Act  of  October  3,  1917,  is  erroneous. 
As  the  question  raised  by  the  appeal  is  entirely  a  question  of  law  involving 
the  construction  of  the  statute,  the  case  was  referred  to  the  Solicitor,  Bureau 
of  Internal  Revenue,  for  an  opinion.  The  contention  of  the  appellant  and 
the  fact  upon  which  it  is  based  are  sufficiently  set  forth  in  the  Solicitor's 
opinion  and  therefore  are  not  here  repeated.  The  Solicitor's  opinion  is  as 
follows : 

Consideration  has  been  given  to  the  attached  file  wherein  it  appears  that  the  Income 
Tax  Unit  had  disallowed  the  claim  of  the  M  Company  for  the  use  of  9  per  centum,  rather 
than  7  per  centum,  in  computing  the  deduction  allowed  under  section  205(a)2  of  the  Rev- 
enue Act  of  October  3,  1917.  The  question,  upon  which  the  opinion  of  this  office  has  been 
requested,  is  whether  or  not  the  construction  contended  for  by  the  appellant  in  its  brief 
of  August  — ,  1921,  is  correct. 

Briefly,  the  facts  may  be  stated  as  follows: 

The  M  Company  in  preparing  its  corporation  excess  profits  tax  returns  for  the  calendar 
year  1917  determined  its  excess  profits  deduction  by  the  use  of  7  per  centum  of  its  invested 
capital  and  entered  the  amount  so  determined  upon  its  return.  Claim  for  abatement 
was  duly  filed  for  the  amount  by  which  the  tax  shown  to  be  due  upon  the  return  exceeded 
the  amount  determined  by  the  use  of  9  per  centum  of  the  invested  capital.  During  the 
prewar  period  the  operations  of  the  company  had  been  greatly  curtailed,  and,  for  a  portion 
of  the  period,  had  entirely  ceased.  Objection  has  been  made  to  the  method  used  by  the 
Income  Tax  Unit  in  determining  the  average  deduction  under  section  205  of  the  Act  in 
cases  (1)  where  taxpayers  had  no  net  income  during  the  prewar  period  and  (2)  where  the 
percentage  which  the  net  income  was  of  the  invested  capital  was  low  as  compared  with 
the  percentage  which  the  net  income  during  such  period  of  representative  concerns  was 
of  their  invested  capital.  It  is  the  contention  of  the  taxpayer  that  in  computing  the 
average  deduction  under  section  205  the  limiting  provisions  of  section  203  are  not  to  be 
applied  until  there  has  been  an  ascertainment  of  the  percentage  which  the  average  net 
income  bears  to  the  average  invested  capital  of  respresentative  concerns. 

The  portions  of  the  Act  which  are  material  to  the  decision  of  the  question  involved 
are  as  follows: 

Sec.  201.  That  in  addition  to  the  taxes  under  existing  law  and  under  this  Act  there 
shall  be  levied,  assessed,  collected,  and  paid  for  each  taxable  year  upon  the  income  of 
every  corporation,  partnership,  or  individual,  a  tax  (hereinafter  in  this  title  referred  to 
as  the  tax)  equal  to  the  following  percentages  of  the  net  income: 

Twenty  per  centum  of  the  amount  of  the  net  income  in  excess  of  the  deduction  (deter- 
mined as  hereinafter  provided)  and  not  in  excess  of  15  per  centum  of  the  invested  capital 
for  the  taxable  year;    *    *  * 

Sec.  203.  That  for  the  purposes  of  this  title  the  deduction  shall  be  as  follows,  except 
as  otherwise  in  this  title  provided — 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1)  an  amount  equal  to  the 
same  percentage  of  the  invested  capital  for  the  taxable  year  which  the  average  amount 
of  the  annual  net  income  of  the  trade  or  business  during  the  prewar  period  was  of  the 
invested  capital  for  the  prewar  period  (but  not  less  than  7  or  more  than  9  per  centum  of 
the  invested  capital  for  the  taxable  year),  and  (2)  $3,000;    *    *  *. 

Sec  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint,  finds  either  (1)  that 
during  the  prewar  period  a  domestic  corporation  or  partnership,  or  a  citizen  or  resident 
of  the  United  States,  had  no  net  income  from  the  trade  or  business,  or  (2)  that  during  the 
prewar  period  the  percentage,  which  the  net  income  was  of  the  invested  capital,  was  low 
as  compared  with  the  percentage,  which  the  net  income  during  such  period  of  representa- 
tive corporations,  partnerships,  and  individuals,  engaged  in  a  like  or  similar  trade  or  busi- 
ness, was  of  their  invested  capital,  then  the  deduction  shall  be  the  sum  of  (1)  an  amount 
equal  to  the  same  percentage  of  its  invested  capital  for  the  taxable  year  which  the  average 
deduction  (determined  in  the  same  manner  as  provided  in  section  203,  without  including 
the  $3,000  or  $6,000  therein  referred  to)  for  such  year  of  representative  corporations, 
partnerships,  or  individuals,  engaged  in  a  like  or  similar  trade  or  business,  is  of  their  aver- 
age invested  capital  for  such  year  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000,  and 
in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the  United  States  $6,000  *  *  * 

The  taxpayer  contends  that  the  following  is  the  correct  method  of  determining  the 
average  deduction  to  be  allowed  in  those  cases  which  are  governed  by  the  provisions  of 
section  205: 

(1)  Determine  the  percentage  which  the  average  amount  of  the  annual  net  income 
was  of  the  invested  capital  for  the  prewar  period  of  representative  corporations. 


Supplementary  Bulletin  Rulings. 


1-7-22. 


Sec.  312.    Art.  791.— 3. 


(2)  Apply  the  limitation  imposed  by  section  203,  to  wit,  "not  less  than  7  or~more 
than  9  per  centum." 

(3)  Apply  such  percentage  to  the  statutory  invested  capital  of  the  corporation  whose 
tax  is  being  computed. 

(4)  Add  to  the  resultant  product  the  specific  exemption  of  $3,000. 

It  will  be  observed  that  in  the  above  method  no  consideration  or  effect  is  given  to 
the  limitations  prescribed  in  section  203  until  there  has  been  a  determination  of  the  per- 
centage which  the  net  income  bears  to  invested  capital.  In  so  computing  the  deduction, 
the  fact  is  completely  overlooked  that  there  is,  in  a  great  number  of  cases,  a  noticeable 
disparity  between  the  percentage  of  deduction  allowed  and  the  percentage  between  net 
income  and  invested  capital. 

The  following  example,  in  which  it  is  assumed  that  the  corporations"are  properly  com- 
parable for  the  purpose  of  determining  the  deduction  to  be  allowed  to  the  fourth  company, 
will  illustrate  the  contention  of  the  taxpayer: 


Name  of  company 

Average  in- 
vested capital 
for  prewar 
period 

Average  tax- 
able income 
for  the  pre- 
war period 

Percentage 
of  earnings 

Percentage 
of  deduc- 
tion 

$3,000,000 
2,500,000 
3,500,000 

$450,000 
225,000 
210,000 

15 
9 
6 

9 
9 
7 

B  

C  

Total  

$9,000,000 
3,000,000 

$885,000 
295,000 

In  the  foregoing  example  the  percentage  of  average  earnings  to  invested  capital  is  9*^ 
per  cent.  The  taxpayer  asserts  that  the  limitation  fixed  by  section  203  should  be  applied 
to  this  percentage  and  no  consideration  be  given  to  the  actual  deduction  permitted  to 
Companies  A,  B.  and  C,  as  shown  in  the  column  designated  "Percentage  of  deduction." 

With  the  contention  of  the  taxpayer  this  office  can  not  agree.  Section  205  is  a  relief 
provision  for  those  taxpayers  who  had  no  net  income  during  the  prewar  period,  or  whose 
net  income  during  the  said  period  was  low  as  compared  with  that  received  by  representa- 
tive concerns  engaged  in  like  or  similar  trades  or  business.  Many  taxpayers  are  thus  per- 
mitted to  take  greater  deductions  from  their  net  income  for  the  purpose  of  computing 
their  war  excess  profits  tax  than  would  otherwise  have  been  allowed.  In  some  cases,  if 
normal  conditions  had  prevailed  during  the  prewar  period,  the  earnings  of  the  corporations 
would  probably  have  been  large  enough  to  entitle  them  to  the  maximum  deductions  pro- 
vided in  section  203.  In  others,  the  earnings  would  probably  have  been  so  low  that  the 
corporations  could  only  have  taken  the  minimum  deduction  therein  provided.  What 
they  might  have  earned,  however,  is  a  matter  of  speculation.  To  equalize  the  burden 
of  the  tax,  and  to  prevent  any  discrimination  in  favor  of  those  taxpayers  engaged  in  similar 
trades  or  businesses  who  had  a  profitable  prewar  history,  Congress  enacted  that  in  those 
cases  covered  by  section  205  the  deduction  should  be  the  sum  of  (1)  "an  amount  equal  to 
the  same  percentage  of  its  invested  capital  for  the  taxable  year  which  the  average  deduc- 
tion *  *  *  for  such  year  of  representative  corporations,  partnerships  or  individuals, 
engaged  in  a  like  or  similar  trade  or  business,  is  of  their  average  invested  capital,  for  such 
year,  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000    *    *  *. 

It  must  be  observed  that  the  term  "average  deduction"  is  used.  There  is  nothing  in 
section  205  which  would  justify  the  interpretation  that  the  term  means  average  percent- 
age. Such  is  the  construction  placed  upon  the  term  by  the  present  taxpayer  when  it  con- 
tends that  the  limitation  of  section  203  should  not  be  imposed  in  computing  the  deduction 
allowed  under  section  205  until  after  there  has  been  a  determination  of  the  percentage  which 
the  average  prewar  net  income  of  representative  concerns  is  of  their  average  prewar  invested 
capital.  The  deduction  allowed  to  some  corporations  in  excess  of  the  specific  exemption 
is  an  amount  equal  to  the  same  percentage  of  the  invested  capital  for  the  taxable  year 
which  the  average  amount  of  the  annual  net  income,  during  the  prewar  period,  was  of  the 
invested  capital  for  the  same  period,  but  it  does  not  follow  that  that  amount  is  allowed 
in  all  cases.  In  many  cases  the  deductions  bear  only  a  slight  relation  to  the  percentage 
of  prewar  net  income  to  prewar  invested  capital.  If  the  earnings  of  a  corporation  during 
the  prewar  period  greatly  exceeded  9  per  cent  of  its  invested  capital,  that  fact  will  not 
assist  it  any  in  getting  a  greater  deduction  than  the  maximum  provided  in  the  Act.  It  is 
only  permitted  to  take  a  deduction  of  9  per  cent  plus  the  specific  deduction  for  the  pur- 
pose of  computing  the  war  excess  profits  tax.  If,  on  the  other  hand,  the  corporation's 
earnings  were  less  than  7  per  cent  during  the  prewar  period,  it  is  entitled  to  a  deduction 
of  7  per  cent. 


Supplementary  Bulletin  Rulings. 


Sec.  312.    Art.  791.— 4 


The  ascertainment  of  the  percentage  of  income  to  capital  is  the  starting  point  in  the 
determination  of  the  deduction,  but  in  those  cases  where  the  income  of  the  taxpayer  is 
greater  than  9  per  cent  or  less  than  7  per  cent,  the  actual  amount  of  the  deduction  can 
never  be  determined  until  there  has  been  an  application  of  the  limitations  imposed  by- 
section  203.  This  is  a  very  essential  and  necessary  step.  The  deduction  is  the  amount 
finally  allowed  in  the  computation  of  the  tax  and  may  be  independent  of  the  percentage 
which  the  income  of  the  taxpayer  bears  to  its  invested  capital.  The  actual  amounts 
which  representative  concerns  engaged  in  similar  trades  or  businesses  are  permitted  to 
deduct  from  their  income  constitutes  the  basis  for  the  computation  of  the  deduction  allowed 
to  those  taxpayers  whose  cases  are  covered  by  section  205  of  the  Act.  Full  force  and 
effect  must  be  given  in  every  instance  to  the  limitations  of  section  203. 

It  is  therefore  the  opinion  of  this  office  that  the  construction  placed  upon  section  205 
by  the  taxpayer  is  erroneous,  and  further  that  the  term  "average  deduction,"  as  used  in 
said  section,  means  the  average  of  the  deductions  allowed  to  representative  concerns  after 
the  limitations  provided  in  section  203  have  been  applied. 

The  Committee  finds  itself  entirely  in  accord  with  the  opinion  of  the 
Solicitor,  and,  therefore,  recommends,  in  the  appeal  of  the  M  Company  that 
the  action  of  the  Income  Tax  Unit  in  determining  the  "average  deduction" 
under  section  205  of  the  Act  of  October  3,  1917,  by  averaging  the  deductions 
allowed  to  representative  concerns  after  the  limitations  provided  in  section 
203  of  the  Act  have  been  applied,  be  affirmed  and  the  appeal  denied. 

2 


I  ('22)-27-393:  I.  T.  1385 
Revenue  Acts  of  1917  and  1918. 

The  question  is  presented  as  to  whether  the  amount  of  the  net  incomes 
disclosed  by  the  returns  of  a  corporation  for  the  prewar  period,  and  upon 
which  the  taxes  have  been  actually  assessed  and  paid,  should  be  accepted  as 
correct  in  determining  the  average  net  income  for  the  prewar  period  for  use 
in  computing  the  profits  tax  credit  under  the  Revenue  Acts  of  1917  and  1918, 
or  whether  this  average  should  be  based  on  the  correct  amount  of  the  income 
for  each  year  of  the  prewar  period,  irrespective  of  the  amount  of  the  income 
shown  by  the  return  for  such  year. 

Held,  that  both  section  203(a)  of  the  Revenue  Act  of  1917  as  interpreted 
by  article  29  of  Regulations  41,  and  section  311(a)2  of  the  Revenue  Act  of 
1918  as  interpreted  by  article  781  of  Regulations  45,  contemplate  that  the 
average  net  income  for  the  prewar  period,  when  used  for  the  purpose  of  the 
deductions  provided  for  in  these  sections,  shall  be  the  correct  average  net 
income  for  such  period,  and  that  they  do  not  contemplate  that  the  net  incomes 
shown  by  the  returns  for  the  prewar  period  shall  be  accepted  in  determining 
the  average  net  income  for  such  period  in  the  event  that  the  amount  of  the 
net  incomes  shown  by  such  returns  are  found  to  be  incorrect. 

Where  errors  are  found  in  the  amount  of  the  net  income  shown  by  a  return 
for  any  year  of  the  prewar  period,  such  errors  should  be  corrected  before  the 
amount  of  the  average  net  income  for  the  prewar  period  is  determined,  both 
with  reference  to  the  Revenue  Act  of  1917  and  the  Revenue  Act  of  1918. 
3 


Supplementary  Bulletin  Rulings. 


2.20-22. 


Sec.  320.    Art.  801.— 1. 


Law  Section  320.— Net  Income  (1918  Act— 1(543,  ante):  (1921  Act— 1f 1027, 
post). 

Article  80L— Net  Income  (Reg.  45— f 725, [ante) :  (Reg.  62,  If  1178,  post^. 

8-19-335:  T.  B.  M.  42. 

With  respect  to  the  inquiry  whether  or  not  value  appreciation  ot  property 
taken  up  on  the  books  of  the  taxpayer  and  returned  as  a  part  of  his  taxable 
income  for  the  year  in  which  the  appreciation  was  written  up  may  be  included 
as  a  part  of  the  income  for  the  prewar  period,  a  negative  reply  must  be  given. 
Appreciation  is  not  and  has  not  been  at  any  time  under  the  income  tax  laws 
proper  taxable  income,  and  where  such  appreciation  has  been  taken  up  on  the 
books  of  the  taxpayer  the  item  must  be  excluded  in  computing  income, 
even  though  an  income  tax  has  been  paid  upon  it. 
1 


Supplementary  Bulletin  Rulingi. 


Sec.  320.    Art.  802.— 1. 


Law  Section  320. — Net  Income  (1(543). 

Article  802. — Prewar  net  income  of  affiliatedjcorporations  (1f734). 

12-21-1526:  A.  R.  M<  116. 

Articles  802  and  869  of  Regulations  45  provide  for  the  inclusion  of  the  same 
corporate  entities  in  prewar  years  for  determining  average  consolidated  prewar 
net  income  and  invested  capital  that  may  properly  be  consolidated  in  the  taxable 
years  years  1917  or  1918. 

Consideration  has  been  given  to  the  request  made  by  the  Income  Tax 
Unit  for  a  ruling  which  would  construe  articles  802  and  869  of  Regulations 
45  for  the  guidance  of  the  Unit. 

Section  330  of  the  Revenue  Act  of  1918  reads  as  follows: 

If  any  asset  of  the  trade  or  business  in  existence  both  during  the  taxable  year  and  any 
prewar  year  is  included  in  the  invested  capital  for  the  taxable  year  but  is  not  included 
in  the  invested  capital  for  such  prewar  year,  or  is  valued  on  a  different  basis  in  computing 
the  invested  capital  for  the  taxable  year  and  such  prewar  year,  respectively,  then  under 
rules  and  regulations  to  be  prescribed  by  the  Commissioner  with  the  approval  of  the  Secre- 
tary such  readjustments  shall  be  made  as  are  necessary  to  place  the  computation  of  the  invested 
capital  for  such  prewar  year  on  the  basis  employed  in  determining  the  invested  capital  for  the 
taxable  year. 

Article  869  of  Regulations  45  provides: 

The  invested  capital  of  affiliated  corporations  for  the  prewar  period  shall  be  computed  on 
the  same  basis  as  the  invested  capital  for  the  taxable  year,  except  that  where  any  one  or  more 
of  the  corporations  included  in  the  consolidation  for  the  taxable  year  were  in  existence 
during  the  prewar  period,  but  were  not  then  affiliated  as  herein  denned,  then  the  average 
consolidated  invested  capital  for  the  prewar  period  shall  be  the  average  invested  capital 
of  the  corporations  which  were  affiliated  in  the  prewar  period  plus  the  aggregate  of  the 
average  invested  capital  for  each  of  the  several  corporations  which  were  not  affiliated 
during  the  prewar  period.  Full  recognition,  however,  must  be  given  to  the  provisions  of 
section  330  of  the  Statute,  particularly  the  last  paragraph  thereof,  and  of  articles  931-934. 

Manifestly  if  the  invested  capital  of  affiliated  corporations  is  to  be  com- 
puted for  the  prewar  period  on  the  same  basis  as  invested  capital  is  computed 
for  the  taxable  year,  there  can  be  no  greater  number  of  corporate  units 
consolidated  in  the  prewar  years  than  were  entitled  to  consolidation  in  the 
taxable  year.  It  is  also  noted  that  consolidation  of  similar  corporate  units 
is  determined  by  the  inclusion  in  the  prewar  period  of  the  aggregate  of  the 
average  invested  capital  for  each  of  the  several  corporations  not  affiliated 
during  the  prewar  period  but  affiliated  during  the  taxable  year.  This  further 
provision  only  emphasizes  the  intent  of  the  regulation  to  determine  affiliation 
of  the  prewar  years  by  the  affiliation  of  the  taxable  years. 

Article  802  of  Regulations  45  reads: 

The  consolidated  net  income  of  affiliated  corporations  for  the  prewar  period  shall  be 
the  average  consolidated  net  income  for  the  prewar  years  of  such  of  the  several  corpora- 
tions included  in  the  consolidation  for  the  taxable  year  as  were  affiliated  during  the  pre- 
war period,  plus  the  aggregate  of  the  average  net  income  for  each  of  the  corporations  not 
affiliated  during  the  prewar  period  which  were  in  existence  during  all  of  the  prewar  period 
or  during  at  least  one  full  year  within  the  prewar  period.  The  net  income  of  a  subsidiary 
corporation  organized  during  the  prewar  period  by  an  existing  corporation  shall  also  be 
included. 

This  article  determining  the  basis  of  consolidated  prewar  net  income  is, 
in  effect,  the  same  in  principle  as  article  869  above  quoted,  which  determines 
consolidated  invested  capital  for  the  prewar  period.  The  expression  "such  of 
the  several  corporations  included  in  the  consolidation  for  the  taxable  year  as 
were  affiliated  during  the  prewar  period"  identifies  the  affiliated  corporations  of 
the  prewar  period  and  clearly  determines  that  the  corporate  entities  of  the 
consolidated  unit  for  each  of  the  prewar  years  are  those  corporate  entities 
affiliated  in  the  taxable  year.  This  is  only  emphasized  by  the  further  provi- 
sion for  inclusion  of  the  aggregate  of  the  average  net  income  of  such  corpo- 


Supplementary  Bulletin  Rulings. 


Sec.  320.    Art.  802  — 2. 

.1— .£08  .tiA    .OSt  .1*2 

rations  not  affiliated  during  the  prewar  period  but  affiliated  during  the 
taxable  year,  thereby  clearly  determining,  as  above  stated,  that  the 
consolidated  unit  of  the  prewar  year  must  be  composed  of  the  same 
corporate  units  as  are  included  in  the  consolidated  unit  of  the  taxable  year. 
If  this  condition  did  not  prevail,  there  would  be  no  reason  for  disallowing 
any  of  the  corporate  units  affiliated  during  the  prewar  years  but  operative 
as  separate  or  otherwise  affiliated  units  during  the  taxable  years  1917  or  1918 
from  claiming  the  same  consolidated  condition  for  the  prewar  years  to  deter- 
mine excess  and  war  profits  credits  of  each  company  or  each  group  of  com- 
panies properly  affiliated  during  the  taxable  years. 

The  Committee  is  accordingly  of  the  opinion  that  there  can  be  taken  into 
consideration  in  the  prewar  years  only  such  corporate  units  for  the  purpose 
of  determining  average  prewar  income  and  average  prewar  invested  capital  as 
may  be  properly  consolidated  into  one  corporate  unit  for  the  taxable  vear 
1917  or  1918. 


Supplementary 


Rulletin 


Rulings. 


2-20-22. 

Sec.  325.    Art.  811.— 1. 

Law  Section  325.— Terms  Relating  to  Invested  Capital  (1918  Act— r  548, 
ante):  (1921  Act— If  1028,  post). 
Article  811. — Intangible  and  Tangible  Property  (Reg.  45 — ^738,  ante): 
(Reg.  62— <U179,  post). 

33-20-1140:  O.  D.  635. 

A  corporation  acquired  a  contract  and  leasehold,  paying  therefor  with  an 
issue  of  stock  in  the  sum  of  500*  dollars.  There  was  no  definite  division  or 
assignment  of  the  amount  paid  between  the  contract  and  leasehold.  At  the 
time  of  acquiring  these  rights  the  amount  paid  was  charged  off  against 
surplus;  it  is  now  sought  to  restore  this  sum  to  surplus  and  a  ruling  is  desired 
whether  the  contract  and  leasehold  are  to  be  treated  as  tangible  or  intangible 
property. 

Held,  that  an  unperformed  contract  to  furnish  manufactured  products 
represents  no  rights  in  tangible  property  which  would  entitle  it  to  be  regarded 
as  deriving  its  value  chiefly  therefrom.  On  the  contrary,  the  value  of  the 
contract  is  of  an  intangible  nature,  contingent  upon  the  performance  of  its 
terms  and  the  realization  of  the  anticipated  profit.  The  intangible  rights 
under  such  a  contract  would,  therefore,  be  subject  to  the  limitation  contained 
in  section  207  of  the  Revenue  Act  of  1917,  and  section  326  of  the  Revenue 
Act  of  1918,  in  the  case  of  intangible  property  purchased  with  corporate 
stock.  On  the  other  hand  a  leasehold  is  tangible  property,  and  may  be 
included  in  invested  capita) ,  under  either  the  1917  or  1918  Act,  at  its  actual 
cash  value  when  paid  in  for  stock,  such  value  in  no  case  to  exceed  the  par 
value  of  the  stock  paid  therefor,  subject  to  qualifications  not  relevant  in  this 
case. 
1 


(See  47-21-1937:  sec.  326,  art.  840.)    Circulation  structure  of  a  news- 
paper. 
2 


Supplementary  Bulletin  Rulings 


2-2  '-22. 

Sec.  325.    Art.  812.— 1. 

Law  Section  325.— Terms  Relating  to  Invested  Capital  (1918  Act— •  548 
ante):  (1921  Act— !|  1028,  post). 
Article  812. — Borrowed  Capital:  Securities  (Reg.  45— <[739,  ante): 
(Reg,  62— «'  1180,  post). 

27-19-609:  S.  1200. 

Preferred  stock,  if  in  the  records  of  the  corporation  it  is  declared  to  be  part  of  its 
capital  stock,  though  convertible  into  first-mortgage  bonds  of  even  date  therewith, 
is  inferior,  on  a  distribution  of  assets  to  pay  debts,  to  the  rights  of  general  creditors, 
and  is  to  be  treated  as  invested  capital  so  long  as  it  is  not  converted. 

Opinion  is  requested  as  to  the  status  of  stock  designated  as  "first  preferred 
stock"  under  the  following  sections  of  the  Revenue  Act  of  1918. 
Section  325  (a)  provides: 

The  term  "borrowed  capital"  means  money  or  other  property  borrowed,  whether 
represented  by  bonds,  notes,  open  accounts,  or  otherwise. 

Section  326  (b)  provides: 

As  used  in  this  title,  the  term  "invested  capital"  does  not  include  borrowed  capital. 

The  following  facts  are  presented:  The  MaCompany,  a  corporation  by  an 
amendment  to  its  articles  of  incorporation  and  pursuant  to  a  resolution  of 
its  stockholders  duly  adopted,  increased  the  amount  of  its  capital  stock  from 
I8x  dollars  to  the  sum  of  45a;  dollars,  of  which  y  shares  were  to  be  preferred, 
Certificates  of  "first  preferred  stock"  were  issued,  which  contained  a  provision 
that  the  shares  of  stock  should  be  convertible  at  the  election  of  the  holder 
into  first  mortgage  gold  bonds.  At  the  time  the  preferred  stock  was  issued, 
the  directors  provided  for  an  issue  of  coupon  bonds,  secured  by  a  first  mort- 
gage or  trust  deed.  Said  bonds  and  trust  deed  were  of  even  date  with  said 
certificates  of  preferred  stock.  The  trust  deed  was  executed,  delivered  to 
the  trustee  and  placed  on  record.  It  contains  the  provision  that  "said  bonds 
shall  be  held  by  said  trustee  and  its  successors  until  issued  and  shall  be  issued 
and  used  only  for  the  purpose  of  being  exchanged,  par  for  par,  for  shares  of 
preferred  stock." 

The  specific  question  is: 

Is  first  preferred  stock  which,  at  the  election  of  the  holder,  is  convertible 
into  bonds,  of  even  date  therewith  and  secured  by  a  first  mortgage  trust 
deed — such  bonds  to  be  issued  only  for  the  purpose  of  converting  such  pre- 
ferred stock — to  be  treated  as  invested  capital  or  as  borrowed  capital? 

The  rights  of  holders  of  preferred  stock  which  represents  a  part  of  the 
capital  stock  of  a  corporation,  and  is  secured  by  a  trust  deed  or  otherwise, 
are  inferior  to  the  rights  of  general  creditors.  (Westerfield-Bonte  v.  Burnett, 
Ky.,  195  S.  W.  479;  Miller,  executor,  v.  Batterman,  treasurer,  47  Ohio  St. 
141,  24  N.  E.  146;  Booth  v.  Union  Fiber  Co.,  Minn.,  162  N.  W.  677;  same 
case  on  rehearing,  171  N.  W.  307;  Spencer  v.  Smith  et  al.,  201  Fed.  674; 
Armstrong  v.  Union  Trust  &  Savings  Bank,  248  Fed.  269.)  Whether 
persons  who  contribute  or  make  payments  to  a  corporation  are  stockholders 
or  creditors  of  the  company  is  a  question  to  be  determined  by  the  intention 
of  the  parties  as  disclosed  by  the  circumstances.  (Miller,  executor,  v. 
Batterman,  treasurer,  47  Ohio  St.  141,  24  N.  E.  496.)  Persons  who  negotiate 
for  and  acquire  preferred  stock  "designed  as,"  and  "declared  to  be,"  a  part 
of  the  capital  stock  of  a  corporation  are  held  to  full  knowledge  of  the  char- 
acter of  their  investments.  From  such  facts  it  is  conclusively  presumed 
that  the  parties  intend  such  persons  to  be  stockholders — preferred  stock- 
holders— and  not  creditors  (Armstrong  v.  Union  Trust  &  Savings  Bank, 
248  Fed.  268). 

In  the  case  of  Spencer  v.  Smith  et  al.,  201  Fed.  647,  the  court  held  that  the 
rights  of  general  creditors  were  superior  to  those  of  a  preferred  stockholder, 

Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  812.— 2. 


whose  certificate  contained  an  agreement  by  the  corporation  to  redeem  the 
amount  thereof  at  a  specified  time,  which  agreement  was  presently  secured 
by  a  first  mortgage  lien  of  the  corporate  property.  Assuming,  in  the  instant 
case,  that  the  mortgage  bonds  and  trust  deed  securing  same  were  in  effect  a 
present  security  for  such  stock,  the  case  would  then  be  no  stronger  than  that 
under  consideration  in  Spencer  v.  Smith  et  al.,  above,  at  least  until  such 
stock  is  converted  into  bonds. 

It  appears  that  the  taxpayer,  by  amending  its  articles  of  incorporation, 
fixed  its  capital  stock  at  45x  dollars,  of  which  y  shares  were  to  be  preferred. 
The  first  preferred  stock  was  therefore  designed  as,  and  was  directly  declared  1 
to  be,  a  part  of  the  capital  stock  of  the  corporation.  These  facts  are  identical, 
apart  from  the  amounts  stated,  with  the  facts  in  the  case  of  Armstrong  v. 
Union  Trust  &  Savings  Bank,  cited  above.  Upon  a  purchase  of  stock,  under 
these  circumstances>  the  intention  of  the  parties  is  conclusively  presumed  to 
be  that  such  purchasers  become  stockholders  and,  on  a  distribution  of  assets 
to  pay  debts,  their  rights  are  inferior  to  creditors. 

It  is  concluded  that  the  preferred  stock  under  consideration  in  the  instant 
case  is  part  of  the  capital  stock  of  the  corporation  and  that  the  rights  of  the 
holders  thereof  are  inferior  to  the  rights  of  general  creditors.  Determined 
by  the  rule  stated  in  article  812,  Regulations  45,  such  preferred  stock  is,  there- 
fore, invested  capital  and  not  borrowed  capital. 

It  is  held  that  preferred  stock,  if  in  the  records  of  the  corporation  it  is 
declared  to  be  part  of  its  capital  stock,  though  convertible  into  first  mortgage 
bonds  of  even  date  therewith,  is  inferior,  on  a  distribjtion  of  assets  to  pay 
debts,  to  the  rights  of  general  creditors,  and  is  to  be  treated  as  invested 
capital  so  long  as  it  is  not  converted. 
1 


21-20-962:  A.  R.  R.  116. 

REVENUE  ACT  OF  1917. 
Held  in  the  matter  of  the  appeal  of  the  0  Co  npany  (Inc.),  that  the  debenture 
bonds  in  the  amount  of  lOx  dollars  can  not  be  included  in  the  computation  of  it? 
invested  capital. 

The  Committee  on  Appeals  and  Review  has  had  under  consideration 
the  appeal  of  the  0  Company  from  a  decision  of  the  Income  Tax  Unit  elim- 
inating an  item  of  10*  dollars  from  the  invested  capital  of  this  corporation. 

It  appears  that  prior  to  1911  the  business  was  conducted  as  a  copartner- 
ship. The  copartnership  transferred  its  assets  to  the  O  Company  and 
received  in  payment  therefor  debenture  bonds  in  the  amount  of  10*  dollars, 
payable  in  30  years,  bearing  interest  at  the  rate  of  6  per  cent  per  annum. 
The  copartnership  also  received  other  good  and  valuable  consideration  in  the 
form  of  common  stock  in  the  amount  of  20:v  dollars,  which  was  issued  against 
good  will,  trade-marks,  etc.  The  debenture  bonds  issued  in  payment  for  the 
assets  of  the  copartnership  were  delivered  to  the  partners  pro  rata.  The 
common  stock  issued  was  distributed  to  the  partners  in  the  same  ratio  a<  the 
bonds.  The  debenture  bonds  were  issued  in  payment  for  the  tangible  at  ets 
of  the  copartnership,  which  were  worth  approximately  11*  dollars,  as  set 
forth  in  a  schedule  attached  to  the  brief  of  the  corporation,  and  the  common 
stock  was  issued  in  payment  for  good  will,  trade-marks,  etc. 

The  revenue  agent,  under  date  of  August  21,  1919,  submitted  ^  report  in 
which  he  recommended  that  additional  taxes  be  assessed  against  the  0 
Company  for  the  years  1916  and  1917. 

it  was  contended  that  since  the  resolution  of  acceptance  of  the  tern.-  o: 
the  sale  by  the  O  Company  distinctly  sets  forth  that  the  bonds  should  be 

Supplementary  Bulletin  Rulings. 


.SI8  .UA 


Sec.  325.    Art.  812.— 3. 


"subject  to  all  rights  of  creditors  of  said  corporation  now  existing  and  at 
all  times  existing  during  the  term  of  said  bonds, "  such  bonds  are  in  fact  no 
more  than  6  per  cent  preferred  stock  and  that  the  property  for  which  the 
debenture  bonds  were  issued  was  already  invested  in  the  business  and  fully 
paid  for  and,  therefore,  the  situation  was  not  one  where  the  corporation 
borrowed  money  against  the  issuance  of  debenture  bonds  and  subsequently 
purchased  goods  or  developed  its  business. 

It  may  be  conceded  that  the  provision  of  the  offer  of  sale  of  the  partner- 
ship property  and  the  resolution  of  acceptance  thereof,  which  provided  that 
the  bonds  should  be  "subject  to  all  rights  of  creditors  of  said  corporation 
now  existing  and  at  all  times  existing  during  the  terms  of  said  bonds,"  was 
fully  operative  (because  it  constituted  one  of  the  conditions  on  which  they 
were  issued)  as  between  the  original  bondholders  having  actual  notice  and 
knowledge  thereof,  and  who  it  appears  have  always  retained  ownership 
thereof,  thus  eliminating  from  consideration  the  situation  resulting  if  the 
bonds  had  been  held  by  innocent  third  parties.  The  facts  therefore 
appear  in  their  most  favorable  aspects  to  the  taxpayers.  The  attorneys 
submitted  further  to  substantiate  the  contention  that  these  bonds  were 
nothing  more  than  preferred  stock,  that  the  debentures  were  in  1918  turned 
in  by  the  owners  of  the  O  Company  and  preferred  stock  was  issued  in  lien 
thereof  to  the  respective  owners  of  the  bonds.  This,  it  is  urged,  shows  that 
the  owners  of  these  bonds  recognized  that  they  were  subordinate  both  as  to 
payment  of  principal  and  interest  to  the  rights  of  the  general  creditors  of  the 
corporation. 

Where  a  corporation  purchased  certain  assets,  paying  therefor  by  creating 
a  bonded  debt  drawing  6  per  cent  interest  peranum,  which,  though  a  subordi- 
nate lien  to  claims  of  general  creditors  of  the  corporation,  was  nevertheless 
superior  to  the  rights  of  stockholders  of  the  corporation,  so  that  on  a  dissolu- 
tion such  bonds  would  be  first  paid  before  the  stockholders  could  be  admitted 
to  share  in  the  assets  of  the  corporation,  the  bonds  represent  borrowed 
money  and  not  invested  capital  within  the  meaning  of  section  207,  Revenue 
Act  of  1917. 

Article  44(b)  of  Regulations  41  provides  that — 

The  term  "money  or  other  property  borrowed"  as  used  in  section  207  and  these  regu- 
lations includes  not  only  cash  or  other  borrowed  property  which  can  be  identified  as  such, 
but  current  liabilities  and  temporary  indebtedness  of  all  i  inds,  and  any  permanent  indebted- 
ness upon  which  the  taxpayer  is  en  itled  to  an  interest  deduction  in  computing  net  income. 
A  corporation  which  under  the  income  tax  law  is  allowed  to  deduct  only  a  part  of  the  entire 
interest  paid  upon  its  indebtedness,  may  include  in  its  invested  capital  such  a  proportion 
of  its  permanent  indebtedness  as  the  amount  of  interest  upon  such  indebtedness  which  the 
corporation  is  not  allowed  to  deduct  is  of  the  total  amount  of  interest  paid  upon  3uch  indebt- 
edness during  the  taxable  year. 

Section  325(a)  of  the  Revenue  Act  of  1918  provides  that  as  used  in  this 
title: 

The  term  "borrowed  capital"  means  money  or  other  property  borrowed,  whether  repre- 
sented by  bonds,  notes,  open  accounts,  or  otherwise. 

Article  812  of  Regulations  45  provides  that — 

Any  interest  in  a  corporation  represented  by  bonds,  debentures,  or  other  securities, 
by  whatever  name  called,  including  so-called  preferred  stock,  if  with  respect  to  the  payment 
of  either  interest  or  principal  it  ranks  with  or  prior  to  the  interest  of  the  general  creditors,  is 
borrowed  capital  and  can  not  be  included  in  computing  invested  capital.  Any  such  pre- 
ferred stock  may,  however,  be  so  included  if  it  is  deferred  with  respect  to  the  payment  of 
both  interest  and  principal  to  the  interest  of  the  general  creditors. 

In  general,  it  might  be  said  that  it  is  always  a  question  of  fact  whether 
a  given  amount  paid  or  left  in  the  business  of  a  corporation  constitutes 
borrowed  capital  or  paid-in  surplus.  The  general  principle  is  that  if  interest 
is  paid,  or  is  to  be  paid,  on  any  such  amount,  or  if  the  stockholders'  or  officers' 


Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  812. — 4. 


right  to  repayment  of  any  such  amount  ranks  with  or  before  that  of  the  general 
creditors,  the  amount  so  left  with  the  corporation  must  be  treated  as  bor- 
rowed capital. 

In  the  instant  case,  the  bonds  were  issued  in  payment  for  property,  interest 
has  been  regularly  paid  each  year  and  has  been  deducted  by  the  corporation 
in  computing  its  net  income  for  each  year  up  to  and  including  1916,  but  no 
interest  deduction  on  account  of  this  indebtedness  was  claimed  for  1917, 
even  though  the  corporation  actually  paid  6  per  cent  on  the  outstanding 
debenture  bonds. 

The  Committee  is  of  the  opinion  that  the  O  Company  is  not  entitled  to 
include  in  the  computation  of  its  invested  capital  the  item  of  debenture  bonds 
on  which  interest  was  paid  but  not  deducted  in  the  computation  of  the  in- 
vested capital  for  1917.  The  corporation  will,  however,  be  entitled  to  a 
deduction  in  computing  its  net  income  of  the  interest  so  paid  on  these  bonds 
within  the  statutory  limitation  with  respect  to  the  payment  of  interest  for 
the  year  1917. 

The  intent  of  the  parties  in  this  case  was  truly  reflected  in  the  form  in 
which  they  organized  their  corporate  business.  They  chose  to  organize  and 
carry  it  on  by  creating  a  corporate  debt  to  be  repaid  at  a  future  date,  plus  a 
fixed  rate  of  interest  evidenced  by  the  debenture  bonds  secured  by  a  lien  on 
corporate  assets,  subordinate  to  claims  of  its  general  creditors.  Bondholders 
have  different  rights  or  interests  in  corporate  business  and  assets  than  would 
preferred  stockholders.  True,  preferred  stock  might  have  been  issued  in  lieu 
thereof,  but  the  parties  elected  otherwise,  and  they  are  bound  by  their 
act  so  long  as  the  bonds  in  question  are  outstanding.  The  subordination  of 
the  lien  of  the  bonds  to  claims  of  general  creditors  is  not  enough  to  render 
the  bonds  the  equivalent  of  preferred  stock.  Nor  is  the  mere  fact  that  pos- 
sibly in  an  effort  to  characterize  the  bonds  as  the  equivalent  of  preferred 
stock  the  corporation  did  not  deduct  interest  thereon  in  filing  its  return  for 
1917  sufficient  to  change  or  fix  their  status. 

A  memorandum  supplementing  the  original  brief  has  been  filed  in  which 
the  attorneys  refer  to  and  quote  from  certain  court  decisions  to  the  effect 
that,  as  between  the  corporation  and  the  original  purchasers,  the  bonds  were 
subordinate  both  as  to  the  payment  of  principal  and  interest  to  the  rights 
of  the  general  creditors.  The  bonds  in  question  are  an  obligation  of  the 
corporation  to  pay  and  in  the  judgment  of  the  Committee  should  be  classed 
as  "borrowed  capitaL', 

The  Committee  therefore  recommends  that  the  decision  of  the  Income 
Tax  Unit  disallowing  the  item  of  10*  dollars  from  the  invested  capital  of  the 
0  Company  be  sustained  and  that  the  case  be  otherwise  closed  in  accordance 
with  this  recommendation. 
2 


33-20-1142:  A.  R.  R.  237. 

Recommended  in  the  appeal  of  the  M  Company  that  the  decision  of  the  Income 
Tax  Unit  holding  that  amounts  received  from  the  sale  of  so-called  debenture 
stock  constitute  part  of  the  invested  capital  of  the  corporation  and  that  the 
interest  paid  thereon  does  not  constitute  an  allowable  deduction  in  the  computation 
of  net  income,  be  reversed. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  a  decision  of  the  Income  Tax  Unit  holding  that  the  amounts  received 
from  the  sale  of  .^-called  debenture  stock  shall  be  treated  as  part  of  the 


Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  812.— 5. 


invested  capital  and  that  the  interest  paid  thereon  can  not  be  deducted  in  the 
computation  of  net  income. 

The  ruling  in  question  was  as  follows: 

It  seems  clearly  to  be  the  intent  of  the  corporation  to  subordinate  the  payment  of  the 
principal  of  the  debenture  stock  in  question  to  the  claims  of  the  general  creditors. 

You  are  advised,  therefore,  that  the  amount  received  from  the  sale  of  these  stocks 
constitutes  a  part  of  the  invested  capital  of  the  M  Company,  and  must  be  included  in  the 
computation  of  that  item.  The  company  is  not.  permitted,  in  its  option,  to  treat  this  amount 
as  borrowed  capital. 

You  are  advised,  further,  that  the  payments  of  interest  on  these  stocks  in  reality  are 
dividends,  and  as  such  are  not  to  be  deducted  by  the  corporation  in  computing  its  taxable 
net  income. 

It  is  from  this  rule  that  the  corporation  has  appealed  to  the  Committee. 
Since  the  questions  raised  by  the  corporation  were  questions  of  law  and  not 
of  fact,  the  Committee  requested  advice  from  the  Solicitor  and  under  date  of 
July  7,  1920,  the  following  opinion  was  received: 

The  war  profits  and  excess  profits  tax,  being  Title  III  of  the  Revenue  Act  of  1918» 
provides,  in  part,  as  follows: 

"Sec.  325(a)  That  as  used  in  this  title — 

The  term  'borrowed  capital'  means  money  or  other  property  borrowed,  whether  repre- 
sented by  bonds,  notes,  open  accounts,  or  otherwise;    *    *  * 

Sec.  326(b)  As  used  in  this  title  the  term  'invested  capital'  does  not  include  borrowed 
capital.    *    *  *" 

Elsewhere  in  the  Act  it  is  provided — 

"Sec.  234(a).    That  in  computing  the  net  income  of  a  corporation  subject  to  the  tax 

imposed  by  section  230  there  shall  be  allowed  as  deductions: 
•    *  * 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  indebtedness,  *  *  V 
■'The  i\i  Company  was  duly  incorporated  under  the  laws  of  the  State  of  Delaware  under 
a  charter  which  provided  that  its  capital  stock  should  be  divided  into  x  shares  without 
nominal  or  par  value,  and  which  authorized  the  corporation  under  the  general  power  to 
borrow  money  to  issue  a  form  of  obligation  in  the  nature  of  certificates  of  indebtedness  to 
the  extent  of  lOOx  dollars,  which  should  be  known  as  debenture  stock.  Pursuant  to  the 
latter  named  power  the  M.  Company  issued  for  cash  to  the  face  value  thereof  100*  dollars 
of  such  debenture  stock,  represented  by  certificates  reading,  in  part,  as  follows: 

"This  is  to  Certify  that  the  M  Company    *    *    *    hereby  acknowledges  itself 

indebted  to  ,  in  the  sum  of  Dollars,  principal  payable  at  the 

expiration  of  the  corporate  existence  of  the  corporation,  interest  at  the  rate  of  y  per  cent 

per  annum  payable  semiannually  on  the  first  days  of  and  in  each  year 

in  gold  coin  of  the  United  States  of  America,  of  the  present  standard  of  weight  and  fineness, 

represented  by  shares  of  debenture  stock  of  the  corporation,  each  of  the  par 

value  of  one  hundred  dollars. 

"In  the  payment  of  their  several  claims,  all  creditors,  other  than  the  stockholders  of 
the  corporation,  shall  rank  superior  to  the  holders  of  the  debenture  stock,  but  all  holders  of 
debenture  stock  shall  rank  pari  passu  with  each  other,  and  superior  to  the  stockholders 
of  the  corporation,  with  respect  to  their  share  stock. 

"The  corporation  shall,  nevertheless,  have  the  right,  the  interest  on  the  debenture  stock 
having  been  paid,  from  time  to  time  to  declare  and  pay  dividends  out  of  the  net  earnings, 
upon  the  stock  or  share  capital  of  the  corporation. 

"The  debenture  stock  shall  be  subject  to  redemption  by  the  corporation  upon  any 
interest  date,  upon  the  affirmative  vote  of  two-thirds  in  amount  of  the  capital  stock  of 
the  corporation  then  issued  and  outstanding,  at  the  rate  of  one  hundred  twenty-five  dollars 
per  share  for  each  one  hundred  dollars  of  the  principal  or  par  value,  plus  all  unpaid  accrued 
interest,  including  interest  at  the  aforesaid  rate  of  y  per  cent  per  annum  up  to  the  time  of 
redemption. 

"Neither  the  corporation  nor  its  shareholders  shall  have  power  to  mortgage  the  property 
or  franchises  of  the  corporation,  except  by  the  written  consent  of  the  then  registered 
holders  of  at  least  two-thirds  in  amount  of  the  debenture  stock.    *    *  *" 

The  company  in  its  return  of  annual  net  income  under  the  Revenue  Act  of  1918,  deducted 
from  gross  income,  among  others,  the  amount  of  interest  paid  by  it  upon  the  above  men- 
tioned certificates  of  debenture  stock.  This  deduction  was  disallowed  by  the  Income  Tax 
Unit  on  the  ground  that  the  holders  of  such  stock  were  in  reality  preferred  stockholders, 
and  amounts  contributed  by  them  were  part  of  the  invested  capital  of  the  corporation  and 
that  interest  paid  was  in  reality  in  the  nature  of  dividends. 

Recognizing  that  the  true  character  of  an  interest  in  a  corporation  is  not  determined 
solely  by  its  name,  article  812  of  Regulations  45,  provides: 

"Any  interest  in  a  corporation  represented  by  bonds,  debentures  or  other  securities, 
Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  81°  —6. 


by  whatever  name  called,  including  so-called  preferred  stock,  if  with  respect  to  the  payment 
of  either  interest  or  principal  it  ranks  with  or  prior  to  the  interest  of  the  ieneral  creditors, 
is  borrowed  capital  and  cannot  be  included  in  computing  invested  capital.  Any  such  pre- 
ferred stock  may,  however,  be  so  included  if  it  is  deferred  with  respect  to  the  payment  of 
both  interest  and  principal  to  the  interest  of  the  general  creditors." 

If  the  instrument  in  question  creates  or  evidences  a  debt,  it  will  be  given  the  character- 
istics of  such  obligation,  regardless  of  its  name.  Spencer  v.  Smith,  C.  C.  A.  8th  Circ.  201 
Fed.  647;   Heller  v.  Marine  Bank,  89  Md.  601. 

In  the  latter  named  case  the  court,  passing  upon  the  question  whether  certain  so-called 
preferred  stock  was  in  fact  entitled  to  priority,  stated  the  general  rule  as  follows: 

"The  question  in  such  cases  is,  not  what  did  the  parties  call  it,  but  what  do  the  facts 
and  circumstances  require  the  court  to  call  it.  Courts  are  not  influenced  by  mere  names. 
They  look  beyond  these  and  give  to  the  subject  dealt  with  the  character — the  status — 
which  its  properties  denote  it  possesses.  The  qualities  and  properties  of  a  thing  are  its 
essentials — they  define  and  mark  what  it  is — the  name  is  purely  accidental — it  is  no  part 
of  the  thing  named." 

The  term  "debenture"  is  well  known  in  England  to  describe  any  instrument  issued  by  a 
corporation  which  creates  or  acknowledges  a  debt.    Cook  on  Corporations,  6th  ed.  2709. 

"Debenture  stock  is  of  the  same  nature  as  ordinary  debentures,  except  that  instead  of 
each  bond  securing  a  definite  amount,  the  whole  sum  secured  is  treated  as  a  single  stock, 
and  bonds  are  issued  declaring  the  holder  to  be  entitled  to  a  definite  sum,  part  of  this 
stock.  This  sum  is  not  necessarily  a  round  sum,  but  may  be  for  any  number  of  pounds,  it 
may  include  fractions  of  a  pound  unless  limitation  is  made  in  that  respect.  A  debenture 
stock  may  be  repayable  at  a  fixed  date,  or  may  be  irredeemable,  according  to  the  deed 
creating  it,  and  may  be  secured  in  any  manner  in  which  a  debenture  may  be  secured." 
See  Lindley's  Company  Law,  195. 

As  used  in  this  country  the  term  "stock"  does  not  mean  a  debt,  but  simply  an  interest 
in  the  corporate  enterprise. 

Examining  the  provisions  of  the  certificates  of  so-called  debenture  stock  in  question,  it 
leemg  clear  that  the  parties  in  interest  intended  to  and  did  create  or  acknowledge  a  definite 
obligation  on  the  part  of  the  corporation  to  repay  a  specified  sum  of  money.  In  other 
words,  the  certificates  in  question  are  more  nearly  related  to  bonds  or  notes  or  certificates 
of  indebtedness  than  to  certificates  of  preferred  stock.  It  will  be  noted  that  the  certificates 
state  that  the  corporation  is  indebted  in  a  specified  amount  to  the  holders  thereof  payable 
at  the  expiration  of  the  corporate  existence.  Irredeemable  notes  or  bonds  are  of  compara- 
tively common  occurrence  in  England,  although  not  so  well  known  in  this  country.  There 
are  instances,  however,  of  such  perpetual  debts,  and  courts  have  held  that  the  character  of 
such  obligations  is  not  affected  by  the  fact  that  they  are  not  redeemable  at  a  fixed  time. 
Thus,  in  Philadelphia  c5  Reading  Railroad  Company  v.  Stichter,  11  Weekly  Notes  of  Cases, 
Pennsylvania,  325,  it  was  held  that  it  was  not  ultra  vires  for  a  railroad  company  to  raise 
funds  by  issuing  bonds  at  a  large  discount.  It  will  be  noted  that  payment  of  the  principal 
is  subordinated  to  other  indebtedness  cf  the  company.  This  feature,  however,  does  not 
preclude  regarding  the  obligation  r.3  a  debt,  for  I  know  of  no  principle  of  law  which  prevents 
corporations  from  creating  priorities  among  creditors.  It  should  be  noted  that  some 
security  is  given  to  the  holders  of  these  certificates  by  the  provision  which  prevents  the 
corporation  from  mortgaging  its  property  or  franchises  without  the  written  consent  oi  at 
least  two-thirds  of  the  holders  of  such  debenture  stock.  As  corollary  there  are  no  indications 
that  the  parties  intended  the  holders  of  these  certificates  to  be  stockholders.  In  the  first 
place,  the  certificates  are  issued  under  a  power  granted  in  the  charter  to  borrow  money,and 
aot  to  issue  stock. 

It  is  elementary  that  a  corporation  Jannot  issue  stock  except  under  authorization  of  its 
charter.  See  Cook  on  Corporations,  6th  ed.  268.  Secondly,  the  certificates  provide  speci- 
fically for  the  payment  of  interest  at  a  specified  rate  per  annum.  No  qualification  is  found 
in  the  charter  or  in  the  by-laws  limiting  this  obligation,  and  there  is  no  reason  why  the  holders 
of  such  certificates  cannot  sue  for  the  interest  if  default  is  made  in  payment.  This,  of 
course,  is  foreign  to  the  idea  of  preferred  stock,  for  it  is  well  settled  that  a  preferred  stock- 
holder is  not  a  creditor  of  the  corporation.    Warren  v.  King,  108  U.  S.  389. 

A  preferred  stockholder  may  not  sue  for  dividends  unless  they  are  declared,  and  a  pro- 
vision guaranteeing  the  payment  of  dividends  is  absolutely  void.  Cook  on  Corporations, 
6th  ed.  sec.  271. 

Finally,  there  is  nowhere  to  be  found  in  the  charter  or  in  the  by-laws  any  indication  of 
an  intent  that  the  holders  of  such  certificates  shall  share  in  the  assets  of  a  corporation  over 
and  above  the  face  amount  of  their  interest. 

As  stated  by  attorneys  for  the  M  Company: 

"The  holders  of  such  debenture  stock  certificates  do  not  have  any  share  in  the  profits 

of  the  business  in  any  way  whatsoever,  irrespective  of  the  amount  of  profits  made  in  any 
one  year  or  over  a  score  of  years,  and  no  dividends  could  be  declared  on  these  certificates 
of  indebtedness.    And  in  the  event  of  the  dissolution  of  the  company  if  there  should  be 


Supplementary  Bulletin  Rulines. 


Sec.  325.    Art.  812.— 7. 


assets  remaining  at  that  time,  more  than  sufficient  to  repay  the  face  value  of  the  certificate! 
of  obligation  called  debenture  stock,  as  well  as  the  capital  contributed  by  the  holders  of  the 
ordinary  capital  stock,  the  debenture  stock lolder*  would  not  share  in  this  excess.  By  the 
express  terms  of  the  charter  the  holder  of  a  debenture  stock  certficate  obtains  no  more  at 
any  time  than  the  amount  of  the  principal  with  interest  thereon  payable  semiannually." 

It  is  held,  therefore,  that  whether  or  not  amounts  received  by  a  corporation  upon  the 
•ale  of  so-called  debenture  stock  constitute  invested  caoital  or  borrowed  capital  depends 
upon  the  rights  and  powers  enjoyed  oy  the  holders  of  such  stock  and  the  obligations  with 
respect  thereto  undertaken  by  the  corporation;  that  where  so-called  debenture  stock  it 
issued  by  a  corporation  for  cash  or  Droperty  under  a  power  granted  by  tie  charter  to  borrow 
money,  and  the  certificates  of  such  stock  contain  an  agreement  on  t  le  part  of  the  corporation 
to  repay  the  face  amount  thereof  upon  dissolution,  and  to  pay  interest  thereon  from  time 
to  time,  at  a  certain  rate  per  cent  per  annum;  and  where  it  appears  that  the  claim  of  such 
debenture  stockholders  will,  upon  dissolution  of  the  corporation,  be  subordinate  to  tie 
claims  of  general  creditors  but  superior  to  the  claims  of  the  ordinary  stockholders;  and 
where  it  further  appears  that  the  holders  of  such  certificates  exercise  no  voice  in  the  control 
or  management  of  the  corporation,  the  amounts  received  for  the  sale  of  such  stock  con- 
stitute borrowed  capital,  and  the  interest  paid  thereon,  from  tine  to  time,  by  the  corpo* 
ration  is  properly  deductible  as  a  business  expense. 

In  view  of  the  foregoing  advice  from  the  Solicitor,  the  Committee  recom- 
mends that  the  action  of  the  Income  Tax  Unit  be  reversed  and  that  the 
amounts  received  by  the  M  Company  from  the  sale  of  the  so-called  debenture 
stock  be  treated  as  borrowed  capital,  and  that  the  interest  paid  thereon  be 
allowed  as  a  deduction  in  computing  the  net  income. 
3 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  325.    Art.  813.— 1. 

Law  Section  325.— Terms  Relating  to  Invested  Capital  (1918  Act— f548, 
ante):  (1921  Act— «|1028,  post). 
Article  813. — Borrowed  Capital — Amounts  Left  in  Business  (Reg.  45— 
^740,  ante):  (Reg.  62,  <|1181,  post). 

23-19-552:  T.  B.  M.  82. 

Excess  profits  tax — Surplus  paid  in  by  stockholders. 

The  M  Company  was  organized  in  1910  with  a  capital  stock  of  lO.r 
dollars.  Such  stock  was  subscribed  for  as  follows:  A,  all  but  2  shares; 
B,  1  share;  and  C,  1  share.  All  the  capital  represented  by  this  stock  was 
actually  furnished  by  A;  the  other  stockholders  holding  their  stock  for  him. 
No  change  in  stock  ownership  took  place,  and  during  1915  A  paid  into  the 
company  Ix  dollars.  No  action  was  taken  by  the  corporation  which  would 
indicate  the  nature  of  this  payment,  except  that  it  was  entered  upon  the 
company's  books  as  a  contribution  to  capital  and  was  never  treated  as  an 
account  payable.  No  stock  was  issued  and  no  interest  was  charged  on  this 
amount.  During  1917  this  money  was  repaid  by  the  corporation  to  A. 
No  evidence  is  presented  to  indicate  the  nature  of  this  payment  or  how  it  was 
treated  by  the  corporation.  The  company  contends  that  this  sum  should  be 
Included  in  invested  capital  for  the  proper  part  of  the  year  1917. 

It  is  evident  that  the  formalities  of  proper  corporate  action  have  in  this 
case  been  disregarded.  This  makes  a  determination  of  the  exact  relation 
between  A  and  the  corporation  with  reference  to  the  Ix  dollars  very  difficult. 
Article  813,  Regulations  45,  contains  the  general  principle: 

That  if  interest  is  paid  or  is  to  be  paid  on  any  such  amount,  or  if  the  stockholders'  or 
officers'  right  to  repayment  of  such  amount  ranks  with  or  before  that  of  the  general  creditors, 
the  amount  so  left  with  the  corporation  must  be  considered  as  borrowed  capital  and  be  so 
treated  in  computing  invested  capital. 

It  is  accepted  legal  doctrine  that  where  stockholders  voluntarily  assess 
themselves  to  relieve  the  corporation  from  pecuniary  embarrassment  or  for 
the  betterment  of  their  stock,  whatever  may  be  the  occasion  of  the  assessment, 
the  advances  thus  made  are  not  debts  against,  but  assets  of,  the  corporation. 
(Broderick  v.  Brown,  69  Fed.,  497.) 

It  is  the  opinion  of  the  Advisory  Tax  Board  that  this  payment  was  in  the 
nature  of  a  voluntary  assessment  by  the  one  who  was  practically  the  sole 
stockholder  of  the  corporation,  and  that  after  it  was  paid  to  the  corporation 
no  obligation  to  repay  it  existed.  The  treatment  of  this  payment  by  the 
corporation  upon  its  books  (undoubtedly  with  the  knowledge  of  A)  is  highly 
significant  and  would  undoubtedly  postpone  A  to  the  general  creditors  of  the 
corporation  as  to  this  amount.  The  repayment  of  this  sum  in  1917  to  the 
stockholder  must  be  deemed  to  be  out  of  undivided  profits  or  earned  surplus 
so  far  as  possible.  (Section  31(b),  Revenue  Act  of  1916,  as  amended.) 
While  this  distribution  was  informal,  it  can  not  be  treated  as  a  return  of 
capital  unless  the  undivided  profits  and  earned  surplus  accumulated  since 
1913  are  first  distributed  as  dividends.  Whether  or  not  such  repayments 
will  reduce  the  invested  capital  will  depend  upon  the  amount  of  current 
earnings  available  for  distribution  at  the  time  of  such  repayment. 

It  is  therefore  recommended  that  the  M  Company  be  permitted  to  include 
in  its  invested  capital  for  the  taxable  year  1917  the  sum  of  Ix  dollars  as  a 
surplus  paid  in  by  the  stockholders,  proper  adjustment  being  made  for  any 
distribution  of  dividends  in  excess  of  available  net  earnings. 
1  

18-20-905:  A.  R.  M.  44. 

REVENUE  ACT  OF  1917. 
Advice  has  been  requested  as  to  whether  an  amount  paid  into  a  corpo- 
ration ratably  by  its  stockholders  under  corporate  resolution  authorizing  and 

Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.  2. 


making  the  assessment  can  be  properly  treated  as  invested  capital  of  the 
corporation,  even  though  its  books  indicate  and  show  that  the  amount  so 
paid  in  has  been  treated  as  a  loan;  that  interest  has  been  regularly  paid  to  the 
contributing  stockholders  and  that  the  corporation  has  regularly  deducted 
the  interest  so  paid  in  making  its  returns  up  to  1917. 

A  revenue  agent  submitted  a  report  of  his  examination  of  the  tax  liability 
of  this  company  and  recommends  the  elimination  of  the  amount  so  paid  in 
from  its  invested  capital  for  the  reason  that  such  amount  has  been  treated 
on  the  books  of  the  company  as  borrowed  capital  and  further,  for  the  reason 
that  it  has  regularly  each  year  in  computing  its  net  income  deducted  interest 
on  this  amount  at  the  rate  of  5  per  cent  per  annum.  No  capital  stock  was 
issued  for  this  amount  of  money  paid  in  and  no  notes  were  given  by  the 
corporation  acknowledging  its  indebtedness  to  the  stockholders  for  this 
amount. 

The  amount  paid  in  in  accordance  with  the  corporate  resolutions  was 
entered  on  the  books  of  the  company  as  a  capital  reserve  fund  and  in  1917 
it  was  carried  as  "Advances  by  stockholders.,, 

The  company  urges  strongly  that  this  amount  is  not  borrowed  money. 
It  is  urged  by  the  taxpayer  that  it  makes  little  difference  whether  or  not 
interest  was  paid  on  this  amount  and  it  submits  that  the  payment  of  the 
interest  is  not  determinative  of  the  question  involved.  The  payment  or  non- 
payment of  interest,  it  is  contended,  does  not  change  the  character  of  this 
capital  and  whether  such  capital  is  borrowed  money  or  paid  in  surplus  must 
be  determined  by  the  facts  and  by  the  intentions  of  the  parties.  This  can 
best  be  determined  from  the  books  and  records  of  the  company.  The  tax- 
payer submits  that  its  records  clearly  show  that  the  amount  was  paid  in  as 
assessments  in  pursuance  of  corporate  resolutions  duly  passed  by  the  board 
of  directors  and  that  the  amount  so  paid  in  was  set  up  on  the  books  as  "Reserve 
capital."  The  company  further  urges  that  inasmuch  as  no  notes  or  other 
evidences  of  indebtedness  were  issued  for  this  money,  there  was  no  obligation 
to  repay  same  to  the  contributors  other  than  that  attaching  with  respect  to 
the  original  capital. 

Section  207  of  the  Revenue  Act  of  1917  provides  that,  as  used  in  this 
title,  "Invested  capital"  does  not  include  stocks,  bonds  (other  than  obligations 
of  the  United  States),  or  other  assets,  the  income  from  which  is  not  subject 
to  the  tax  imposed  by  this  title,  nor  money  or  other  property  borrowed. 

Article  44  of  Regulations  41  provides,  in  part,  as  follows: 

The  terra  "money  or  other  property  borrowed"  as  used  in  section  207  of  these  regu- 
lations includes  not  only  cash  or  other  borrowed  property  which  can  be  identified  as  such, 
out  current  liabilities  and  temporary  indebtedness  of  all  kinds,  and  any  permanent  indebted- 
ness upon  which  the  taxpayer  is  entitled  to  an  interest  deduction  in  computing  net  income. 
A  corporation,  which  under  the  income  tax  law  is  allowed  to  deduct  only  a  part  of  the 
entire  interest  paid  upon  its  indebtedness,  may  include  in  its  invested  capital  such  a  pro- 
portion of  its  permanent  indebtedness  as  the  amount  of  interest  upon  such  indebtedness 
which  the  corporation  is  not  allowed  to  deduct  is  of  the  total  amount  of  interest  paid  unon 
such  indebtedness  during  the  taxable  ye,,  r 

The  Committee  has  considered  all  the  facts  presented  in  this  case  and 
has  reached  the  conclusion  that  the  money  paid  into  the  company  under 
corporate  resolution  for  which  no  notes  were  given  nor  even  authorized  does 
not  fall  within  the  provisions  of  article  812,  Regulations  45.  It  is  not  thought 
that  any  court  of  equity  or  law  would  permit  the  repayment  of  this  money 
ratably  to  the  stockholders  and  interest  thereon  before  the  general  creditors 
had  been  satisfied.  If  this  assumption  be  correct,  then  assessments  paidjn 
would  be  subordinated  to  the  rights  of  the  general  creditors  as  to  the  payment 
of  both  the  principal  and  interest  thereon. 

Therefore,  after  careful  consideration  of  the  brief  submitted  by  the'eom- 

Supplementary  Bulletin  Rulings. 


Sec.  325.   Art.  813. — 3. 


pany,,  and  the  recommendations  of  the  revenue  ^agent  in  this  case,  it  is  the 
opinion  of  the  Committee  that  in  determining  the  invested  capital  of  this 
corporation  the  minute  books  of  the  corporation  showing  the  resolutions 
making  the  assessment  against  the  stockholders,  reflect  more  clearly  the 
true  nature  of  the  transaction  than  do  mere  bookkeeping  entries  concerning 
the  same  transaction  made  at  a  later  date  by  a  subordinate  officer  of  the 
corporation.  Although  the  sums  paid  to  the  stockholders  as  a  return  on  their 
capital  on  account  of  these  assessments  were  noted  on  the  books  of  the  corpo- 
ration as  interest,  the  facts  indicate  that  such  payments  were  more  in  the 
nature  of  dividends.  The  books  of  the  corporation  treat  the  amounts  paid 
by  assessment  as  an  obligation  of  the  corporation.  This  is  true,  but  so  also 
are  amounts  paid  in  for  capital  stock  carried  as  liabilities  of  a  corporation. 
The  resolutions  authorizing  the  assessments  do  not  provide  that  interest 
shall  be  paid  to  the  stockholders,  no  notes  or  other  evidence  of  indebtedness 
are  given  by  the  corporation,  and  the  stockholders  are  not  preferred  over 
general  creditors  as  to  the  amounts  paid  in  assessments. 

Held,  that  the  corporation  may  include  in  its  invested  capital  for  1917  the 
amount  assessed  against  its  stockholders  and  paid  in  by  them. 
2 


21-20-963:  A.  R.  R.  102. 

REVENUE  ACT  OF  1917. 
Held  in  the  appeal  of  the  M  Company  that  the  amount  of  36*  dollars  standing 
upon  the  books  of  the  company  to  the  individual  credits  of  three  stockholders, 
at  the  beginning  of  business  July  1,  1916,  is  not  invested  capital  within  the  meaning 
of  the  Revenue  Act  of  1917 

The  M  Company  is  a  corporation,  all  of  the  stock  of  which  was  owned  by 
three  stockholders,  A,  B,  and  C.  During  the  lifetime  of  these  stockholders 
no  distribution  of  profits  was  made  and  the  earnings  were  allowed  to  accumu- 
late from  year  to  year. 

At  the  death  of  A,  in  1907,  the  board  of  directors  passed  a  resolution 
ordering  the  reserve  fund  to  be  prorated  and  credited  to  the  deposit  accounts 
of  the  three  principal  stockholders. 

In  accordance  with  this  resolution  the  accumulated  profits  were  divided 
and  placed  to  the  credit  of  these  various  accounts.  None  of  these  profits 
was  withdrawn;  the  business  proceeded  as  before  and  the  profits  were  allowed 
again  to  accumulate  until  1909,  when  B  died,  and  the  same  procedure  was 
taken  as  in  1907;  although  it  does  not  appear  in  the  record  that  there  was 
formal  action  on  the  part  of  the  directors,  nor  is  the  rate  of  the  division  nor 
the  total  amount  divided,  shown. 

From  the  inception  of  the  business  until  the  present  day  no  dividend 
has  been  declared  nor  have  any  of  the  profits  been  withdrawn  from  the 
business  or  segregated  from  the  surplus  of  the  company  except  as  hereinbefore 
stated;  but  against  the  accounts  credited  as  above,  comparatively  small 
charges  have  been  made  from  time  to  time  to  cover  living  expenses  of  two 
of  these  stockholders.  It  is  contended  and  sworn  to  that  substantially  all 
of  the  profits  thus  credited  to  these  three  stockholders  have  been,  by  verbal 
agreement,  left  in  the  corporation  funds  for  the  conduct  of  its  business  and 
that  on  the  amounts  so  credited  no  interest  has  ever  been  paid  by  the  corpo- 
ration nor  have  notes  been  issued  therefor,  for  the  reason  that  they  never 
have  been  considered  as  obligations  of  the  corporation;  but,  on  the  contrary, 
as  funds  left  in  the  business  to  be  used  as  capital;  and  deponents  further  de- 


Suppiementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.— 4. 


clare  that  the  banks  and  other  large  creditors  of  the  corporation  were,  and 
are,  cognizant  of  this  verbal  agreement,  and  by  reason  of  it  extend  credit  to 
the  corporation  on  these  funds  considered  as  capital. 

In  support  of  this  sworn  statement  there  were  submitted  two  identical 
affidavits  of  the  presidents  of  two  banks,  to  the  effect  that  the  amounts 
carried  on  the  books  to  the  credit  of  the  stockholders  were  considered  by 
their  respective  banks  as  capital  left  in  the  business  of  the  corporation  by 
those  parties  under  a  verbal  agreement,  and  that  on  the  strength  of  this  agree- 
ment and  the  indorsement  or  guaranty  given  to  these  banks  by  the  individuals 
named,  credit  was  extended  by  these  banks  to  the  corporation;  these  credits 
amounting  to  I2x  dollars  and  25x  dollars,  respectively. 

On  this  statement  of  facts,  which  is  not  contested  by  the  Income  Tax 
Unit,  the  taxpayer  appeals  to  this  Committee  to  have  these  credits  to  these 
individual  stockholders,  which  on  July  1,  1916,  amounted  to  36*  dollars 
considered  as  invested  capital  of  the  corporation;  the  Unit  having  denied 
such  consideration. 

Section  207  of  the  Revenue  Act  of  1917  provides  that — 

*  *  *  As  used  in  this  title  "invested  capital"  does  not  include  *  *  money  or 
other  property  borrowed,  and  means,  subject  to  the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  *  *  *  and 
(3)  paid  in  or  earned  surplus  and  undivided  profits  used  or  employed  in  the  busi- 
ness,   *    *  *. 

In  the  consideration  of  this  case  no  question  of  good  faith  or  of  fact  is 
involved.  There  is  no  doubt  that  these  amounts  have  been  left  in  the 
business  in  accordance  with  the  verbal  understanding  above  referred  to,  to 
be  used  as  capital,  or  that  they  have  been  so  used  as  necessary  contributions 
to  the  working  capital  of  the  business,  which  has  expanded  so  rapidly  that 
their  withdrawal  would  at  all  times  have  rendered  necessary  some  provision 
for  the  financing  of  the  company  upon  some  other  basis. 

It  is  contended  in  the  taxpayer's  brief  and  was  reasserted  at  an  informal 
oral  hearing  before  this  Committee  on  April  10,  at  which  the  taxpayer  was 
represented  by  is  president,  that  these  amounts,  which  admittedly  constitute 
a  considerable  part  of  the  actual  working  capital  of  the  business,  should  be, 
by  reason  of  that  fact,  regarded  as  a  part  of  the  invested  capital  of  the  busi- 
ness within  the  meaning  of  the  Revenue  Act  of  1917.  In  support  of  this 
contention  the  taxpayer  advances  the  argument  that  these  credits  and  the 
funds  representing  them  have  been  regarded  as  a  part  of  the  capital  of  the 
corporation  by  the  banks  with  which  it  does  business  and  which  loan  it  large 
amounts  of  money  by  reason  of  these  credits  as  well  as  by  its  other  large  com- 
mercial creditors. 

The  taxpayer  contends  that  the  intent  of  these  stockholder-creditors, 
rather  than  the  letter  of  the  law,  should  prevail  in  the  consideration  of  this 
case  and  that  the  good  faith  behind  such  intent  has  been  amply  and  cone 
clusively  demonstrated  by  the  fact  that  these  amounts  have  been  left  in  the 
business  over  a  period  of  more  than  10  years,  to  the  actual  and  material 
financial  detriment  of  these  creditors  by  reason  of  the  fact  that  the  funds 
representing  these  amounts  have  been  actively  and  continuously  used  in  the 
conduct  of  the  business  and  in  earning  profits  for  the  stockholders,  from  which 
profits  these  creditor  stockholders  derive  no  advantage  beyond  the  general 
pro  rata  participation  in  the  earnings  enjoyed  by  all  the  stockholders  alike. 

The  taxpayer  further  contends  that  it  should  not  be  penalized  in  1917 
merely  because  of  its  failure  to  have  made  a  "book  entry,"  converting  these 
credits  into  capital  stock. 

The  Committee  has  given  due  and  earnest  consideration  to  all  the  facts 


Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.— 5. 


in  this  case  and  to  the  arguments  presented  by  the  taxpayer;  but  it  can 
not  see  its  way  clear  to  accept  the  taxpayer's  views. 

Under  section  207  as  quoted  above,  these  credits  are,  in  law,  obviously 
either  borrowed  money  or  earned  surplus  and  undivided  profits.  The 
very  purpose  for  which  and  the  circumstances  under  which  they  were 
created  excludes  them  from  consideration  as  "surplus  and  undivided 
profits."  It  was  to  determine  exactly  the  equities  of  these  three  stock- 
holders in  the  profits  or  surplus,  until  that  time  undivided,  that  these 
credits  were  established.  The  president  of  this  corporation  vigorously 
denies  that  they  are  "surplus"  of  the  company  in  the  sense  that  all  the 
present  stockholders  have  a  right  to  share  in  them  ratably,  and  admits 
that  these  rights  of  these  three  stockholders  would  be  asserted  as  against 
the  other  stockholders,  though  not  against  the  general  creditors.  That 
being  true,  they  form  no  part  at  all  of  the  "surplus"  of  the  corporation, 
and  the  alternative  that  they  are  borrowed  money  can  not  be  escaped. 

Article  813  of  Regulations  45  provides  that — 

Whether  a  given  amount  paid  into  or  left  in  the  business  of  a  corporation 
constitutes  borrowed  capital  or  paid-in  surplus  is  largely  a  question  of  fact.  Thus, 
indebtedness  to  stockholders  actually  canceled  and  left  in  the  business  would 
ordinarily  constitute  paid-in  surplus,  while  amounts  left  in  the  business  repre- 
senting salaries  of  officers  in  excess  of  their  actual  withdrawals,  or  deposit  ac- 
counts in  favor  of  partners  in  a  partnership  succeeded  by  the  corporation,  will 
be  considered  paid-in  surplus  or  borrowed  capita!  according  to  the  facts  of  the 
particular  case.  The  general  principle  is  that  if  interest  is  paid  or  is  to  be  paid 
on  any  such  amount,  or  if  the  stockholder's  or  officer's  right  to  repayment  of 
such  amount  ranks  with  or  before  that  of  the  general  creditors,  the  amount  so 
left  with  the  corporation  must  be  considered  as  borrowed  capital  and  be  so 
treated  in  computing  invested  capital. 

These  credits  unquestionably  rank,  in  law,  with  the  claims  of  other 
general  creditors  ;  even  though  by  the  good  faith  and  honor  of  these  three 
stockholders,  they  would  be  voluntarily  deferred  until  the  claims  of  the 
other  general  creditors  had  been  liquidated  in  full. 

The  Committee,  moreover,  can  not  concede  the  corporation's  con- 
tention that  it  is  being  penalized  merely  because  of  its  failure  to  have 
made  a  "book  entry"  converting  these  credits  into  capital  stock ;  be- 
cause there  can  be  no  doubt  that  these  credits  being  a  direct  and  fixed 
obligation  of  the  corporation,  ha~Te  not  at  all  the  same  status  among 
the  corporation's  liabilities  as  would  have  been  the  case  had  they,  by 
formal  action  of  the  board,  been  converted  into  capital  stock  and  certifi- 
cates issued  therefor,  or  had  the  interested  stockholders  waived  all 
proprietary  rights  to  them  and  thus  actually  contributed  them  to  surplus. 

Therefore,  the  Committee  is  of  the  opinion  that  the  Income  Tax  Unit 
was  correct  in  disallowing  as  invested  capital  this  amount  of  2>6x  dollars 
and  the  action  of  the  Unit  is  confirmed. 
3 


52-20-1366:  A.  R.  R.  356 

REVENUE  ACT  OF  1917. 
Held,  that  special  accounts  in  a  corporation,  represented  by 
interest-bearing  notes  in  the  hands  of  certain  stockholders,  cannot 
be  included  in  invested  capital,  even  though  such  notes  carry  a 
condition  that  demand  for  payment  will  not  be  made  until  all  gen- 
eral credits  are  satisfied. 
The  Committee  has  had  under  consideration  the  appeal  of  the  M 


Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.— 6. 


Company,  a  corporation,  from  the  action  of  the  Income  Tax  Unit  in 
disallowing  an  item  of  3  dollars  as  invested  capital,  this  amount  having 
been  paid  into  the  corporation  by  certain  stockholders  and  held,  at 
interest,  under  certain  conditions  as  working  capital  of  the  corporation. 

This  company  was  incorporated  July,  191-,  with  an  authorized  capital 
stock  of  Ax  dollars  of  which  only  3x  dollars  has  been  paid  in.  Its  business 
is  conducted  on  the  same  general  plan  and  by  practically  the  same  in- 
dividuals who  were  copartners  in  the  predecessor  company.  Prior  to 
the  incorporation,  the  partners  had  allowed  a  portion  of  their  earnings 
to  remain  in  the  business,  such  amounts  being  credited  as  "Special 
Accounts"  of  partners.  When  the  partnership  was  liquidated  certain 
partners  returned  their  pro  rata  share  in  distribution  to  the  corporation 
and  on  the  books  of  the  corporation  amounts  so  paid  in  were  again 
credited  to  certain  "Special  Accounts."  Since  the  incorporation  certain 
other  amounts,  acquired  by  declaration  of  dividend,  have  been  credited 
to  these  accounts.  It  is  stated  that  it  was  the  intention  of  the  stock- 
holders, as  it  had  been  the  custom  of  the  partners,  to  allow  this  fund  to 
be  used  in  the  business  of  the  company  so  long  as  it  was  necessary, 
subject  to  all  the  debts  of  the  corporation  as  fully  as  though  it  had  been 
paid  in  for  capital  stock. 

It  is  accordingly  contended  by  the  corporation  that  the  entire  amount 
so  credited  to  the  special  accounts  is  "Surplus  accumulated  during  the 
existence  of  the  partnership  and  the  existence  of  the  corporation — while 
technically  the  amount  received  from  the  partnership  cannot  be  treated 
as  a  surplus  of  the  corporation,  still  so  far  as  the  individual  interest  of 
the  stockholder  is  concerned,  it  is  the  same  thing  as  though  the  entire 
amount  was  an  accumulated  surplus  of  the  corporation." 

These  special  accounts  of  the  corporation  are  now  covered  by  notes, 
the  pertinent  part  of  which  reads  as  follows: 

Bv    mutual   agreement    and   consent,    demand   for  payment  "of   this   note  is  not 

to  be  made  by  . .  ,  his  heirs  or  assigns,  until  all  of  the  indebtedness 

of  the  M  Company,  for  money  borrowed,  merchandise  bought  and  delivered, 
together  with  unfilled  contracts  for  merchandise  bought  which  may  be  out- 
standing when  notice  is  given  that  payment  is  desired,  has  been  fully  paid  and 
satisfied.    This  note  is  nonnegotiable. 

The  Income  Tax  Unit  has  denied  the  inclusion  of  these  special  ac- 
counts for  invested  capital  for  the  following  reasons : 

1.  They  represent  advances  made  by  the  stockholders  from  time  to 
time  but  not  in  proportion  to  stockholdings  and,  therefore,  do  not  repre- 
sent paid-in  surplus. 

2.  They  were  secured  by  notes  which  were  payable  on  demand 
provided  all  obligations  outstanding  at  the  time  demand  was  made  were 
satisfied,  and  accordingly  the  obligation  of  the  notes  is  inferior  to  claims 
of  general  creditors  only  until  the  date  when  notice  is  given  that  pay- 
ment is  desired. 

3.  The  notes  contain  an  absolute  and  unconditional  promise  to  pay 
interest  every  six  months,  which  promise  is  not  modified  by  the  pro- 
vision subrogating  the  principal  of  the  notes  to  the  general  creditors, 
and  accordingly  the  notes  could  not  be  considered  in  the  light  of  pre- 
ferred stock. 

The  Committee  finds  this  case  quite  analogous  to  that  covered  by 
its  recommendation  No.  102.  (Cumulative  Bulletin  Xo.  2.  page  277.) 
The  following  exceptions  of  importance,  however,  are  noted: 

Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813—7. 


1.  The  special  accounts,  as  indicated,  represent  loans  only  by  special 
stockholders. 

2.  Interest  is  paid  on  such  loans. 

3.  An  agreement  in  the  notes  to  the  effect  that  demand  for  payment 
is  not  to  be  made  until  all  indebtedness  of  the  corporation  is  liquidated. 

4.  The  guarantee  of  certain  stockholders  to  be  individually  respon- 
sible for  the  entire  debts  of  the  corporation  to  the  extent  of  the  private 
resources  of  such  stockholders. 

The  stockholders  are  ten  in  number.  Of  this  ten,  five  are  owners 
of  the  so-called  "Special  Accounts"  for  which  the  above-mentioned  notes 
were  given.  The  liability,  therefore,  is  not  to  all  of  the  stockholders, 
pro  rata  according  to  the  shareholdings.  It  is  not  an  undivided  amount 
which  may  be  distributed  pro  rata  in  liquidation.  The  amounts  so  re- 
tained in  the  business  are  subject  to  interest  charges  and  interest  is 
actually  accrued  but  it  is  apparently  credited  to  the  special  accounts  in 
part  or  in  whole.  There  is  an  obligation  on  the  part  of  the  stockholders 
directly  interested  in  the  special  accounts,  not  to  demand  payment  of 
the  notes  supporting  these  special  accounts  until  the  indebtedness  of 
the  coq)oration  is  fully  paid  and  satisfied  but  this  agreement  does  not 
preclude  the  corporation  as  a  distinct  entity  from  liquidating  these 
liabilities  at  such  time  as  it  may  be  deemed  proper  and  in  accordance 
with  the  tenor  of  the  notes — not  pro  rata  according  to  shareholders  in 
the  corporation.  Furthermore,  as  stated  by  the  Income  Tax  Unit :  "The 
notes  contained  an  absolute  and  unconditional  promise  to  pay  interest 
every  six  months,  which  promise  is  not  modified  by  the  provisions  sub- 
rogating the  principal  of  the  notes  to  the  general  creditors  and  ac- 
cording! v  the  notes  could  not  be  considered  in  the  light  of  preferred 
stock." 

It  is  further  stated  in  affidavit  submitted  by  the  five  stockholders, 
who  financially  give  independent  support  to  the  corporation,  that  they 
are  "guarantors  of  the  debts  of  the  corporation  on  guarantees  given  by 
the  corporation  to  our  banks  and  brokers  and  each  and  every  one  of  us 
is  individually  liable  on  these  guarantees  for  the  entire  debts  of  the 
corporation  up  to  the  extent  of  our  private  means  as  fully  as  though  we 
were  members  of  a  partnership."  This  obligation  establishes  a  right  of 
action  against  the  stockholders  individually  and  not  against  the  corpora- 
tion. As  against  the  corporation  it  would  not  be  enforceable  at  lawr 
which  limits  the  liability  of  the  stockholder  to  his  share  of  paid-in  capital. 
Briefly,  it  may  be  stated  that  capital  in'  a  corporate  enterprise  is : 
U  Cash  or  property  paid  in  by  subscription  to  capital  stock  or  as 
paid-in  surplus. 

2.  Borrowed  money  for  which  obligations  of  the  corporation  may 
be  issued. 

3.  Undivided  increment  of  income  resting  in  the  surplus  of  the  cor- 
poration. 

Manifestly  these  "Special  Accounts"  do  not  represent  either  stock 
subscriptions  of  undivided  increment  of  income.  In  the  latter  the  share- 
holder's interest  is  measured  by  his  pro  rata  share  interest  in  the  cor- 
poration.  This  undivided  increment  of  income  is  not  a  vested  right. 
Borrowed  capital  is  not  invested  capital  under  section  207  of  the  Revenue 
Act  of  1917,  which  reads: 

*   *   *   As  used  in  this  title  "invested  capital"  docs  not  include   *   *  • 
money  or  other  property  honow.  .!.  ^n.i  m,  ;«ns,  subject  to  the  above  limitations: 
(a)  In  the  case  of  a  corporation  oi  partnership: 

Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.— 8. 


(i)  Actual  cash  paid  in,    *    *    *  and 

(3)  Paid-in  or  earned  surplus  and  undivided  profits  used  or  employed 
in  the  business    *   *   *  , -  / 

It  seems  pertinent  at  this  point  to  quote  from  the  recommendation 
of  this  Committee  (102),  supra: 

Under  section  207  as  quoted  above,  these  credits  are,  in  law,  obviously  either 
borrowed  money  or  earned  surplus  and  undivided  profits.  The  very  purpose  for 
which  and  the  circumstances  under  which  they  were  created  excludes  them 
from  consideration  as  "surplus  and  undivided  profits."  It  was  to  determine 
exactly  the  equities  of  these  three  stockholders  in  the  profits  or  surplus,  until 
that  time  undivided,  that  these  credits  were  established.  The  president  of  this 
corporation  vigorously  denies  that  they  are  "surplus"  of  the  company  in  the 
sense  that  all  the  present  stockholders  have  a  right  to  share  in  them  ratably, 
and  admits  that  these  rights  of  these  three  stockholders  would  be  asserted  as 
against  the  other  stockholders,  though  not  against  the  general  creditors.  That 
being  true,  they  form  no  part  at  all  of  the  "surplus"  of  the  corporation,  and 
the  alternative  that  they  are  borrowed  money  cannot  be  escaped. 

Accordingly  the  Committee  recommends  that  the  conclusions  of  the 
Income  Tax  Unit  in  denying-  these  "Special  Accounts"  as  invested  capi- 
tal, be  sustained  under  section  207  of  the  Revenue  Act  of  1917. 


17-21-1602:  A.  R.  R.  473 

Recommended,  in  the  case  of  the  M  Company,  that  treasury  demand  notes 
drawn  by  order  of  the  president  of  a  corporation  payable  to  its  stockholders,  but 
not  in  proportion  of  shareholdings,  do  not  constitute  a  liability  of  the  corporation 
even  though  such  notes  are  charged  against  surplus  on  the  books  of  the  company. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  disallowing  the  item  of  x  dollars 
as  invested  capital  in  the  taxable  year  1918  on  the  ground  that  the  item 
constituted  notes  of  the  corporation  in  the  hands  of  its  stockholders. 

The  facts,  as  submitted,  are  as  follows: 

The  company  had  prior  to  December  31,  1910,  acquired  a  paid-in  and  earned  surplus 
of  x  dollars,  represented  by  increased  inventory  stock,  capital  expenditures  on  machinery, 
plant,  and  equipment,  and  accounts  receivable  and  notes  receivable,  thus  absorbing  the 
whole  of  this  amount  in  the  conduct  of  the  business. 

At  this  time  the  president  of  the  corporation  instructed  the  secretary  of  the  company 
to  make  demand  notes  out  in  the  names  of  the  stockholders  for  their  respective  interests 
in  the  x  dollars,  merely  as  a  memorandum  of  the  amount  representing  such  interest,  and  not 
as  an  obligation  of  the  company. 

The  board  of  directors  never  authorized  the  issue  of  these  notes,  and  there  is  no  resolution 
on  the  records  of  the  corporation  authorizing  the  issue  of  these  notes;  said  notes  were  never 
issued  to  the  respective  stockholders,  but  were  retained  by  the  treasurer  of  the  corporation, 
and  are  to-day  in  his  possession.  The  notes  were  made  without  any  reference  to  payment 
of  interest,  or  principal,  and  no  interest  has  been  paid,  or  credited  to  the  accounts  of  the 
respective  stockholders,  and  furthermore  it  was  not  the  intent  when  these  notes  were 
made  out  to  pay  either  the  principal  or  interest,  as  the  company  was  never  in  a  financial 
position  to  liquidate  this  amount. 

No  entry  was  ever  made  on  the  books  of  the  company  apportioning  this  amount  to  the 
respective  stockholders,  the  amount  reading  "undivided  surplus." 

These  facts  are  not  disputed  by  the  Income  Tax  Unit,  but  the  Unit 
contends  that  the  demand  notes  in  the  amount  of  x  dollars  issued  to  the 
stockholders  of  the  corporation  in  effect  represent  borrowed  capital  and,  there- 
fore, should  be  disallowed  as  statutory  invested  capital  in  accordance  with 
Article  813  of  Regulations  45. 

The  Unit  has  evidently  overlooked  the  fact  that  a  corporation  can  not, 

without  consideration,  issue  notes  to  its  stockholders  for  the  amount  of  its 

surplus,  except  bv  declaration  of  dividends    prorata  according   to  Stock- 
pile fnllowirtir  f»CCtiQWte*'v,1'*;«J  >«>  »«<-»tt»:ia«MOo  *  lo  )U»  SOI  til  (m) 


Supplementary  Bulletin  Rulings. 


6-2-22. 

Sec.  325.    Art.  813.— 9. 

holdings,  for  the  stockholders  have  no  vested  right  in  the  surplus  of  a  corpo- 
ration. If  this  transaction  was  intended  as  a  dividend  with  the  accrued 
liability  covered  by  demand  notes,  it  was  not  sanctioned  by  formal  resolution 
of  the  directors. 

It  is  manifest  the  issuance  of  the  notes  was  not  for  the  purpose  of  setting 
up  a  dividend  liability,  because  the  company  states,  and  its  statement  is  not 
controverted,  that  no  apportionment  of  the  x  dollars  wa8  made  prorata 
according  to  shareholdings  of  the  stockholders.  -  The  action  taken  by  the 
secretary  of  the  company  was  on  instructions  from  its  president,  and  the 
only  entry  made  was  to  debit  surplus  to  the  credit  of  notes  payable. 

Furthermore,  delivery  of  demand  notes  by  the  maker  is  essential  to  negotia- 
bility, and  as  long  as  these  notes  remain  in  possession  of  the  corporation 
without  formal  declaration  of  distribution  of  surplus  prorata  according  to 
shareholdings  under  formal  action  of  the  corporation,  they  can  not  be  held 
to  constitute  a  liability. 

The  Committee  accordingly  is  of  the  opinion  that  the  action  of  the 
Income  Tax  Unit  in  considering  this  amount  as  borrowed  capital  should  be 
reversed. 
S 


34-21-1786:  O.  D.  1006. 

A  Massachusetts  corporation  declared  dividends  as  follows:  November, 
1916,  x  dollars;  December,  1916,  x  dollars.  These  dividends  were  credited 
to  the  respective  accounts  of  the  shareholders  with  the  understanding  that 
they  were  not  to  be  drawn  against,  and  were  not  to  bear  interest,  since  the 
corporation  needed  the  capital  and  it  did  not  possess  the  cash  with  which 
to  make  actual  payment.  These  dividends  have  been  treated  as  liabilities 
of  the  corporation  from  1916  down  to  date,  and  no  interest  has  been  paid  or 
accrued  thereon.  The  first  dividend  was  formally  declared  by  the  board 
of  directors,  but  the  second  dividend  was  credited  to  the  stockholders,  under 
an  agreement  that  it  was  to  be  like  the  first  dividend,  although  its  declara- 
tion was  not  recorded  in  the  minutes  book  of  the  corporation. 

The  corporation  requests  permission  to  use  these  amounts  credited  to 
the  stockholders'  accounts  as  a  part  of  its  invested  capital. 

Held,  in  view  of  Massachusetts  court  decisions  that  the  dividend  formally 
declared  by  the  board  of  directors  and  credited  to  the  accounts  of  the  stock- 
holders on  the  books  of  the  company  was  a  distribution  of  part  of  the  cor- 
poration's surplus.  From  the  date  of  its  declaration  the  corporation  became 
a  debtor  and  the  stockholders  became  creditors,  ranking  with  general  creditors 
in  their  right  to  reduce  to  possession  the  amounts  credited  to  their  accounts. 

The  amounts  of  surplus  agreed  to  be  credited  to  the  stockholders'  accounts 
by  all  the  stockholders  without  formal  action  on  the  part  of  the  directors 
was  equivalent  to  a  dividend.  Its  effect  on  the  corporation's  surplus  and 
the  rights  of  the  stockholders  are  exactly  the  same  as  though  the  dividend 
had  been  formally  declared. 

While  the  corporation  may  have  had  the  use  of  the  amounts  credited  to 
the  stockholders,  it  was  at  all  times  liable  to  them  for  payment.  Viewed 
in  this  light,  the  corporation's  surplus  must  be  reduced  from  the  date  the 
first  dividend  was  formally  declared  and  from  the  date  the  agreement  was 
made  informally  to  further  credit  stockholders'  accounts  with  profits. 
6 


Supplementary  Bulletin  Ruling.-;. 


Sec.  325.   Art.  813.-10. 


37-21-1821:  O.  D.  1034. 

A  corporation  filed  a  return  for  1920  showing  a  loss  of  7x  dollars.  At 
the  close  of  the  taxable  year  the  corporation  owed  its  officers  4#  dollars, 
which  it  was  unable  to  pay.  The  officers  agreed  to  a  reduction  of  x  dollars 
each,  which,  after  the  permission  of  this  office  had  been  granted,  the  officers 
deducted  in  reporting  their  salaries  on  their  individual  returns.  A  total 
of  3x  dollars  was  waived  by  the  three  officers.  This  amount  was  credited  to 
surplus  in  January,  1921,  thus  wiping  out  the  deficit  which  existed  at  the 
close  of  1920.  While  this  book  credit  was  actually  made  in  1921  it  is  contended 
that  it  was  really  an  offset  to  the  losses  of  1920,  and  if  so  regarded,  the  corpora- 
tion would  show  a  credit  balance  for  1920  of  x  dollars. 

It  is  held  that  the  amounts  waived  by  the  officers  did  not  constitute 
income  to  the  corporation.  Such  amounts  are  paid-in  surplus  and  should 
be  so  treated  in  making  a  return  for  the  year  1921.  Therefore  no  amended 
return  is  required  for  the  year  1920. 

This  ruling  is  based  on  the  principle  that  there  was  in  fact  a  valid  obliga- 
tion on  the  part  of  the  corporation  to  pay  the  amounts  waived  by  the  officers. 
If  no  such  obligation  existed,  an  amended  return  should  be  filed  in  which  the 
amounts  claimed  as  a  deduction  on  account  of  the  salaries  of  the  officers 
should  be  reduced,  which  would  result  in  there  being  additional  taxable 
income  disclosed  by  the  corporation's  return. 
7 


I  ('22)-22-322:    I.  T.  1334. 
Revenue  Act  of  1918. 

In  November,  1919,  the  stockholders  of  the  M  Company,  by  proper 
resolution,  voted  to  increase  the  capital  stock  of  the  company.  In  pur- 
suance of  such  resolution,  the  officers  of  the  company  issued  to  everyone 
entitled  thereto  a  certificate  called  a  "stock  subscription  warrant"  setting 
forth  the  terms  upon  which  subscription  to  the  stock  of  the  new  issue  would 
be  received.  If  such  person  accepted  the  offer  to  subscribe,  his  acceptance 
was  indicated  by  signing  a  printed  acceptance  on  the  back  of  such  warrant. 
It  was  provided  that  such  warrant  should  be  surrendered  to  the  M  Com- 
pany on  or  before  January  — ,  1920,  accompanied  by  an  installment  pay- 
ment of .  .  .  .  per  cent  of  the  par  value  of  the  stock  subscribed  for.  Upon 
such  surrender  and  payment  the  company  issued  to  the  subscriber  a  stock 
subscription  certificate  which  read  as  follows: 

This  certifies  that  has  subscribed  for  shares  of  the  capita  i 

stock  of  the  M  Company,  of  a  par  value  of  $100  each,  in  accordance  with  resolutions 
adopted  by  the  stockholders  on  November,  1919,  and  has  agreed  to  pay  therefor  tjie  par 
value  thereof,  and  has  paid  the  first  installment  of  per  cent  thereon,  and  that  sub- 
sequent installments  will  be  payable    *    *    *    as  follows: 

Second  installment  on  or  before  April  — ,  1920. 

Third  installment  on  or  before  July  ■ — ,  1920. 

Interest  at  the  rate  of  6  per  cent  per  annum  will  be  allowed  from  January  • — ,  t<< 
June  — ,  1920,  on  all  payments  made  on  or  before  January  ■ — ,  1920,  and  interest  at  baid 
rate  will  be  allowed  from  April  ■ — ,  1920,  to  June  — ,  1920,  on  all  payments  made  after 
January  ■ — ,  1920,  and  on  or  before  April  — ,  1920.  And  the  stock  subscribed  for  Will 
participate  in  dividends  from  and  after  July  — ,  1920. 

Upon  full  and  final  payment  as  herein  provided,  and  the  surrender  of  this  certificate, 
and  as  soon  as  may  be  practical  after  July  — ,  1920,  certificate  for  full  paid  stock  will  be 
issued,  and  adjustment  of  interest  will  be  made. 

In  the  event  of  a  failure  to  pay  any  of  said  installments  when  due,  the  company  may 
sell  the  stock  subscribed  for  at  public  or  private  sale  without  notice,  and  apply  thfe  a&\ 
proceeds  to  the  payment  of  the  amount  still  payable  under  said  subscription,  acci  iii  tii»; 
to  the  subscriber  for  any  surplus,  he  to  remain  liable  for  any  deficit. 

This  certificate  may  be  transferred  by  assignment  as  indorsed  hereon,  but  :. 

Supplementary  Bulletin  Rulings. 


6-2-22. 

Sec.  325.    Art.  813.-11. 

hereof  will  be  valid  until  this  certificate  is  surrendered  and  the  transfer  is  recorded  on 
the  books  of  the  company. 

*  *  *  *  *  *  *  *  * 

The  payments  made  by  the  subscribers  were  credited  on  the  general 
books  of  the  company  to  an  account  called  "Received  on  stock  subscriptions, 
new  issue,"  but  on  the  books  of  the  transfer  department  an  account  was 
kept  with  each  subscriber,  crediting  him  with  payments  made  and  showing 
the  amounts  of  interest  paid  him. 

The  M  tompany  is  a  corporation  organized  under  the  laws  of  Texas. 

Article  1145  of  the  Revised  Statutes  of  Texas  (See  Vernon's  Sayles' 
Texas  Civil  Statutes,  1914)  governing  increases  in  capital  stock  provides  as 
follows : 

Art.  1145.  May  increase  its  capital  stock,  hou . — A  corporation  may  increase  its  author- 
ized capital  by  a  two-thirds  vote  of  all  its  stock;  provided,  that  no  stock  shall  be  issued 
except  for  money  paid,  labor  done,  or  property  actually  received.  And  when  such  vote  is 
given  in  favor  of  the  increase,  the  same  may  be  done  by  the  board  of  directors,  trustees' 
or  managing  board  of  such  corporation;  and,  upon  such  increase  of  stock  being  made  in 
accordance  with  the  above  provisions  and  certified  to  the  secretary  of  state  by  the  direc- 
tors, together  with  satisfactory  proof,  which  shall  be  the  affidavit  of  the  directors  showing 
that  the  full  amount  of  the  increase  has  been  in  good  faith  subscribed,  and  50  per  cent 
thereof  paid,  and  in  other  respects  conforming  to  the  proof  required  as  on  original  appli- 
cation for  charter,  or  showing  that  such  portion  thereof  has  been  subscribed,  or  subscribed 
and  paid,  as  is  required  for  the  corporation  thus  increasing  its  stock,  and,  if  the  secretary 
of  state  is  satisfied  that  the  increase  of  stock  has  been  made  in  accordance  with  law  and 
that  the  requirements  of  law  have  been  complied  with  as  to  the  subscription  and  pay- 
ment of  stock  and  in  other  respects,  as  on  an  original  application  for  charter,  he  shall  file 
such  certificate  of  increase;  and. thereupon  the  same  shall  become  a  part  of  the  capital  stock 
of  such  corporation.  Such  certificate  shall  be  filed  and  recorded  in  the  same  manner  as 
the  charter. 

The  certificate  of  increase,  with  the  necessary  proof  to  support  the  same, 
was  not  filed  with  the  secretary  of  state  until  August,  1920,  whereupon  such 
increase  was  approved.  Thereafter  the  subscription  certificates  were  taken 
up  and  canceled  and  certificates  of  stock  were  issued  to  the  holders  thereof. 

The  question  presented  in  the  case  is  whether  the  payments  made  in 
accordance  with  the  agreement  evidenced  by  the  stock  subscription  certifi- 
cates should  be  treated  as  a  part  of  the  capital  stock  of  the  company  from 
the  time  of  the  receipt  of  each  such  payment  or  should  be  treated  as  bor- 
rowed capital  until  the  increase  in  the  capital  stock  of  the  company  was 
properly  authorized. 

Payments  received  by  a  corporation  for  which  it  is  obligated  eventually 
to  issue  stock,  which  it  has  no  present  power  to  issue,  meanwhile  paying 
interest,  may  be  treated  as  constituting  a  loan  until  the  stock  is  issued  rather 
than  as  a  payment  into  the  capital  stock  of  the  company.  (Associated  Pipe 
Line  Co.  v.  United  States,  258  Fed.,  800.)  Tbe  nature  of  the  agreement 
under  which  payments  are  received  is  dependent  upon  the  intention  of  the 
parties.  Under  article  1140  of  the  Revised  Statutes  of  Texas,  every  private 
corporation,  as  such,  has  power  "to  enter  into  any  obligation  or  contract 
essential  to  the  transaction  of  its  authorized  business."  Such  power  includes 
the  power  to  borrow  money.  An  agreement  entered  into  by  a  corporation 
having  power  to  borrow  money  is  prima  facie  a  loan  agreement  if  it  contains 
provisions  for  the  payment  by  such  corporation  of  interest  upon  money 
received  by  it  thereunder.   Interest  is  compensation  for  the  use  of  money. 

Under  article  1145  of  the  Revised  Statutes  of  Texas,  quoted  above,  an 
increase  in  the  capital  stock  of  a  company  does  not  become  effective  until  a 
certificate  of  such  increase  has  been  filed  with  the  secretary  of  state.  This 
provision  is  very  similar  in  its  operation  to  article  1132  of  such  statutes, 
which  provides  that  the  existence  of  a  corporation  shall  date  from  the  riling 


Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  813.— 12. 


of  the  charter  in  the  office  of  the  secretary  of  state.  In  Bank  of  De  Soto  v. 
Reed  (50  Texas  Civil  Appeals  102,  109  S.  W.,  259)  it  was  said  that  perform- 
ance of  all  the  prerequisites  short  of  filing  the  charter  with  the  secretary  of 
state  is  not  sufficient  to  bring  a  company  into  existence  as  a  corporation  de 
jure,  nor  are  such  acts  sufficient  to  create  an  association  a  corporation  de 
facto.  The  court  said  that  the  filing  of  the  charter  in  the  office  of  the  secre- 
tary of  state  was  a  necessary  act  to  bring  the  corporation  into  existence.  The 
requirements  of  article  1145  with  respect  to  an  increase  of  capital  stock  are 
expressly  placed  upon  the  same  basis  as  an  original  application  for  a  charter. 
Articles  1132  and  1145  are  provisions  of  law  in  pari  materia,  and  if  the  charter 
of  the  proposed  corporation  is  not  effective  until  the  filing  thereof  in  the 
office  of  the  secretary  of  state,  a  proposed  increase  in  the  capital  stock  of  a 
company  is  likewise  not  effective  until  a  certificate  of  increase  has  been 
filed  with  the  secretary  of  state.  It  follows  that  prior  to  complete  compli- 
ance with  the  provisions  of  article  1145  a  corporation  has  no  power  to  in- 
crease its  capital  stock.  The  issuance  of  share-stock  by  the  company  before 
such  compliance  would  be  ultra  vires.  An  unauthorized  increase  of  capital 
stock  is  void  and  a  subscriber  to  such  increase  incurs  no  liability  by  reason 
of  his  subscription,  nor  can  he  derive  any  benefits  from  it.  The  contract 
fails  for  lack  of  consideration  to  support  it.  ( Kampmann  v.  Tarver,  87 
Tex.,  491;  29  S.  W.,  768,  769,  citing  Scovill  v.  Thayer,  105  U.  S.,  143,  and 
Insurance  Co.  v.  Kamper,  73  Ala.,  325.) 

The  M  Company  had  no  power,  therefore,  to  issue,  prior  to  August, 
1920,  new  shares  of  stock  pursuant  to  the  increase  of  its  capital  stock  voted 
by  the  stockholders.  The  contract  set  out  in  the  certificate  quoted  above 
evidences  an  understanding  by  the  parties  of  this  fact.  It  was  provided 
that  shares  of  stock  would  be  issued  as  soon  as  practicable  after  the  final 
payment  upon  the  subscription  was  made,  which  may  fairly  be  construed 
to  mean  that  share-stock  would  be  issued  when  the  authority  to  do  so  was 
procured.  Meanwhile  the  subscriber  was  not,  of  course,  a  shareholder  or 
member.  The  company  had  no  authority  to  bring  him  in  as  such.  His 
relations  with  the  corporation  could  not  extend  beyond  his  contract,  which, 
under  the  circumstances,  was  one  of  purchase  of  share-stock  to  come  into 
being  in  the  future.  Since  he  was  not  a  stockholder  or  member  he  could 
not  share  in  the  earnings  of  the  company.  He  was  in  all  fairness,  of  course, 
entitled  to  a  return  upon  the  money  paid  in  and  for  this  reason  the  company 
agreed  to  pay  him  interest  in  the  manner  set  out  in  the  subscription  certifi- 
cate. There  is  no  qualification  of  the  subscriber's  right  to  interest  for  the 
period  specified.  It  was  payable  whether  or  not  the  company  had  earnings 
on  hand  when  it  fell  due.  Such  interest  payments  can  not,  therefore,  be 
considered  to  be  distributions  of  profit.  While  the  subscription  contract 
does  not  contemplate  a  repayment  of  the  money  paid  by  the  subscriber, 
the  company's  right  to  such  payments  was  not  complete  until  it  was  properly 
authorized  to  increase  its  capital  stock.  In  view  of  this  fact,  together  with 
the  considerations  outlined  above,  it  is  believed  that  the  payments  made  to 
the  M  Company  under  the  subscription  contracts  here  considered  should 
be  treated  as  borrowed  capital  until  the  authorization  to  increase  the  com- 
pany capital  stock  was  properly  secured. 

It  follows  that  the  interest  payments  made  are  properly  deductible  as 
such  by  the  company.  Such  payments,  in  the  hands  of  the  holders  of  the 
stock  subscription  certificates,  constitute  interest  received  and  are  subject 
to  both  normal  tax  and  surtax.  This  is  so,  even  if  such  payments  were  made 
by  way  of  a  credit  to  the  price  of  the  share-stock  to  the  subscriber,  in  which 


Supplementary  Bulletin  Rulings. 


9-13-22, 


Sec.  325.    Art.  813.— 13. 


case  such  interest  payments  are  to  be  treated  as  if  received  by  the  subscribers 
and  immediately  reinvested  by  applying  them  to  the  purchase  price  of  the 
new  stock. 
8 


I-('22)-37-507:    A.  R.  R.  1004. 
Section  207,  Revenue  Act  of  1917.  Section  326,  Revenue  Act  of  1918. 

Recommended  in  the  appeal  of  the  M  Company,  that  the  action  of  the 
Income  Tax  Unit  in  holding  that  certain  items  of  earned  surplus  distributed 
upon  appellant's  books  and  placed  to  the  credit  of  individual  surplus  accounts 
standing  in  the  names  of  the  stockholders  do  not  constitute  a  part  of  invested 
capital  under  section  207,  Revenue  Act  of  1917,  and  section  326,  Revenue  Act 
of  1918,  be  sustained,  and,  accordingly,  that  the  appeal  be  denied. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  holding  that  certain  items 
appearing  on  its  books  on  January  1,  1917,  and  January  1,  1918,  do  not 
constitute  earned  surplus  within  the  meaning  of  section  207,  Revenue  Act 
of  1917,  and  section  326,  Revenue  Act  of  1918,  and  therefore  are  not  to  be 
included  in  invested  capital  for  those  years. 

The  appellant  through  its  representatives,  both  by  brief  and  in  oral 
conference,  has  submitted  arguments  in  support  of  its  contention  that  the 
items  involved  should  be  treated  as  earned  surplus  used  and  employed  in 
the  business  and  as  such  included  in  the  computation  of  its  invested  capital. 

The  facts  as  they  appear  upon  the  record  are  substantially  as  follows: 
The  taxpayer  was  incorporated  in  Connecticut  in  189-.  The  outstanding 
capital  stock  is  x  dollars.  Prior  to  1917  there  were  but  three  stockholders, 
two  of  them,  A  and  B,  owning  substantially  the  entire  capital  stock  in  nearly 
equal  proportions.  In  1917  and  1918  there  were  four  stockholders.  A  hold- 
ing 52  per  cent,  B,  45  per  cent,  and  two  others  each  holding  lJ/£  per  cent. 
Until  1918  the  taxpayer  was  engaged  in  manufacturing.  During  1918  it 
was  engaged  in  the  manufacture  of  certain  devices  for  the  Government.  Its 
net  income  for  1917  was  lOAx  dollars,  and  for  1918,  2.3x  dollars. 

For  many  years  prior  to  1917  it  was  the  custom  of  the  board  of  directors 
to  pass  a  resolution  annually  authorizing  a  distribution  of  the  year's  net 
income  to  the  stockholders  pro  rata  to  their  stockholdings.  On  January  — , 
1917,  the  directors  passed  the  following  resolution,  differing  from  those  passed 
annually  for  many  years  prior  thereto  only  in  the  designation  of  the  year 
to  which  it  applied: 

It  was  moved  and  voted  that  the  net  profit  for  the  year  ending  December  31,  1916, 
be  divided  pro  rata  with  the  stockholders  as  the  individual  holdings  appear  and  credit  the 
amount  to  the  individual  surplus  accounts  standing  in  the  names  of  the  stockholders. 

On  January  — ,  1918,  the  following  resolution  was  passed,  referring  to 
the  division  of  profits  for  the  year  1917: 

It  was  moved  and  voted  that  the  net  profits  remaining  after  deducting  salaries,  expenses, 
and  war-profits  tax  be  divided  in  the  following  proportions  and  the  amounts  credited  to  the 
individual  surplus  accounts  of  the  stockholders: 

Per  cent. 

A  hi   52  j, 

B   45  , 

c  :   "  va  . 

Pursuant  to  these  resolutions,  the  amount  of  the  surplus  at  the  end  of 
each  year  was  credited  on  the  corporation's  books  to  the  surplus  accounts 

Supplementary  Bulletin  Rulings- 


Sec.  325.    Art.  831— 14. 


standing  in  the  names  of  the  stockholders.  From  time  to  time  the  stock- 
holders withdrew  a  portion  of  the  amounts  credited  to  their  accounts  with- 
out further  authority  from  the  corporation,  although  this  was  done  only- 
after  consultation  between  A  and  B.  the  president  and  treasurer,  respec- 
tively. Such  withdrawals  were  never  in  excess  of  current  annual  earnings, 
except  in  the  year  1918,  and  were  charged  by  the  taxpayer  to  the  special 
surplus  accounts  bearing  the  names  of  the  respective  stockholders,  An 
examination  of  the  individual  returns  of  the  stockholders  shows,  and  this  is 
admitted  in  the  affidavit  of  the  president,  A.  that  they  reported  the  income 
when  credited  to  their  accounts  and  not  when  actually  withdrawn. 

The  entire  profits  credited  to  the  stockholders'  accounts  were  not  with- 
drawn immediately  or  in  any  one  year,  but  were  allowed  to  accumulate  from 
time  to  time,  and  remain  in  the  business,  without  interest.  The  aggregate 
amount  of  the  accumulated  earnings  remaining  in  the  business  on  January, 
1917  and  1918  was  18.8a;  dollars  and  19.5.V  dollars,  respect.i\  elv.  The  cur- 
rent profits  and  withdrawals,  which  do  not  include  salary,  were  as  fdUbws 
for  the  years  which  are  material  here: 


Year. 

- — _„oiij  ic\  Uj. 

Current 
profit?. 

With- 
drawals. 

Dollars. 

Dollars. 



3 . 0.v 

6.  lv 

5 .  S.v 

1Q18   

1     '  1 

In  connection  with  the  income  and  excess-profits  tax  returns  for  the  year 
1917  and  income  and  profits  tax  return  for  the  year  1918,  the  Unit  has  held 
that  the  earnings  and  profits,  placed  to  the  credit  of  the  individual  stock- 
holders and  voluntarily  left  in  the  business  without  interest,  should  be 
treated  as  borrowed  capital  no  part  of  which  can  be  included  in  computing 
invested  capital.  The  Unit  relies  upon  A.  R.  R.  102  (C.  B.  2,  p.  277)  and 
A.  R.  R.  133  (not  published). 

A  computation  of  the  tax  under  sections  201  and  207  of  the  Revenue 
Act  of  1917  and  section  301  of  the  Revenue  Act  of  1918  indicated  a  tax 
liability  in  excess  of  —  per  cent  of  the  net  income  of  the  corporation  for 
these  years.  The  taxpayer,  therefore,  was  granted  relief  under  section 
210  of  the  Revenue  Act  of  1917  and  section  328  of  the  Revenue  Act  of  1918. 

The  taxpayer  has  declined  to  accept  the  relief  granted  and  appeals.  It 
contends  that  the  surplus  of  the  taxpayer  credited  to  the  surplus  accounts 
in  the  names  of  the  stockholders  and  used  in  the  business  constitute  earned 
surplus  and  not  borrowed  money,  and,  therefore,  is  a  part  of  its  invested 
capital.  It  contends  that  the  resolutions  referred  to  do  not  constitute  a 
legal  declaration  of  a  dividend.  The  taxpayer  concedes  that  the  with- 
drawals by  the  stockholders  reduced  the  invested  capital  by  the  amounts 
thereof  from  the  date  of  such  withdrawals. 

The  question  at  issue  has  been  considered  by  the  Solicitor  of  Internal 
Revenue  upon  the  basis  of  the  facts  just  stated  and  under  date  of  May  — , 
1922,  he  submitted  to  this  Committee  an  informal  opinion  the  pertinent 
portions  of  which  are  here  quoted: 

Section  207  of  the  Revenue  Act  of  1917,  in  defining  invested  capital,  limits  it  among 
other  things  to  the  following,  subdivision  (a)  (3.): 

Paid  in  or  earned  surplus  and  undivided  profits  used  or  employed  in  the  business, 
exclusive  of  undivided  profits  earned  during  the  taxable  year. 

The  corresponding  provision  of  the  Revenue  Act  of  1918,  section  326(a)3,  reads: 
fctnl/CODB'  °l!lCpU3  3flf  Oj   ?5lCOO  2  flOJJ BlOqiOJ  9T»J   a"  UlJiiJ  'IJ  u^*» 

Supplemcni  ary  Bulletin  Rulings. 


9-13-22. 


Sec.  325.    Art.  813.— 15. 

Paid  in  or  earned  surplus  and  undivided  profits  not  including  surplus  and  undivided 
profits  earned  during  the  year. 

The  questions  involved  here  rest  on  whether  the  proportionate  amounts  of  annual 
earned  surplus  credited  to  the  respective  individual  surplus  account  of  the  several  stock- 
holders were  dividends,  or  in  whole  or  in  part  earned  surplus. 

Article  858,  Regulations  45,  in  so  far  as  pertinent  here  reads  as  follows: 

A  dividend  other  than  a  stock  dividend  affects  the  computation  of  invested  capital  from 
the  date  when  the  dividend  is  payable  and  not.  from  the  date  when  it  is  declared,  except 
that,  where  no  date  is  set  for  its  payment  the  date  when  declared  will  be  considered  also  the 
date  when  payable  for  the  purpose  of  this  article.  *  *  *  From  the  date  when  any 
dividend  is  payable  the  amount  which  the  several  stockholders  are  entitled  to  receive  will 
be  treated  as  if  actually  paid  to  them,  whether  or  not  it  is  so  paid  in  fact,  and  the  surplus 
and  undivided  profits,  either  of  the  taxable  year  or  of  the  preceding  years,  will  in  accordance 
with  the  foregoing  provisions  be  deemed  to  be  reduced  as  of  that  date  by  the  full  amount 
of  the  dividend. 

The  statute  of  Connecticut  as  to  dividends  follows  the  general  form  as  that  of  most 
States.  It  prohibits  a  corporation  from  paying  any  dividend  or  from  making  any  other 
distribution  of  its  assets  except  from  its  net  profits  or  actual  surplus,  unless  in  accordance 
with  the  law  as  to  the  reduction  of  stock  or  upon  dissolution. 

While  the  resolutions  referred  to  do  not  specifically  refer  to  the  amounts  credited  to  the 
so-called  individual  surplus  accounts  as  dividends,  the  purpose  is  clear  that  it  was  intended 
to  make  available  to  each  stockholder  at  least  a  large  part  if  not  all  of  the  amounts  so 
credited.  This  is  evidenced  by  the  large  withdrawals  without  any  further  corporate  action. 
While  the  usual  and  proper  way  to  appropriate  corporation  profits  to  stockholders  is  by 
formally  declaring  a  dividend,  it  has  been  very  generally  held  that  there  may  be  a  division 
of  profits  among  stockholders  without  the  formality  of  declaring  a  dividend,  and  that  such 
a  division  is  the  equivalent  of  a  dividend.  (Smith  v.  Moore,  199  Fed.,  689;  Hartley  v. 
Pioneer  Iron  Works,  73  N.  E.,  576  (N.  Y.).)  And  it  has  been  held  that  if  the  directors 
ascertain  the  profits  and  set  apart  the  portion  thereof  that  is  to  be  divided,  a  failure  to 
observe  the  forms  prescribed  by  law  as  to  the  time,  place  and  manner  of  declaring  them  is 
immaterial.  (Breslin  v.  Fries- Breslin  Co.,  58  Atl.,  313  (N.  ].).)  This  is  the  law  in  Con- 
necticut.   {Cogswell  v.  Second  National  Bank,  60  Atl.,  1059,  affirmed  in  204  U.  S.,  1.) 

In  the  instant  case  the  directors  having  ascertained  the  profits,  and  set  apart  certain 
sums  which  were  actually  credited  to  the  individual  stockholders,  all  matters  of  form  are 
immaterial.  The  evidence  shows  that  at  stated  times  the  specific  things  necessary  to 
warrant  a  declaration  of  dividends  were  done  and  that  the  profits  actually  made  were  set 
apart  for  distribution  among  the  stockholders.  This  is  the  essence  of  the  declaration  of  a 
dividend,  so  far  as  it  results  in  segregating  a  portion  of  the  property  of  the  company  for  the 
use  of  the  stockholders.  Thenceforward  the  corporation,  as  such,  had  no  property  interest 
in  the  money  thus  set  apart.  (Breslin  v.  Fries- Breslin  Co.,  supra;  Barnes  v.  Spencer 
&  Barnes  Co.,  127  N.  W.,  752  (Mich.);  Cogswell  v.  Second  National  Bank,  supra  (Conn.).) 
The  effect  of  the  declaration  of  a  dividend  is  at  once  the  establishment  of  a  debt  due  from 
the  corporation  to  each  stockholder.  (Boardman  v.  Mansfield,  66  Atl.,  169  (Conn.); 
Bishop  v.  Bishop,  71  Atl.,  583  (Conn.).) 

The  amounts  credited  to  the  accounts  of  the  respective  stockholders  were  freely  drawn 
upon  and  the  amounts  so  credited  reported  as  income  by  the  individual  stockholders  when 
credited  to  their  accounts.  These  are  circumstances  which  are  of  great  persuasive  force 
in  reaching  a  conclusion  as  to  how  the  individual  stockholders  themselves  considered  the 
amounts  so  credited. 

It  is,  therefore,  the  opinion  of  this  oifice  that  the  proportionate  amounts  of  the  annual 
earned  surplus  credited  to  the  respective  individual  surplus  accounts  of  the  several  stock- 
holders were  dividends,  and  that  such  surplus  accounts  were  in  effect  debts  owing  at  all 
times  by  the  corporation  to  its  stockholders,  any  withdrawal  by  individual  stockholders 
merely  being  a  debit  against  the  proper  individual  surplus  account.  It  follows  that  for  the 
years  1917  and  1918  the  net  credit,  balances  of  individual  surplus  accounts  can  not  be 
included  in  the  invested  capital  of  the  M  Company. 

Iii  accordance  with  the  above  opinion  of  the  Solicitor,  in  which  the  Com- 
mittee concurs,  it  is  recommended  that  the  action  of  the  Income  Tax  Unit 
in  holding  that  certain  amounts  standing  as  credits  to  the  individual  surplus 
accounts  of  stockholders  on  January  1,  1917,  and  January  1,  1918,  repre- 
sented dividends  owing  to  its  stockholders  and  not,  as  contended  by  the 
appellant,  earned  surplus  which  could  properly  be  included  in  invested  capital, 
be  sustained,  and,  accordingly,  that  the  appeal  be  denied. 

9 


Supplementary  Bulletin^Rulings. 


2-20-22. 


Sec.  325.    Art.  815.— 1 


Law  Section  325.— Terms  Relating  to  Invested  Capital  (1918  Act— 11548 
ante):  (1921  Act— 111028,  post). 
Article  815.— Inadmissible  Assets  (Reg.  45—^743,  ante):  (Reg.  62— 
•[1183,  post). 

1-19-116:  O.  781. 
War  Finance  Corporation  Bonds — "Admissible  Assets." 
interest  on  an  amount  of  bonds  of  the  War  Finance  Corporation,  the  principal 
of  which  does  not  exceed  in  the  aggregate  $5,000,  is#  exempt  from  Federal  income 
and  excess-profits  taxes.  Corporate  funds  invested  in  such  bonds  are  inadmissible 
assets  to  the  extent  that  they  are  invested  in  bonds  of  a  face  value  of  not  more  than 
$5,000,  but  funds  of  a  corporation  or  an  association  invested  in  such  bonds  are 
admissible  assets  so  far  as  they  are  invested  In  such  bonds  beyond  a  principal 
or  face  value  of  $5,000. 

Opinion  is  requested  as  to  whether  War  Finance  Corporation  bonds  are 
admissible  or  inadmissible  assets  of  a  corporation,  within  the  meaning  of 
section  325(a)  of  the  Revenue  Act  of  1918.  That  subsection  includes  the 
provision  that — 

The  term  "inadmissible  assets"  means  *  *  *  bonds  and  other  obligations  (other 
than  obligations  of  the  United  States),  the  dividends  or  interest  from  which  is  not  included 
in  computing  net  income  *  *  *  The  term  "admissible  assets"  means  all  assets  other 
than  inadmissible  assets,  valued  in  accordance  with  the  provision  of  subdivision  (a)  of 
section  326,  section  330,  and  section  331. 

Therefore,  if  funds  which  would  otherwise  be  a  part  of  the  invested  capital 
of  a  corporation  are  invested  in  War  Finance  Corporation  bonds,  no  exclusion 
of  funds  so  invested  from  invested  capital  will  be  necessary  unless  interest 
on  such  bonds  is  not  included  in  computing  net  income.  As  shownbelow,  the 
interest  on  so  much  of  the  principal  of  such  bonds  as  exceeds  $5,000  is  included 
in  net  income,  and  no  funds  so  invested  are  to  be  considered  inadmissible 
assets,  by  reason  of  being  invested  in  such  bonds,  except  as  are  invested  in 
bonds  having  a  face  value  of  $5,000,  the  interest  on  which  is  exempt. 

This  conclusion  has  the  following  basis: 

War  Finance  Corporation  bonds,  held  in  excess  of  $5,000  principal,  are 
subject  to  surtaxes,  although  not  to  normal  taxes,  under  the  provisions  of 
section  213(a)  (4)  Revenue  Act  of  1918— 

In  the  case  of  bonds  issued  by  the  War  Finance  Corporation,  the  interest  shall  be  exempt 
only  if  and  to  the  extent  provided  in  the  respective  Acts  authorizing  the  issue  thereof  at 
amended  and  supplemented,  and  shall  be  excluded  from  gross  income  only  if  and  to  the 
extent  it  is  wholly  exempt  from  taxation  to  the  taxpayer  both  under  this  title  and  under 
Title  III. 

That  is,  if,  under  the  Acts  authorizing  the  issuing  of  such  bonds,  they  arc 
not  wholly  exempt  from  taxation,  such  interest  may  not  be  excluded  from 
gross  income.  These  bonds  are  issued  under  the  authority  of  the  Act  of 
April  5,  1918,  which  provides,  in  section  16 — 

That  all  such  bonds  shall  be  exempt,  both  as  to  principal  and  interest,  from  ali  taxation 
now  or  hereafter  imposed  by  the  United  States  *  *  *  except  (a)  estate  or  inheritance 
taxes  and  (b)  graduated  additional  income  taxes,  commonly  known  as  surtaxes,  and  excess 
profits  and  war  profits  taxes,  now  or  hereafter  imposed  by  the  United  States  upon  the  income 
or  profits  of  individuals,  partnerships,  corporations,  or  associations.  The  interest  on  the 
amount  of  such  bonds  the  principal  of  which  does  not  exceed  in  the  aggregate  $5,000,  owned 
by  any  individual,  partnership,  corporation,  or  assocation  shall  be  exempt  from  the  taxes 
referred  to  in  clause  (b). 

Recognizing  that  a  taxpayer  may  be  required  to  include  a  certain  amount 
of  interest  upon  such  bonds  in  gross  income,  section  216(b)  of  the  Revenue 
Act  of  1918  allows  a  credit  for — 

The  amount  received  as  interest  upon  obligations  of  the  United  States  and  bonds 
issued  by  the  War  Finance  Corporation,  which  is  included  in  gross  income  under  section  213. 

Supplementary  Bulletin  Rulings. 


Sec.  325.    Art.  815— 2. 


It  is  therefore  held  that  interest  on  an  amount  of  bonds  of  the  War 
Finance  Corporation,  the  principal  of  which  does  not  exceed  in  the  aggregate 
$5,000,  is  exempt  from  Federal  income  and  excess  profits  taxes.  Corporate 
funds  invested  in  such  bonds  are  inadmissible  assets  to  the  extent  that  they 
are  invested  in  bonds  of  a  face  value  ot  not  more  than  $5,000,  but  funds  of  a 
corporation  or  an  association  invested  in  such  bonds  are  admissible  assets 
so  far  as  they  are  invested  in  such  bonds  beyond  a  principal  or  face  value  of 
$5,000. 
1 


1-19-118:  O.  D.  81. 

Federal  reserve  bank  stock  held  by  member  banks  is  held  to  be  an  in- 
admissible asset  in  determining  invested  capital  for  excess  profits  tax  purposes. 
2 


(See  22-19-538;  Section1326,  Article  838.)    Stock  of  foreign  corporations 
deriving  no  income  from  sources  within  the  United  States. 
3 


24-19-576:  O.  D.  305. 

Inasmuch  as  dividends  received  by  a  domestic  corporation  from  a  foreign 
corporation  deriving  income  from  sources  within  the  United  States  are  allow- 
able deductions  in  ascertaining  the  net  income  of  the  domestic  corporation 
subject  to  tax,  there  could  not  be  included  in  the  invested  capital  of  the 
domestic  corporation  receiving  the  dividends  the  amount  of  capital  invested 
in  the  stock  of  the  foreign  corporation,  or  any  part  of  the  value  thereof,  except 
as  outlined  in  article  817. 
4 


21-21-1656:  O.  D.  929. 

School  warrants  issued  by  a  county  of  a  State  are  held  to  be  inadmissible 
assets  in  determining  invested  capital  for  excess  profits  tax  purposes.  [For 
modification  see  No.  3  at  Sec.  325,  Art.  818.— 1.] 


Supplementary  Bulletin  Rulings. 


1-31-22.    (2)  9-1-22. 

Sec.  325.    Art.  815.— 3. 

40-21-1857:  0.  D.  1057.^ 
Inquiry  if  made  whether  4  per  cent  bonds  of  the  Government  of  the 

Philippine  Islands  are  to  be  considered  admissible  or  inadmissible  asset* 

in  computing  invested  capital. 

Section  325  (a)  of  the  Revenue  Act  of  1918  provides  that: 

The  term  "inadmissible  assets"  means  stacks,  bonds  and  other  obligations  (other  that, 
obligations  of  the  United  States),  the  dividends  or  interest  from  which  is  not  included  in 
computing  net  income    *    *  *. 

It  is  further  provided  in  section  213(b)  4  of  the  Act  that  interest  upon 
obligations  issued  by  a  possession  of  the  United  States  is  exempt  from  Federal 
income  tax. 

The  bonds  referred  to  are  not  obligations  of  the  United  States,  but  on 
the  contrary  are  obligations  of  a  possession  of  the  United  States.  Accordingly, 
it  is  held,  that  4  per  cent  bonds  of  the  Government  of  the  Philippine  Islands 
are  inadmissible  assets  within  the  meaning  of  section  325  (a)  of  the  Revenue 
Act  of  1918, 
6 

42-21-1875:  O.  D.  1069. 
Since  the  income  from  Federal  land  bank  bonds  is  tax  free  and  since  such 
bonds  are  not  obligations  of  the  United  States,  they  are  inadmissible  assets 
within  the  meaning  of  section  325(a)  of  the  Revenue  Act  of  1918,  and  should 
be  so  treated  in  computing  the  invested  capital  of  a  corporation. 
7 


(See  I  ('22)-4-48;  Section  326,  Article  831.    Ruling  No.  32.)  Foreign 
corporate  stock. 
S 


1-35-486:  I.  T.  1434 

Revenue  Act  of  1921. 

The  M.  Company,  a  corporation  with  a  fiscal  year  ending  April  30,  1922, 
owned  on  May  1,  1921,  y  shares  of  the  capital  stock  of  the  O  Company  which 
were  carried  as  an  asset  at  x  dollars,  representing  their  cost  price. 

In  June,  1921,  the  O  Company  was  dissolved.  The  general  corporation 
laws  of  the  State  under  which  it  was  organized  provide  that  a  corporation 
continues  in  existence  for  three  years  after  the  date  of  its  dissolution  for  the 
purpose  of  closing  its  business  and  distributing  its  assets,  but  not  for  the 
purpose  of  continuing  its  business,  and  that  during  this  period  the  directors 
or  governing  body  of  the  corporation  are  its  trustees  with  power  to  settle 
its  affairs,  convey  its  property,  pay  its  obligations,  and  divide  its  remaining 
assets  among  its  stockholders. 

Inquiry  is  made  whether  the  undivided  interest  of  the  M  Company  in 
the  liquidation  of  the  assets  of  the  O  Company  is  an  admissible  asset  from 
and  after  June,  1921,  the  date  of  the  dissolution  of  the  latter  company. 

Held,  that  the  interest  of  the  M  Company  in  the  assets  of  the  dissolved 
corporation  is  represented  by  its  stock  in  that  corporation  until  such  time 
as  the  assets  of  that  corporation  are  actually  distributed.  It  accordingly 
follows  that  any  interest  the  M  Company  has  in  such  assets  prior  to  their 
distribution  must  be  classed  as  an  inadmissible  asset. 
9 


Supplementary  Bulletin  Rulings. 


2-20-22. 


Sec.  325.    Art.  816.— 1. 

Law  Section  325.— Terms  relating  to  Invested  Capital  (1918  Act— If 548, 
ante):  (1921  Act— ^1028,  post). 
Article  816. — Inadmissible  assets:  Government  Bonds  (Reg.  45 — 1l748, 
ante):  (Reg.  62— f  1184,  post). 

38-21-1836:  O.  D.  1044. 

Inquiry  is  made  whether  bonds  issued  by  Porto  Rico  and  Hawaii  are 
inadmissible  assets. 

The  Revenue  Act  of  1918  provides,  in  part,  as  follows: 

Section  325(a).  That  as  used  in  this  title  the  term  "inadmissible  assets"  means  stocks, 
bonds,  and  other  obligations  (other  than  obligations  of  the  United  States),  the  dividends 
or  interest  from  which  is  not  included  in  computing  net  income    *    *  * 

It  is  further  provided  in  paragraph  4,  section  213(b),  of  the  Act  that 
interest  -upon  obligations  of  a  possession  or  territory  of  the  United  States 
is  exempt  from  Federal  taxation. 

The  foregoing  provisions  of  law  are  here  applicable.  The  bonds  referred 
to  are  not  obligations  of  the  United  States  within  the  meaning  of  the  paren- 
thetical clause  embodied  in  section  325(a)  of  the  Act.  Therefore,  they 
fall  squarely  within  the  general  language  of  that  section  and  must  be  held  to 
be  inadmissible  assets. 
1 


Supplementary  Bulletin  Rulings. 


.1 — .d  18  ,1i A    .est  .o»8 


r 


Sec.  325.    Art.  817.— 1. 


Law  Section  325.— Terms  Relating  to  Invested  Capital  (1918  Act— 1[548 
ante):  (1921  Act— H1028,  post). 
Article  817. — Inadmissible  Assets:  Partial  Exception  (Reg.  45 — 1f749 
ante):  (Reg.  62— Hi  185,  post). 

Revenue  Act  of  1921. 

I  (,22)-5 1-649:    I.  T.  1536. 

A  corporation  sold  inadmissible  assets  consisting  of  stock  at  a  profit 
and  so  brought  itself  within  the  provisions  of  article  817  of  Regulations  62, 
to  the  effect  that  where  the  income  derived  from  inadmissible  assets  con- 
sists in  part  of  profit  from  the  disposition  thereof,  a  corresponding  part  of 
the  capital  invested  in  such  assets  shall  be  deemed  an  admissible  asset. 

The  question  was  submitted  as  to  whether  under  these  conditions  a  cor- 
poration should  deduct  only  the  cost  of  the  stock  sold  from  its  inadmissible 
assets  for  the  period  after  the  sale  or  whether  it  is  permitted  to  deduct  an 
amount  equal  to  the  amount  which  is  added  to  admissibles  as  a  result  of  the 
sale  of  the  stock. 

Held,  that  under  the  conditions  stated,  a  corporation  can  decrease  its 
inadmissibles  only  in  an  amount  equal  to  the  cost  of  the  stock  sold,  for  the 
period  after  the  sale,  as  the  value  of  both  admissible  and  inadmissible  assets 
employed  in  determining  the  invested  capital  of  a  corporation  is  represented 
by  their  cost  of  acquisition.  In  other  words,  when  inadmissible  assets  are 
eliminated  through  sale,  the  total  value  of  the  inadmissibles  is  reduced  by 
the  cost  price  of  the  inadmissibles  sold. 

A  corresponding  increase  equal  to  the  cost  of  the  inadmissibles  sold 
should  be  made  in  admissibles  effective  only  from  the  date  of  the  sale,  unless 
such  proceeds  are  reinvested  in  admissibles.  Any  profit  realized  during  the 
year  on  the  sale  of  inadmissibles  is  a  current  profit  and  can  not,  under  the 
provisions  of  the  statute  (section  326(3)  ),  be  included  in  invested  capital 
until  the  succeeding  year. 

1 


Supplementary  Bulletin  Rulings. 


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2-20-22. 

Sec.  325.    Art.  818.— 1. 

Law  Section  325. — Terms  Relating  to  Invested  Capital  (1918  Act — ^548, 
ante):  (1921  Act— «I1028,  post). 
Article "818.— Admissible  Assets  (Reg.  45 — 1f750,  ante):  (Reg.  62— 
If  1186,  post). 

1-19-40:  O.  D.  28. 

The  computation  of  exempt  interest  from  Liberty  loan  bonds  will  be 
based  upon  the  full  amount  of  bonds  subscribed  for  and  still  owned.  Interest 
upon  obligations  incurred  to  purchase  or  carry  Liberty  bonds  issued  after 
September  24,  1917,  may  be  deducted  from  gross  income. 

In  computing  the  amount  of  admissible  assets  for  the  purpose  of  determin- 
ing the  average  percentage  of  inadmissible  assets,  the  total  cost  of  bonds 
subscribed  for,  whether  fully  paid  for  or  not,  may  be  included  in  admissible 
assets, 
s 


1-19-132:  O.  D.  93. 

Conversion  of  certificates  of  indebtedness  purchased  by  a  corporation  in 
1918  into  Victory  loan  notes  of  same  value  would  not  affect  invested  capital 
for  purposes  of  war  profits  tax. 
2 


45-21-1915:    O.  D.  1096. 

A  bank  is  in  possession  of  certain  warrants  drawn  by  a  school  district 
on  the  superintendent  of  schools  for  a  county.  These  warrants  are  in  the 
nature  of  drafts  drawn  in  favor  of  the  teachers  in  the  public  schools  of  a 
particular  district.  They  were  cashed  by  the  bank  as  a  matter  of  accom- 
modation only  for  the  teachers  of  the  district.  These  warrants  have  been 
returned  by  the  superintendent  upon  whom  they  were  drawn  with  the  nota- 
tion thereon  that  no  funds  were  available  with  which  to  meet  these  obli- 
gations. The  warrants  are  carried  by  the  bank  without  any  remuneration 
in  the  shape  of  interest  or  discount. 

Advice  is  requested  as  to  whether  these  school  warrants  are  admissible 
or  inadmissible  assets  for  the  purpose  of  computing  invested  capital. 

The  definition  of  "inadmissible  assets"  as  laid  down  in  the  different 
revenue  Acts  implies  that  stocks,  bonds,  and  other  obligations  must  be 
potentially  interest-bearing  or  dividend-producing  securities  to  come  within 
the  classification  of  an  inadmissible  asset.  In  the  instant  case  it  appears 
that  the  drafts,  or  school  warrants,  were  cashed  for  the  accommodation 
merely  of  the  school  teachers  in  whose  favor  they  were  drawn.  No  discount 
was  received  by  and  no  interest  is  payable  to  the  bank. 

Held,  that  the  noninterest  bearing  warrants  drawn  by  the  particular 
school  district  on  the  superintendent  of  schools  for  a  county  are  admissible 
assets  capable  of  being  included  in  the  invested  capital  of  the  bank  in  com- 
puting its  assets.  (O.  D.  929.  C.  B.  4,  p.  363,  modified  [see  No.  5  at  Sec, 
325,  Art.  815-?,  herein].) 
3 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.    Art.  831.— 1. 

Law  Section  326— Invested  Capital  (1918  Act — •j555,  ante):  (1921  Act— 
1fl035,  post). 

Article  831. — Meaning  of  Invested  Capital  (Reg.  45— H 751,  ante): 
(Reg.  62— <[1187,  post). 

9-19-350:  O.  D.  202. 

The  amount  of  taxes  withheld  at  the  source  to  be  later  paid  over  to  the 
Government  is  not  an  asset  of  the  withholding  agent  and  must  be  eliminated 
entirely  from  the  computation  of  invested  capital. 

1   

10-19-365:  O.  872. 

Valuation  of  Invested  Capital  in  Case  of  Consolidation  Prior  to 
March  3,  1917. 

Where  two  corporations  are  engaged  in  different  branches  of  the  same  business, 
and  the  certificate  of  incorporation  of  one  of  them  is  amended  so  as  to  change  its 
name  and  increase  its  capital  stock,  which  new  stock  is  issued  in  exchange  for  the 
•lock  of  the  original  companies,  and  this  exchange  is  made  prior  to  March  3,  1917. 
to  determine  the  invested  capital  of  the  new  organization  there  should  be  added 
to  the  invested  capital,  as  defined  by  Section  207  (a).  Revenue  Act  of  1917,  of  the 
company  whose  certificate  has  been  awarded  the  fa.r  value  of  the  assets  of  the 
other  company,  this  latter  valuation  to  be  made  as  of  the  date  of  the  exchange  of 
stock,  and  not  of  a  later  formal  transfer  of  the  tangible  assets.  (Revenue  Act  of 
1917,  sees.  201,  207,  and  208.) 

Opinion  is  requested  as  to  the  method  of  determining  the  amount  of  the 
invested  capital  of  the  Z  Company  for  the  year  1917. 

In  the  year  1916  the  M  Company  and  the  Y  Company  were  engaged  in  the 
manufacture  and  sale  of  certain  commodities.  The  M  Company  had  a  cap- 
italization of  8*  dollars;  the  Y  Company  of  5x  dollars.  It  was  decided  to 
consolidate  the  business  of  the  two  companies,  and  to  this  end  the  certificate 
of  incorporation  of  the  M  Company  was  in  1916  amended  so  as  to  change  its 
name  to  "Z  Company,"  and  to  increase  its  capital  stock  to  67*  dollars. 
The  stock  of  the  Z  Company  was  in  that  year  issued  to  the  stockholders  of 
the  M  Company  and  of  the  Y  Company.  The  assets  of  the  Y  Company 
were  formally  transferred  to  the  Z  Company  by  a  bill  of  sale  and  by  deed  in 
1917.  A  valuation  was  made  in  1916  of  the  properties  of  the  two  companies 
which  indicated  that  the  net  assets  of  the  M  Company  were  12a*  dollars  and 
of  the  Y  Company  10*  dollars.  The  Z  Company  seeks  to  have  this  valuation 
of  the  assets  of  the  two  companies,  a  total  of  22x  dollars,  accepted  as  the 
basis  of  its  invested  capital  for  the  year  1917. 

It  is  assumed  from  the  statement  of  facts  that  there  was  no  change  of 
corporate  entity  as  between  the  M  Company  and  Z  Company,  a  theory 
which  seems  fair  to  the  taxpayer  by  reason  of  the  statement  in  the  brief 
presented  in  its  behalf  that  the  certificate  of  incorporation  of  the  M  Company 
was  amended,  changing  its  name  to  "Z  Company,"  and  increasing  its  capital 
stock,  etc. 

The  question  presented  is  whether  a  "reorganization,  consolidation,  or 
change  of  ownership"  under  these  facts  was  effected  before  or  after  March  3, 
1917,  within  the  meaning  of  section  208  of  the  Revenue  Act  of  1917;  and  if 
before  March  3,  1917,  how  far  the  valuation  of  the  assets  of  the  two  companies 
made  in  1916  may  be  accepted  as  the  basis  of  the  invested  capital  of  the  Z 
Company  for  1917. 

The  original  M  Company  dealt  in  raw  product,  and  the  Y  Company 
bought  and  manufactured  it.  It  was,  however,  decided  that  the  entire 
business  could  be  better  conducted  under  one  management;  and  with  this 
end  in  view  the  M  Company  increased  its  capital  stock  and  issued  it  in  ex- 


Supplementary  Bulletin  Rulings 


Sec.  326.    Art.  831.— 2. 


change  for  the  stock  of  the  other  two  companies.  The  result  was  to  vest 
complete  control  of  the  entire  business  in  the  Z  Company,  and  to  transfer 
to  that  company  the  control  of  the  property  of  the  Y  Company  as  of  the  time 
when  such  merger  so  became  legally  effective,  which  was  in  1916. 

The  Revenue  Act  of  1917  imposed  a  tax  called  the  "War  excess  profits 
tax"  upon  "the  net  income  of  every  corporation,  partnership,  or  individual," 
in  so  far  as  such  income  exceeded  certain  percentages  "of  the  invested  capital 
for  the  taxable  year"  of  the  taxpayer  (Revenue  Act  of  1917,  sec.  201).  "In- 
vested capital"  is  defined  as  consisting  of  (1)  actual  cash  paid  in;  (2)  the 
cash  value  of  tangible  property  paid  in;  and  (3)  surplus  and  undivided  profits, 
exclusive  of  those  earned  in  the  taxable  year  (sec.  207).  The  statute  further 
provides: 

That  in  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business  after  March  3,  1917,  if  an  interest  or  control  in  such  trade  or  business  of  50  per 
cent  or  more  remains  in  control  of  the  same  persons,  corporation,  associations,  partnerships, 
or  any  of  them,  then  in  ascertaining  the  invested  capital  of  the  trade  or  business  no  asset 
transferred  or  received  from  the  prior  trade  or  business  shall  be  allowed  a  greater  value  than 
would  have  been  allowed  under  this  title  in  computing  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  received,  unless  such  asset 
was  paid  for  specifically  as  such,  in  cash  or  tangible  property,  and  then  not  to  exceed  the 
actual  cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such 
payment.    (Sec.  202.) 

The  general  rule  indicated  in  the  statute  is  that  the  value  of  invested 
capital  is  to  be  determined  at  the  time  when  it  is  "paid  in."  It  must  now 
be  decided  when  such  payment  is  deemed  to  be  made  in  cases  where  there 
has  been  a  transfer  or  substitution  of  stock  made  in  1916,  followed  by  a  formal 
transfer  of  tangible  assets  in  1917. 

Restating  the  rule  of  section  208,  Revenue  Act  of  1917,  for  the  determin- 
tion  of  invested  capital: 

A.  By  express  provision  where  there  is  a  reorganization,  consolidation,  or  change  of 
ownership,  (1)  after  March  3,  1917,  and  (2)  50  per  cent  or  more  of  an  interest  or  control 
remains  in  the  same  persons,  corporations,  associations,  partnerships,  or  any  of  them,  then 
as  to  assets  transferred  or  received  from  the  prior  trade  or  business,  no  greater  value  shall 
be  allowed  therefor  than  if  there  had  been  no  transfer,  unless  paid  for  in  cash  or  tangible 
property 

B.  In  cases  not  covered  by  the  provision  quoted,  that  is,  cases  where  the  reorganization, 
consolidation,  or  change  of  ownership  occurred  before  March  3;  1917,  or  after  March  3, 
1917,  with  less  than  50  per  cent  remaining  in  the  same  control,  the  invested  capital  will  be 
determined  under  the  general  rule.  But  where  there  is  no  change  of  identity  of  the  absorb- 
ing organization,  its  prior  assets  must  be  valued  under  section  207  and  not  at  the  time  of  the 
reorganization,  consolidation,  or  transfer,  since  there  was  no  transfer  of  its  assets  at  that 
time. 

Applying  the  rule  to  the  present  case,  the  mere  change  of  name  by  a  nend- 
ment  with  an  increase  of  stock  did  not  involve  a  change  of  indentity  as  to  the 
M  Company,  and  there  could  not  have  been  therefore,  a  transfer  of  the 
assets  of  that  organization  within  the  meaning  of  the  statute.  As  to  the  Y 
Company,  there  was  a  transfer  of  control,  and  under  the  facts  this  transfer 
was  consummated  before  March  3,  1917,  and  its  assets  may  therefore  be  valued 
as  of  the  time  of  such  transfer. 

It  will  be  necessary,  therefore,  in  determining  the  invested  capital  of  the 
Z  Company  to  add  to  the  valuation  of  the  assets  of  the  Y  Company  made  in 
1916  (assuming  such  a  valuation  to  have  been  fair)  such  a  sum  as  represents 
the^n  vested  capital  of  the  M  Company  as  defined  by  section  207(a)  of  the 
Revenue  Act  of  1917.  The  valuation  of  the  assets  of  the  latter  company 
made  in  1916  will  have  to  be  disregarded,  and  its  assets  valued  on  the  basis 
that  no  change  of  ownership  or  control  has  occurred  as  to  those  assets.  There 
was  no  transfer  or  receipt  from  "a  prior  trade  or  business"  as  to  such  assets. 
2 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 3. 


11-19-389:  T.  B.  M.  49. 

It  appears  that  the  Y  Company  went  into  the  hands  of  a  receiver,  the 
plant  being  worth,  on  the  basis  of  cost  less  depreciation,  approximately  8x 
dollars.  The  creditors  acquired  the  assets  at  a  receiver's  sale  at  a  nominal 
figure  in  order  to  cover  loans.  They  turned  the  business  over  to  the  Z  Com- 
pany, a  new  corporation  formed  for  the  purpose  of  taking  over  the  property. 
The  conditions  of  this  latter  sale  were:  (1)  the  Z  Company  was  to  supply  x 
dollars  working  capital;  (2)  the  Z  Company  was  to  assume  the  unpaid  liab- 
ilities of  the  Y  Company  and  pay  them  off  within  a  period  of  years;  (3)  the 
Z  Company  was  to  have  the  assets  of  the  Y  Company  in  return  for  meeting 
the  liabilities. 

Upon  these  conditions  the  Z  Company  was  duly  incorporated  with  a 
capital  stock  of  x  dollars  subscribed.  It  is  claimed  that  the  stockholders  of 
the  new  corporation  are  the  same  as  those  of  the  defunct  Y  Company,  and 
for  that  reason  the  new  corporation  requests  to  be  permitted  to  set  up  an 
invested  capital  equal  to  that  of  the  defunct  corporation. 

There  is  a  difference  of  opinion  as  to  whether  the  x  dollars  actually  paid 
in  to  the  Z  Company  in  return  for  their  stock  should  be  considered  the  total 
invested  capital  of  the  new  corporation  or  whether  the  view  should  be  taken 
that  the  new  business  is  substantially  a  reorganization  of  the  old,  and,  there- 
fore, the  invested  capital  be  fixed  upon  that  basis. 

It  would  appear  that  the  first  of  these  views  is  correct.  The  Y  Company 
went  into  the  hands  of  a  receiver  and  its  property  was  sold  to  its  creditors 
who  were  not  the  stockholders  of  the  corporation.  The  title  to  this  property 
passed  absolutely  to  the  purchasers,  who  were  in  nowise  connected  with  the 
old  corporation,  except  as  creditors.  The  transaction  was  closed  and  com- 
pleted as  far  as  the  old  corporation  and  its  stockholders  were  concerned. 

The  new  corporation  which  was  formed  to  take  over  the  property  could 
have  been  incorporated  by  stockholders  of  the  former  company  or  by  entire 
strangers;  the  situation  so  far  as  it  affected  the  creditors  would  have  been 
the  same.  There  may  have  been  a  community  of  interest  between  the  stock- 
holders of  the  old  corporation  and  its  creditors,  and  such  interest  would  be  a 
proving  factor  in  the  creation  of  the  new  corporation  to  salvage  the  property, 
but  this  would  not  change  the  legal  status  of  the  transaction.  The  new 
corporation  having  been  formed,  it  took  over  the  property  which  had  been 
taken  by  the  creditors  in  satisfaction  of  their  claims  on  the  following  con 
ditions : 

They  were  to  furnish  x  dollars  working  capital,  to  raise  which  they  sold 
stock;  and  they  were  to  assume  the  unpaid  liabilities  of  the  old  corporation 
in  exchange  for  the  property  taken  over  by  the  banks. 

The  invested  capital  of  the  Z  Company,  therefore,  would  appear  to  be  the 
x  dollars  received  for  the  stock  sold.    The  value  of  the  property  received  on 
condition  of  the  assumption  of  the  unpaid  liabilities  of  the  Y  Company  can 
not  be  included  in  invested  capital  because  it  is  borrowed  capital. 
3 


11-19-391:  T.  B.  R.  40. 

Reasonable  commissions  or  other  forms  of  compensation  lawfully  paid  by  a 
corporation  for  the  sale  of  its  capital  stock  not  to  be  deducted  in  cornp  ; 
invested  capital. 

The  opinion  of  the  Advisory  Tax  Board  has  been  asked  as  to  whether 
commissions  paid  by  a  corporation  for  the  sale  of  its  capital  stock  are  to  be 

Supplementary  Bulletin  Rulings. 


Sec.  32£.    Ait.  831.— 4 


deducted  in  computing  invested  capital.  Upon  this  question  section  326(a) 
states  that  invested  capital  means  (1)  "Actual  cash  bona  fide  paid  in  for 
stock  or  shares."  *  *  *  These  words  signify  the  actual  cash  paid  in  to  the 
corporation  or  to  its  duly  authorized  agents  by  the  shareholders.  Moreover, 
the  treatment  of  this  question  and  that  of  the  deductibility  of  such  com- 
missions from  gross  income  as  ordinary  and  necessary  expenses  should  be 
correlative.  Under  all  Federal  income  tax  laws  corporations  have  been 
denied  the  right  to  deduct  such  commissions  either  as  current  expense  or  as 
a  deferred  charge  to  future  years.  As  it  is  a  fact  that  such  commissions  are 
"ordinarily"  paid — and  in  the  organization  of  many  corporations  "neces- 
sarily"paid — the  position  of  the  department  with  respect  to  the  deductibility 
from  income  of  this  expense  can  rest  only  on  the  ground  that  it  is  essentially  a 
capital  expenditure,  balanced  by  the  acquisition  of  a  permanent  capital 
asset  of  equivalent  worth. 

Such  payments  must,  like  other  compensation  for  personal  service,  be 
"reasonable"  in  amount.  The  payment  of  any  unusual  or  disproportionate 
commission  should,  in  the  opinion  of  the  Advisory  Tax  Board,  be  examined 
for  the  purpose  of  ascertaining  whether  the  cash  subscription  has  been 
"bona  fide  paid  in"  and  whether  under  the  circumstances  of  the  particular 
case  the  commission  was  reasonable. 
4 


13-19-425:  O.  D.  246. 

No  taxable  income  accrues  to  a  public  utility  corporation  from  a  mere 
book  entry  charging  construction  account  and  crediting  income  account  due 
to  charging  interest  on  the  company's  own  funds  used  temporarily  for  con- 
struction purposes,  as  permitted  under  the  Interstate  Commerce  Com- 
mission's classification;  neither  will  the  company  be  allowed  to  include  in 
its  assets  such  amount  of  interest  charged  to  capital  account  for  the  purpose 
of  determining  invested  capital. 
5 


13-19-431:  O.  D.  248. 

Shares  of  stock  distributed  by  a  corporation  to  its  employees  in  payment 
of  services  rendered,  where  the  amount  is  not  excessive,  may  be  included  in 
invested  capital  to  the  extent  of  the  actual  cash  value  of  the  services  rendered. 
6 


24-19-577:  O.  D.  306. 

Where  bonds  are  exchanged  for  stock  in  the  same  corporation  under  the 
terms  of  a  convertible  trust  deed,  it  will  be  presumed,  for  the  purpose  of 
computing  invested  capital,  that  the  value  of  the  bonds  is  equivalent  to  the 
value  of  the  stock.  The  addition  to  invested  capital  would  accordingly  be 
the  amount  for  which  the  bonds  were  originally  sold. 

7 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 5. 
24-19-578:  O.  D.  307. 

A  contract  may  be  treated  as  tangible  property  when  it  relates  to  rights  in 
tangible  property  to  such  an  extent  that  its  value  arises  chiefly  therefrom, 
but  it  may  not  be  treated  as  invested  capital  unless  it  is  bona  fide  paid  in  for 
stock  or  shares  in  the  corporation,  in  accordance  with  section  326(a)  of  the 
Revenue  Act  of  1918. 
8 


1-20-664:  A.  R.  R.  10. 

Held,  that  the  M  Company  is  entitled  to  include  in  invested  capital  only  the 
amounts  which  have  actually  been  paid  to  the  company  for  the  shares  of  stock 
issued  and  sold  to  officers  and  employees  of  the  company  under  an  installment 
agreement. 

A  meeting  of  the  stockholders  of  the  M  Company  authorized  the  setting 
aside  of  a  sufficient  number  of  shares  of  its  common  stock  for  the  benefit  of 
such  employees  as  desired  to  purchase  stock  under  prescribed  conditions,  and 
in  pursuance  of  this  authority  a  certain  number  of  shares  were  so  set  aside, 
part  of  which  were  taken  by  an  officer  of  the  company  and  the  balance  of  the 
stock  by  other  employees.  The  officer's  stock  was  charged  to  his  personal 
account,  which  draws  interest.  The  stock  sold  to  the  employees  was  sub- 
scribed for  under  agreement  which  permitted  payment  in  cash,  part  cash 
and  part  deferred  payments,  or  all  deferred  payments,  subject  to  conditions 
that  payment  of  subscriptions  should  be  in  weekly  installments;  that  deferred 
payments  should  bear  interest;  and  that  the  agreement  might  be  canceled 
either  upon  request  of  the  employee,  failure  to  make  payments,  any  attempt  of 
the  purchaser  to  sell  his  stock  or  agreement,  or  resignation  or  dismissal  of  the 
employee  prior  to  the  expiration  of  five  years;  in  the  event  of  any  cancellation 
the  employee  to  receive  from  the  company  the  full  amount  of  all  payments 
with  interest,  and,  dependent  upon  the  time  held  more  than  one  year,  certain 
percentages  of  the  difference  between  the  subscription  and  market  price  of 
the  stock.  Dividends  on  the  stock  were  to  be  credited  to  the  subscriber's 
account  as  additional  payments.  In  case  of  cancellation,  however,  the  divi- 
dends were  not  to  be  credited  and  the  subscriber  is  not  to  be  charged  with 
interest  upon  deferred  payments. 

Upon  this  statement  of  fact  only  so  much  of  the  subscription  payments 
as  have  been  actually  received  by  the  company  may  be  recognized  as  invested 
capital  from  the  date  of  such  receipt.  In  the  case  of  the  officer's  stock  only 
so  much  of  the  stock  as  canceled  a  credit  balance  in  his  personal  account  or 
was  actually  paid  for  by  him  can  be  recognized. 
9 


14-20-838:  A.  R.  R.  48. 
RULING  UNDER  REVENUE  ACT  OF  1917. 
Amounts  added  to  invested  capital  in  accordance  with  article  44  of 
Regulations  41  must  be  based  on  the  amount  of  interest  for  the  taxable  year 
which  is  not  allowed  as  a  deduction,  and  not  on  amounts  disallowed  repre- 
senting accrued  interest  for  prior  years. 
10 


Supplementary  Bulletin  Rulings 


Sec.  326.    Art.  831.— 6. 


17-20-881:  A.  R.  M.  43. 

National  banks  at  times  declare  dividends  which  instead  of  being  paid  to 
stockholders  are  carried  with  the  consent  of  the  stockholders  to  a  stockholders' 
liability  account  in  the  name  of  a  trustee  and  the  amount  invested  in  deals  not 
countenanced  by  the  Comptroller  of  the  Currency.  Such  stockholders* 
trustee  account,  however,  is  a  liability  to  the  individual  stockholders,  and  the 
assets  in  which  the  reserve  is  invested  are  the  property  of  the  trustee  for  the 
stockholders.  Therefore,  from  a  technical  viewpoint,  no  part  thereof  should 
be  included  in  the  invested  capital  of  the  bank  even  though  it  includes  the 
income  from  the  reserve  in  its  gross  income. 

Since  shares  in  the  bank  and  in  this  reserve  are  on  the  same  pro  rata  basis, 
and  the  stockholders  are  in  fact  an  association,  a  consolidated  return  could 
be  required  of  the  bank  and  the  association,  the  practical  effect  of  which  /ould 
be  to  include  the  amount  of  the  reserve  in  the  consolidated  invested  capital 
and  the  income  from  the  reserve  in  the  consolidated  income.  The  Committee 
therefore  recommends  that  the  returns  as  made,  including  the  stockholders' 
reserve  accounts  in  the  capital  of  the  banks,  and  the  income  therefrom  in  the 
income  of  the  banks,  be  allowed  to  stand. 
I  ! 


28-20-1063:  A.  R.  R.  167. 
At  the  request  of  the  taxpayer  the  Committee  has  reconsidered  Recom- 
mendation 10,  dealing  with  the  question  of  whether  or  not  an  issue  of  stock 
sold  to  officers  and  employees  of  the  M  Company  can  be  regarded  as  invested 
capital,  the  taxpayer  urging  that  the  conclusion  of  the  Committee  is  not 
consistent  with  article  833  of  Regulations  45,  which  holds  that  enforceable 
notes  or  other  evidences  of  indebtedness,  either  interest  bearing  or  noninterest 
bearing,  of  the  subscriber  received  by  a  corporation  upon  a  subscription  for 
stock  may  be  considered  as  tangible  property  and  included  in  invested 
capital. 

The  Committee  requested  advice  from  the  Solicitor  as  to  whether  or  not 
the  subscription  agreements  under  which  it  was  originally  understood  all  of 
this  stock  was  issued  can  be  regarded  as  enforceable  notes  or  other  evidences 
of  indebtedness  within  the  meaning  of  this  regulation,  and  is  in  receipt  of  a 
memorandum  from  him  expressing  the  opinion  that  such  stock  agreements 
are  not  evidences  of  indebtedness  and  concurring  in  the  conclusion  reached 
by  the  Committee  on  Appeals  as  to  these  subscription  agreements.  It  now 
appears,  however,  that  the  stock  issued  to  the  president  was  not  issued  in  ac- 
cordance with  the  conditions  of  the  subscription  agreements,  but  was  a 
straight-out  unconditional  subscription  charged  to  his  account,  bearing 
interest  and  subsequently  converted  into  a  note. 

The  Committee  therefore  recommends  that  so  far  as  stock  issued  under 
subscription  agreements  is  concerned  the  conclusion  in  A.  R.  R.  10  should 
stand,  but  that  the  stock  issued  to  the  president,  not  issued  under  sub- 
scription agreement,  should  be  recognized  as  invested  ^capital  under  the 
provisions  of  article  833. 
112 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 7. 


31-20-1109:  0.  D.  618. 

A  domestic  corporation  has  a  branch  office  in  London  which  keeps  a 
separate  set  of  books  in  English  currency  and  renders  a  report  at  the  end  of 
the  year  as  to  the  profits,  making  remittances  to  the  home  office  from  time 
to  time  as  they  accumulate  in  excess  of  the  amount  required  for  regular 
expenses. 

In  order  to  obtain  the  correct  invested  capital  as  at  the  beginning  of  the 
taxable  year  1919,  it  is  necessary  to  consolidate  the  balance  sheet  of  the 
branch  office  with  that  of  the  home  office.  It  is  assumed  that  the  net  profits 
earned  by  the  London  branch  during  the  year  1918  represent  surplus;  there- 
fore in  determining  the  amount  of  earned  surplus  attributable  to  the  London 
branch,  the  amounts  remitted  by  it  to  the  home  office  should  be  taken  into 
earned  surplus  at  their  value  in  American  currency  at  the  time  when  such 
remittances  were  made,  and  the  balance  of  the  net  profits  expressed  in 
English  currency  should  be  converted  into  United  States  money  at  the  rate 
of  exchange  as  of  the  end  of  the  taxable  year,  regardless  of  the  fact  that  the 
profits  may  not  have  been  remitted  to  the  home  office. 
13 


(See  31-20-1111;  Section  327,  Article  901.)    Authority  of  Secretary  of 
Treasury  to  fix  tax  and  determine  invested  capital  under  section  210  of  the 
Revenue  Act  of  1917. 
14 


41-20-1238:  A.  R.  R.  268. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, a  Georgia  corporation,  from  the  audit  of  the  company's  returns  for  the 
years  ended  August  31,  1917,  and  August  31,  1918,  resulting  in  additional 
assessments  for  those  years. 

In  determining  the  invested  capital  of  the  corporation  the  field  agent 
undertook  to  establish  values  as  of  1898,  on  the  theory  that  the  company  has 
been  in  continuous  existence  since  that  date.  It  appears,  however,  that  the 
charter  of  the  original  corporation  expired  in  190-,  which  fact  was  not  called 
to  the  attention  of  the  officers  or  stockholders  until  190-,  at  which  time  a 
new  charter  was  secured.  The  question  at  issue,  therefore,  between  the 
Unit  and  the  taxpayer  is  whether  the  present  company  was  in  fact  organized 
in  190-,  or  has  been  in  continuous  operation  at  least  since  1898.  As  this  was 
a  question  of  law  involving  the  scrutiny  of  the  Georgia  statutes,  an  opinion 
of  the  Solicitor  upon  the  point  involved  was  requested  and  the  Committee  is 
in  receipt  of  an  opinion  from  him  as  follows: 

The  Revenue  Act  of  1917,  on  the  subject  of  invested  capital  of  corporations  provides 
as  follows: 

Sec.  207.  That  as  used  in  this  title,  the  term  "invested  capital"  for  any  year  means 
the  average  invested  capital  for  the  year,  as  defined  and  limited  in  this  title,  averaged 
monthly. 

As  used  in  this  title  "invested  capital"  does  not  include  stocks,  bonds  (other  than  obli- 
gations of  the  United  States),  or  other  assets,  the  income  from  which  is  not  subject  to  the 
tax  imposed  by  this  title  nor  money  or  other  property  borrowed,  and  means,  subject  to  the 
above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (I)  Actual  cash  paid  in,  (2)  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash,  for  stocks  or  shares  in  such  corpo- 
ration or  partnership,  at  the  time  of  such  payment  (but  in  case  such  tangible  property  was 
paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of  such 
property  as  of  January  first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed  the 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 8. 


par  value  of  the  original  stock  or  shares  specifically  issued  therefor);  and  (3)  paid  in  or 
earned  surplus  and  undivided  profits  used  or  employed  in  the  business,  exclusive  of  undivided 
profits  earned  during  the  taxable  year:  Provided,  That,  (a)  the  actual  cash  value  of  patents 
and  copyrights  paid  in  for  stock  or  shares  in  such  corporation  or  partnership,  at  the  time 
of  such  payment,  shall  be  included  as  invested  capital,  but  not  to  exceed  the  par  value  of 
such  stock  or  shares  at  the  time  of  such  payment,  and  (b)  the  good  will,  trade-marks,  trade 
brands,  the  franchise  of  the  corporation  or  partnership,  or  other  intangible  property,  shall 
be  included  as  invested  capital  if  the  corporation  or  partnership  made  payment  bona  fide 
therefor  specifically  as  such  in  cash  or  tangible  property,  the  value  of  such  good  will,  trade- 
mark, trade  brand,  franchise,  or  intangible  property,  not  to  exceed  the  actual  cash  or  actual 
cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such  payment;  but  good 
will,  trade-marks,  trade  brands,  franchise  of  a  corporation  or  partnership,  or  other  intangible 
property,  bona  fide  purchased  prior  to  March  third,  nineteen  hundred  and  seventeen,  for 
and  with  interests  or  shares  in  a  partnership  or  for  and  with  shares  in  the  capital  stock  of  a 
corporation  (issued  prior  to  March  third,  nineteen  hundred  and  seventeen),  in  an  amount 
not  to  exceed,  on  March  third,  nineteen  hundred  and  seventeen,  twenty  per  centum  of  the 
total  interests  or  shares  in  the  partnership  or  of  the  total  shares  of  the  capital  stock  of  the 
corporation,  shall  be  included  in  invested  capital  at  a  value  net  to  exceed  the  actual  cash 
value  at  the  time  of  such  purchase,  and  in  case  of  issue  of  stock  therefor  not  to  exceed  the 
par  value  of  such  stock. 

Its  terms,  with  some  modifications  not  necessary  to  consider  here,  were  extended  and 
embodied  in  section  326  of  the  Revenue  Act  of  1918. 

The  only  other  provisions  in  either  of  said  Acts  relating  to  invested  capital  are  sections 
204  and  208  of  the  Revenue  Act  of  1917,  and  sections  330  and  331  of  the  Revenue  Act  of 
1918.  Sections  204  of  the  first  Act  and  330  of  the  latter  Act  both  are  limited  in  scope  to 
the  determination  of  invested,  capital  for  the  prewar  period  and  not  for  the  taxable  year, 
the  former  relating  to  reorganization  ''on  or  after  January  2,  1913,''  and  the  latter  to 
reorganization  "after  January  1,  1911"  (see  article  22,  Regulations  41,  and  article  931, 
Regulations  45).  While  neither  sections  208  of  the  former  Act  nor  331  of  the  latter  Act 
have  any  application  to  reorganizations  prior  to  March  3,  1917,  since  in  express  terms  both 
relate  to  companies  reorganized  "after  March  3,  1917,"  it  is  considered  that  the  fair  inference 
to  be  drawn  from  them  is  that  assets,  in  case  of  reorganization  prior  to  March  3,  1917, 
should  be  valued  as  of  the  date  of  transfer  to  the  new  corporation  for  the  purpose  of  deter- 
mining the  invested  capital  of  such  corporation  for  the  taxable  year. 

The  question  is  now  asked  in  connection  with  the  appeal  of  the  M  Company,  a  Georgia 
corporation,  whether  said  company  is  a  continuation  of  a  predecessor  corporation,  of  the 
same  name,  whose  charter  actually  expired  in  190--,  or  is  it,  under  the  Georgia  law,  a  new 
entity  entitled  to  consider  the  value  of  assets  paid  in  in  190-,  in  the  determination  of  its 
invested  capital.  The  Income  Tax  Unit  has  taken  the  position  that  there  was  no  reorganiz- 
ation in  190-. 

It  appears  that  originally  the  M  Company  was  organized  in  187-,  as  a  Georgia  corpo- 
ration, the  life  of  its  charter  being  30  years.  During  this  period  it  built  up  a  large  business, 
and  acquired  control  of,  and  in  1898  absorbed,  the  property  and  business  of  several  other 
corporations.  The  charter  expired  by  limitation  in  190-.  There  was  no  renewal  of  the 
old  charter.  In  190  -the  stockholders  discovered  that  the  corporation's  charter  had  expired, 
and  they  then  organized  a  new  corporation  under  the  laws  of  Georgia  known  as  M  Company; 
issued  new  shares  of  capital  stock  and  paid  for  these  shares  by  turning  over  to  the  nev 
corporation  "all  of  the  property  and  assets  and  all  of  their  interest  in  the  M  Company 
chartered  in  1 87—."  The  new  company  was  authorized  "to  ratify  and  accept  as  its  corpo- 
ration action  all  acts  and  deeds  of  the  plants  of  the  M  Companv  which,  was  charterer  ti 
1«7-." 

Park's  Georgia  Code,  par.  2241,  provides  that  "Every  corporation  is  dissolved  (1)  by 
exj  iration  of  its  charter."  And  par.  2245  thereof  provides:  "Upon  ihc  dissolution  of  a  cor- 
poration .for  any  cause  all  of  the  property  and  assets  of  every  description  belonging  to  the 
corporation  shall  constitute  a  fund,  first  for  the  payment  of  its  debts  and  then  for  equal 
distribution  among  its  members." 

The  Supreme  Court  of  Georgia  has  held  that,  where  a  corporation's  charter  expired 
"the  corporation  was  as  dead  as  if  it  had  never  been  chartered":  (  Terry  v.  Merchants  \S 
P.  Bk.,  66  Ga.  177-8);  that  "after  expiration  of  its  charter,  the  corporation  was  no  longer 
a  legal  entity"  and  a  writ  of  error  pending  in  the  Supreme  Court  at  the  time  of  such  expira- 
tion was  dismissed,  {Logan  v.  W.  IS  A.  R.  Co.,  87  Ga.  533),  as  (there  being  then  no  longer 
anv  law  under  which  it  could  exist)  no  valid  judgment  could  be  rendered  against  it  (citing 
Bertram  v.  Collins  Mfg.  Co.,  69  Ga.  751,  Ran  v.  Union  Paper  Mill  Co.,  95  Ga.  208);  and 
that  the  remedy  provided  by  the  Georgia  Civil  Code.  par.  1886,  when  litigation  was  pending 
against  a  corporation  at  the  time  of  expiration  of  its  charter,  is  to  have  a  receiver  appointed 
to  administer  its  assets  under  the  direction  of  the  court,  its  debts  to  be  first  paid,  and  the 
balance,  if  any,  distributed  among  its  shareholders,  "as  the  action  of  its  stockholders  (who 
were  separate  and  distinct  from  the  corporation)  owning  all  the  stock,  in  continuing  to 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 9. 


defend  the  suit  after  the  expiration  of  the  charter"  did  not  operate  to  make  the  dead 
corporation  a  corporation  de  facto,  or  a  corporation  by  estoppel,  so  as  to  authorize  the 
plaintiffs  to  proceed  to  judgment  against  it.  {Venable  v.  Southern  Granite  Co.,  135  Ga. 
508-9). 

The  rules  in  question  are  not  peculiar  to  Georgia,  but  are  of  general  application  and  have 
been  variously  stated  as  follows: 

On  the  termination  of  the  corporate  life,  either  by  lapse  of  time  or  decree  of  court  or 
otherwise,  stockholders  are  at  least  the  equitable  owners  of  its  assets,  and  it  seems  that, 
after  the  debts  are  paid,  the  legal  title  to  real  property  vests  in  them  as  tenants  in  common, 
where  the  title  of  the  corporation  or  its  officers  is  not  continued  by  statute  or  where  the  time 
during  which  the  corporate  life  is  extended  by  statute  has  expired,  or  where  the  term  of  the 
statutory  trusteeship  of  the  corporate  officers  has  expired.  (8  Fletcher  Cyc.  Corp.  par. 
5591,  5593  (37);  Stearns  Coat  and  Lbr.  Co.  v.  Van  Winkle,  (Ky.)  221  Fed.  590.) 

Pewabic  Min.  Co.  vr.  Mason,  145  U.  S.  349,  356,  36  L.  Ed.  732. 

When  the  charter  expires,  the  corporation  ceases  to  be  a  corporation  either  de  jure  or 
de  facto  and  can  thereafter  exercise  no  corporate  powers.    (1  Fletcher  Cyc.  par.  285.) 

A  deed  made  by  a  corporation  after  its  charter  has  expired  is  a  nullity.  (2  Cook  on 
Corporations,  par.  641,  p.  1829). 

Furthermore,  "the  stock  cannot  be  transferred."  (8  Fletcher  Cyc.  Corp.  par.  5587). 
It  is  said  rhat  "a  dissolution  of  a  private  corporation  entirely  changes  the  character  of  the 
property  interest  of  the  stockholders;  it  destroys  their  stock  as  such  and  under  the  modern 
equitable  view  substitutes  the  thing  which  their  stock  represented,  that  is,  an  interest 
in  the  corporate  property."  (7  R.  C.  L.  par.  745). 

Solicitor's  Opinion  4  is  consistent  with  the  foregoing. 

It  is  therefore  held  that  for  the  purpose  of  determining  invested  capital  for  the  taxable 
year  a  new  and  distinct  corporation  is  created,  where,  upon  the  expiration  of  the  corporate 
charter  of  the  old  organization,  a  new  corporation  is  formed  under  a  different  charter, 
and  property  and  assets  of  the  old  corporation  are  transferred  by  the  old  stockholders  as 
legal  owners  thereof  to  the  new  corporation  prior  to  March  3,  1917,  in  return  for  capital 
•tock,  and  that  the  provisions  of  section  207,  Revenue  Act  of  1917,  and  section  326,  Revenue 
Act  of  1918,  embodying  with  some  modifications  its  terms,  are  applicable  in  determining 
the  invested  capital  of  the  corporation  in  question. 

In  this  conclusion  the  Committee  concurs,  and  it  will  be  necessary  for 
the  Income  Tax  Unit  to  redetermine  the  invested  capital  paid  in  at  the  date  of 
organization  in  190-. 
16 


46-20-1307:  A.  R.  R.  315 

REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Income  Tax  Unit  in  denying  the  claim  of  the 
company  for  assessment  under  the  provisions  of  section  209  for  1917,  and 
assessing  tax  under  the  provisions  of  section  210 

The  facts  appear  to  be  that  this  company  was  organized  with  a  small 
amount  of  capital  stock,  none  of  which  was  paid  up,  and  later  it  secured  a 
lease  to  wharf  property,  no  bonus  being  paid  for  the  lease.  The  businees  of 
the  company  is  the  subletting  of  this  leased  property. 

It  is  clear  that  the  income  of  the  company  is  derived  chiefly  from  the 
possession  of  a  capital  asset  which  is  not  capital  in  name  only,  but  a  real 
tangible  asset,  to  wit,  its  lease  upon  the  wharf  property. 

The  Committee  is  therefore  of  the  opinion  that  the  company  can  not  be 
construed  to  have  had  no  capital  or  only  a  nominal  capital  in  the  sense 
in  which  nominal  capital  has  been  construed  by  the  courts,  that  is,  capital 
in  name  only,  and  that  the  action  of  the  Unit  in  denying  assessment  under 
section  209  and  assessing  tax  under  section  210  was  proper.  It  therefore 
recommends  that  the  action  of  the  Unit  be  sustained. 
16 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 10. 


47-20-1317:  O.  D.  734. 

In  1912  a  piece  of  property  was  leased  by  the  M  Company  for  50  years 
to  A,  who  assigned  his  interest  to  the  X  Company,  of  which  he  was  president. 
In  1913  the  X  Company  erected  a  theater  building  on  the  property,  which 
building  became  part  of  the  reversion,  and  in  1914  leased  the  building  and 
its  interest  in  the  assignment  for  a  period  of  20  years  to  the  Z  Company, 
which  agreed  to  pay  certain  expenses  as  well  as  all  taxes  of  both  corporations 
(X,  Company  and  Z  Company)  and  distribute  remaining  profits  in  accor- 
dance with  certain  terms  agreed  on,  the  X  Company  and  the  Z  Company 
being  in  no  manner  affiliated  and  having  no  stock  holdings  in  common. 

Held,  that  the  X  Company  and  the  Z  Company  should  each  file  a  separate 
return  and  compute  their  tax  on  their  own  invested  capital.  In  computing 
the  income  and  invested  capital  of  the  X  Company  the  erection  cost  of  the 
theater  building  should  be  allocated  over  the  term  of  its  lease  under  the 
assignment  from  A,  such  amounts  being  deducted  each  year  as  business  ex- 
penses. The  value  of  the  building  may  be  included  in  invested  capital  to 
the  extent  that  it  was  erected  out  of  the  original  paid-in  capital  or  surplus 
of  the  X  Company.  Any  part  of  its  cost  which  was  borne  by  borrowing 
money  can  not  be  so  included,  In  arriving  at  the  amount  of  invested  capital 
as  of  the  beginning  of  the  taxable  year,  the  sum  of  such  prorated  amounts 
which^were  or  should  have  been  deducted  from  the  gross  income*  of  prior 
years,  should  be  subtracted  from  the  original  cost  of  the  building. 
17 


7-21-1456:  A.  R.  R.  384. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  reducing  an  improvement  account 
carried  on  the  corporation's  books  to  cover  the  cost  of  improving  a  leased 
property  under  the  terms  of  a  10-year  lease  which  expired  April,  1915,  through 
depreciation  charges  allocated  over  the  term  of  such  lease,  and  disallowing 
as  invested  capital  any  portion  of  such  account  for  the  taxable  year  1917 
and  subsequent  years. 

It  appears  from  the  records  that  the  M  Company,  a  corporation  organized 
for  the  purpose  of  conducting  a  restaurant,  leased  certain  portions  of  a 
building  from  A  for  a  period  of  10  years  and  3  months.  Under  a  memoran- 
dum of  agreement  which  formed  a  part  of  the  lease  between  A  and  the  cor- 
poration, the  latter  obligated  itself  to  pay  a  monthly  rental  of  x  dollars  for 
the  demised  premises  plus  certain  contingent  charges  and  to  expend  30* 
dollars  or  more  in  making  certain  specified  permanent  improvements  to  such 
premises.  The  amount  expended  in  making  these  improvements  was 
carried  to  an  improvement  account  on  the  books  of  the  corporation,  which 
account  is  still  maintained.  It  is  this  account  which  the  Unit  has  disallowed 
as  invested  capital  for  the  year  1917  and  subsequent  years,  from  which  action 
the  taxpayer  now  appeals  for  the  reason  that  no  depreciation  on  the  improve- 
ments has  ever  been  claimed  and  for  the  further  reason  that  the  premises 
with  respect  to  which  the  improvements  were  made  are  still  in  the  possssions 
of  the  taxpayer,  the  original  lease  having  been  renewed. 

The  taxpayer  has  filed  with  the  Unit  a  certified  copy  of  the  memorandum 
of  agreement  which  formed  a  part  of  the  original  lease  dated  November,  1904, 
together  with  certified  copies  of  the  agreements  covering  renewal  leases 
dated  March,  1915,  and  April,  1920. 

This  memorandum  of  agreement  specifically  provides  that  the  imp  rove- 
Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.-11. 


ments  therein  provided  for  shall  upon  their  installation  by  the  lessee  immedi- 
ately become  the  property  of  the  lessor.  It  contains  no  provision  granting 
the  lessee  any  right  of  renewal  upon  expiration  of  the  lease  and  it  is  not 
shown  nor  claimed  that  the  lessee  had  any  such  right  under  the  lease  itself. 
The  lease  was  to  run  for  a  period  of  10  years  and  3  months  beginning  Febru- 
ary, 1905,  and  ending  April,  1915,  on  which  latter  date  the  lessee  corporation 
was  to  surrender  all  right  and  title  to  the  demised  premises  and  the  improve- 
ments which  it  was  obligated  to  make.  That  the  corporation  did  surrender 
all  of  such  right  and  title  is  evidenced  by  the  memorandum  of  agreement  form- 
ing part  of  the  renewal  lease,  dated  March,  1915. 

Article  109  of  Regulations  45  as  amended  by  Treasury  Decision  3062, 
provides: 

Where  a  leasehold  is  acquired  for  business  purposes  for  a  specified  sum,  the  purchaser 
may  take  as  a  deduction  in  his  return  an  aliquot  part  of  such  sum  each  year,  based  on  the 
number  of  years  the  lease  has  to  run.  *  *  *  The  cost  borne  by  a  lessee  in  erecting 
buildings  or  making  permanent  improvements  on  ground  of  which  he  is  lessee  is  held  to  be 
a  capital  investment  and  not  deductible  as  a  business  expense.  In  order  to  return  to  such 
taxpayer  his  investment  of  capital,  an  annual  deduction  may  be  made  from  gross  income  of 
an  amount  equal  to  the  total  cost  of  such  improvements  divided  by  the  number  of  years 
remaining  of  the  term  of  lease,  and  such  deduction  shall  be  in  lieu  of  a  deduction  for  de- 
preciation.   *    *  * 

Under  the  provisions  of  the  above-quoted  article  the  amount  invested  by 
the  M  Company  in  the  said  improvements,  if  paid  for  out  of  original  capital 
or  surplus,  can  be  held  to  constitute  invested  capital  for  the  taxable  year 
during  which  expended,  such  invested  capital  to  be  reduced  at  the  beginning 
of  each  subsequent  year  by  an  amount  equal  to  the  result  obtained  by  dividing 
the  total  cost  of  such  improvements  by  the  number  of  years  of  the  lease 
term.  The  lease  under  the  terms  of  which  the  improvements  were  made 
expired  in  1915,  and  subsequent  to  that  year  the  taxpayer  had  no  right  or 
title  under  the  lease  to  any  asset  which  constituted  a  part  of  such  improve- 
ments, not  even  the  right  of  usage.  The  amount  expended  for  the  improve- 
ments and  their  installation  may  be  considered  as  a  bonus  paid  to  secure  the 
execution  of  the  lease,  or  as  additional  rental  for  the  leased  premises  to  be 
charged  off  as  expense  ratably  over  the  term  of  the  lease.  Whether  or  not 
such  amount  was  so  charged  off,  any  right  or  title  which  the  taxpayer  ever 
possessed  in  the  investment  was  exhausted  upon  termination  of  the  original 
lease  in  April,  1915,  and  subsequent  to  that  date  it  possessed  nothing  therein 
which  can  be  said  to  constitute  invested  capital  for  the  purpose  of  computing 
excess  profits  tax  under  the  provisions  of  the  Revenue  Act  of  1917  or  1918. 

The  Committee,  therefore,  recommends  that  the  action  of  the  Unit  in 
disallowing  as  invested  capital  any  portion  of  the  amount  expended  for 
improvements  by  the  M  Company  under  the  terms  of  the  lease  dated  No- 
vember, 1904,  be  sustained. 
18 


7-21-1453:  O.  D.  811. 

No  taxable  income  accrues  to  a  railroad  corporation  from  a  mere  book 
entry  charging  construction  account  and  crediting  income  account  due  to 
charging  rental  on  its  equipment  such  as  locomotives,  cars,  etc.,  when  used 
temporarily  by  the  corporation  for  its  construction  work,  as  permitted  under 
the  Interstate  Commerce  Commission's  classification.  Neither  will  the 
company  be  allowed  to  include  in  its  assets  such  amount  of  rental  charged  to 
capital  account  for  the  purpose  of  determining  invested  capital. 
19 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 12. 


8-21-1470:  A.  R.  R.  393. 
REVENUE  ACT  OF  1917. 

Held,  that  values  claimed  for  "contracts,  brands,  and  good  will"  can  not  be 
allowed  as  invested  capital  when  it  is  not  conclusively  shown  that  such  values 
represent  paid-in  capital  of  a  partnership,  and  that  in  reorganization  no  greater 
value  can  be  given  to  corporate  assets  than  existed  before  reorganization,  the 
interest  in  the  corporation  being  substantially  the  same  as  that  in  the  partnership. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  part- 
nership, and  the  N  corporation,  from  the  action  of  the  Income  Tax  Unit 
in  disallowing  certain  items  as  invested  capital. 

The  action  of  the  Income  Tax  Unit  in  disallowing,  in  the  taxable  year 
1917,  7x  dollars  as  invested  capital  of  the  M  partnership  is  explained  in  the 
following  language: 

This  decrease  is  due  to  the  disallowance  of  7x  dollars  claimed  as  the  value  of  contracts 
and  good  will  not  shown  on  the  books  of  the  partnership.  No  evidence  has  been  submitted 
as  to  the  value  of  these  intangible  assets,  the  methods  of  acquiring  them,  and  the  cost. 
(See  Regulations  41,  articles  57-60,  64.) 

The  action  of  the  Income  Tax  Unit  in  disallowing  as  invested  capital 
for  the  N  corporation  an  item  of  lOx  dollars  is  explained  in  the  following 
language: 

The  amount  at  which  these  intangible  assets  were  included  in  the  invested  capital  of 
the  M  partnership,  in  its  return  for  the  five  months'  period  ended  May  31,  1917,  has  been 
excluded  from  the  invested  capital  of  the  partnership  in  a  letter  addressed  to  it  by  this 
office.  The  corporation  succeeded  the  partnership  as  of  June  1,  1917.  The  excess  profits 
tax  return  filed  by  the  corporation  shows  that  an  interest  of  50  per  cent  or  more  remained 
in  control  of  the  same  persons.  In  such  case  no  asset  transferred  from  the  partnership 
will  be  allowed  to  be  included  in  the  invested  capital  of  the  corporation,  at  a  value  greater 
than  would  have  been  allowed  in  computing  the  invested  capital  of  the  partnership  if  no 
transfer  of  assets  had  taken  place,  unless  such  asset  is  specifically  paid  for  in  cash  or  tangible 
property.    (See  Regulations  41,  article  50.) 

The  facts  on  which  the  appeal  has  been  taken  may,  therefore,  be  said  to 
be  definitely  stated  in  the  exceptions  above  quoted. 

The  partnership  was  of  more  than  40  years'  standing  and  on  June  1,  1917, 
its  affairs  were  incorporated  as  the  N  Corporation  with  capital  stock  of  40x 
dollars.  In  the  year  1917,  just  prior  to  this  reorganization,  there  was  set 
up  on  the  books  of  the  partnership  an  item  of  7x  dollars  for  "contracts, 
brands,  and  good  will,"  but  in  the  reorganization  by  incorporation  the  said 
account  "contracts,  brands,  and  good  will"  was  set  up  on  the  books  of  the 
corporation  as  of  the  value  of  lOx  dollars.  It  is  contended  that  two  contracts, 
recorded  in  this  accounting,  were  worth  at  least  lOx  dollars,  but  it  is  noted, 
these  contracts  dated  as  far  back  as  the  year  1908.  It  is  further  contended 
that  as  the  result  of  an  examination  and  audit  of  the  books  of  the  M  part- 
nership, for  the  years  1908  to  1912,  inclusive,  the  average  net  earnings  on 
invested  capital  of  said  partnership  were  more  than  52  per  cent.  It  is  noted 
however,  that  at  December  31,  1916,  the  financial  statement  of  the  partner- 
ship showed  a  deficit  of  l^x  dollars.  It  is  not  in  evidence  that  the  value  of 
"contracts,  brands,  and  good  will,"  either  in  the  amount  claimed  as  set  up 
on  the  partnership  books  or  in  the  amount  claimed  as  set  up  on  the  corporation 
books,  was  actually  paid  into  the  partnership  or  corporation. 

Article  42  of  Regulations  41  provides,  in  part,  as  follows. 

The  basis,  or  starting  point,  in  the  computation  of  invested  capital  is  found  in  the 
amount  of  cash  and  other  property  paid  in,  the  original  values  of  such  other  property 
being  determined  in  accordance  with  the  rules  laid  down  in  these  regulations.  *  *  * 
If  value  appreciation  of  a  kind  not  subject  to  income  tax  (other  than  that  allowed  under 
article  55)  has  been  taken  up  in  the  accounts,  a  deduction  must  be  made  in  respect  of  such 
appreciation  so  taken  up. 


Supplementary  Bulletin  Rulings 


Sec.  326.    Art.  831.— 13. 


This  Committee,  in  its  Recommendation  17  published  in  Bulletin  3-20, 
said,  in  part,  as  follows: 

The  fact  remains,  however,  that  the  law  expressly  provides  what  may  be  regarded 
as  the  invested  capital  of  a  corporation  or  partnership,  and  that  is,  as  affects  the  question 
now  at  issue,  the  amount  of  cash  or  tangible  property  paid  in  to  the  corporation  or  part- 
nership for  stock  or  shares,  the  share  evidently  referring  to  the  member's  interest  in  the 
paid-in  capital  of  the  partnership. 

The  law  and  the  decisions  issued  thereon  by  the  Department  have  con- 
sistently stated  that  the  basis  or  starting  point  in  the  computation  of  invested 
capital  is  the  amount  of  cash  or  other  property  actually  paid  in,  the  original 
values  of  such  other  property  being  determined  in  accordance  with  the 
statute  and  regulations. 

It  is  contended  that  the  partnership  was  one  of  long  standing  and  that 
the  right  to  include  this  additional  capital  is  entirely  justified  from  figures 
and  detailed  statements  of  earnings  as  reflected  by  two  contracts  alone. 
The  Committee  can  not  concur  in  this  contention.  It  can  not  recognize 
going  concern  value  or  appreciation  growing  out  of  the  development  and  ex- 
pansion of  a  business.  There  is  no  justification  in  the  law  or  in  the  regula- 
tions for  doing  so.  Furthermore,  it  has  been  conclusively  pointed  out  by  the 
Income  Tax  Unit,  that  under  article  50  of  Regulations  41 : 

If  an  interest  or  control  in  such  trade  or  business  of  50  per  cent  or  more  remains  in  con- 
trol of  the  same  persons,  corporations,  associations,  partnerships,  or  any  of  them,  then 
in  ascertaining  the  invested  capital  of  the  trade  or  business  no  asset  transferred  or  received 
from  the  prior  trade  or  business  shall  be  allowed  a  greater  value  than  would  have  been 
allowed  under  these  regulations  in  computing  the  invested  capital  of  such  prior  trade 
or  business  if  such  asset  had  not  been  so  transferred  or  received,  unless  such  asset  was 
paid  for  specifically  as  such,  in  cash  or  tangible  property,  and  then  not  to  exceed  the  actual 
cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such  pay- 
ment. 

In  this  article  no  distinction  is  made  between  tangible  and  intangible 
assets  so  transferred. 

The  Committee  accordingly  recommends  that  the  action  of  the  Income 
Tax  Unit  in  disallowing  these  items  as  invested  capital  of  the  partnership 
and  of  the  corporation  be  sustained. 
20 


8-21-1471:  A.  R.  R.  396. 
REVENUE  ACT  OF  1917. 

Held,  that  the  value  of  certain  patents  for  which  stock  of  the  M  Company 
was  issued  must  be  measured  by  the  cash  consideration  paid  therefor  by  certain  in- 
corporators of  the  company  just  prior  to  incorporation. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  disallowing  as  invested  capital 
the  par  value  of  shares  of  stock  of  the  said  corporation  issued  specifically 
for  patents  at  date  of  incorporation. 

The  M  Company  was  incorporated  in  1914,  with  capital  common  stock 
of  250x  dollars.   The  articles  of  incorporation  read,  in  part,  as  follows: 

The  amount  of  the  capital  stock  of  said  corporation  shall  be  250*  dollars  divided  into 
25y  shares. 

It  appears  that  in  September,  1913,  A  assigned  an  undivided  one-half 
interest  in  two  patents  to  B  in  consideration  of  \\^x  dollars  in  cash,  and  in 
June,  1914,  A  assigned  his  remaining  one-half  interest  in  said  patents  to  C, 
D,  E,  and  F,  in  consideration  of  5x  dollars  cash  and  in  further  consideration 
of  said  assignees  assuming  the  liability  of  A  in  all  the  debts  and  outstanding 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 14. 


obligations  of  the  A  Company,  a  partnership,  which  debts  and  obligations 
amounted  to  2>]/^x  dollars. 

The  Income  Tax  Unit,  based  on  the  report  of  an  examining  revenue 
agent,  allowed  6}/2X  dollars  as  the  value  of  the  patents  acquired  for  225* 
dollars  of  the  total  issue  of  capital  stock  of  the  corporation  organized  imme- 
diately thereafter.  In  addition  thereto,  there  was  allowed  as  invested  capital 
llx  dollars,  the  said  amount  being  the  cash  paid  in  at  par  ($100)  for  1  l-10y 
shares.  There  was  also  allowed  as  invested  capital  XY^x  dollars,  the  actual 
cost  of  patents  subsequently  acquired,  making  a  total  invested  capital  of 
19#  dollars. 

Because  the  income  of  the  corporation  was  disproportionate  to  the  amount 
of  invested  capital,  the  tax  was  subsequently  adjusted  under  section  210 
of  the  Revenue  Act. 

The  taxpayer  contends  that  the  full  par  value,  namely,  225a:  dollars, 
should  be  allowed  for  the  two  patents  first  mentioned,  and  that  on  this 
basis  of  invested  capital  the  tax  should  be  assessed  under  section  207  of  the 
Revenue  Act.  As  above  stated,  the  Income  Tax  Unit  has  rested  its  decision 
on  the  purchase  price  of  the  patents,  as  evidenced  by  sale  when  acquired 
by  certain  individuals,  five  of  whom  subsequently  became  incorporators 
of  the  M  Company. 

No  evidence  has  been  submitted  by  the  taxpayer  to  show  the  value  of 
similar  patents,  if  indeed  such  evidence  could  be  produced,  but  the  record 
shows  that  for  the  fractional  part  of  the  year  1914  (the  year  in  which  the 
company  was  incorporated)  there  was  a  profit  of  }/§x  dollars  from  operations; 
in  1915  a  profit  of  Tlx  dollars;  in  1916  a  profit  of  44a;  dollars,  and  in  1917  a 
profit  of  43a;  dollars.  In  this  latter  year  the  corporation  claimed  a  deprecia- 
tion based  on  the  life  of  the  patents  which,  if  disallowed,  would  leave  a  net 
income  of  70a;  dollars.  It  is  also  a  matter  of  record  that  the  1  l-10y  shares 
of  stock  were  sold  at  par  to  about  25  individual  subscribers  in  various  propor- 
tions and  an  affidavit  has  been  submitted  by  a  broker  who  says  that  he  has  been 
engaged  in  the  brokerage  business  for  several  years  and  that  in  the  course  of 
his  business  he  has  sold  a  good  deal  of  the  stock  of  the  M  Company  during 
the  three  years  just  prior  to  May,  1919,  at  a  price  uniformly  something  near 
par,  the  sales  ranging:  between  $85  and  $105  per  share. 

The  Committee  has  given  careful  consideration  to  the  above  facts,  but 
it  can  not  fail  to  recognize  that  the  A  Company,  a  partnership,  which  con- 
veyed the  patents  immediately  prior  to  the  organization  of  the  M  Company, 
a  corporation,  to  the  principal  incorporators  for  a  cash  consideration  definitely 
known,  was  not  successful  in  developing  these  patents.  What  efforts  were 
made  to  do  so  are  not  recorded  in  the  files  before  the  Committee,  but  the  fact 
is  that  after  final  sale  of  the  patent  rights  to  a  group  of  successful  business 
men  there  was  immediately  put  forth  an  active,  progressive,  commercial 
plan  which  gave  general  recognition  to  the  practical  use  of  the  patents.  It 
was  this  development  of  an  idea  in  a  systematic,  corporate  way  without 
the  necessity  of  large  financial  investment  by  any  one  of  the  incorporators 
of  the  M  Company  that  gave  substantial  return  to  the  stockholders.  The 
Revenue  Act  does  not  recognize  as  paid-in  capital  a  value  rising  from  develop- 
ment of  an  idea  after  incorporation.  It  may  be  said  this  value  is  reflected 
in  the  earned  surplus  and,  as  such,  it  is  a  part  of  the  invested  capital  of  the 
corporation. 

That  a  cash  value  of  225*  dollars  for  the  patents  at  time  of  incorporation 
of  the  M  Company  was  not  recognized  by  the  incorporators  is  indicated 
by  failure  of  such  incorporators  to  return  as  individual  taxable  income  the 
difference  between  this  amount,  pro  rata,  and  the  cash  purchase  price. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  331.— 15. 


On  these  conclusions  the  Committee  recommends  that  the  action  of  the 
Income  Tax  Unit  in  fixing  a  value  of  the  patents  by  the  cash  consideration 
paid  therefor  just  prior  to  incorporation  of  the  M  Company  and  the  sub- 
sequent assessment  of  taxes  by  the  Unit  under  Section  210  of  the  Revenue 
Act  of  1917  be  approved. 
21 


8-21-1468:  O.  D.  821. 

Section  1764,  Wisconsin  Statutes  (1915)  provides  that  the  corporate 
existence  of  a  dissolved  corporation  shall  be  continued  for  the  purpose  of 
liquidating  its  assets  and  winding  up  its  affairs.  It  is  held,  therefore,  that 
profit  resulting  from  the  sale  of  assets  of  a  Wisconsin  corporation  in  process 
of  liquidation  is  subject  to  income  and  excess  profits  taxes  in  the  same  manner 
as  profits  derived  from  the  active  operation  of  the  corporation. 

In  such  a  case  the  invested  capital  to  be  used  as  a  basis  in  determining 
the  excess  profits  credit  is  arrived  at  in  the  same  manner  as  invested  capi- 
tal of  an  active  corporation,  making  due  allowance  for  any  amount  of 
capital  assets  which  have  been  liquidated  and  returned  to  the  stockholders. 

Section  1764,  Wisconsin  Statutes  (1915)  provides: 

*  *  *  and  when  any  corporation  shall  become  so  dissolved  the  directors  or  managers 
of  the  affairs  of  such  corporation  at  the  time  of  its  dissolution,  by  whatever  name  they  may 
be  known,  shall,  subject  to  the  power  of  any  court  of  competent  jurisdiction  to  make,  in 
any  case,  a  different  provision,  continue  to  act  as  such  during  said  term  and  shall  be  deemed 
the  legal  administrators  of  such  corporation  with  full  power  to  settle  its  affairs,  etc. 

Therefore,  the  responsibility  for  filing  appropriate  returns  for  the  cor- 
poration and  paying  taxes  shown  thereby  to  be  due  devolves  upon  the  trustees 
in  liquidation  of  such  other  legal  administrators  as  have  charge  of  the  property 
and  affairs  of  the  corporation  during  the  period  of  liquidation.  They  must 
make  returns  of  income  for  such  corporation  in  the  same  manner  and  form 
as  an  active  corporation.  Conversely,  they  are  not  required  to  file  returns 
as  fiduciaries. 
22 


9-21-1487:  A.  R.  R.  390. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company, 
a  corporation,  from  the  action  of  the  Income  Tax  Unit  in  adjusting  the 
company's  tax  returns  for  the  years  1917  and  1918.  The  points  at  issue  are 
the  valuation  of  the  old  plant  of  the  company  as  of  February  14,  1917;  de- 
preciation actually  sustained  in  the  years  1917  and  1918,  and  a  proper  com- 
pensation for  officers. 

As  of  January  1,  1917,  the  N  Company  had  outstanding  paid-in  capital 
stock  of  \0x  dollars,  all  of  which  was  owned  by  A  and  B,  but  the  buildings 
and  the  land  on  which  the  buildings  were  located  were  owned  individually 
by  A  and  B.  During  the  month  of  January  there  was  a  reorganization. 
The  name  of  the  company  was  changed  to  the  M  Company  and  the  capital 
stock  was  increased  to  40a:  dollars  and  issued  in  equal  amounts  to  A  and  B. 
The  stock  of  the  N  Company  v/as  retired,  and  the  additional  capital  of  30* 
dollars  was  written  up  on  the  books  as  good  will.  Under  date  of  February  14, 
1917,  A  and  B,  without  further  consideration,  turned  over  to  the  corporation 
the  buildings,  which  they  individually  owned,  and  the  original  bookkeeping 
entry  was  adjusted,  crediting  good  will  with  15*  dollars  to  the  debit  of 
real  estate  and  buildings.    The  revenue  agent,  who  examined  the  books  of 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 16. 


the  corpuiaaon,  reduced  the  value  of  these  buildings  from  15*  dollars  to  6x 
dollars,  and  this  deduction  affected  both  depreciation  and  invested  capital. 
This  examination  was  made  in  1919  and  he  based  his  reduction  of  this  asset 
on  a  statement  made  by  A  that  he  would  accept  4#  dollars  in  cash  for  the 
property,  and  on  a  statement  made  by  B  that  they  were  holding  the  property 
at  8x  dollars  on  a  trade  for  some  other  real  estate.  The  taxpayer,  in  taking 
exception  to  the  valuation  determined  by  these  statements,  has  submitted 
two  appraisals,  one  by  C,  which  places  a  going  concern  value  on  the  property 
as  of  February  11,  1917,  of  15x  dollars,  and  the  other  by  D,  which  places 
the  appraisal  on  a  cost  basis  less  depreciation  as  of  December  22,  1919, 
at  10a;  dollars,  of  which  valuation  9x  dollars  is  for  the  buildings  and  x  dollars 
is  for  the  land.  In  a  conference  held  with  the  Income  Tax  Unit  the  valuation 
of  6x  dollars  placed  by  the  revenue  agent  was  increased  by  the  Unit  to  Sx 
dollars. 

The  Committee  is  of  the  opinion  that  the  going  concern  value,  as  deter- 
mined by  the  appraisal  by  C,  is  more  or  less  speculative  and  that  the  value 
adopted  by  the  revenue  agent  is  without  substantial  foundation.  The 
additional  value  allowed  by  the  Unit  appears  to  be  more  or  less  arbitrary  in 
an  effort  to  arrive  at  a  compromise  adjustment  which,  however,  was  not 
accepted  by  the  taxpayer.  Accordingly,  the  Committee  is  of  the  opinion 
that  it  can  not  fail  to  respect  the  appraised  value  (by  D)  of  lOx  dollars, 
plus  the  depreciation  on  the  buildings  from  February  14,  1917,  to  December 
22,  1919,  as  most  correctly  reflecting  the  sound  value  at  date  of  transfer. 

This  adjustment  of  value  will  change  the  amount  of  depreciation  as 
adjusted  by  the  revenue  agent,  but  in  addition  thereto  the  taxpayer,  through 
public  accountants  of  good  standing,  has  submitted  a  very  elaborate  schedule 
of  depreciation  on  all  other  property  values,  basing  the  same  on  inventory 
of  the  values  taken  by  the  owners  of  the  property  in  March,  1913.  These 
were  depreciated  values  but  the  taxpayer  applied  these  rates  of  depreciation 
annually  on  reduced  values.  The  revenue  agent  made  no  changes  in  this 
basis  but  accepted  the  taxpayer's  figures  as  reasonable.  The  public  account- 
ants, however,  have  consistently,  in  the  compilation  of  their  statement, 
applied  the  rates  annually  on  the  appraised  value  or  on  cost  when  acquired 
subsequent  to  appraisal  and  it  is  understood  that  no  substantial  change 
has  been  made  in  the  rates  except  in  the  year  1917  when,  on  account  of  the 
plant  running  at  double  capacity,  an  accelerated  rate  on  machinery,  based 
on  40  per  cent  of  the  normal  rate,  was  used.  The  Committee  has  carefully 
analyzed  this  schedule  of  depreciation  prepared  by  the  public  accountants 
and  is  of  the  opinion  that  it  should  govern  in  disposing  of  the  question  of 
depreciation,  subject,  however,  to  the  valuation  as  above  approved  for  the 
buildings  taken  over  in  February,  1917. 

For  three  years  prior  to  1917,  A  and  B,  sole  owners  of  the  stock  of  the 
corporation,  and  its  principal  officers,  were  each  paid  x  dollars  annual  salary. 
In  November,  1917,  by  resolution  of  the  board  of  directors,  this  salary  was 
increased  to  a  total  salaried  expense  of  5x  dollars  per  annum.  Of  this  aggregate 
amount  for  the  two  officers,  the  revenue  agent  disallowed  2x  dollars  prorated 
for  1917  and  for  the  year  1918,  making  the  salary  of  each  1  V£r  dollars  per 
annum  instead  of  2%x  dollars.  This  disallowance  of  2x  dollars  was  reduced 
by  the  Income  Tax  Unit,  in  conference  with  the  taxpayer,  to  x  dollars,  which 
gave  each  of  the  officers  of  the  company  an  annual  salary  of  2v  dollars  per 
year  as  against  2%x  dollars  per  year  as  claimed  in  the  returns  and  supported 
by  the  action  of  the  directors  of  the  company. 

The  average  yearly  sales  of  the  company  from  1912  to  1916,  inclusive, 
amounted  to  45*  dollars.    In  the  year  1916  the  sales  were  52*  dollars;  in 


Supplementary  Bulletin  Rulings. 


.81— .I£8  .ftA    .dSfc  .392 


Sec.  326.   Art.  831.— 17. 


1917,  72x  dollars;  in  1918,  82*  dollars.  In  the  latter  year  the  net  income 
of  the  company  was  less  than  in  1917,  but  this  is  explained  by  the  retirement 
of  substantial  parts  of  the  old  plant  and  to  moving  into  the  new  plant.  How- 
ever, a  salary  deduction  of  4x  dollars  for  the  taxable  year  is  in  fair  com- 
parison with  that  of  similar  industries  and  on  this  basis  it  was  allowed  by  the 
Unit. 

Summing  up,  the  Committee  is  of  the  opinion  that  value  of  buildings 
acquired  in  February,  1914,  should  be  accepted  on  basis  of  recognized  ap- 
praised value;  that  depreciation  should  be  adjusted  on  this  value  and  on 
the  appraised  value  as  of  March,  1913,  of  other  units  of  equipment  and  at 
established  rates  to  which  the  taxpayer  conforms  in  his  depreciation  schedule 
and  that  the  action  of  the  Income  Tax  Unit  be  sustained  in  allowing  com- 
pensation of  the  two  principal  officers  at  the  rate  of  4x  dollars  per  annum. 


23-21-1680:  Ct.  D.  12. 
[ThisV'ruling"^consists,  merely,  of  the  United  States  Supreme  Court 
decision  in  the  La  Belle  Iron  Works  case  reported  in  full  beginning  at  f889 
herein. — The  Corporation  Trust  Company.] 
24 


27-21-1719:  A.  R.  M.  134. 

REVENUE  ACT  OF  1917. 

Held,  that  the  M  Company  should  be  allowed  the  full  amount  of  2>\$x 
dollars  expended  by  it  in  cash  prior  to  the  year  1909  and  capitalized  as  a 
part  of  the  cost  of  developing  certain  intangible  assets  which  it  had  acquired 
for  stock  and  cash. 

The  Committee  has  had  under  consideration  the  request  of  the  Income 
Tax  Unit  for  an  expression  of  opinion  whether  an  expenditure  of  3%x  dollars 
by  the  M  Company  for  advertising  prior  to  the  year  1909  can  be  capitalized 
and  allowed  as  invested  capital  for  the  taxable  year  1917. 

The  M  Company  was  incorporated  in  189-,  at  which  time  it  acquired 
a  trade-mark  for  a  consideration  of  2x  dollars  cash.  This  purchase  included 
a  contract  granting  to  the  corporation  the  exclusive  right  to  sell  this  prepa- 
ration. In  189-  it  acquired  certain  other  trade-marks  for  3x  dollars,  issu- 
ing therefor  capital  stock  of  the  company  in  this  amount.  In  another  year 
prior  to  1909,  it  acquired  several  other  trade-marks  and  formulae,  issuing 
therefor  2x  dollars  in  capital  stock. 

In  1905,  by  action  of  the  board  of  directors  of  the  company,  the  sum 
of  x  dollars,  expended  for  advertising,  was  capitalized  by  being  charged  to 
trade-marks,  formulae,  etc.  In  1906  the  board  of  directors  ordered  x  dollars 
eliminated  from  expense  and  capitalized.  In  December,  1906,  by  order  of 
the  board  of  directors,  following  an  advertising  campaign,  a  credit  of  }/^x 
dollars  was  carried  to  profit  and  loss  (thus  decreasing  expenses  and  increas- 
ing net  income)  and  same  was  capitalized  by  charging  it  to  trade-marks, 
formulae,  etc.  In  April,  1906,  by  action  of  the  board  of  directors,  a  further 
expenditure  of  x  dollars,  made  as  of  a  previous  year  for  advertising,  was 
capitalized  and  charged  to  trade-marks,  formulae,  etc.  The  items  for  ad- 
vertising, capitalized  as  above  indicated,  aggregate  3%x  dollars  and  the 
corporation  now  contends  that  the  capital  stock  issued  against  this  intangible 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  831.— 18. 


should  be  allowed  in  full  as  invested  capital  since  the  intangible  was  acquired 
for  cash. 

It  is  noted  that  all  of  these  transactions  occurred  prior  to  the  year  1909 
and  the  case,  therefore,  as  presented,  is  not  unlike  that  on  which  the  Com- 
mittee passed  its  opinion  under  Recommendation  115  (not  published  in 
bulletin  service),  March  27,  1920.    In  that  opinion  it  was  said: 

The  Committee  is  not  of  the  opinion  that  article  841  of  Regulations  45  should  be  applied 
in  the  instant  case.  This  regulation  seems  obviously  to  have  been  drawn  for  the  purpose 
of  preventing  the  inclusion  in  surplus  or  invested  capital,  for  the  taxable  year  1918,  of 
amounts  charged  to  expenses  prior  thereto,  when  the  intent  was  to  evade  taxation.  But 
such  intent  in  this  case  is  not  clear,  nor  can  it  even  be  inferred.  Indeed,  the  facts  abso- 
lutely prohibit  such  an  inference,  for  the  reason  that  the  transaction  by  which  this  res- 
toration to  invested  capital  was  accomplished  was  made  effective  on  the  first  day  of  March, 
1909,  thus  conclusively  demonstrating  the  intention  of  the  directors  in  regard  to  these 
expenditures,  many  years  before  the  income  and  excess-profits  tax  law  was  placed  upon 
the  statute  books. 

In  the  opinion  of  the  Committee,  the  regulation  would  be  effective  to  prevent  the  res- 
toration to  invested  capital  in  1918  of  amounts  previously  charged  to  expenses,  but  a 
careful  reading  of  the  regulation  renders  it  exceedingly  doubtful  that  it  is  subject  to  so 
broad  a  construction  that  it  can,  by  any  possibility,  be  applied  to  transactions  accom- 
plished and  completed  before  that  year.  Attention  is  particularly  directed  to  the  last 
sentence  of  the  regulation  quoted  above:  "An  election  of  this  sort  which  was  made  con- 
currently with  the  transaction  can  not  now  be  revised,  and  amended  returns  in  respect 
thereof  can  not  be  accepted."' 

There  is  no  intent  on  the  part  of  the  corporation  now  to  revise  an  action  taken  years 
ago  and  no  attempt  has  been  made  to  file  amended  returns. 

The  Committee  believes  that  this  reasoning  is  strengthened  by  the  following  quotation 
from  Article  843  of  Regulations  45: 

*  *  *  Where  a  corporation  has  charged  to  current  expenses  the  cost  of  developing 
or  protecting  patents,  no  amount  in  respect  thereof  expended  since  January  1,  1909,  can 
be  restored  in  computing  invested  capital.  In  respect  of  expenditures  made  before  Jan- 
uary 1,  1909,  a  corporation  now  seeking  to  restore  them  must  be  prepared  to  show  to  the 
satisfaction  of  the  Commissioner  that  all  such  items  are  proper  capital  expenditures. 

While  the  opinion  just  quoted  was  applicable  to  the  invested  capital  of  a 
corporation  for  the  taxable  year  1918,  there  is  no  reason  why  the  same  prin- 
ciple should  not  be  applied  in  determining  the  invested  capital  of  the  M 
Company  for  the  taxable  year  1917. 

The  Committee  accordingly  is  of  the  opinion  that  the  M  Company  should 
be  allowed  the  full  amount  of  3%x  dollars,  expended  by  it  in  cash  prior  to 
the  year  1909  and  capitalized,  as  a  part  of  the  cost  of  developing  certain 
intangible  assets  which  it  had  acquired  for  stock  and  cash. 
25 


Supplementary  Bulletin  Rulings. 


1-31-22 

Sec.  326.   Art  831.— 19. 

32-21-1765:  O.D.  991. 

In  1920  a  corporation  increased  its  capital  stock  by  issuing  y  additional 
shares  of  stock  of  a  par  value  of  x  dollars  perjshare.  Each  stockholder 
registered  on  the  corporation's  book  at  the  close  of  business  March  — ,  1920, 
was  given  the  right  to  subscribe  for  one  new  share  of  stock  for  each  two 
shares  of  old  stock  held  by  him_on^that  date  uponjpayment  of  2%x  dollars 
per  share,  payable  as  follows:  x  dollars  on  May  — ,  1920,  %x  dollars  on 
June  — ,  1920,  and  %x  dollars  on  July  — ,  1920. 

The  company  was  to  pay  interest  at  the  rate  of  6jper^cent|per  annum 
on  such  payments  from  the  date  each  payment  was  made.  Interest  on  all 
payments  ceased  August  — ,  1920,  the  date  when  the  certificates  were  ex- 
changed for  the  stock  of  the  company.  Stockholders  desiring  to  pay  in  full 
at  one  time  were  privileged  to  do  so  on  May  — ,  1920,  but  at  no  other  time. 
The  right  to  subscribe  for  stock  expired  on  May  — ,  1920. 

The  question  raised  is  whether  the  payments  made  prior  to  August  — , 
1920,  can  be  treated  as  invested  capital  from  the  date  on  which  they  were 
received,  or  whether  the  invested  capital  may  be  increased  only  as  of  August 
— ,  1920,  the  date  on  which  the  subscribers  received  their  paid-up  stock 
certificates. 

Held,  that  the  subscription  payments  received  by  the^company  may 
be  properly  treated  as  invested  capital  from  the  date  on  which  they  were 
received,  and  that  the  so-called  interest  paid  to  the  subscribers  on  the  install- 
ment payments  from  the  date  of  each  payment  to  August  — ,  1920,  was,  in 
fact,  distribution  of  profits  from  surplus,  and  accordingly  is  not  deductible 
expense. 
26 


34-21-1789:  O.  D.  1007. 

The  books  of  a  corporation  were  kept  according  to  the  single-entry 
system  of  bookkeeping,  and  its  income  and  expenses  were|recorded  on  a 
cash  receipts  and  disbursements  basis.  At  the  end  of  the  taxable  year  1919 
a  statement  of  assets  and  liabilities  was  prepared  in  connection  with  its 
Federal  income  and  profits  tax  return.  There  were  reported  on  the  statement 
as  assets  the  cash  balance,  the  fixed  and  intangible  assets,  and  also  such  ac- 
counts receivable  as  were  on  the  memorandum  records,  but  the  income 
from  which  had  not  been  taken  into  the  books.  The  statement  also  showed 
on  the  liability  side  the  amount  of  outstanding  capital  stock  and  also  bills 
payable  and  accounts  payable  which  were  shown  by  the  memorandum 
records,  but  the  expenses  for  which  had  not  been  taken  into  the  books. 

Held,  that  the  corporation  can  not  report  its  income  on  a  cash  receipts 
and  disbursements  basis  and  compute  its  invested  capital  on  an  accrual 
basis.  As  the  corporation's  income  is  reported  on  a  cash  receipts  nad  disburse- 
ments basis,  accrued  items  can  not  be  taken  into  consideration  in  computing 
its  invested  capital. 
27 


41-21-1862:  O.  D.  1061. 
The  principles  contained  in  office  decision  246  [No.  5  of  Sec.  326.  Art. 
831. — 4,  herein.]  are  applicable  under  the  Revenue  Acts  of  1916  and  1917. 
28 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 20. 


49-21-1968:  O.  D.  1131. 
It  is  the  purpose  of  Treasury  Decision  3220,  in  cases  in  which  returns 
were  filed  contrary  to  section  207  of  the  Revenue  Act  of  1917  and  section  326 
of  the  Revenue  Act  of  1918,  and  the  regulations  issued  thereunder,  to  have 
amended  returns  filed  and  any  tax  shown  to  be  due  thereon  paid  immediately, 
rather  than  to  wait  until  the  returns  are  finally  reached  in  the  regular  course 
of  audit  in  this  office.  The  fact  that  there  may  be  no  further  tax  shown  to  be 
due  on  the  amended  returns  in  such  cases  is  not  sufficient  to  waive  the  filing 
of  such  returns. 

29 


I  ('22)-l-14:  I.  T.  1155. 

Revenue  Act  of  1918. 

A  corporation  which  is  a  "dealer  in  securities"  within  the  meaning  of 
article  1585  of  Regulations  45  is  not  entitled  to  include  in  invested  capital 
amounts  invested  in  inadmissible  assets,  even  though  such  assets  are  held  as 
merchandise,  except  under  conditions  entitling  it  to  the  benefits  of  article 
817  of  Regulations  45. 
30 


IC22)-2-25:  I.  T.  1163 
Revenue  Acts  of  1917  and  1918. 

Where  for  the  year  1918  returns  were  filed  and  the  war  and  excess  profits 
tax  paid  was  equal  to  50  per  cent  of  the  net  income,  relief  having  been  re- 
quested under  sections  327  and  328  of  the  Revenue  Act  of  1918,  or  where  for 
the  year  1917  returns  were  filed  under  article  64  of  Regulations  41,  and  full 
disclosure  was  made  on  the  return  of  the  inclusion  therein  of  restorations  to 
invested  capital,  amended  return  will  not  be  required  under  T.  D.  3.220 
(Bui.  37-21,  p.  18)  and  T.  D.  3243  (Bui.  48-21,  p.  18).  However,  in  cases 
where  returns  were  filed  under  article  64  of  Regulations  41  and  no  disclosure 
was  made  of  the  inclusion  therein  of  restorations  to  invested  capital,  the 
requirements  of  T.  D.  3220  and  T.  D.  3243  must  be  complied  with. 
31 


I  ('22)-4-48:  I.  T.  1177. 
Revenue  Acts  of  1917  and  1918. 

A  domestic  corporation,  prior  to  March  3,  1917,  transferred  tangible 
property  to  a  foreign  corporation  in  exchange  for  over  50  per  cent  of  the 
stock  of  the  foreign  corporation.  Subsequent  to  March  3,  1917,  the  domestic 
corporation  transferred  certain  other  tangible  property  to  another  foreign 
corporation  in  exchange  for  over  50  per  cent  of  the  stock  of  the  foreign  cor- 
poration. Neither  foreign  corporation  had  income  from  sources  within  the 
United  States. 

Two  questions  are  raised:  (1)  At  what  value  may  the  domestic  corporation 
include  in  its  invested  capital  the  stock  of  the  foreign  corporations  under  the 
Revenue  Acts  of  1917  and  1918?  (2)  In  case  the  foreign  corporate  stock  is 
recognized  as  invested  capital  only  to  the  amount  of  the  original  cost  of  the 
property  transferred,  is  it  possible  for  any  taxable  income  to  accrue  from  the 
exchange? 

These  two  inquiries  may  be  considered  together,  as  the  same  principles 
of  law  are  involved.    Section  208  of  the  Revenue  Act  of  1917  and  section 

Supplementary  Bulletin  Rulings 


8-7-22. 


Sec.  326.   Art.  831.-21. 

331  of  the  Revenue  Act  of  1918,  relating  to  a  determination  of  the  invested 
capital  of  a  corporation  exchanging  its  stock  for  tangible  property,  are  not 
here  applicable. 

A  foreign  corporation  having  no  income  from  United  States  sources 
would  be  tax  exempt,  and  consequently  its  stock  in  the  hands  of  a  United 
States  corporation  would  constitute  an  admissible  asset.  The  exchange 
being  of  one  kind  of  property  for  another  kind,  a  profit  or  loss  would  normally 
arise,  as  the  values  would  ordinarily  not  be  exactly  equal.  An  exchange  of 
one  capital  asset  for  another  would  not,  however,  affect  the  invested  capital 
of  the  United  States  corporation,  unless  in  the  case  of  a  loss  the  current 
earnings  were  insufficient  to  meet  such  loss,  in  which  case  the  true  or  earned 
surplus  would  have  to  be  reduced;  but  in  no  case  should  the  original  paid-in 
capital  or  surplus  be  reduced  on  account  of  such  loss,  it  not  being  permissible 
to  reduce  those  items  except  upon  partial  or  total  liquidation. 

Accordingly,  it  is  held  that  the  stock  should  be  included  in  invested  capital 
at  the  same  value  that  the  tangible  property  exchanged  therefor  would  have 
been  entitled  to  be  included  therein  had  no  exchange  taken  place,  regardless 
of  when  the  transaction  was  consummated,  and  that  taxable  income  or 
deductible  loss  might  result  from  the  transaction. 

A  domestic  corporation  owning  stock  of.  a  foreign  corporation  should 
treat  such  stock  as  an  inadmissible  for  the  entire  taxable  year  if  at  any  time 
during  such  taxable  year  the  foreign  corporation  had  income  from  sources 
within  the  United  States. 
32 


I('22)-6-82: 1.  T.  1201. 

Revenue  Acts  of  1917  and  1918. 

In  determining  invested  capital  for  1917  and  subsequent  years  the  tax- 
payer, an  insurance  company,  used  security  valuations  demanded  and 
furnished  by  the  insurance  department  of  the  State  and,  as  required,  filed 
a  copy  of  its  State  report  with  this  office. 

Owing  to  its  inability  to  furnish  cost  values  of  securities,  advice  was 
requested  as  to  what  action  should  be  taken  in  order  to  comply  with  the 
provisions  of  Treasury  Decision  3220  (1J865  herein). 

Held,  that  as  the  invested  capital  of  insurance  companies  is  adjusted 
by  this  office  on  the  basis  of  cost  from  annual  statements  rendered  to  the 
insurance  departments  at  the  close  of  the  previous  year,  it  will  not  be  nec- 
essary for  insurance  companies  to  file  amended  returns  under  the  provisions 
of  Treasury  Decision  3220,  if  in  the  original  returns  securities  or  real  estate 
have  been  valued  on  the  basis  of  book  or  market  as  reported  to  the  insur- 
ance department  of  the  State 
33 


I('22)-8-108:  I.  T.  1218. 
Revenue  Acts  of  1917  and  1918 

The  taxpayer  company  for  several  years  prior  to  1917  followed  the 
consistent  practice  of  adding  taxes  paid  upon  its  real  estate  to  the  capital 
account  representing  such  real  estate  on  its  books,  and  did  not  charge  such 
taxes  to  expense,  and  did  not  make  any  deduction  on  account  of  such  taxes 
in  preparing  its  income  tax  returns  for  the  years  1909  to  1916,  inclusive. 


Supplementary  Bulletin  Ruling*. 


Sec.  326.    Art.  831.— 22. 


During  1917  and  subsequent  years  such  real  estate  taxes  were  charged  to 
expense  and  were  not  capitalized. 

Held,  that  taxes  on  real  estate  are  not  properly  chargeable  to  the  real  f 
estate  capital  account  for  income  and  profits  tax  purposes,  but  are  deduct- 
ible as  expenses  for  the  year  in  which  paid  or  accrued,  dependent  on  how 
the  taxpayer's  books  are  kept.  The  taxpayer  should  eliminate  from  its 
invested  capital  the  taxes  formerly  included  in  its  real  estate  capital  account, 
and  the  excess  profits  tax  for  1917  and  subsequent  years  should  be  recomputed. 
34 


I('22)-9-122:  I.  T.  1226 

Revenue  Act  of  1917. 

The  terms  current  liabilities  and  temporary  indebtedness,  as  used  in 
article  44  of  Regulations  41,  which  reads  as  follows: 

The  term  "money  or  other  property  borrowed"  as  used  in  section  207  and  these  regula-  ^ 
tions  includes  not  only  cash  or  other  borrowed  property,  which  can  be  identified  as  such, 
but  current  liabilities  and  temporary  indebtedness  of  all  kinds,  and  any  permanent  in- 
debtedness upon  which  the  taxpayer  is  entitled  to  an  interest  deduction  in  computing 
net  income.  A  corporation  which,- under  the  income  tax  law,  is  allowed  to  take  only  a 
part  of  the  entire  interest  paid  upon  its  indebtedness,  may  include  in  its  invested  capital 
such  a  proportion  of  its  permanent  indebtedness  as  the  amount  of  interest  upon  such  in- 
debtedness which  the  corporation  is  not  allowed  to  deduct  is  of  the  total  amount  of  interest 
paid  upon  such  indebtedness  during  the  taxable  year — 

are  intended  to  apply  to  liabilities  chargeable  against  profits  as  distinguished 
from  indebtedness  incurred  for  the  purpose  of  raising  capital.  Such  per- 
manent indebtedness  amounts  to  a  capital  investment.  Therefore,  while  the 
amount  of  interest  on  current  liabilities  deductible  against  income  for  the  year  # 
is  included  within  the  language  of  the  Act  limiting  the  amount  of  interest 
deductible  as  well  as  interest  on  permanent  indebtedness,  article  44  did  not 
operate  to  make  current  liabilities  includable  in  invested  capital,  since  from 
their  nature  they  were  not  includable.  It  does  permit  a  portion  of  the  per- 
manent indebtedness  to  be  included  where  the  interest  on  such  permanent 
indebtedness  is  not  deductible  by  reason  of  the  limitation  contained  in  section 
12  of  the  Revenue  Act  of  1916  as  amended  by  the  Revenue  Act  of  1917. 

In  case  a  corporation  had  no  permanent  indebtedness  but  the  amount  of 
deductible  interest  was  limited,  no  amount  may  be  included  in  invested 
capital  on  account  of  such  limitation.  But  a  corporation  which  has  both 
temporary  and  permanent  indebtedness  may  assume  to  the  extent  of  its  ^ 
permanent  indebtedness  that  any  interest  which  it  is  not  allowed  to  deduct 
has  been  paid  upon  such  permanent  indebtedness. 

The  term  permanent  indebtedness  is  intended  to  cover  money  and  prop- 
erty borrowed  to  be  invested  in  the  business. 

If  the  indebtedness  is  of  a  permanent  character  the  term  or  nature  of  the 
particular  obligation  by  which  the  indebtedness  is  evidenced  at  any  time  is 
not  conclusive.  Thus,  notes  used  to  acquire  borrowed  capital  which  the  ^ 
corporation  plans  to  continue  to  use  after  the  maturity  of  the  notes  (meeting 
the  matured  notes  with  the  proceeds  of  other  borrowings)  may  be  regarded 
as  permanent  indebtedness  within  the  meaning  of  article  44  of  Regulations 
41.  So  also  in  the  case  of  bonds,  mortgages,  or  other  obligations  about  to 
fall  due.  If  in  the  regular  financial  procedure  of  the  corporation  these  obliga- 
tions will  be  met  by  the  proceeds  of  other  indebtedness,  such  obligations  may 
be  treated  as  a  part  of  the  permanent  indebtedness.  * 

The  computation  of  additions  to  invested  capital  must  be  based  on  per- 

Supplementary  Bulletin  Rulings. 


7-20-22. 

Sec.  326.    Art.  831.— 23. 

manent  indebtedness  as  distinguished  from  temporary  indebtedness  and 
current  liabilities.  In  case  the  permanent  indebtedness  is  increased,  dim- 
inished, or  liquidated  during  the  tax  period  the  average  amount  of  such 
indebtedness  for  the  period  should  be  used  in  applying  the  provisions  of 
article  44  of  Regulations  41. 
35 


I ('22)- 13- 190:  I.  T.  1260 

Revenue  Act  of  1921. 

Where  a  business  owned  by  an  individual  is  organized  as  a  corporation 
under  the  provisions  of  section  229  of  the  Revenue  Act  of  1921,  investments 
owned  by  the  individual  but  not  connected  with  his  business  can  not  be 
included  in  invested  capital  unless  and  until  they  are  paid  in  and  become 
assets  of  the  corporation. 
36 


I('22)-26-375:  I.  T.  1374 
Revenue  Acts  of  1918  and  1921. 

In  1919  a  group  of  men  contributed  300a:  dollars  in  cash  to  a  common 
fund  which  was  placed  in  the  hands  of  a  trustee  for  the  purpose  of  acquiring 
royalty  contracts  under  certain  patents  which  they  desired  to  obtain  for  a 
proposed  corporation  which  had  not  been  incorporated  at  that  time.  Later 
this  trustee  obtained  assignments  of  these  various  contracts  and  rights  for  a 
total  consideration  of  300a;  dollars  in  cash.  A  corporation  was  then  formed 
and  after  its  organization  the  trustee  offered  to  transfer  to  the  corporation 
all  of  the  contract  rights  which  he  had  acquired  in  consideration  of  the  issu- 
ance of  300y  par-value  shares  of  its  stock  to  the  parties  who  were  the  original 
contributors  of  the  300a;  dollars  cash  with  which  he  acquired  these  rights. 
This  offer  was  accepted  by  the  corporation  and  the  agreement  was  carried 
into  effect. 

||f  Held,  that  the  facts  stated  show  this  to  be  a  case  where  a  corporation 
acquired  intangible  property  for  stock,  and  that  as  such  it  must  be  governed 
by  the  provisions  of  section  326(a)5  of  the  Revenue  Acts  of  1918  and  1921, 
and  that  the  invested  capital  of  the  corporation  represented  by  the  patent 
rights  is  subject  to  the  25  per  cent  limitation  imposed  by  that  section.  This 
is  true,  although  the  individuals  who  advanced  the  money  for  the  purchase 
of  the  contract  rights  were  the  same  individuals  who  became  the  stockholders 
of  the  corporation  through  a  transfer  of  these  rights  in  exchange  for  the 
corporation's  stock. 
37 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 24. 


I  ('22)-28-405:    I.  T.  1391. 
Revenue  Acts  of  1918  and  1921. 

The  procedure  set  forth  in  Office  Decision  623  (C.  B.  3,  p.  105)  to  be  fol- 
lowed by  concerns  which  report  profits  from  installment  sales  as  realized 
at  dates  of  payments  does  not  contemplate  adjustments  of  the  capital  invest- 
ment account  either  for  payments  on  such  contracts  or  for  the  final  transfer 
of  title.  It  does,  however,  require  the  elimination  from  inventory  of  goods 
sold  on  installment  contracts.  No  distinction  is  made  between  sales  on  con 
dition,  in  which  title  remains  in  the  seller,  sales  which  involve  transfer  of 
title  subject  to  a  lien  and  sales  in  which  title  passes  but  is  revested  in  the 


vendor  by  means  of  a  chattel  mortgage.    (Article  42,  Regulations  45.) 
The  following  example  illustrates  the  effect  of  this  procedure: 

Inventory,  January  1,  1921   $100,000 

Installment  sales,  1921   100,000 

Cash  receipts  from  installments  saies  contracts,  l!v21   50,000 

Gross  profit  percentage                                                                .  ,  50% 

(a)  Installment  sales  contract  (1921)   $100,000 

Goods  sold  (at  cost)   50,000 

Unrealized  gross  profit  on  installment  sales  con- 
tracts (1921)   50,000 

(b)  Cash   50,000 

Installment  sales  contracts  (1921)   50,000 

(r)     Unrealized  gross  profit  on  installment  sales  contracts 

(1921)   25,000 

Realized  gross  profits  on  installment  sales  contracts   25,000 


It  will  be  seen  that  installment  sales  contracts  (1921)  less  unrealized 
gross  profits  at  the  time  of  the  sale  equals  the  value  of  goods  sold  and  is  sub- 
stituted therefor.  The  installment  sales  contract  account  is  decreased  and 
replaced  to  the  extent  of  cash  payments  thereon.  At  the  same  time  that 
proportion  of  unrealized  gross  profits  on  installment  sales  contracts  which 
represents  the  gain  included  in  cash  receipts  is  transferred  to  realized  profits 
on  installment  sales  contracts. 

In  the  balance  sheet  as  at  December  31,  1 '  2 1 ,  the  opening  inventory 
of  $100,000  is  replaced  by  cash,  $50,000;  installment  sales  contracts  less 
unrealized  profits,  $25,000;  inventoiy,  $50,000.  These  items  reflect  the 
original  value  plus  a  realized  gain  of  $25,000. 

38 


(See  A.  R.  R.  988;  sec.  331,  art.  941  [ruling  No.  17*1.)  Increase  of  invested 
capital  of  a  corporation  by  appreciation  in  value  of  its  assets  upon  dbajrge 
of  ownership  which  was  nominal  and  not  substantial. 

39 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  831.— 25. 

I  ('22)-33-459:  I.  T.  1420. 
Revenue  Acts  of  1917,  1918,  and  1921. 

In  1885  certain  persons  organized  a  corporation  and  a  certificate  of 
incorporation  was  issued  to  them.  In  1911,  in  pursuance  of  the  advice  of 
an  attorney,  the  company  was  reorganized  in  order  to  cure  defects  in  its 
original  organization,  and  the  powers  of  the  corporation  were  broadened,  its 
capital  increased,  and  its  existence  made  perpetual.  In  1914  the  name  of 
the  corporation  was  changed  and  thereupon  all  of  the  assets  standing  in  the 
then  name  of  the  corporation  were  transferred  by  a  deed  having  a  covenant 
of  warranty  to  the  corporation  designated  by  its  new  corporate  name. 

Held,  that  the  copy  of  the  original  charter  of  the  corporation  and  of  the 
renewed  charter,  and  the  other  evidence  submitted  by  the  taxpayer,  disclose 
that  the  amendmen  of  its  charter  and  the  subsequent  change  in  its  name 
did  not  create  a  new  corporation,  nor  cause  any  change  in  its  existing  cor- 
porate organization.  The  invested  capital  of  the  corporation,  accordingly, 
must  be  computed  in  the  same  manner  as  though  the  invested  capital  of 
the  corporation  originally  formed  in  1885  was  being  determined.  The  values 
of  the  assets  on  hand  at  the  beginning  of  1917  and  later  years  must  be  deter- 
mined by  their  values  at  the  time  of  their  original  acquisition,  as  limited  and 
defined  by  the  Revenue  Acts  applicable  to  the  taxable  years  involved,  and 
their  values  at  the  date  of  the  amendment  of  the  corporation's  charter  or 
at  the  date  of  its  change  of  name  can  not  be  considered  for  such  purpose. 
40 


I  ('22)-49-628:  I.  T.  1523. 
Revenue  Acts  of  1918  and  1921. 

If  a  corporation  acquires  patents  or  other  intangible  assets  for  cash,  such 
assets  may  be  reflected  in  its  invested  capital  at  an  amount  equal  to  the 
amount  of  the  cash  actually  paid  for  them,  but  if  they  are  acquired  for  stock 
they  can  be  reflected  in  invested  capital  only  to  an  amount  not  in  excess  of 
25  per  cent  of  the  capital  stock  of  the  corporation  outstanding  at  the  begin- 
ning of  the  taxable  year.  This  limitation  prevents  intangibles  purchased 
with  stock  from  being  included  at  their  full  cost  only  when  such  cost  exceeds 
in  amount  25  per  cent  of  the  par  value  of  the  total  stock  or  shares  of  the  cor- 
poration outstanding  at  the  beginning  of  the  taxable  year.  No  expenditures 
of  capital  made  by  a  corporation  in  organization  or  advertising  can  be  used  to 
increase  the  value  at  which  the  patents  owned  by  it  may  be  reflected  in  its 
invested  capital,  as  this  amount  is  fixed  by  the  cost  of  the  acquisition  of  the 
patents,  subject  to  the  25  per  cent  limitation  in  case  they  were  acquired  for 
stock. 

In  the  case  of  the  reorganization  of  a  corporation  which  does  not  involve 
a  change  in  corporate  identity,  no  change  takes  place  in  the  value  at  which  its 
intangibles  acquired  for  cash  are  to  be  included  in  its  invested  capital,  and 
no  change  takes  place  in  this  value  with  reference  to  patents  or  other  in- 
tangibles acquired  for  stock,  unless  the  reorganization  involves  a  change  in 
the  amount  of  the  corporation's  capital  stock  which  is  sufficient  to  cause  a 
different  result  when  the  25  per  cent  limitation  is  applied. 

In  case  the  reorganization  involves  a  change  of  corporate  identity  through 
which  the  assets  of  an  existing  corporation  are  acquired  by  a  successor,  the 
rule  applicable  to  the  original  corporation  will  apply  in  determining  the 
amount  at  which  the  intangible  assets  acquired  by  the  new  corporation  may 
be  included  in  its  invested  capital.    If  such  assets  are  acquired  for  cash,  they 


Supplementary  Bulletin  Rulings. 


Sec.  326.   Art.  831.— 26. 


may  be  included  in  computing  invested  capital  at  their  cost  price,  while  if 
they  are  acquired  for  stock  they  may  be  included  to  an  amount  not  in  excess 
of  the  par  value  of  the  stock  issued  for  the  same,  subject  to  the  25  per  cent 
limitation,  as  explained  above. 

,  ,  The  statements  in  the  preceding  paragraph,  however,  are  subject  to  re- 
quirements of  sections  331  of  the  Revenue  Acts  of  1918  and  1921. 

From  the  foregoing  it  is  apparent  that  the  reorganization  of  a  corporation 
does  not  necessarily  cause  any  decrease  in  its  capital  represented  by  patents 
or  other  intangibles. 
41 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.    Art.  833. — 1. 

Law  Section  326.— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
H1035,  post). 

Article  833. — Tangible  Property  Paid  in:  Evidence  of  Indebtedness 
(Reg.  45— 1  754,  ante):  (Reg.  62— 1jll89,  post). 

22-20-980:  S.  1391. 
WAR  PROFITS  AND  EXCESS  PROFITS  TAX— SECTIONS  325  AND  326, 
REVENUE  ACT  OF  1918.    INVESTED  CAPITAU 
Notes  to  be  paid  for  only  out  of  earnings  accruing  on  stock  for  which  they  are 
ostensibly  given  should  not  be  included  in  invested  capital. 

Section  325  (a)  of  the  Revenue  Act  of  1918  provides  that  the  term  "in- 
vested capital"  as  used  in  the  Act  shall  include  notes.  The  by-laws  of  the 
M  Company,  a  corporation  organized  under  the  laws  of  the  State  of  Oregon, 
provide  that  no  one  shall  be  allowed  to  hold  stock  in  the  corporation  who  is 
not  actually  identified  with  and  devoting  his  entire  time  and  talents  to  the 
interests  of  the  company,  and  it  is  the  practice  in  that  company  when  the 
services  of  a  desirable  person  are  secured  to  pay  him  a  nominal  salary  and 
issue  him  shares  of  stock,  for  which  his  enforceable  note  is  taken,  the  note 
being  paid  out  of  the  profits  accruing  on  the  stock.  The  questions  are  as 
follows: 

(a)  Do  the  laws  of  the  State  of  Oregon  allow  issuance  of  capital  stock  for 

(enforceable)  notes? 

(b)  Can  the  amount  of  (enforceable)  notes  outstanding  at  the  beginning 

of  the  year  be  included  in  invested  capital? 

(c)  Are  the  notes,  given  under  the  conditions  named  above,  enforceable 

within  the  meaning  of  the  law  as  enacted  by  Congress,  and  inter- 
preted by  the  Commissioner  to  govern  invested  capital  computa- 
tions ? 

(a)  It  is  not  found  that  the  laws  of  Oregon  specifically  recognize  the  is- 
suance of  stock  for  notes.  They  do,  however,  recognize  issuance  of  stock 
without  cash  payment.  They  also  recognize  the  issuance  of  stock  for  prop- 
erty, real  or  personal.    Section  6694,  Lord's  Oregon  Laws,  provides: 

Every  corporation  organized  under  this  chapter  shall  keep  a  stock  book  in  such  manner 
as  to  show  intelligibly  the  original  stockholders,  their  respective  shares,  the  amount  paid, 
and  the  amount  due  thereon,  if  any    *    *  *. 

See  also  sections  6696  and  6707.  If  stock  may  be  issued  for  property  or 
without  any  payment,  it  seems  clear  that  it  may  be  issued  for  notes. 

(b)  Section  326  (a)  of  the  Revenue  Act  of  1918  provides: 

That  as  used  in  this  title  the  term  "invested  capital"  for  any  year  means    *    *  * 
(a)  Actual  cash  value  of  tangible  property  other  than  cash,  bona  fide  paid  in  for  stock 

or  shares  at  the  time  of  such  payment    *    *  *. 

Under  this  language  it  is  not  sufficient  that  notes  are  enforceable.  They 

must  be  bona  fide  paid  in.    This  point  is  discussed  more  fully  in  dealing  with 

the  next  question. 

(c)  While  nothing  is  found  in  the  statement  submitted  to  show  that  the 
notes  in  question  are  not  legally  enforceable,  it  does  not  necessarily  follow 
that  they  are  such  notes  ~s  were  contemplated  by  the  framers  of  the  Act 
as  to  be  treated  as  invested  capital.  The  law  limits  includable  tangible 
property  to  that  bona  fide  paid  in.  The  notes  in  question  are  taken  from 
employees,  and  it  is  stated  by  the  president  of  the  concern  that  it  is  "clearly 
understood  that  the  notes  given  as  evidence  of  stock  ownership  were  to  be 
paid  wholly  from  the  earnings  of  such  stock  and  in  the  event  that  such  em- 
ployee-stockholder severed  his  connection  with  the  company,  such  stock 
immediately  would  revert  to  the  company,  and  the  net  earnings  accrued  on 
same  would  be  immediately  paid  to  him."    Notes  given  under  such  condi- 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  833.-2. 


tions  are  not  bona  fide  paid  in  within  the  intent  of  the  statute.  As  indicated 
by  the  regulations,  article  833,  Congress  doubtless  had  in  mind  notes  given  in 
absolute  and  unqualified  payment,  notes  which  are  practically  equivalent  to 
cash  and  might  be  sold  for  cash,  which,  in  other  words,  work  an  increase  of 
the  assets  of  the  concern.  Here  the  notes  are  given  only  as  "evidence  of 
ownership"  and  no  collection  thereon  is  to  be  made  from  the  employee  until 
he  receives  or  is  credited  with  dividends  on  the  stock  for  which  the  notes  are 
ostensibly  given.  The  notes,  therefore,  add  nothing  to  the  resources  of  the 
company.  There  is  no  increase  in  its  invested  capital  until  it  is  earned  by 
the  company.  It  would  not  be  consistent  with  the  understanding  between 
the  company  and  the  employee  to  raise  money  by  discounting  the  notes. 
Conceivably,  the  concern  might  achieve  an  increase  of  working  capital  by 
borrowing  on  the  notes,  but  by  the  express  terms  of  the  Act,  borrowed  money 
is  not  admissible.  Section  325  (a),  section  326  (b).  If  such  arrangements 
should  be  recognized  as  working  an  increase  of  invested  capital,  invested 
capital  might,  at  least  to  the  extent  of  the  amount  authorized  by  the  com- 
pany's charter,  be  increased  practically  at  will.  The  conclusion  reached  is 
that  a  note  to  be  paid  for  only  out  of  earnings  accruing  on  the  stock  for  which 
it  is  ostensibly  given  should  not  be  included  in  invested  capital. 
1 


10-21-1502:  A.  R.  R.  413 

Held,  that  good  will  in  a  corporation  can  not  be  allowed  as  invested  capita": 
under  a  claim  that  a  price  paid  to  stockholders  by  certain  individuals  was  ii. 
excess  of  corporate  book  value  of  the  stock.  Good  will  must  be  acquired  by 
direct  purchase;  it  can  not  be  determined  by  a  collateral  transaction. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  an  hem  of  good  will  of 
10*  dollars,  claimed  bv  the  corporation  to  have  been  purchased  with  cash 
in  1911. 

In  1876,  A  established  a  restaurant  business  and  continued  to  operate 
the  same  as  sole  owner  until  his  death  in  February,  1901.  After  his  death, 
the  business  was  carried  on  under  the  terms  of  his  will  by  certain  trustees. 
The  trust  estate  continued  for  a  period  of  10  years,  but  on  account  of  contracts 
expiring  in  1905  and  1906  requiring  a  renewal  for  a  period  of  10  years,  thus 
extending  beyond  the  trust,  it  was  necessary  to  create  some  entity  capable 
of  contract.  A  corporation  with  nominal  capital  of  4x  dollars  was  accord- 
ingly formed  and,  in  keeping  with  tue  terms  of  the  will,  the  stock  was  issued 
in  the  name  of  the  trustees.  All  contracts  were  renewed  in  the  name  of  A, 
except  for  certain  business  directly  pertaining  to  the  State  of  Y,  which 
business  was  contracted  in  the  name  of  the  N  Company,  another  corporation 
capitalized  at  4x  dollars  to  meet  statutory  requirements  of  the  State  of  Y. 
It  is  the  contention  of  the  taxpayer  that  the  business  of  the  corporation  was 
conducted  substantially  as  a  personal  service  corporation  and  that  all  bank 
accounts  were  continued  in  the  name  of  A. 

In  1911,  in  accordance  with  the  provisions  of  the  will,  the  trust  terminated 
and  it  was  necessary  to  make  distribution  to  the  six  heirs.  Under  this  dis- 
tribution the  widow  was  entitled  to  50  per  cent  of  the  estate  and  the  balance 
was  to  be  equally  divided  among  five  children.  In  order  to  make  satisfactory 
distribution,  the  trustees  sold  the  stock  which  they  held  for  60*  dollars  in 
cash  and  this  amount  was  distributed  to  the  heirs  in  the  proportions  above 
indicated.  It  appears  that  the  book  value  of  the  stock  was  only  50;v  dollars 
and  in  order  to  measure  the  value  of  the  stock  by  the  cash  consideration 
that  was  paid  to  the  trustees,  there  was  set  up  an  asset  of  good  mu  in  the 

Supplementary  Bulletin  Ruling!. 


4-6-22. 

Sec/326.    Art.  833.— 3. 

amount  of  10*  dollars.  This  amount  was  subsequently,  in  the  next  succeeding 
five  years,  charged  off  at  2x  dollars  per  annum. 

In  submitting  the  case  for  consideration  by  this  Committee,  B,  president 
of  the  corporation,  made  affidavit  in  the  following  statement: 

*  *  *  in  other  words,  there  was  paid  in  cash  for  4#  dollars  par  value  of  M  Company 
stock  (with  which  went  the  4#  dollars  par  value  N  Company  stock),  50#  dollars  being  the 
book  value  of  the  furniture,  fixtures,  supplies,  etc.,  and  also  10*  dollars  for  good  will, 
or  a  total  of  60*  dollars  which  was  contributed  as  follows:  B,  38%;  C,  20%;  D,  20%; 
E,  15%;  F,  7%  and  the  stock  was  distributed  accordingly. 

Of  these  purchasers,  only  B  and  D  were  beneficiaries  under  the  will, 
each  receiving  10  per  cent  of  the  estate.  Subsequent  to  consideration  of  the 
case  by  the  Committee  but  prior  to  the  final  approval  by  the  Committee, 
B  submitted  an  additional  affidavit  in  which  the  statement  is  made  that — 

As  representative  of  the  corporation,  I  had  agreed  to  sell  to  myself  and  the  other  four 
individuals,  the  entire  assets  of  the  business  of  the  M  Company  and  the  N  Company. 
This  was  my  intention;  it  was  what  we  did. 

The  matter  of  the  transfer  of  this  property  to  the  new  organization  was  never  din- 
cussed,  but  what  we  were  purchasing  was  minutely  understood  by  all  of  us;  that  is  to  say, 
we  were  purchasing  all  of  the  assets  of  the  business  No  thought  was  given  to  the  purchase 
of  stock,  and  no  thought  was  given  as  to  the  method  of  transfer. 

This  subsequent  affidavit  seems  to  have  no  material  bearing  on  the  case, 
since  it  is  a  matter  of  record  that  the  corporation  known  as  the  M  Company 
was  never  liquidated.  A  corporation  can  not  sell  its  assets  and  at  the  same 
time  retain  them.  The  M  Company  is  doing  business  to-day  under  the 
charter  issued  at  date  of  organization,  namely,  June,  1906,  and  the  same 
amount  of  capital  stock  is  outstanding,  namely,  ix  dollars.  It  was,  of  course, 
necessary  to  cancel  the  certificates  of  stock  that  were  outstanding  at  the  time 
of  purchase  by  B  and  his  associates  because,  as  above  suggested,  the  certi- 
ficates had  to  be  issued  in  different  proportions  of  ownership.  The  trans- 
action, accordingly,  was  between  stockholders  and  individuals,  and,  under 
such  circumstances,  where  value  in  excess  of  corporate  book  value  is  the 
consideration  for  the  acquisition  of  stock,  the  exchange  value  does  not 
measure  the  value  of  assets  of  the  corporation.  It  is  admitted  by  the  tax- 
payer that  the  10*  dollars  in  cash,  in  excess  of  the  book  value  of  the  assets 
and  forming  a  part  of  the  cash  consideration  of  60x  dollars  was  never  paid  in 
to  the  corporation  but  went  to  the  trustees  of  the  A  estate  and  was  distri- 
buted to  the  beneficiaries  under  the  will.  Hence,  to  include  this  10*  dollars 
in  the  assets  of  M  Company,  through  a  credit  to  the  surplus  account  of 
the  company,  would  be  the  recognition  of  appreciation  based  on  going 
concern  value. 

The  earnings  of  the  business  of  the  M  Company  undoubtedly  justify 
establishing  good  will,  but  good  will  can  only  be  set  up  on  the  books  of  a  cor- 
oration  and  considered  as  invested  capital  for  tax  purposes  when  acquired 
y  direct  purchase.    Article  57  of  Regulations  41  reads: 

If  good  will  *  *  *  of  a  corporation  or  partnership  *  *  *  jia3  been  purchased 
with  stock  or  shares  issued  prior  to  March  3,  1917,  the  amount  that  may  be  included  in 
invested  capital  must  not  exceed: 

(a)  20%  of  the  par  value  of  the  total  stock  or  shares  outstanding  on  that  date,  nor 
(b)  the  actual  value  of  the  asset  at  the  date  acquired,  nor  (c)  the  par  value  of  the  sto:>k 
issued  in  payment  for  the  asset. 

Article  60  reads: 

Good  will  and  other  similar  intangible  assets  purchased  with  cash  or  tangible  property 
must  be  taken  at  a  value  not  in  excess  of  the  cash  or  actual  cash  value  of  the  tangible 
property  specifically  paid  therefor. 

These  articles  do  not  contemplate  a  value  measured  by  a  collateral 
transaction,  and  while,  as  above  stated,  this  corporation  has  undoubtedly 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  833.-4. 

earned  a  good  will  value,  there  is  no  provision  in  the  law  for  its  inclusion  in 
invested  capital,  except  by  purchase  direct  by  the  corporation  or  part- 
nership. Appreciation  arising  from  going  concern  value  is  not  recognized 
in  the  Revenue  Acts  of  1917  and  1918  for  invested  capital  purposes.  The 
taxpayer  has  made  reference  in  his  contention  to  this  Committee's  Memor- 
andum 21  wherein  it  is  said: 

If,  upon  the  sale  of  the  capital  assets  of  a  corporation  to  another  corporation  shares  of 
stock  are  surrendered  by  the  old  stockholders  to  the  vendee  corporation,  the  nature  of  the 
transaction  is  not  changed  from  one  of  the  sale  by  the  corporation  to  one  of  sale  of  stock 
by  the  stockholders. 

In  this  transaction  there  was  a  sale  of  assets  by  several  incorporated 
companies  to  another  incorporated  company,  and  as  an  incident  of  the 
transfer  of  the  assets  all  of  the  stock  of  said  companies  was  to  be  transferred 
and  delivered  at  the  time  the  sale  and  purchase  was  finally  consummated. 
Accordingly,  this  was  not  a  transaction  between  individuals. 

The  Committee  finds  no  basis  on  which  to  establish  a  precedent  by  ignor- 
ing the  corporate  entity  of  the  M  Company^ and  is  accordingly  of  the 
opinion  that  the  taxpayer's  claim  for  good  will  of  10*  dollars,  measured  by  a 
transaction  in  the  sale  of  stock  of  the  corporation,  by  the  stockholders  to 
individuals,  can  not  be  sustained  under  the  Revenue  Acts  of  1917  or  1918. 

1 


I('22)-14-204:  A.  R.  K.  81V 
Section  207 — Revenue  Act  of  1917.™ Invested  Capital. 

Recommended  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit,  in  its  adjustment  of  invested  capital,  be  sustained,  and  accordingly 
that  the  appeal  be  denied. 

The  Committee  has  carefully  considered  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  with  respect  to  an  increase  of  50* 
dollars  in  invested  capital  as  evidenced  by  an  issue  of  capital  stock  having 
a  par  value  of  like  amount. 

The  pertinent  facts  are  related  as  follows:  The  appellant  company  was 
organized  in  190-  with  a  paid-in  capital  of  75*  dollars  and  an  authorized 
capital  of  125*  dollars.  The  compan)'  was  organized  for  the  purpose  of 
purchasing  the  going  business  of  the  O  Company,  for  which  it  paid  25* 
dollars  cash  and  executed  nine  notes,  eight  for  the  sum  of  10*  dollars  each 
and  one  in  excess  of  5*  dollars  (one  note  maturing  June  1  of  each  year  there- 
after). These  notes  were  all  indorsed  by  the  stockholders  of  the  company. 
In  191-  the  company  was  embarrassed  in  the  conduct  of  its  business  by  reason 
of  the  heavy  indebtedness  which  it  carried  and  the  consequent  effect  upon 
its  credit.  In  order  to  relieve  this  situation,  arrangements  were  made 
with  A,  the  holder  of  the  purchase  money  notes,  to  accept  in  lieu  of  five  10* 
dollar  notes  of  the  corporation,  five  personal  notes  of  the  stockholders  of  the 
company  for  similar  amounts.  The  stockholders  thereupon  agreed  to  execute 
five  10*  dollar  notes  in  favor  of  the  corporation  in  consideration  of  the  balance 
of  50*  dollars  of  the  authorized  and  unissued  capital  stock  of  the  company. 
Subscriptions  for  the  unissued  stock  were  duly  taken  in  most  cases  and  stock 
was  receipted  for,  and  all  of  it  was  left  in  the  treasury  of  the  company  as 
collateral  to  the  notes.  These  notes  were  immediately  indorsed  to  A,  and 
five  of  the  corporation's  notes  of  the  same  amount  and  of  like  dates,  were 
taken  up  and  canceled,  thus  reducing  the  indebtedness  of  the  corporation 
by  50*  dollars.  Later,  as  these  notes  matured,  they  were  taken  up  by  the  M 
Company  in  behalf  of  its  individual  stockholders,  but  the  corporation  still 


Supplementary  Bulletin  Rulings 


Sec.  326.    Art.  833.-5. 


held  the  notes  and  the  capital  stock.  When  the  notes  were  paid  by  the 
corporation,  the  entry  was  posted  from  the  cash  book  to  a  special  dividend 
account. 

The  Unit  in  passing  on  the  point  involved  stated: 

The  new  corporation  from  time  to  time  paid  off  these  notes  out  of  its  earned  surplus. 
None  of  the  notes  were  paid  by  the  stockholders  who  had  signed  them.  The  certificates 
of  capital  stock  of  the  new  corporation  were  attached  to  the  notes  as  collateral  security. 
The  new  corporation  paid  off"  the  new  notes  on  which  it  was  the  indorser  at  the  rate  of 
a  bout  10*  dollars  per  year,  plus  interest  at  6  per  cent,  and  retained  the  notes  in  its  treas- 
ury for  the  alleged  purpose  of  increasing  its  credit  with  out-of-town  banks.  This  seems 
improbable  in  view  of  the  fact  that  some  of  the  stockholders'  notes  became  as  much  as 
seven  years  overdue,  and  in  view  of  the  further  fact  that  as  soon  as  the  notes  were  paid 
they  were  charged  on  the  books  to  "Special  dividend  account."  The  new  corporation 
claimed  that  these  notes  paid  by  the  corporation  are  still  assets  of  the  corporation  and 
should  be  included  in  its  invested  capital,  in  addition  to  the  amounts  paid  in  satisfaction 
of  these  notes,  even  though  none  of  the  interest  and  principal  was  ever  paid  by  the  stock- 
holders who  signed  them,  and  they  were  when  paid  charged  to  "Special  dividend  account." 

In  the  case  here  at  issue  the  notes  of  the  stockholders  were  paid  for  assets  of  the  old 
corporation,  the  new  corporation  merely  being  the  original  payee  and  an  indorser.  The 
notes  were  satisfied  out  of  the  earnings  of  the  new  corporation  and  then  allowed  to  become 
overdue  without  any  attempt  having  been  made  to  collect  from  the  makers  of  such  notes. 
Therefore,  as  fast  as  such  notes  are  paid,  they  should  be  eliminated  from  invested  capital, 
and  the  stockholders  should  report  as  dividends  received  the  amounts  so  paid. 

In  connection  with  the  position  taken  by  the  Unit,  that  the  payments 
actually  made  were  in  fact  dividend  payments,  the  taxpayer  states  the 
following: 

The  declaration  and  payment  of  a  dividend  by  a  corporation  may  be  legally  accom- 
plished only  by  certain  formal  action  on  the  part  of  the^board  of  directors  of  a  corpor- 
ation, and  no  such  action  was  taken. 

The  question  involved  has  been  considered  by  the  office  of  the  Solicitor 
of  Internal  Revenue,  which  requested  a  brief  from  the  taxpayer  on  the  question 
as  to  whether  the  notes  executed  by  the  stockholders  and  indorsed  over  to  A 
by  the  company,  after  having  been  redeemed  by  the  company,  constituted 
enforceable  obligations  against  the  stockholders  under  the  statutes  of  the 
particular  State,  and  further  requested  the  corporation  to  submit  for  in- 
spection its  books  containing  the  special  dividend  account,  surplus  account, 
regular  dividend  account,  and  its  minute  books  of  the  directors'  meetings. 
It  developed  that  the  capital  stock  books  showed  that  the  stock  in  question 
was  in  fact  issued.  Most  of  it  had  been  receipted  for,  although  certificates 
had  never  been  removed  from  the  stock  book.  The  "special  dividend 
account"  and  the  "dividend  account"  shown  on  the  ledger  are  identical 
with  copies  of  book  entries  found  in  the  file.  The  "Capital  Stock  account" 
on  the  ledger  shows  entries  under  date  of  June  — ,  190-,  of  75x  dollars,  and 
February  — ,  191—,  of  50x  dollars,  total  capital  stock  issued  125#  dollars. 
The  "Surplus  account"  has  been  reduced  by  the  amount  of  the  regular  annual 
dividend,  but  has  not  been  reduced  by  the  amount  of  the  notes  paid  by  the 
corporation.  Copies  of  some  of  the  notes  were  exhibited  and  the  word 
"Canceled"  appears  in  red  ink  across  the  face  of  the  notes.  Two  notes  were 
submitted  in  the  sum  of  10*  dollars  each,  which  were  stated  to  be  in  renewal 
of  notes  which  were  barred  by  the  statute  of  limitations.  It  developed, 
however,  that  these  notes  were  renewed  after  the  revenue  agent  made  his 
investigation. 

The  taxpayer's  brief  on  page  3,  which  was  sworn  to,  states  in  part  that: 

Two  of  the  notes  as  originally  drawn  were  at  the  time  of  the  revenue  agent's  investi- 
gation barred  by  the  statute  of  limitations,  their  renewal  having  been  overlooked.  These 
two  notes  have  been  renewed  in  order  that  the  obligation  may  be  kept  legally  enforce- 
able, and  they  will  be  exhibited  at  the  hearing. 

Supplementary  Bulletin  Rulings. 


326.    Art,  KVI. 
Sec.  326,    Art.  833.-^. 


The  minute  books  of  the  directors'  meeting  showed  dividends  regularly 

declared  each  year,  a  typical  resolution  being  as  follows: 

On  motion,  a  special  dividend  of  25  per  cent  on  75*  dollars  of  capital  stock  be  paid  at 
once. 

The  minute  books  also  show  a  resolution  for  each  year  from  1913  to  1917, 
inclusive,  declaring  a  special  dividend  of  lOx  dollars  to  pay  the  stockholders' 
notes  as  they  fell  due.    The  typical  record  of  such  action  is  as  follows: 

A  special  dividend  of  10*  dollars  to  meet  note  for  A,  made  by  stockholders  was  ordered. 

It  is  apparent,  therefore,  that  the  statements  in  the  taxpayer's  brief,  that 
no  dividend  had  been  declared,  is  not  in  fact  true. 

The  minute  books  also  show  that  only  z  out  of  2%%  shares  of  the  stock  were 
considered  as  voting  stock,  the  z  shares  held  as  collateral  for  the  notes  evi- 
dently being  treated  as  treasury  stock. 

The  following  is  quoted  from  an  informal  memorandum  written  by  the 
Solicitor  under  date  of  January  25,  1922,  and  trie  observations  and  opinion 
are  subscribed  to  by  the  Committee: 

It  appears  to  this  office  in  view  of  the  additional  facts  gathered  from  the  books  that 
the  capital  stock  of  the  corporation  is  125*  dollars  and  that  the  50*  dollars  in  notes  issued 
for  the  50*  dollars  stock  in  February,  1911,  was  an  enforceable  obligation  against  the 
stockholders  of  the  corporation  until  the  corporation  paid  each  note  by  the  declaration 
of  a  special  dividend.  It  is  not  believed,  however,  that  the  notes  can  be  treated  as  an 
asset  of  the  company  after  they  were  paid  out  of  the  profits  of  the  corporation  in  the  form 
of  a  dividend  to  the  stockholders.  All  of  the  stockholders  signed  the  notes  and  were  liable 
as  between  themselves  in  the  same  proportion  as  they  held  the  stock  of  the  corporation. 
A  declaration  of  a  dividend  to  pay  the  notes  therefore  was  regular,  and  the  earnings  of 
the  corporation  were  sufficient  to  pay  the  dividend  regularly  declared. 

It  is  urged  by  the  taxpayer  that  the  action  of  the  corporation  and  the  stockholders 
is  inconsistent  with  the  theory  that  the  declaration  of  a  dividend  was  intended,  but  that 
the  action  taken  should  be  construed  to  have  been  merely  an  authorization  by  the  direc- 
tors to  the  treasurer  to  take  up  these  notes  and  hold  them  as  an  accommodation  to  the 
stockholders.  The  action  of  the  directors  and  stockholders,  however,  does  not  seem  to 
sustain  this  theory.  The  corporation's  liability  upon  the  notes  was  only  secondary,  and 
it  was  not  obliged  to  take  up  the  notes  unless  and  until  the  stockholders  had  defaulted. 
It  is  affirmatively  stated  by  the  taxpayer  and  proven  by  other  evidence  that  each  of  the 
stockholders  is  worth  much  more  than  his  liability  on  these  notes.  The  notes  were  in- 
terest bearing  and  in  all  the  period  since  they  were  executed  no  stockholder  has  been 
called  upon  to  pay  any  of  the  principal,  nor  has  any  stockholder  paid  any  interest  upon 
them.  The  notes  were  not  due  until  June  1  each  year,  and  without  waiting  for  the  due 
date  or  default  of  the  stockholders  the  corporation  declared  dividends  in  February  of 
each  year  to  take  up  the  notes  when  they  became  due  June  1,  and  thus  by  its  voluntary 
action  legally  obligated  itself  to  the  stockholders  in  advance  to  pay  their  obligation  and 
charge  it  to  their  dividend  accounts.  Furthermore,  when  the  notes  were  paid  the  cash 
entry  was  posted  direct  from  the  cash  book  to  a  special  dividend  account  and  the  book- 
keeper who  posted  the  entry  is  a  stockholder,  director,  and  secretary  and  treasurer  of  the 
corporation. 

All  further  arguments  of  the  taxpayer  are  based  upon  the  fundamental  error  that 
the  dividend  was  to  be  paid  with  the  stockholders'  notes,  whereas  at  the  time  the  divi- 
dends were  declared  and  paid  the  corporation  did  not  hold  the  notes  of  the  stockholders 
which  were  being  paid.  Thus  the  taxpayer  contends  that  if  a  dividend  was  in  fact  de- 
clared, it  was  never  paid,  whereas  all  the  dividends  in  question  were  paid  promptly,  in 
cash,  to  A,  the  person  to  whom  they  were  payable  on  behalf  of  the  stockholders,  accord- 
ing to  the  resolution  declaring  the  dividend.  It  contends  that  the  statute  of  limitations 
has  now  run  against  the  stockholders  and  they  can  not  enforce  the  collection  of  the  divi- 
dends, whereas  the  dividends  were  paid  on  June  1  each  year  and  the  stockholders  have 
no  rights  against  which  the  statute  may  run.  Again,  it  insists  that  the  assets  with  which 
alone  the  dividends  as  declared  might  be  paid  were  allowed  to  remain  in  the  business  and 
became  paid-in  surplus,  when  the  dividends  were  payable,  and  were  paid  in  cash  from  the 
earnings  of  the  corporation;  that  the  stockholders  are  estopped  from  claiming  that  divi- 
dends were  declared,  although  they  have  received  the  payment  of  them  in  the  payment, 
of  their  notes. 

No  other  conclusion  can  be  reached  than  that  the  corporation  did  what  its  records 
indicate;  that  is,  declared  and  paid  a  dividend  out  of  its  earnings  each  year  in  the  sum 

Supplementary  Bulletin  Rulings. 


1-4-23. 


Sec.  326.    Art.  833.-7. 


of  lOx  dollars  for  the  payment  of  these  notes,  and  it  should  have  reduced  its  surplus  accord- 
ingly- 

It  might  be,  as  between  the  stockholders  and  creditors  of  the  corporations,  that  the 
stockholders  would  be  held  estopped  from  denying  that  they  still  owe  these  notes  to  the 
corporation,  but  that  is  extremely  doubtful,  and  could  be  determined  only  upon  the  hap- 
pening of  that  contingency.  However  that  may  be,  such  an  estoppel  would  not  set  up 
these  notes  as  valid  and  legal  obligations,  but  would  only  estop  the  stockholders  from 
claiming  that  they  had  already  been  paid. 

It  is  suggested,  therefore,  that  the  surplus  account  of  the  corporation  be  reduced  each 
year  by  the  amount  which  it  paid  as  a  dividend  in  satisfaction  of  these  notes  as  they  fell 
due.  This  conclusion  necessarily  reduced  the  corporation's  invested  capital  by  40a;  dollars 
prior  to  the  year  1917,  and  requires  an  adjustment  on  account  of  the  lOx  dollar  note  paid 
on  June  1,  1917. 

In  view  of  the  foregoing  quoted  opinion,  with  which  the  Committee  is  in 
accord,  it  is  recommended  that  the  surplus  account  of  the  corporation  be 
reduced  each  year  by  the  amount  which  was  paid  as  a  dividend  in  satisfaction 
of  these  notes  as  they  fell  due,  and  that  the  corporation's  invested  capital  be 
reduced  by  40*  dollars  prior  to  the  year  1917  and  a  further  adjustment  of 
invested  capital  be  made  as  of  June  1,  1917,  on  account  of  the  note  paid 
through  the  medium  of  a  special  dividend  on  that  date.  Accordingly,  it  is 
recommended  that  the  action  of  the  Income  Tax  Unit  be  sustained  and  the 
taxpayer's  appeal  be  denied. 
S 


I  ('22)-31-^44:    I.  T.  1409. 
Revenue  Act  of  1918. 

Section  8632  of  the  Ohio  General  Code,  which  provides  that  at  the  time 
of  making  a  subscription  10  per  cent  on  each  share  subscribed  for  shall  be 
paid,  and  which  provides  that  the  residue  shall  be  paid  in  such  installments 
at  the  times  and  places  and  to  such  persons  as  the  directors  require,  has  been 
construed  by  the  Ohio  courts  as  merely  marking  the  time  when  the  first 
installment  shall  be  payable  upon  a  stock  subscription  and  as  providing  the 
mode  for  determining  the  time  at  which  the  residue  shall  become  payable. 
(Chamberlain  v.  Railroad,  15  Ohio  State,  249.)  Stock  issued  without  the 
payment  of  the  first  10  per  cent  at  the  time  of  making  the  subscription  is 
not  invalid.  (Smith  v.  Railroad,  15  Ohio  State,  336,  and  Henry  v.  Ra.lroad, 
13  Ohio  Reports,  187.)  A  note  given  for  such  10  per  cent  is  enforceable 
(Latham  v.  Insurance  Co.,  1  Bull.,  127.) 

In  view  of  the  above  interpretation,  it  is  held  that,  under  the  provisions 
of  section  8632  of  the  Ohio  General  Code,  promissory  notes  of  subscribers 
may  legally  be  received  in  respect  of  the  entire  amount  of  stock  subscribed. 
Consequently,  it  follows  that  all  the  notes  received  by  the  M  Company 
upon  stock  subscriptions  may  be  included  in  the  company's  invested  capital 
to  the  extent  of  their  fair  market  value  at  the  time  paid  in  under  the  pro- 
visions of  article  833  of  Regulations  45,  provided  they  were  received  in  abso- 
lute payment  and  not  as  conditional  payment  only. 
4 


Supplementary  Bulletia  Ruling*. 


.tea 


Sec.  326.    Art.  833.-8. 


I  ('22)-52-660:  I.  T.  1542. 

Revenue  Act  of  1918. 

Inquiry  is  made  whether  under  the  laws  of  the  State  of  New  York  notes 
may  legally  be  received  in  payment  for  stock. 

Section  326(a)  1  of  the  Revenue  Act  of  1918  provides: 

That  as  used  in  this  title  the  term  "invested  capital"  for  any  year  means  (except  as 
provided  in  subdivisions  (b)  and  (c)  of  this  section)- 

Actual  cash  bona  fide  paid  in  for  stock  or  shares;    *    *  *. 

Article  833  of  Regulations  45  provides: 

Tangible  property  paid  in:  evidences  of  indebtedness.— Enforciblc  notes  or  other  evidences 
of  indebtedness,  either  interest-bearing  or  noninterest  bearing,  of  the  subscriber  received 
by  a  corporation  upon  a  subscription  for  stock  may  be  considered  as  tangible  property  in 
computing  its  invested  capital  to  the  extent  of  the  actual  cash  value  of  such  notes  or  other 
evidences  of  indebtedness  at  the  time  when  paid  in,  but  only  (a)  if  such  notes  or  evidences 
of  indebtedness  could  under  the  laws  of  the  jurisdiction  in  which  the  corporation  was 
organized  legally  be  received  in  payment  for  stock,  and  (b)  if  they  were  actually  received 
by  the  corporation  as  absolute,  and  not  as  conditional,  payment  in  whole  or  in  part  of  the 
stock  subscription. 

With  regard  to  incorporation  under  New  York  laws,  section  55  of  the  stock 
corporation  law  provides  that  stock  may  be  issued  only  for  money,  property, 
or  services,  and  where  a  subscription  is  payable  in  money,  section  53  requires 
10  per  cent  of  such  subscription  to  be  paid  in  cash.  Section  29  provides  that 
no  corporation  or  officer  thereof  shall  "discount  any  note  or  other  evidences 
of  indebtedness,  or  receive  the  same  in  payment  of  any  installment  *  *  * 
due  or  to  become  due  on  any  stock  in  such  corporation."  (Birdseys,  Consoli- 
dated Laws  of  New  York,  p.  8205.) 

Accordingly,  under  the  laws  of  New  York,  any  notes  given  for  balances  of 
stock  subscriptions  may  not  legally  be  discounted  or  received  as  payment  for 
stock.  Such  notes,  therefore,  may  not  be  included  in  invested  capital  under 
section  326  of  the  Revenue  Act  of  1918  and  article  833  of  Regulations  45. 

5 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.    Art.  834— 1 . 

Law  Section  326.— Invested  capital  (1918  Act— «j555,  ante):  (1921  Act— 
*[1035,  post). 

Article  834. — Tangible  Property  Paid  in.-  inadmissible  Assets  (Re^.  45 — • 
^755,  ante):  (Reg.  62— *;119G,  post). 

21-20-964:  A.R.R.lll 

REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  the  O  Com- 
pany. This  appeal  is  based  on  two  grounds:  One,  the  action  of  the  Unit  in 
rejecting  the  claim  for  assessment  under  section  210,  and  the  other,  the  dis- 
allowance, in  the  computation  of  invested  capital  under  section  201,  of  an 
amount  of  x  dollars  representing  capital  stocks  of  other  corporations  owned. 

At  the  time  of  organization,  the  business  having  been  conducted  originally 
by  a  partnership,  no  attention  appears  to  have  been  given  to  the  actual  value 
of  the  assets  assumed  by  the  corporation,  which  started  business  with  a  capital 
stock  of  y  dollars,  and  one  of  the  grounds  for  the  claim  under  section  210  is 
this  defective  accounting.  It  is  understood,  however,  that  in  1912,  and  again 
in  1913,  the  value  of  these  permanent  assets  was  appraised  and  written  up 
and  stock  issued  therefor,  all  of  which  has  been  allowed  as  invested  capital. 
The  other  ground  is  that  the  corporation's  income  in  1917  was  the  fruits  of 
previous  activities.  It  is  claimed  that  a  large  part  of  the  income  for  1917 
was  from  a  contract  undertaken  in  1916. 

The  matter  of  the  company's  claim  for  assessment  under  section  210  was 
under  consideration  by  the  Tax  Reviewers  and  by  them  rejected,  and  the 
Committee  sees  no  sufficient  reason  for  a  reversal  of  this  action.  Further- 
more, it  appears  from  a  statement  of  the  special  assessment  section  that  the 
company's  excess  profits  tax  was  41 .49  per  cent  of  the  income  and  that  statis- 
tics obtained  from  comparison  of  other  corporations  engaged  in  a  like  or 
similar  business  reflect  an  average  tax  of  40.14  per  cent  of  the  income. 

The  disallowance  of  the  x  dollars  of  inadmissible  assets  appears  to  grow 
out  of  the  strict  interpretation  and  application  of  article  44  of  Regulations 
41.  This  article,  following  the  provisions  of  section  207  of  the  excess  profits 
tax  law,  provides  that  "Stocks,  bonds  (other  than  obligations  of  the  United 
States),  or  other  assets,  the  income  from  which  is  not  subject  to  the  excess 
profits  tax"  may  not  be  incuded  in  invested  capital.  This  is  merely  a  state- 
ment of  the  general  principle  adopted  in  the  Act  that  borrowed  money,  interest 
on  which  is  an  allowable  deduction,  may  not  be  included  in  invested  capital, 
nor  may  assets  the  income  from  which  is  not  included  in  the  income  account, 
be  included.  The  framers  of  the  Act,  however,  did  not  foresee  or  make 
specific  provision  for  a  situation  wrhere  inadmissible  assets  are  purchased 
with  borrowed  money.  It  was  clearly  not  the  intention  of  Congress,  where, 
for  instance,  a  corporation  has  $250,000  of  admissible  assets,  $250,000  of 
inadmissibles,  $250,000  of  cash  capital  and  $250,000  of  borrowed  money,  to 
hold  that  the  corporation  has  no  invested  capital,  nor  does  the  law  so  provide 
unless  the  cash  capital  is  invested  in  inadmissible  assets. 

When  Regulations  41  were  in  course  of  preparation  the  method  of  meeting 
this  situation  was  given  very  careful  consideration  and  full  discussion.  It 
was  recognized  that  in  many,  if  not  most  instances,  it  would  be  impossible 
to  earmark  the  dollar  paid  for  inadmissible  assets  and  to  say  whether  it 
represented  invested  capital  or  borrowed  money.  It  was  therefore  deter- 
mined to  give  the  taxpayer  the  benefit  of  the  doubt,  and  this  wTas  done  by 
paragraph  129  of  article  53,  which,  after  specifying  certain  adjustments 
necessary  to  be  made,  provides  that  the  sum  so  found  shall  be  the  invested 
capital  at  the  beginning  of  the  taxable  year,  "except  that  in  any  case  where 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  834.-2. 


the  admissible  assets  *  *  *  are  less  than  the  amount  of  such  adjusted  total, 
then  the  invested  capital  must  be  further  reduced  to  an  amount  equal  to  the 
sum  of  the  admissible  assets."  In  drafting  the  form  to  put  into  effect  this 
provision  it  was  found  to  be  an  awkward  thing  to  accomplish,  and  precisely 
the  same  result  was  accomplished  in  the  method  prescribed  by  Schedule  C  8, 
Form  1 103,  and  the  instructions  covering  same;  that  is  to  say,  if  the  admissible 
assets  are  in  excess  of  the  adjusted  capital  and  surplus,  no  further  deduction 
is  required  because  of  inadmissible  assets;  in  other  words,  only  the  excess  of 
inadmissible  assets  over  total  indebtedness  is  to  be  deducted  from  the  capital 
and  surplus  so  found. 

^Therefore,  giving  the  intended  effect  to  article  53  and  to  schedule  8  (c) 
of  the  form,  the  deduction  of  x  dollars  for  inadmissible  assets,  which  is  much 
less  than  the  outstanding  indebtedness  of  the  company,  was  not  required, 
and  the  action  of  the  Unit  in  further  adjusting  the  capital  and  surplus  by  a 
reduction  for  inadmissible  assets  was  erroneous,  and  the  Committee  therefore 
recommends  that  the  corporation  be  advised  to  file  claim  for  abatement  of 
the  a  nount  of  the  assessment  based  on  this  error,  or  if  claim  has  already  been 
filed  that  it  be  allowed  to  such  extent;  and  that  the  action  of  the  Unit  in 
rejecting  the  claim  for  assessment  under  section  210  be  sustained. 
1 


Supplementary  Bulletin  Rulings 


2-20-22. 


Sec.  326.    Art.  835.— 1 


Law  Section  326.— Invested  Capital  (1918  Act— ^[555,  ante):  (1921  Act— 
If  1035,  post). 

Article  835. — Tangible  Property  Paid  in;  Mixture  of  Tangible  and  In- 
tangible Property  (Reg.  45—^756.  ante):  (Reg.  62— ^1191, 
post). 


1-19-120:  T.  B.  M.  5. 

Where  since  the  organization  of  a  corporation  its  capital  stock  has  been 
increased  or  reduced  and  such  change  represents  an  actual  acquisition  of  new 
property  for  stock  or  an  actual  impairment  of  original  properties,  the  20  per 
cent  limitation  imposed  by  section  207,  Revenue  Act  of  1917,  will  be  based 
upon  the  par  value  of  the  total  stock  outstanding  on  March  3,  1917. 
1 


16-19-467:  T.  B.  R.  49. 

Article  59  of  Regulations  41  is  a  reasonable  interpretation  of  the  Act  of  October 
3,  1917,  and  where  a  corporation  has  acquired  tangible  and  intangible  property  in 
exchange  for  its  bonds  and  stocks  it  will  be  deemed,  in  the  absence  of  clear  evidence 
to  the  contrary,  that  the  intangibles  were  acquired  by  the  stock. 

In  computing  consolidated  invested  capital,  where  one  corporation  has  acquired 
the  stock  of  one  or  more  subsidiary  companies,  such  transaction  should  be  treated 
in  effect  as  though  the  assets  of  the  respective  companies  had  been  acquired.  In 
the  case  under  consideration,  the  decision  of  the  income  tax  unit  in  allowing  a  9 
per  cent  deduction  is  approved. 

(1)  The  W  Company  was  formed  through  the  merger  of  the  Y  Com- 
pany and  the  Z  Company  with  the  W  Company  as  it  existed  before  the  merger. 
The  new  company  issued  the  following  securities: 

Bonds   67  x  dollars 

Capital  stock   59  x  dollars 

Total  bonds  and  stock   126  x  dollars 

The  company  also  assumed  liabilities  amounting  to  9x  dollars.  For  the 
above  securities  and  the  assumption  of  the  liabilities  just  mentioned  the  com- 
pany acquired  total  tangible  assets  of  84*  dollars  and  intangible  assets  of  51* 
dollars.  In  computing  its  invested  capital  for  1917  the  company  claims  that 
these  securities  were  issued  ratably  for  both  tangible  and  intangible  assets, 
and  that,  therefore,  46  per  cent  of  the  bonds  were  issued  for  tangible  and  54 
per  cent  for  intangible  property.  These  ratios  apply  also  to  the  common 
stock.    Is  this  method  of  computation  correct? 

The  act  of  October  3,  1917,  provides  that,  where  intangible  assets,  such 
as  good  will,  trade-marks,  trade  brands,  etc.,  have  been  acquired  by  capital 
stock,  the  maximum  amount  that  may  be  included  in  invested  capital  in 
respect  of  such  intangibles  is  limited  to  20  per  cent  of  the  capital  stock  of  teh 
corporation  outstanding  on  March  3, 1917.  This  is  a  purely  arbitrary  limita- 
tion designed  to  prevent  the  inclusion  in  invested  capital  of  excessive  amounts 
of  capital  stock  issued  for  intangibles  in  excess  of  their  reasonable  value. 
Where  capital  stock  is  issued  directly  for  intangible  property,  the  application 
of  this  rule  is  simple,  but  where,  as  in  the  present  case,  a  mixed  aggregate  of 
tangible  and  intangible  property  is  acquired  for  the  total  amount  of  securities, 
part  of  which  are  in  the  form  of  bonds  and  part  of  which  are  in  the  form  of 
stock,  it  becomes  necessary  to  determine  how  much  of  the  tangible  property 
was  acquired  by  bonds  and  how  much,  if  any,  by  the  issuance  of  capital  stock. 
Regulations  41,  article  59,  lays  down  the  rule  that — 

In  the  absence  of  satisfactory  evidence  to  the  contrary,  it  will  be  presumed  in  the  case  of 
a  corporation  that  its  stock  was  issued  for  the  following  purposes  in  the  order  named:  (a) 


Supplementary  Bulletin  Rulings. 


Ssc.  326.    Art.  835.-2. 


Good  will  or  other  intangible  property,  (b)  patents  and  copyrights,  (c)  tangible  property. 
Stating  the  rule  conversely,  bonds  are  to  be  applied  first  against  tangible 

froperty,  and  any  remainder  only  will  be  applicable  to  intangible  property, 
here  is  no  clearly  stated  rule  in  the  statute;  therefore  the  regulation  is  based 
upon  inference,  and  to  be  sound  must  be  a  reasonable  interpretation  of  what 
the  statute  requires.  In  any  case  in  which  a  mixed  aggregate  of  tangible 
and  intangible  property  is  acquired  for  a  block  of  securities  consisting  in  part 
of  bonds  of  the  corporation  and  in  part  of  its  capital  stock,  the  allocation  of 
the  tangible  and  intangible  property  to  the  respective  securities  may  be  made 
upon  one  of  three  possible  bases: 

(a)  That  the  stock  was  issued  first  against  tangible  property,  and  that 
the  bonds  were  issued  against  intangible  property; 

(b)  That  the  bonds  and  the  stock  apply  ratably  against  the  tangible 
and  intangible  assets;  and 

(c)  That  the  bonds  apply  first  against  tangible  assets,  and  that  the  stock 
was  issued  against  any  remaining  tangible  property  and  for  the  intangible 
property. 

Considering  briefly  these  possible  bases,  the  first  must  be  discarded  as 
altogether  unreasonable.  Corporate  securities  are  not  and  could  not  in  any 
ordinary  case  be  issued  upon  such  a  basis.  The  second  basis  is  that  claimed 
by  the  taxpayer,  but  it  also  must  be  discarded  on  the  ground  that  it  does  not 
conform  to  the  methods  of  corporate  finance.  Bonds  are  universally  drawn 
in  such  a  way  as  to  rank  senior  to  capital  stock.  A  bond  aims  to  give  the 
maximum  of  security  with  a  moderate  rate  of  return,  and  this  return,  while 
limited  in  amount,  is  nevertheless  a  fixed  obligation  for  the  payment  of  which, 
together  with  the  principal  of  the  bond,  tangible  assets  are  specifically  pledged. 
It  is  true  that  in  some  instances  the  mortgage  or  other  instrument  may  cover 
not  only  tangible  property  but  intangible  property  also,  but  even  in  such  a 
case  the  satisfaction  of  the  bond  is  first  sought  against  the  tangible  property. 
The  stock  as  the  junior  security  is  more  speculative  in  character.  It  has  no 
right  of  foreclosure  and  after  satisfaction  of  the  senior  securities  the  stock 
must  bear  all  losses.  As  against  this,  however,  the  stock  is  limited  in  its 
return  only  by  the  earning  capacity  of  the  corporation.  Tangible  property 
has  an  actual  value  resting  upon  its  permanency  and  upon  the  variety  of  its 
possible  uses.  Intangible  property  is  evanescent  in  its  character,  and  its 
value  rests  upon  its  potential  earning  power  and  its  use  is  limited  usually  to 
the  trade  or  business  in  which  it  has  its  origin.  It  thus  lacks  the  elements 
which  make  tangible  property  the  accepted  security  for  bonds,  but  because 
of  its  earning  power  it  is  a  fitting  basis  for  an  issue  of  common  stock.  These 
distinctions  are  not  merely  theoretical  but  underlie  the  whole  structure  of 
corporate  finance  in  this  country,  and  are  so  interwoven  with  the  practice 
and  procedure  in  the  issuance  of  securities  that  they  have  become,  for  all 
practical  purposes,  obligatory. 

The  rule  laid  down  in  article  59  of  Regulations  41  is,  in  the  opinion  of 
the  Advisory  Tax  Board,  reasonable  and  fairly  interprets  the  intent  of  the 
Statute.  It  is,  therefore,  recommended  that  the  claim  of  the  W  Company 
to  the  right  to  compute  invested  capital  upon  the  basis  of  prorating  the  bonds 
and  stock  issued  by  it  over  the  tangible  and  intangible  property  be  denied. 

(2)  In  accordance  with  a  court  decree  the  W  Company  as  it  then  existed 
was  dissolved.  Two  new  companies,  the  R  Company  and  S  Company,  were 
organized  and  a  certain  portion  of  the  tangible  and  intangible  assets  of  the 
W  Company  was  transferred  to  these  new  corporations.  In  this  connection 
the  W  Company  claims  that  the  tangible  and  intangible  property  transferred 
at  this  time  was  acquired  by  it  partly  for  bonds  and  partly  for  stock.  This 
question  is  not  material  in  view  of  the  negative  conclusion  reached  in  (1) 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  835.-3. 


above.  This  applied,  however,  only  in  so  far  as  it  relates  to  property  ac- 
quired at  the  time  of  the  merger  and  it  may  be  that  some  part  of  the  intan- 
gible property  in  the  form  of  trade-marks  or  trade  brands  so  transferred  may 
have  been  acquired  for  cash  or  tangible  property  since  that  date.  Proper 
recognition  should,  of  course,  be  given  to  the  facts  in  such  an  event. 

(3)  The  W  Company  acquired  through  the  merger  already  mentioned 
the  stock  of  certain  subsidiary  companies.  In  the  computation  of  the  con- 
solidated invested  capital  the  Income  Tax  Unit  has  treated  the  acquisition 
of  the  stock  of  these  subsidiary  companies  in  the  same  manner  as  if  the  tan- 
gible and  intangible  assets  of  the  respective  companies  had  been  acquired. 
In  some  cases  these  subsidiary  companies  have  since  been  dissolved  and 
upon  dissolution  the  assets  have  been  taken  up  by  the  parent  company  and 
the  liabilities  assumed  by  it.  In  the  opinion  of  the  Advisory  Tax  Board  the 
method  of  computation  used  by  the  unit  as  above  stated  is  correct. 

(4)  The  W  Company  makes  claim  for  prewar  deduction  of  9  per  cent, 
although  its  actual  earnings  during  the  prewar  period  amount  to  less  than  this 
percentage  of  its  invested  capital.  Representative  corporations,  however, 
show  more  than  9  per  cent,  and  the  W  Company  would  have  shown  more 
than  9  per  cent  except  for  a  charge  that  occurred  during  this  period  by  way 
of  premium  paid  upon  certain  bonds  of  the  company  which  it  had  called  in 
and  canceled  pursuant  to  the  dissolution  decree. 

In  view  of  all  these  circumstances,  the  Advisory  Tax  Board  concurs  in 
the  decision  of  the  Income  Tax  Unit  that  the  taxpayer's  claim  should  be 
allowed. 
2 


kL  i   31 

44-20-1282:^  ^A.'R.  R.  307. 

The  Committee  has  had  under  consideration  the  appeal  of  the  N  Com- 
pany against  the  ruling  of  the  Income  Tax  Unit  disallowing  an  item  of  50* 
dollars  claimed  as  good  will  in  its  invested  capital  for  1918. 

The  facts  appear  to  be  that  the  N  Company,  a  corporation,  succeeded 
N  and  Company,  a  partnership,  in  1897.  The  partnership  had  been  very 
profitable  prior  to  incorporation,  its  average  earnings  for  the  five  years  just 
prior  to  1897  being  approximately  100*  dollars.  As  its  tangible  assets  pre- 
sumably were  substantially  the  same  as  when  turned  over  to  the  corporation 
in  1897,  200a:  dollars,  it  is  clear  that  its  earnings  indicated  a  good  will  worth 
at  least  as  much  as  the  tangible  assets.  The  deed  transferring  assets  to  the 
corporation  specifically  recited  that  the  200#  dollars  in  stock  was  paid  for  the 
trade  name  and  good  will  of  the  business  and  the  physical  assets.  The 
amount  of  the  net  tangible  assets  taken  up  on  the  books  of  the  corporation 
was  200x  dollars,  the  good  will  not  being  carried  on  the  books  as  an  asset  at  all. 

The  denial  of  the  item  of  50x  dollars  claimed  as  invested  capital  appears 
to  be  based  upon  the  assumption  that  if  allowed  at  all  it  must  be  allowed  as 
paid-in  surplus,  and  the  Unit  has  consistently  and  correctly,  in  the  opinion 
of  the  Committee,  taken  the  attitude  that  no  paid-in  surplus  is  permissible 
direcdy  or  indirectly  as  to  intangible  assets  conveyed .  However,  this  amount 
may  be  allowed  without  its  inclusion  as  paid-in  surplus.  The  tangible  assets 
taken  oyer  were  raw  materials  and  stock  in  trade  which  were  sold  long  prior 
to  any  income  tax  law.  To  distribute  the  purchase  price  of  the  tangibles 
and  intangibles  purchased  as  being  150*  dollars  for  tangibles  and  50*  dollars 
t'  r  intangibles  will  have  the  effect  of  reducing  the  cost  price  of  assets  from 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  835. 


200*  dollars  to  150*  dollars  and  consequently  increasing  the  earned  surplus 
by  50*  dollars. 

It  is  clear  that  this  is  a  case  of  acquisition  for  stock  of  a  mixed  aggregate 
of  tangibles  and  intangibles  such  as  would  justify  the  application  of  section 
327  if  satisfactory  allocation  of  values  can  not  be  arrived  at.  In  view  of  the 
history  of  the  concern  and  the  profits  earned  in  excess  of  a  return  upon  tangible 
assets,  the  Committee  is  clearly  of  the  opinion  that  the  intangible  assets  were 
as  readily  worth  50*  dollars  as  the  tangibles  were  worth  150*  dollars.  How- 
ever, as  50*  dollars  in  1918  is  the  maximum  value  which  can  be  included  in 
invested  capital  by  reason  of  the  purchase  of  intangible  assets  for  stock,  the 
Committee  recommends  that  the  corporation  be  allowed  to  allocate  the  values 
at  the  time  of  purchase  and  to  attribute  to  the  tangibles  a  cost  of  150*  dollars 
and  to  the  intangibles  a  cost  of  50*  dollars,  and  to  adjust  its  books  so  as  to 
increase  its  earned  surplus  by  the  sum  of  50*  dollars. 

3 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.    Art.  836.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— «[ 555,  ante):  (1921  Act— 
If 1035,  post). 

Article  836. — Tangible  Property  Paid  in;  value  in  Excess  of  Par  Value 
of  Stock  (Reg.  45 — 1|757,  ante):  (Reg.  62—111192,  post). 

1-19-128:  O.  D.  89. 
The  value  as  at  January  1.  1914,  of  tangible  property  .paid  in  for  stock 
or  shares  is  no  factor  in  computing  invested  capital  under  the  Revenue  Act 
of  1918. 
1 


1-19-129:  O.  D.  90. 
Paid-in  surplus  representing  tangible  property  need  not  be  reduced  by 
reason  of  depreciation  of  the  property  in  question.    All  adjustments  neces- 
sary on  account  of  inadequate  or  excessive  depreciation  should  be  made  in 
connection  with  earned  surplus  or  undivided  profits. 
2 


8-19-334:  T.  B.  R.  32. 

How  invested  capital  shall  be  determined  in  the  case  of  the  X  company  where 
bondholders  purchased  at  foreclosure  sale  the  property  covered  by  the  mortgage 
securing  the  bonds,  and  then  transferred  said  property  to  a  new  corporation  in 
exchange  for  its  total  authorized  stock  issue. 

The  bondholders  of  the  X  Company  obtained  judgment  against  the  debtor 
corporation  in  the  amount  of  Ax  dollars.  The  property  of  the  corporation 
was  sold  and  bid  in  by  the  bondholders  for  3x  dollars.  The  memorandum 
states  that  the  cash  value  of  the  property  was  probably  less  than  the  judg- 
ment and  probably  more  than  the  bid.  After  the  property  was  bid  in  by  the 
bondholders  a  new  corporation  with  an  authorized  stock  issue  of  2x  dollars 
was  organized,  and  the  property  bid  in  at  foreclosure  sale  by  the  bondholders 
was  exchanged  for  the  total  issue  of  the  stock  of  the  new  corporation.  The 
inquiry  is,  What  shall  be  the  amount  of  the  invested  capital  of  the  new  cor- 
poration? 

Article  153  of  Regulations  45  provides  that  where  under  foreclosure  a 
mortgagee  buys  in  the  mortgaged  property  and  credits  the  indebtedness 
with  the  purchase  price,  the  difference  between  the  purchase  price  and  the 
indebtedness  will  not  be  allowable  as  a  deduction  for  a  bad  debt,  for  the 
property  which  was  security  for  the  debt  stands  in  place  of  the  debt.  Article 
1563,  Regulations  45,  also  provides  that  there  is  no  gain  or  loss  arising  from 
the  acquisition  and  subsequent  disposition  of  property  when  as  a  result  of  a 
transaction  there  is  not  a  change  in  substance  but  merely  in  form  of  ownership. 
It  is  provided  that  there  must  be  a  change  into  the  equivalent  of  cash  to 
complete  or  close  a  transaction  from  which  income  may  be  realized.  These 
regulations  deny  to  the  stockholders  the  right  of  taking  loss  upon  the  basis 
of  any  estimated  difference  in  value  between  their  investment  in  bonds  and 
the  property  taken  to  secure  such  bonds. 

Article  836  provides  that  evidence  offered  in  support  of  a  claim  for  a 
paid-in  surplus  may  consist  among  other  things  of  an  appraisal  of  the  prop- 
erty; certification  of  the  assessed  value  in  the  case  of  real  estate;  and  proof  of 
a  market  price  in  excess  of  the  par  value  of  the  stock  or  shares.    It  provides, 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-2. 


however,  that  "generally,  allowable  claims  under  this  article  will  arise  out 
of  transactions  in  which  there  has  been  no  substantial  change  of  beneficial 
interest  in  the  property  paid  in  to  the  corporation,  and  in  all  cases  the  proof 
of  value  must  be  clear  and  explicit." 

In  the  case  of  the  X  Company  there  has  been  no  change  of  beneficial 
interest  of  the  stockholders,  and  the  Advisory  Tax  Board  is  of  the  opinion 
that  the  corporation  should  be  allowed  to  set  up  an  invested  capital  equal 
to  the  value  of  the  property  transferred  to  the  corporation  as  of  the  date  of 
transfer,  such  value  to  be  established  by  evidence  acceptable  to  the  Commis- 
sioner. The  question  of  gain  or  loss  to  the  stockholders  who  were  the  former 
bondholders  and  the  invested  capital  of  the  new  corporation  are  not  con- 
current as  to  time  of  determination  in  the  above  case.  The  gain  or  loss  of 
stockholders  will  be  determined  on  the  basis  of  the  price  paid  for  the  bonds 
and  the  price  received. for  stock  of  the  new  corporation  when  sold. 
3 


13-19-432:  O.  D.  249. 

Where  a  corporation  exchanges  its  stock  for  the  assets  of  a  partnership, 
which  are  greatly  in  excess  of  the  par  value  of  the  stock,  and  there  is  no  written 
obligation  to  the  partners  as  to  the  payment  of  the  excess,  the  taxpayer  is 
entitled  to  submit  evidence  in  support  of  a  claim  for  paid-in  surplus;  however, 
if  the  corporation  is  obligated  to  the  partners  for  any  portion  of  the  excess, 
a  claim  can  not  be  sustained. 
4 

icjd^L  t>rb  3yni£g£  Inarrrgbuj.  Lanbsldo  vneqmoO  X  od.3  to  aiobioribnod  oHT 

i 

rniibfifi-iomom  odT  .audfob  iot  faobiorlbnod  arta  vd  ni  bid  bnfi  bios  t&n 
-gbui  oih  nerli  szoi  vjdfidoiq  aisw  yn^qoiq  aril  k>  suIbv  riaiso  arb  JbHj  eaJAJi 

14.19.440:  T.  B.  M.  57. 

The  assets  of  a  corporation  can  not  be  valued  as  of  March  1,  1913,  for  the 
purpose  of  computing  invested  capital. 

The  X  Company  has  appealed  from  a  decision  of  the  Income  Tax  Unit 
that  it  can  not  appraise  its  assets  as  of  March  1,  1913,  and  use  the  values 
thus  ascertained  as  a  basis  for  determining  invested  capital.  The  company 
relies  on  Lynch  v.  Turrish  (247  U.  S.,  221)  and  similar  decisions,  holding  that 
appreciation  prior  to  March  1,  1913,  can  not  be  considered  net  income  for 
the  purposes  of  the  income  tax. 

An  inspection  of  section  207  of  the  Revenue  Act  of  1918  with  its  reitera- 
tion of  the  phrase  'Value  *  *  *  at  the  time  of  such  payment"  clearly  shows 
that  with  minor  exceptions  the  statutory  invested  capital  is  based  upon  the 
value  of  property  at  the  time  it  is  paid  in  for  stock  or  shares  and  not  upon  |a 
valuation  at  some  subsequent  date.  The  law  has  been  consistently  inter- 
preted to  mean  that  the  basis  or  starting  point  in  the  computation  of  invested 
capital  is  found  in  the  amount  of  cash  or  other  property  paid  in,  the  original 
values  of  such  other  property  being  determined  in  accordance  with  the  statute 
and  the  regulations.  (Art.  42,  Regulations  41.)  In  enacting  the  Revenue 
Act  of  1918,  Congress  advisedly  continued  and  confirmed  this  general  prin- 
ciple. (Senate  Rept.  No.  617,  p.  11;  sec.  326,  Revenue  Act  of  1918.)  This 
well-established  rule  must  be  applied  in  the  present  case.  The  fact  that  this 
particular  company  has  defective  accounting  records  and  can  not  accurately 
compute  its  invested  capital  in  the  ordinary  manner  may  justify  assessment 
under  section  210  of  the  1917  Revenue  Act  or  section  328  of  the  1918  Revenue 


Supplementary  Bulletin  Rulings. 


.d£8  .HA    .dSE  .D58 


Sec.  326.    Art.  836.-3. 


Act,  but  does  not  permit  any  appraisal  of  assets  at  a  time  subsequent  to  the 
date  on  which  they  were  paid  in  for  stock  as  a  basis  of  a  computation  of 
invested  capital. 


21-20-965:  S.  1387. 

EXCESS  PROFITS  TAX,  REVENUE  ACT  OF  1917,  SECTION  207  (a),  REGULA- 
TIONS 41,  ARTICLE  63. 

Time  of  Valuation  for  the  Purpose  of  Determining  Invested  Capital  of  Property  Acquired  bj  a 

Corporation  by  Gift. 

Where  certain  commercial  leases  to  oil  lands  are  informally  transferred  to  a 
corporation  formed  by  the  lessees  for  the  purpose  of  taking  over  such  leases,  no 
consideration  being  paid  for  such  transfer,  it  will  be  deemed  that  the  transfer  was 
made  at  the  time  of  taking  possession,  and  the  addition  to  invested  capital  of  the 
corporation  upon  such  transfer  is  the  fair  market  price  or  value  of  the  leases  at 
the  time  possession  is  so  taken  by  the  corporation. 

Opinion  is  requested  as  to  the  time  when  certain  commercial  leases  should 
be  valued  for  the  purpose  of  determining  the  invested  capital  of  the  M  Com- 
pany which  leases  were  informally  transferred  to  the  corporation  without 
consideration  by  its  stockholders. 

The  Revenue  Act  of  1917  provides,  section  207. 

That  as  used  in  this  title,  the  term  "invested  capital"  *    *    *  means  *    *  * 

(a)  In  a  case  of  a  corporation  or  partnership  *    *    *  (3)  paid  in  or  earned  surplus  and 

undivided  profits  used  or  employed  in  the  business,  exclusive  of  undivided  profits  earned 

during  the  taxable  year;  *    *  *. 

Interpreting  this  section  article  63  of  Regulations  41  provides: 

When  Tangible  Property  May  Be ^  Included  in  Surplus. — Where  it  can  be  shown  by 
evidence  satisfactory  to  the  Commissioner  of  Internal  Revenue  that  tangible  property  has 
been  conveyed  to  a  corporation  or  partnership  by  gift  or  at  a  value,  accurately  ascertainable 
or  definitely  known  as  at  the  date  of  conveyance,  clearly  and  s  bstantially  in  excess  of 
the  cash  or  tlv;  par  value  of  the  stock  or  shares  paid  therefor,  then  the  amount  of  the  excess 
shall  be  deemed  to  be  paid-in  surplus.  The  adopted  value  shall  not  cover  mineral  deposits 
or  other  properties  discovered  or  developed  after  the  date  of  conveyance,  but  shall  be 
confined  to  the  value  accurately  ascertainable  or  definitely  known  at  the  time. 

Evidence  tending  to  support  a  claim  for  paid-in  surplus  under  these  circumstances  must 
be  as  of  the  date  of  conveyance,  and  may  consist,  among  other  things,  of  (1)  an  appraisal 
of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case  of  real  estate, 
and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

Prior  to  October,  1913,  the  M  Company  was  a  partnership.  This  part- 
nership acquired  leases  to  certain  oil  lands  in  consideration  for  its  promise 
to  begin  drilling  wells  on  the  lands  leased  within  a  stated  period  of  time,  and 
to  continue  development.  About  October,  1913,  the  partnership  instituted 
proceedings  to  incorporate.  Immediately  upon  incorporation,  and  without 
formal  record  in  any  manner,  the  commercial  leases  held  by  the  partnership 
were  turned  over  to  the  corporation,  which,  thereupon,  continued  the  work 
of  drilling  wells  and  developing  properties.  At  the  time  of  this  formal 
transfer  to  the  corporation  the  leases  in  question  were  of  a  value  which  can 
be  determined  with  reasonable  accuracy.  A  few  months  later,  as  a  result 
of  the  development  carried  on  by  the  corporation,  the  value  of  the  leases 
became  greatly  enhanced. 

It  is  the  contention  of  the  taxpayer  that  since  the  only  way  title  to  the 
leases  could  be  acquired  by  the  corporation  was  by  fulfilling  their  individual 
requirements  as  to  the  developing  of  the  properties,  the  leases  were  acquired 
on  different  dates,  that  is,  the  dates  when  permanent  improvements  were 
made  by  the  corporation. 

The  excess  profits  tax  law  of  October  3,  1917,  authorizes  a  corporation  to 


Supplementary  Bulletin 


Sec.  326.   Art.  836.--4. 


include  in  "invested  capital"  as  paid-in  surplus  the  actual  cash  value  of 
tangible  property  made  the  subject  of  a  gift.  Construing  this  provision, 
section  207  (a)  3,  Regulations  41,  article  63,  provides  that  where  tangible 
property  has  been  conveyed  to  a  corporation  or  partnership  by  gift  or  at  a 
value  accurately  ascertainable  or  definitely  known  as  at  the  date  of  con- 
veyance, clearly  and  substantially  in  excess  of  the  cash  or  the  par  value  of 
the  stock  or  shares  paid  therefor,  then  the  amount  of  the  excess  shall  be 
deemed  to  be  paid-in  surplus.  That  article  >oes  on  to  state  that  the  adopted 
value  shall  not  cover  mineral  deposits  or  other  properties  discovered  or  de- 
veloped after  the  date  of  conveyance,  but  shall  be  confined  to  the  value  ac- 
curately ascertainable  or  definitely  known  at  that  time.  Although  not 
definitely  authorized  by  this  article,  the  practice  of  the  Bureau  has  been  to 
regard  as  paid-in  surplus  the  entire  value  of  property  made  the  subject  of  a 
gift  at  the  date  of  its  "conveyance. " 

The  term  "conveyance''  is  not  used  in  this  article  in  its  strict  technical 
sense,  but  means  simply  a  transfer  of  the  interest  of  the  donor  to  the  donee. 
This  is  shown  by  the  fact  that  the  article  is  concerned  with  tangible  property 
in  general,  whereas,  as  is  well  known,  the  term  "convey ance"  is,  strictly 
speaking,  applied  only  to  the  formal  transfer  of  real  property  by  deed. 

In  the  instant  case  it  is  undisputed  that  the  entire  interest  of  the  part- 
nership or  the  individual  members  thereof  in  the  leases  in  question  was  trans- 
ferred to  the  corporation  at  its  date  of  incorporation. 

While  it  is  true  that  after  such  transfer  of  interest  the  corporation  was 
required  to  continue  the  drilling  of  wells  and  the  developing  of  the  properties 
in  order  to  carry  out  the  terms  of  the  original  leases,  still,  so  far  as  the  part- 
nership, the  donor,  and  the  corporation,  the  donee,  are  concerned,  the  entire 
interest  of  the  former  was  transferred  at  the  date  of  incorporation.  The  con- 
ditions which  had  to  be  fulfilled  by  the  corporation  did  not  affect  the  transfer 
of  interest  in  the  leases  from  the  partnership,  but  simply  the  maintaining  of 
the  property  in  the  leases  as  originally  made. 

As  a  general  rule  a  sale  of  an  interest  in  real  property  is  held  to  occur  at 
the  time  a  deed  passes  or  at  the  time  possession  and  the  burdens  and  benefits 
of  ownership  are,  from  a  practical  standpoint,  transferred  to  the  buyer, 
whichever  occurs  first.  (See  Law  Opinion  988;  Solicitor's  Memorandum 
1267,  and  cases  therein  cited.)  The  rule  as  to  the  effective  date  of  a  gift  of 
an  interest  in  real  property  for  purposes  of  valuation  should  be  the  same  as 
in  the  case  of  a  sale.  Since  only  the  original  parties  are  concerned,  this 
conclusion  is  not  affected  by  reason  of  the  fact  that  the  transfer  was  oral. 
In  the  instant  case  possession  of  the  lands  covered  by  the  leases  was  taken 
immediately  by  the  corporation;  in  fact  such  taking  of  possession  is  the  only 
evidence  of  the  transfer.  Even  if  there  had  been  a  subsequent  written  as- 
signment of  the  leases,  such  assignment  would,  for  the  purpose  of  fixing 
valuation,  be  retroactive  to  the  time  when  the  parties  intended  the  property 
to  pass,  i.  e.,  in  this  instance  to  the  time  when  the  corporation  took  possession 
and  dealt  with  the  leases  as  the  owner  thereof. 

It  is,  therefore,  held  that  where  certain  commercial  leases  to  oil  lands  are 
informally  transferred  to  a  corporation  formed  by  the  lessees  for  the  purpose 
of  taking  over  such  leases,  no  consideration  being  paid  for  such  transfer,  it 
will  be  deemed  that  the  transfer  was  made  at  the  time  of  taking  possession, 
and  the  addition  to  invested  capital  of  the  corporation  upon  such  transfer 
is  the  fair  market  price  or  value  of  the  leases  at  the  time  possession  is  so  taken 
by  the  corporation. 
6 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-5. 


28-20-1064:  A.  R.  R.  161. 
REVENUE  ACT  OF  1917. 
Recommended  that  the  claim  of  M.  &  Company  for  a  paid-in  surplus  of  15* 
dollars  on  account  of  the  excess  value  of  properties  in  1911  be  allowed. 

The  Committee  has  had  under  consideration  the  appeal  of  M.  &  Com- 
pany, a  corporation,  from  the  action  of  the  Unit  in  disallowing  a  claim  for 
15*  dollars  as  paid-in  surplus  in  the  determination  of  the  corporation's  in- 
vested capital  for  the  purpose  of  adjusting  excess  profits  tax. 

M.  &  Company  was  organized  in  1911  as  a  consolidation  of  two  pre- 
existing corporations.  Among  other  assets  which  were  taken  over  by  the 
present  corporation  and  for  which  stock  was  issued  were  two  pieces  of  real 
estate,  the  values  of  which  are  the  basis  of  the  present  claim.  One  of  these 
properties,  the  so-called  warehouse  property,  was  purchased  by  the  original 
corporation  at  a  cost  of  x  dollars  and  on  which  a  warehouse  building  was 
erected  in  the  year  1902  at  an  actual  cost  of  2x  dollars,  this  property  having 
a  book  value  of  3x  dollars  at  the  time  of  organization  of  the  new  company, 
at  which  value  it  was  taken  over,  stock  issued  therefor,  and  the  property  set 
up  on  the  books  of  the  new  corporation.  The  other,  the  main  store  building, 
was  purchased  by  the  original  corporation  at  approximately  5x  dollars,  and 
there  was  erected  thereon,  in  the  years  1902  and  1903,  a  store  building  at  an 
actual  cost  of  llx  dollars,  the  property  being  carried  on  the  books  of  the  old 
corporation  at  16*  dollars,  at  which  figure  it  was  taken  over  and  carried  on 
the  books  of  the  new  corporation.  The  claim  for  paid-in  surplus  arises  on 
the  alleged  excess  of  value  of  the  land  on  which  these  two  buildings  stand,  in 
1911.  There  was  no  substantial  change  of  interest  at  the  time  of  reorgani- 
zation, the  stockholders  of  the  new  corporation  being  practically  the  same 
as  in  the  old. 

Article  63  of  Regulations  41  provides  as  follows. 

Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner  oi  internal  Revenue 
that  tangible  property  has  been  conveyed  to  a  corporation  or  partnership  by  gift  or  at  a 
value,  accurately  ascertainable  or  definitely  known  as  at  the  date  of  conveyance,  clearly 
and  substantially  in  excess  of  the  cash  or  the  par  value  of  the  stock  or^shares  paid  therefor, 
then  the  amount  pf  the  excess  shall  be  deemed  to  be  paid  in  surplus."  The  adopted  value 
shall  not  cover  mineral  deposits  or  other  properties  discovered  or  developed  after  the  date 
of  conveyance,  but  shall  be  confined  to  the  value  accurately  ascertainable  or  definitely 
known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under  these  circumstances 
must  be  as  of  the  date  of  conveyance,  and  may  consist,  among  other  things,  of  (1)  appraisal 
of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case  of  real  estate, 
and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

It  will  be  noted  that  the  properties  were  taken  over  in  January,  1911, 
and  it  appears  that  some  time  during  the  late  summer  of  1912  an  appraisal 
was  made  of  these  two  properties  and  the  value  of  the  main  store  lot,  exclu- 
sive of  the  building,  was  appraised  at  17 x  dollars,  while  the  value  of  the  ware- 
house lot,  exclusive  of  the  building,  was  appraised  at  4x  dollars. 

The  last  paragraph  of  article  63  requires  that  "evidence  tending  to  sup- 
port a  claim  for  paid-in  surplus  *  *  *  must  be  as  of  the  date  of  conveyance," 
and  the  Unit  has  apparently  rejected  the  claim  on  the  theory  that  the  ap- 
praisal, in  order  to  be  valid,  must  have  been  made  on  the  exact  date  of  con- 
veyance. In  the  opinion  of  the  Committee  this  is  too  narrow  a  construction. 
It  is  believed  that  the  real  meaning  is  that  the  appraisal  must  have  been  made 
as  of  that  date;  that  is  to  say,  jn  the  light  only  of  knowledge  or  facts  ascer- 
tainable on  that  date  and  not  in  the  light  of  subsequent  happenings.  Evi- 
dence was  produced  at  the  hearing  to  show  that  between  January  1,  1911,  the 
date  of  transfer,  and  the  date  of  this  appraisal  there  was  no  appreciable  in- 
crease in  the  value  of  real  estate  in  the  locality.  The  appraisal  then  made 
has  been  substantiated  by  an  appraisal  subsequently  made  by  two/lisinterested 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-6. 


appraisers  as  of  January  1,  1911,  who  find  the  values  only  slightly  different 
from  those  reached  by  the  first  appraisers,  the  recent  appraisal  being  4x 
dollars  for  the  warehouse  lot  and  18*  dollars  for  the  store  lot. 

At  the  time  of  the  appraisal  in  1912,  5x  dollars  of  the  increase  shown 
thereby  was  carried  into  the  books  of  the  company  and  a  tax  of  1  per  cent 
paid  thereon  under  the  Act  of  1909,  under  the  mistaken  view,  subsequently 
reversed  in  the  Baldwin  Locomotive  Co.  case,  that  appreciation  written  on 
the  books  constitutes  income.  It  is  stated  that  the  reasons  for  not  then 
carrying  the  entire  appreciation  on  to  the  books  were  that,  first,  they  were 
under  the  impression  that  they  would  have  to  pay  tax  on  all  the  amount 
written  on  the  books;  second,  that  an  increase  in  book  values  might  lead  to 
an  increase  in  their  local  taxation;  and,  third,  and  probably  most  cogent  of 
all,  was  the  fact  that  the  stock  was  issued  under  a  stockholders'  agreement, 
under  which  no  stock  could  be  sold  unless  first  offered  to  remaining  stock- 
holders, and  that  in  the  event  of  the  death  of  any  stockholder,  the  corpora- 
tion had  the  right  to  purchase  stock  from  his  estate  at  approximately  10  per 
cent  in  excess  of  its  then  book  value. 

The  store  is  advantageously  located  in  the  business  center  of  the  city, 
while  the  warehouse  property  is  only  a  few  blocks  away.  The  properties 
clearly  had  a  value  in  excess  of  that  at  which  they  were  taken  on  to  the  books 
of  the  corporation  in  consolidation,  and  it  has  been  adundantly  established 
to  the  satisfaction  of  the  Committee  that  the  real  estate  had  a  value  not  less 
than  15*  dollars  in  excess  of  the  figure  at  which  it  was  taken  over. 

It  accordingly  recommends  that  the  claim  of  the  corporation  to  an  addi- 
tion of  15*  dollars  to  its  invested  capital  as  paid-in  surplus  be  allowed. 
7 


2-21-1393:  A.  R.  R.  358. 

REVENUE  ACT  OF  1917. 
The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  denying  to  the  taxpayer  an 
invested  capital  as  of  January  1,  1913,  based  upon  an  appraisal  of  the  tax- 
payer's property  as  of  January  1,  1917. 

K  j  It  appears  that  the  business  which  is  now  carried  on  by  the  M  Company 
was  organized  by  A  in  the  year  1880.  From  that  time  until  January  1,  1913, 
he  carried  on  the  business  as  an  individual  and  was  successful  in  building 
up  a  large  business.  During  all  this  period,  it  is  said  that  A  kept  practically 
no  accounts  beyond  a  few  memoranda  principally  for  the  purpose  of  showing 
his  current  earnings  from  time  to  time.  In  the  fall  of  1912  he  decided  to 
incorporate  the  business,  and  as  he  was  not  dependent  upon  credit,  he  thought 
a  corporation  with  a  capital  of  5*  dollars  would  answer  his  purpose.  There- 
fore on  January  1,  1913,  he  turned  over  all  the  assets  of  the  business  to  the 
new  corporation,  including  cash  and  cash  assets  totaling  2x  dollars,  and 
machinery,  fixtures,  plant,  and  equipment  valued,  for  the  purpose  of  giving 
to  the  capital  stock  a  book  value  equal  to  the  par  value  thereof,  at  an  arbi- 
trary figure  of  3x  dollars.  In  return  he  received  all  the  capital  stock  of  the 
corporation. 

After  its  incorporation  few~changes  were  made  in  the  method  of  keeping 
the  books  of  the  company;  and  when  early  in  1917  it  was  discovered  by  the 
attorneys  of  the  company  that  it  was  practically  impossible  to  get  from  such 
books  the  necessary  information  for  the  proper  preparation  of  income  tax 
returns  and  also  for  the  purpose  of  determining  the  amount  of  assets  for 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-7. 


Insurance  purposes,  a  thorough  and  complete  inventory  and  valuation  were 
made  and  certified  to  by  the  N  Appraisal  Company,  which  showed  the  valua- 
tion of  the  plant  as  of  the  date  of  January  1,  1917,  in  the  sum  of  8x  dollars. 

Following  this  appraisal  another  firm  of  certified  public  accountants  was 
engaged  to  make  an  examination  of  the  books  of  the  company  from  the  time 
of  its  incorporation  and  to  restate  the  company's  accounts  as  of  January  1, 
1917,  using  for  the  valuation  of  the  plant  and  equipment  the  figures  as  deter- 
mined by  the  inventory  and  appraisal. 

gf^When  it  became  necessary  in  the  early  part  of  1918  to  make  up  the  excess 
profits  tax  return  of  the  company  for  the  year  1917,  the  N  Appraisal  Com- 
pany was  again  engaged  to  value  the  plant,  this  time  as  of  January  1,  1913, 
at  which  time  the  company  took  it  over.  This  valuation  was  arrived  at  by 
deducting  from  the  plant  valuation  as  of  January  1,  1917,  the  additions  to 
equipment  which  had  been  acquired  after  January  1,  1913,  allowing  for 
depreciation  and  other  adjustments  to  value.  This  computation  showed  a 
valuation  of  the  plant  as  of  January  1,  1913,  in  the  sum  of  7x  dollars,  which 
amount  was  3x  dollars  more  than  the  nominal  sum  at  which  the  plant  had 
been  valued  at  the  date  of  incorporation;  and  this  is  the  value  which  the 
taxpayer  desires  to  include  in  its  excess  profits  tax  return  for  the  year  1917 
for  the  purpose  of  determining  its  invested  capital. 

In  their  argument  for  the  inclusion  of  this  amount  in  the  invested  capital 
of  the  taxpayer,  its  attorneys  rely  upon  article  63  of  Regulations  41,  and 
upon  Recommendation  161  of  this  Committee  [Sec.  326.  Art.  836. — 5, 
herein],  which  was  based  upon  the  regulations  above  referred  to. 

Article  63  of  Regulations  41  is  as  follows: 

Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner  of  Interna!  Revenue 
that  tangible  property  has  been  conveyed  to  a  corporation  or  partnership  by  gift  or  at  a 
value  accurately  ascertainable  or  definitely  known  as  at  the  date  of  conveyance,  clearly 
and  substantially  in  excess  of  the  cash  or  the  par  value  of  the  stock  or  shares  paid  therefor, 
then  the  amount  of  the  excess  shall  be  deemed  to  be  paid-in  surplus.  The  adopted  value 
shall  not  cover  mineral  deposits  or  other  properties  discovered  or  developed  after  the  date 
of  conveyance,  but  shall  be  confined  to  the  value  accurately  ascertainable  or  definitely 
known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under  these^  circumstances 
must  be  as  of  the  date  of  conveyance,  and  many  consist,  among  other  things,  of  (1)  an 
appraisal  of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case 
or  real  estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

This  Committee's  Recommendation  161  (Bulletin  28-20-1064)  was 
concerned  with  a  claim  for  paid-in  surplus  on  account  of  the  excess  value  of 
properties  in  1911,  and  in  that  case  the  Committee  recommended  the  allow- 
ance of  such  excess  valuation  as  invested  capital;  but  the  facts  therein  were 
quite  different  from  those  now  under  consideration. 

In  that  recommendation  the  Committee  held  that  in  order  to  establish 
such  excess  valuation,  it  was  not  necessary  that  the  appraisal  should  have 
been  made  upon  the  exact  date  on  which  the  tangible  property  had  been 
conveyed  to  the  corporation;  but  only  that  the  appraisal  must  have  been 
made  "as  of  that  date;  that  is  to  say,  in  the  light  only  of  knowledge  or  facts 
ascertainable  on  that  date  and  not  in  the  light  of  subsequent  happenings." 

The  tangible  property,  the  value  of  which  was  then  under  consideration, 
was  real  estate  and  buildings,  and  the  Committee  held  that  inasmuch  as  the 
evidence  was  of  such  character  that  these  values  could  be  ascertained  from 
all  the  surrounding  facts  at  that  time  with  an  accuracy  amounting  almost  to  a 
certainty,  therefore,  the  taxpayer  was  entitled  to  include  that  excess  value 
in  his  invested  capital,  since  the  value,  clearly  and  substantially  in  excess  of 
the  par  value  of  the  stock  or  shares  paid  therefor,  was  accurately  ascertain- 
able or  definitely  known  as  at  the  date  of  conveyance.    It  must  be  remem- 


Supplementary  Bulletin  Rulings. 


Sec.  326.   Art  836.-8. 


bered  that  the  Bureau  was  here  dealing  with  real  estate  and  buildings  and 
that  the  appraisah  wasjnade^  within  Jiwo^years  of  the  date  of  valuation. 

In  the  instant  case  theJE>ureau  is  asked  to  accept  not  an  appraisal  as  of 
January  1,  1913,  but  an  estimated  figure  resulting  from  a  computation  which 
was  based  upon  an  appraisal  made  as  of  January  1,  1917,  or  four  years  later; 
and  this  so-called  appraisal  is  not  merely  a  valuation  of  real  estate  and  build- 
ings, the  value  of  which  might  be  definitely  ascertained  even  after  so  long  a 
lapse  of  time,  but  of  machinery  and  equipment,  by  an  entirely  empirical 
process  of  adjusting  valuations  obtained  four  years  later;  so  that  it  can  not 
be  asserted  or  successfully  maintained  that  the  valuation  as  of  January  1, 
1913,  was  made  "in  the  light  only  of  knowledge  or  facts  ascertainable  on 
that  date  and  not  in  the  light  of  subsequent  happenings." 

The  appraisers  and  the  accountants  were  without  doubt  justified,  for 
commercial  purposes,  in  establishing  tne  valuations  and  recasting  the  books 
as  of  January  1,  1913,  by  the  best  method  at  their  disposal,  which  may  have 
been  the  one  employed;  but  the  Committee  does  not  believe  that  either 
the  appraisers  or  the  accountants  would  certify  to  the  rigorous  accuracy  of 
such  a  valuation  or  of  accounts  established  upon  such  a  basis  without  quali- 
fications which  would  render  the  valuation  and  accounts  worthless  for  the 
purpose  of  computation  of  invested  capital. 

As  a  matter  of  fact,  the  taxpayer  himself  admits  the  unreliability  of 
valuations  so  arrived  at  when  he  says  in  his  brief  that — 

Using  the  valuation  of  the  plant  as  of  January  1,  1913,  as  shown  by  the  appraisal,  add- 
ing to  that  value  the  additions  to  the  plant  between  January  1,  1913,  and  January  1,  1917, 
and  deducting  the  depreciation  charged  off  during  the  same  period, 

the  plant  had  a  valuation  on  January  1,  1917,  as  shown  by  the  books  of  the 
corporation,  in  the  sum  of  Ix  dollars,  as  against  the  appraisal  value  at  the 
same  date  of  8x  dollars;  and  the  taxpayer  says,  further,  that — 

Inasmuch  as  the  books  of  the  company  had  been  restated  by  the  accountants  on  the 
basis  of  the  appraisement  of  January  1,  1917,  it  was  evident  that  the  item  of  plant  had 
been  entered  on  the  books  at  X  dollars  in  excess  of  the  proper  figures  for  invested  capital, 

and  accordingly  in  making  up  the  company's  return  this  excess  amount  was 
deducted  from  the  invested  capital  appearing  on  the  company's  books;  but 
while  this  tends  to  demonstrate  the  good  faith  of  the  taxpayer  in  making  its 
claim,  it  shows  conclusively  the  unreliability  of  the  figures  obtained  by  any 
such  methods. 

Therefore,  the  Committee  recommends  that  the  claim"of  the  taxpayer 
for  invested  capital  on  January  1,  1913,   based  upon  adjustments  of  an 
appraisal  made  as  of  January  1,  1917,  be  denied,  and  that  the  action  of  the 
Unit  in  disallowing  such  claim  be  sustained. 
8 


7-21-1457:  O.  D.  813. 

The  M  Company  was  organized  subsequent  to  1919.  Soon  thereafter 
it  acquired  all  the  capital  stock  of  the  N  Company  by  issuing  to  the  stock- 
holders of  the  N  Company  its  own  stock  in  an  amount  equal  to  the  par  value 
of  their  shares  of  stock.  The  M  Company  thereupon  by  merger  absorbed 
the  N  Company  and  became  the  owner  of  all  the  property  of  the  N  Company, 
which  consisted  of  real  estate,  buildings,  machinery  and  equipment,  stock  on 
hand,  and  work  in  process.  This  property  had  been  purchased  by  the  N 
Company  in  the  same  year  at  a  bargain,  as  shown  by  an  appraisal  made  of 
the  property  about  the  time  it  was  taken  over  by  the  M  Company. 

Held,  that  the  company  could  not  include  in  its  invested  capital  as  paid-in 

Supplementary  Bulletin  Ruiingo. 


2-6-22. 


Sec.  326.    Art.  836.-9. 


surplus  the  excess  of  the  value  of  the  property  over  the  purchase  price  paid 
therefor.  Any  excess  resulted  from  a  successful  bargain  and  is  not  paid-in 
surplus.  Paid-in  surplus  as  used  in  section  326'of  the  Revenue  Act  of  1918 
does  not  mean  the  excess  value  of  property  purchased  in  a  bona  fide  sale  over 
the  purchase  price  thereof.  To  constitute  paid-in  surplus  of  a  corporation 
there  must,  in  effect,  be  a  gift  to  the  corporation. 
9 


I  ('22)-5-60:    A.  R.  R.  747. 
Revenue  Acts  of  1917  and  1918. 

Recommended,  upon  the  reconsideration  of  the  appeal  in  the  case  of  the  M  corpora- 
tion from  the  action  of  the  Income  Tax  Unit  in  holding  that  the  invested  capital  can  not 
be  satisfactorily  established  and  that  assessment  of  excess  profits  taxes  for  the  year  1917 
should  be  made  under  the  provisions  of  section  210  of  the  Revenue  Act  of  1917  and  for 
subsequent  years  under  the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of 
1918,  be  reversed;  that  Committee  on  Appeals  and  Review  Recommendation  490  sus- 
taining the  action  of  the  Unit  be  revoked;  that  retrospective  appraisals  be  accepted  as 
evidence  of  paid-in  surplus  when  made  upon  the  basis  herein  outlined  and  the  facts  upon 
which  the  appraisals  are  based  have  been  established  by  proof;  that  the  retrospective 
appraisals  and  the  facts  upon  which  they  are  based  in  the  instant  case  be  verified  to  deter- 
mine the  method  of  their  construction  and  the  truth  of  the  facts  upon  which  they  are 
based;  and  that  in  this  and  in  all  similar  cases  where  the  law  directs  that  the  value  of 
property  at  a  given  basic  date  be  ascertained,  the  Unit  be  instructed  to  receive  such  proof 
of  the  facts  as  is  ordinarily  accepted  in  important  business  transactions  of  like  character 
and  that  the  practice  which  has  obtained  in  the  Unit  in  refusing  to  receive  such  proof 
on  the  ground  that  it  consisted  of  so-called  retroactive  appraisals  be  discontinued. 

The  Committee  has  reconsidered  its  Recommendation  490  (not  pub- 
lished) in  the  matter  of  the  appeal  of  the  M  corporation  from  the  action 
of  the  Income  Tax  Unit  in  assessing  excess  profits  taxes  for  the  year  1917 
under  the  provisions  of  section  210  of  the  Revenue  Act  of  1917  and  for  sub- 
sequent years  under  the  provisions  of  sections  327  and  328  of  the  Revenue 
Act  of  1918. 

In  a  memorandum  from  the  Unit  transmitting  this  case  to  the  Committee 
the  following  statement  is  made: 

The  corporation  was  organized  in  1914  and  took  over  the  assets  and  assumed  all  the 
liabilities  of  two  going  concerns,  the  O  corporation  and  the  P  partnership,  the  entire  capital 
stock  of  the  new  corporation,  Ax  dollars,  issued  to  the  stockholders  of  the  old  corporation 
and  the  members  of  the  partnership.  The  evidence  submitted  in  the  form  of  various 
appraisals  shows  that  the  assets  acquired  had  a  valuation  far  in  excess  of  the  capital  stock. 
The  corporation,  however,  could  not  submit  any  data  showing  the  cost  of  the  assets,  as 
the  records  had  been  destroyed  by  water.  In  January,  1921,  appraisals  of  the  different 
classes  of  assets  were  made  as  of  1914  by  different  individuals  assisted  by  others  who 
were  employed  by  the  corporation  in  1914.  In  the  conference  the  manager  of  the  corpor- 
ation first  stated  the  method  used  in  determining  whether  the  assets  listed  were  acquired  in 
the.  consolidation  in  1914  was  by  taking  an  appraisal  made  in  1917  and  eliminating  there- 
from all  items  shown  by  the  books  to  have  been  purchased  and  charged  to  the  asset  accounts 
from  1914  to  the  date  the  appraisal  was  made.  Later  he  stated  that  the  appraisal  was 
made  by  the  former  employees  going  through  the  department  and  listing  the  assets  which 
from  their  own  knowledge  were  acquired  in  the  consolidation  and  afterwards  comparing 
these  items  with  the  appraisal  made  in  1917. 

In  the  consideration  of  this  case  it  is  necessary  to  refer  to  the  provisions 
of  the  Revenue  Act  of  1917  which  deals  with  tangible  property  paid  in  for 
stock.   The  pertinent  part  of  section  207  (a)  reads  as  follows: 

*  *  *  (2)  the  actual  cash  value  of  tangible  property  paid  in  other  than  cash,  for 
stock  or  shares  in  such  corporation  or  partnership,  at  the  time  of  such  payment  (but  in 
case  such  tangible  property  was  paid  in  prior  to  January  1st,  1914,  the  actual  cash  value 
of  such  property  as  of  January  1st,  1914,  but  in  no  case  to  exceed  the  par  value  of  the 
original  stock  or  shares  specifically  issued  therefor),  and  (3)  paid  in  or  earned  surplus  and 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-10. 


undivided  profits  used  or  employed  in  the  business,  exclusive  of  undivided  profits  earned 
during  the  taxable  year.     *        *  * 

Article  63,  Regulations*  41,  interprets  the  foregoing  provisions  of  the 
statute  and  reads  as  follows: 

Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner  of  Internal  Rev- 
enue that  tangible  property  has  been  conveyed  to  a  corporation  or  partnership  by  gift 
or  at  a  value,  accurately  ascertainable  or  definitely  known  as  at  the  date  of  conveyance, 
clearly  and  substantially  in  excess  of  the  cash  or  the  par  value  of  the  stock  or  shares  paid 
therefor,  then  the  amount  of  the  excess  shall  be  deemed  to  be  paid-in  surplus.  The  adopted 
value  shall  not  cover  mineral  deposits  or  other  properties  discovered  or  developed  after 
the  date  of  conveyance,  but  shall  be  confined  to  the  value  accurately  ascertainable  or 
definitely  known  at  that  time. 

Evidence  tending  to  support  a  claim  for  paid-in  surplus  under  these  circumstances 
must  be  as  of  the  date  of  conveyance,  and  may  consist,  among  other  things,  of  (1)  an 
appraisal  of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case 
of  real  estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

The  pertinent  part  of  the  Revenue  Act  of  1918  reads  as  follows: 

*  *  *  (2)  Actual  cash  value  of  tangible  property,  other  than  cash,  bona  fide  paid 
in  for  stock  or  shares,  at  the  time  of  such  payment,  but  in  no  case  to  exceed  the  par  value 
of  the  original  stock  or  shares  specifically  issued  therefor,  unless  the  actual  cash  value  of 
such  tangible  property  at  the  time  paid  in  is  shown  to  the  satisfaction  of  the  Commissioner 
to  have  been  clearly  and  substantially  in  excess  of  such  par  value,  in  which  case  such  excess 
shall  be  treated  as  paid-in  surplus.    *    *  * 

Article  836,  Regulations  45,  interprets  the  foregoing  quoted  provision 
of  the  statute  and  reads  in  part  as  follows: 

Evidence  offered  to  support  a  claim  for  a  paid-in  surplus  must  be  as  of  the  date  of  the 
payment,  and  may  consist  among  other  things  of  (a)  an  appraisal  of  the  property  by 
disinterested  authorities  made  on  or  about  the  date  of  the  transaction;  (b)  certification 
of  the  assessed  value  in  the  case  of  real  estate;  and  (c)  proof  of  a  market  price  in  excess 
of  the  par  value  of  the  stock  or  shares.  The  additional  value  allowed  in  any  case  is  con- 
fined to  the  value  definitelv  known  or  accuratelv  ascertainable  at  the  time  of  the  pav- 
raent  '  *    *  * 

The  records  in  the  case  show  that  for  several  years  prior  to  1914  the  P 
partnership  had  conducted  a  repair  business.  In  190-  a  corporation  known 
as  the  O  corporation  was  incorporated,  its  entire  capital  stock  being  owned 
by  the  P  partnership.  In  1914  this  corporation  and  the  P  partnership,  con- 
sisting of  A,  B,  and  C,  were  consolidated  and  incorporated  under  the  name 
of  the  M  corporation,  with  a  capital  stock  issue  of  Ax  dollars.  This  capital- 
ization was  nominal  and  was  not  based  on  any  valuation  of  either  plant, 
as  it  was  not  deemed  necessary  to  set  an  actual  value  on  the  asset  because 
of  the  fact  that  all  the  corporate  stock  was  held  by  the  three  members  of 
the  partnership.  During  the  lifetime  of  A  the  partnership's  accounting 
system  was  very  lax  and,  as  shown  by  a  number  of  affidavits  filed  in  behalf 
of  the  M  corporation,  all  the  books,  balance  sheets,  and  other  accounting 
records  of  the  P  partnership  and  the  O  corporation  were  rendered  useless 
during  a  storm  in  1918,  so  that  at  the  present  time  no  records  exist  from 
which -might  be  obtained  a  complete  statement  as  to  the  cost  of  the  assets 
taken  over  by  the  M  corporation  in  the  consolidation  of  1914.  Under  these 
circumstances  the  Unit  holds  that  the  statutory  invested  capital  of  the  cor- 
poration can  not  be  satisfactorily  determined,  and  proposes  to  make  assess- 
ment of  excess  profits  tax  under  the  provisions  of  section  210  of  the  Revenue 
Act  of  1917  and  section  328  of  the  Revenue  Act  of  1918.  The  corporation 
has  had  various  appraisals  and  estimates  made  in  an  effort  to  show  the 
value  of  the  assets  in  order  to  establish  a  claim  for  paid-in  surplus,  which 
appraisals  may  be  classed  as  follows: 

(1)  Two  appraisals  were  made  by  engineers  versed  in  the  particular 
line  of  business  in  1917. 


Supplementary  Bulletin  Rulings. 


2-6-22. 

Sec.  326.    Art.  836.— 11. 

Each  of  the  gentlemen  who  fixed  upon  the  values  shown  above  was  un- 
doubtedly well  qualified  to  make  appraisals  covering  the  assets  of  the  char- 
acter owned  by  the  M  corporation,  but  it  is  to  be  noted  that  while  there  is 
a  net  difference  of  but  2x  dollars  between  the  totals  of  the  two  sets  of  figures 
no  one  unit  was  given  the  same  value  except  in  the  case  of  automobiles, 
etc.,  the  difference  in  the  values  given  the  other  items  ranging  from  ^x 
dollars  in  the  case  of  office  furniture  to  2^2X  dollars  in  the  case  of  other 
property,  which  in  a  measure  indicates  the  difficulties  experienced  in  fixing 
upon  definite  values. 

(2)  Three  affidavits  as  to  the  value  of  the  property  taken  over  by  the 
M  corporation  were  submitted  by  persons  familiar  with  values  of  such 
property. 

Each  of  these  gentlemen  stated  in  his  affidavit  that  of  his  own  knowledge 
and  belief  the  plant  and  equipment  of  the  P  partnership  in  1914  was  worth 
60x  dollars,  while  the  fair  value  in  1914  of  the  plant  and  equipment  of  the 
0  corporation  as  estimated  by  one  of  them  was  24\x  dollars  and  by  the  other 
two  about  240x  dollars,  although  no  value  is  placed  upon  any  individual 
assets. 

(3)  Three  affidavits  similar  to  the  next  above  made  give  a  value  of 
29lx  dollars. 

(4)  A  composite  appraisal  made  in  1921 — assets  being  divided  into 
classes  and  itemized  and  each  class  appraised  by  men  particularly  qualified 
for  the  work,  showing  a  total  value  as  of  1914  of  304x  dollars. 

This  last  appraisal  was  taken  subsequent  to  a  conference  held  in  1920 
between  representatives  of  the  taxpayer  and  members  of  the  Income  Tax 
Unit,  during  which  the  former  were  advised  that  in  order  to  establish  a 
claim  for  paid-in  surplus  evidence  must  be  furnished  showing  the  assets 
taken  over  upon  consolidation,  the  cash  value  of  the  assets  as  of  that  date, 
the  cost  of  subsequent  additions  by  years,  the  proportion  of  such  cost,  if 
any,  which  had  been  included  in  the  deductions  claimed  on  taxpayer's 
returns,  and  the  assessed  value  of  the  properties.  To  each  individual  ap- 
praisal which  forms  a  part  of  this  composite  appraisal  is  attached  an  affidavit 
signed  by  the  appraiser  indicating  the  character  of  the  work  performed  and 
the  experience  had  by  him  in  the  past  which  would  serve  to  qualify  him 
to  place  fair  and  just  values  on  the  particular  class  of  assets  covered  by  his 
appraisal,  but  the  appraisals  contain  little  or  no  evidence  of  the  facts  upon 
which  they  are  based  and  as  to  how  they  acquired  their  information  or  data 
to  make  up  the  appraisals,  or  as  to  how  the  appraisals  were  constructed. 
It  was  stated  during  a  conference  granted  representatives  of  the  taxpayer 
by  this  Committee  that  no  assets  were  included  in  these  appraisals  except 
such  as  were  positively  known  to  have  been  in  the  possession  of  the  P  part- 
nership and  the  O  corporation  and  taken  over  by  the  M  corporation  at  the 
time  of  consolidation  except  an  item  of  "Hand  tools,"  etc.,  valued  at  4x 
dollars,  with  reference,  to  which  the  representatives  of  the  taxpayer  volun- 
teered the  information  that  such  item  was  a  mere  estimate.  No  other  proof 
is  submitted  to  show  how  it  was  known  that  nothing  was  included  except 
that  which  was  in  the  possession  of  the  company  in  1914. 

Accompanying  this  appraisal  are  statements  taken  from  the  books  show- 
ing the  amounts  expended  in  the  purchase  of  additional  assets  during  the 
years  1914-1919,  the  amount  of  depreciation  charged  off  during  each  of 
those  years,  and  a  summary  showing  the  adjusted  values  of  all  lands,  build- 
ings, machinery,  and  equipment  for  the  years  1914-1919  based  on  the 
appraisal  made  as  of  January  1,  1914. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.— 12 


As  shown  above,  the  appraisals  forming  the  first  set  were  taken  in  1917 
and  show  values  as  of  that  year.  The  affidavits  forming  the  second  and 
third  sets  contain  nothing  except  general  statements  to  the  effect  that  in 
the  opinion  of  the  affiants  the  assets  taken  over  upon  consolidation  were 
worth  certain  amounts  in  1914.  Neither  of  these  appraisals  or  estimates, 
therefore,  can  be  said  to  be  of  such  a  satisfactory  and  convincing  character 
as  to  justify  the  acceptance  of  the  values  therein  stated  for  invested  capital 
purposes  in  the  computation  of  excess  profits  tax  liability  without  further 
investigation  by  the  Unit  to  ascertain  whether  such  values  were  computed 
upon  the  basis  outlined  herein. 

The  representatives  of  the  taxpayer  have  stated  to  the  Committee  that 
their  whole  objection  to  assessment  under  the  provisions  of  sections  210 
and  328  of  the  Revenue  Acts  of  1917  and  1918,  respectively,  is  on  the  ground 
that  such  a  method  of  assessment  affords  no  stable  basis  from  year  to  year 
for  a  determination  of  the  corporation's  tax  liability,  for  which  reason  they 
desire  that  the  corporation  be  classed  as  one  having  a  determinable  statutory 
invested  capital  rather  than  as  one  entitled  to  relief  under  the  provisions 
of  the  said  sections  even  though  its  tax  liability  be  greater  under  the  first 
method  than  under  the  latter. 

The  values  as  stated  in  the  four  sets  of  appraisals  mentioned  above  were 
apparently  fixed  by  men  who  were  well  qualified  for  the  work,  but  a  differ- 
ent value  is  stated  in  each  appraisal,  which  indicates  the  difficulties  experi- 
enced in  carrying  out  such  a  task  and  the  practical  difficulty  in  establishing 
cost.  The  first  appraisal  being  taken  at  1917  values,  and  the  affidavits 
comprising  the  second  and  third  appraisals,  so  called,  being  nothing  more 
than  general  statements,  can  not  be  accepted. 

The  fourth  appraisal,  while  stated  in  detail,  shows  in  some  cases  approxi- 
mations and  not  actual  ascertainment  of  values.  That  part  of  this  appraisal 
which  covers  fire  protection  system,  plumbing  and  piping,  indicates  that  the 
great  majority  of  the  items  so  covered  was  approximated,  while  that  part 
which  covers  certain  other  property  indicates  that  the  quantity  of  material 
entering  into  the  construction  of  such  assets  has  been  approximated.  Errors 
in  stated  figures  which  affect  the  total  value  shown  have  also  been  made. 
While  many  of  the  assets  covered  by  this  appraisal  are  of  such  character 
and  size,  such  as  lands,  large  machines,  etc.,  as  to  be  easily  identified  as 
having  been  among  the  assets  transferred,  even  after  a  lapse  of  years,  by 
those  who  had  worked  with,  around,  and  among  them,  and  their  value  as 
of  time  of  transfer  more  or  less  satisfactorily  established,  yet  it  is  to  be  noted 
that  this  appraisal  covers  hundreds  of  very  minor  items  which,  because  of 
their  lack  of  size,  importance,  and  cost,  ranging  in  stated  figures  from  a  few 
cents  to  not  more  than  $50,  lack  distinctive  character,  and  the  Committee 
finds  it  hard  to  believe  that  such  assets  would  so  firmly  fix  themselves  in 
the  remembrance  of  any  man  or  men  as  to  permit  such  persons  to  posit i\  ely 
identify  them  in  1921  as  having  been  the  identical  articles  which  wore  in 
the  hands  of  the  P  partnership  and  the  O  corporation  and  transferred  to 
the  M  corporation  in  1914,  especially  when  it  is  known  that  many  of  mcfo 
items  were  removed  from  a  plant  and  reinstated  and  rearranged  in  new 
buildings  in  another  community.  It  is  also  shown  by  an  appraisal  made  in 
1917,  by  competent  men,  and  before  the  loss  of  the  book  records,  that  the 
value  of  the  assets  at  that  time  was  a  little  less  than  240.v  dollars  and  there 
is  nothing  to  show  why  the  assets  were  worth  approximately  60x  dollars 
more  in  1914  than  in  1917. 

It  was  stated  in  conference  that  since  the  consolidation  in  1914  accurate 
book  records  have  been  kept  from  which  it  is  possible  to  accurately  deter- 

Supplementary  Bulletin  Rulings. 


2-6-22. 

Sec.  326.    Art.  836.— 13. 

mine  just  what  additions  to  the  plant  had  been  made  in  order  that  the  ap- 
praisals as  of  1914  might  contain  nothing  acquired  since  consolidation,  and 
yet,  in  a  statement  filed  with  the  Unit,  the  cost  of  such  additions  made 
during  the  year  1917  was  stated  as  dollars,  while  in  a  later  statement 

such  cost  is  stated  as  \}/§x  dollars,  which  fact  throws  doubt  upon  the  accuracy 
of  such  book  records  as  have  been  kept.  In  the  said  appraisal  the  value 
of  all  flat  lands,  regardless  of  location  or  character,  is  stated  at  a  certain 
amount  per  square  foot,  but  no  statements  have  been  submitted  showing 
the  values  placed  thereon  for  local  tax  purposes. 

In  the  consideration  of  the  case  the  Committee  has  pointed  out  certain 
discrepancies  in  the  appraisals  which  it  is  sought  to  have  the  Income  Tax 
Unit  accept  as  a  basis  for  the  allowance  of  a  paid-in  surplus.  These  dis- 
crepancies raise  a  doubt  as  to  the  accuracy  of  the  figures  submitted  in  such 
appraisals  and  of  the  facts  upon  which  such  appraisals  are  based.  The 
appraisals  in  question  are  apparently  based  upon  the  opinions  of  persons 
qualified  to  testify  in  a  matter  of  this  kind,  but  it  does  not  appear  that  the 
inventory  of  the  assets  of  this  corporation,  as  enumerated  in  the  appraisals, 
has  been  valued  upon  a  cost  basis.  It  is  thought  possible  to  so  value  the 
assets  in  this  case  when  the  appraisals  have  been  modified  in  accordance 
with  the  method  hereinafter  outlined  and  to  this  end  the  Unit  should  make 
or  have  made  an  independent  appraisal  for  the  purpose  of  verifying  or  check- 
ing the  amounts  and  values  stated  in  the  appraisals  submitted  by  this  com- 
pany before  accepting  same  as  representing  sound  values  of  the  assets  at 
the  time  they  were  paid  in  to  the  corporation  in  1914. 

In  the  past  it  has  been  the  policy  of  the  Bureau  to  construe  strictly  the 
requirements  of  article  63,  Regulations  41,  and  article  836,  Regulations  45 
(1920  edition).  As  a  result  of  such  construction  of  these  articles  numerous 
retroactive  or  retrospective  appraisals  have  been  rejected  as  a  basis  for  a 
claim  for  paid-in  surplus.  The  Committee  has  made  an  exhaustive  study 
of  appraisals  and  their  relation  to  invested  capital  of  corporations.  It  has 
also  considered  appraisals  in  connection  with  establishing  March  1  values  for 
purposes  of  depreciation  and  depletion,  and  for  purposes  of  establishing 
certain  values  in  connection  with  amortization  claims,  and  has  reached  the 
conclusion  that  the  Unit  has  been  too  strict  in  interpreting  the  provisions  of 
the  statute  and  the  articles  of  regulations  interpreting  same  quoted  above, 
and  that  retrospective  appraisals,  if  made  upon  the  basis  hereinafter  out- 
lined and  proof  is  furnished  of  the  facts  upon  which  they  are  based,  may 
properly  be  accepted  as  a  basis  for  the  allowance  of  a  paid-in  surplus.  The 
Unit,  as  well  as  the  Committee,  is  continually  fixing  values  for  one  purpose 
or  another.  This  is  particularly  true  in  fixing  the  March  1  values  for  the 
purpose  of  computing  gain  or  loss  upon  the  sale  of  an  asset  which  has  been 
held  for  some  time  and  which  is  of  a  class  not  regularly  dealt  in  by  the  public. 

In  the  instant  case  it  is  not  only  necessary  to  determine  the  actual  cash 
value  of  the  tangible  assets  at  the  time  paid  in  in  1914  for  the  purpose  of 
invested  capital,  but  it  is  necessary  to  determine  the  fair  market  value  of 
the  depreciable  property  so  paid  in  as  at  March  1,  1913,  for  depreciation 
purposes  and  also  for  the  purpose  of  ascertaining  whether  or  not  the  stock- 
holders in  the  O  corporation  and  the  partners  in  the  P  partnership  derived 
any  profit  from  the  sale  of  these  assets  to  the  M  corporation.  It  is  under- 
stood that  the  stockholders  and  copartners  did  not  include  any  profit  in  the 
computation  of  their  net  income  for  the  year  1914. 

In  making  a  retroactive  or  retrospective  appraisal  to  show  the  actual 
cash  value  of  tangible  assets  at  the  time  paid  in  at  some  date  in  the  past, 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.— 14. 


care  should  be  exercised  in  order  to  eliminate  any  appreciation  written  upon 
the  books  of  the  corporation  since  the  date  of  acquisition,  and  also  to  value 
the  assets  in  question  at  cost.  In  the  case  of  the  La  Belle  Iron  Works  v. 
United  States  (C.  B.  4,  p.  373),  decided  by  the  Supreme  Court  on  May  16, 
1921,  it  was  held  that  any  appreciation  in  value  of  property  over  its  cost 
is  not  to  be  included  in  invested  capital  as  paid-in  surplus.  Treasury  De- 
cision 3220  (Bulletin  37-21-1822)  was  promulgated  subsequent  to  this  deci- 
sion and  requires  the  filing  of  amended  returns  in  all  cases  where  taxpayers 
have  written  appreciated  or  inflated  values  upon  their  books  and  have  used 
same  in  determining  the  amount  of  their  invested  capital.  It  would,  there- 
fore, appear  that  no  appreciation  over  cost  can  be  recognized  in  the  com- 
putation of  invested  capital  and  that  appraisals  made  for  the  purpose  of 
establishing  invested  capital  and  for  the  purpose  of  allowance  of  a  paid-in 
surplus  should  be  based  upon  the  actual  cost  of  the  tangible  properties  as 
they  existed  at  the  time  they  were  paid  in,  giving  particular  attention  and 
consideration  to  the  original  cost  and  depreciated  reproduction  cost  as  at 
the  basic  date  and  the  remaining  expectancy  of  life.  In  order  to  accomplish 
this  result  it  will  be  necessary  to  inventory  at  cost  as  of  the  basic  date  (the 
date  of  acquisition)  the  property  then  on  hand  and  in  many  cases  to  estab- 
lish by  historical  investigation  the  date  of  original  acquisition,  date  of  re- 
newal, and  the  cost  of  additions  made  subsequent  to  the  date  the  property- 
was  paid  in.  Adjustments  should  be  made  for  property  scrapped  or  dis- 
carded and  for  depreciation. 

The  books  of  account,  if  available,  should  be  considered  the  best  evi- 
dence as  to  dates  of  acquisition  and  actual  cost.  The  asset  account  showing 
the  tangible  property  may  be  incomplete  for  many  reasons  and  may  include 
property  still  on  the  books  that  has  been  discarded  as  well  as  property  in 
existence  that  has  never  been  capitalized  or  entered  on  the  books  and  certain 
arbitrary  amounts  charged  off  as  depreciation  which  have  no  relation  to 
the  expired  and  remaining  life  of  the  property. 

The  tangible  property  actually  in  existence  and  in  use  should  be  con- 
sidered as  the  basic  evidence  of  the  invested  capital  in  existence  and  should 
be  used  as  a  basis  for  the  proper  correction  of  the  accounts  to  correctly  reflect 
the  actual  investment  in  the  depreciable  properties  in  existence  during  the 
taxable  years. 

The  burden  of  proof  is  upon  the  taxpayer  when  a  claim  for  a  paid-in 
surplus  is  made,  and  in  so  far  as  the  records  of  the  taxpayer  may  be  incom- 
plete or  the  regulations  permit  values  of  the  property  at  the  date  paid  in 
should  be  established  by  proof.  The  regulations  quoted  above  do  not  pre- 
scribe any  specific  method  for  ascertaining  the  facts,  but  only  indicate  some 
of  the  means  by  which  appropriate  proof  may  be  furnished  which  would  be 
acceptable  to  the  Bureau.  A  retrospective  appraisal  is  in  substance  the 
opinion  of  experts  based  upon  the  facts  presented  to  them  and  as  such  is 
admissible  as  evidence  of  a  paid-in  surplus,  but  its  value  as  proof  of  a  paid-in 
surplus  must  depend  upon  the  truth  of  the  facts  upon  which  it  is  based. 
Necessarily,  if  any  of  the  facts  presented  to  the  experts  are  not  accurate,  the 
experts'  opinion  is  inaccurate  to  the  extent  that  such  facts  are  inaccurate. 
In  order,  therefore,  for  the  Bureau  to  accept  as  conclusive  a  retrospective 
appraisal,  it  must  be  satisfied  under  the  regulations  that  the  facts  upon  which 
the  appraisal  is  based  are  true.  In  determining  whether  or  not  the  facts 
are  true  the  Bureau  should  accept  such  proof  of  the  facts  as  is  ordinarily 
accepted  in  business  transactions  of  like  character.  In  all  such  inquiries 
the  Bureau  is  dealing  with  facts  which  themsehes  come  within  the  control 


Supplementary  Rullclin  Rulings.. 


2-9-22. 

Sec.  326.    Art.  836.— 15. 

of  human  will  or  human  caprice,  and  the  evidence  for  which  depends  on  the 
trustworthiness  of  human  informants.  Such  evidence  may  range  through 
every  degree,  from  the  barest  likelihood  to  that  undoubted  moral  certainty 
on  which  every  man  acts  without  hesitation  in  practical  affairs.  The  Bureau 
must  receive  and  consider  such  appraisals,  therefore,  with  a  sound  and  in- 
telligent discretion  as  it  considers  much  other  evidence,  and  be  content  to 
accept  them,  without  being  able  to  prove  their  accuracy  as  mathematicians 
judge  accuracy,  if  they  convince  the  mind  of  their  correctness  to  that  moral 
certainty  upon  which  practical  men  of  affairs  act. 

In  view  of  the  foregoing,  it  is  recommended  that  the  action  of  the  Income 
Tax  Unit  in  holding  that  the  invested  capital  can  not  be  satisfactorily  estab- 
lished and  that  assessment  of  excess  profits  taxes  for  the  year  1917  should  be 
made  under  the  provisions  of  section  210  of  the  Revenue  Act  of  1917  and  for 
subsequent  years  under  the  provisions  of  sections  327  and  328  of  the  Revenue 
Act  of  1918  be  reversed;  that  Committee  on  Appeals  and  Review  Recom- 
mendation 490  sustaining  the  action  of  the  Unit  be  revoked;  that  retro- 
spective appraisals  be  accepted  as  evidence  of  paid-in  surplus  when  made 
upon  the  basis  herein  outlined  and  the  facts  upon  which  the  appraisals  are 
based  have  been  established  by  proof;  that  the  retrospective  appraisals  and 
the  facts  upon  which  they  are  based  in  the  instant  case  be  verified  to  deter- 
mine the  method  of  their  construction  and  the  truth  of  the  facts  upon  which 
they  are  based;  and  that  in  this  and  in  all  similar  cases  where  the  law  directs 
that  the  value  of  property  at  a  given  basic  date  be  ascertained,  the  Unit  be 
instructed  to  receive  such  proof  of  the  facts  as  is  ordinarily  accepted  in  im- 
portant business  transactions  of  like  character  and  that  the  practice  which 
has  obtained  in  the  Unit  in  refusing  to  receive  such  proof  on  the  ground 
that  it  consisted  of  so-called  retroactive  appraisals  be  discontinued. 
10 


I('22)-6-83:Sol.  Op.  129. 
Excess  Profits  Tax— Revenue  Acts  of  1917  and  1918. 

Where  water  power  is  developed  and  applied  on  the  same  parcel  of  land  by  virtue  of 
riparian  rights  of  the  owner  of  the  land,  its  value  is  an  element  of  the  value  of  the  land  and 
should  be  treated  as  tangible  property  for  the  purpose  of  determining  invested  capital. 

Where  a  number  of  small  dams  at  a  given  point  are  acquired  by  a  corporation  and 
consolidated  as  one  dam,  the  proper  measure  of  value  of  the  property  thus  acquired,  for 
the  purpose  of  determining  invested  capital,  is  the  total  value  of  all  the  powers  thus  ac- 
quired, valued  separately. 

Where  water  power  is  valued  at  a  certain  amount  per  horsepower,  the  valuation  in 
such  cases  should  relate  to  horsepower  actually  developed  at  the  date  of  valuation  and  not 
to  the  estimated  potential  power. 

The  question  has  arisen  as  to  whether  water  power  should  be  treated 
as  tangible  or  intangible  property  for  the  purpose  of  determining  invested 
capital  under  the  Revenue  Acts  of  1917  and  1918. 

A  claim  was  filed  by  the  M  Company  for  the  abatement  of  8x  dollars  cor- 
poration income  and  excess  profits  taxes  for  the  calendar  year  1917,  and  8^v 
dollars  corporation  income  and  excess  profits  taxes  for  the  calendar  year  1918. 
A  claim  was  also  filed  by  the  Q  Company  for  the  abatement  of  2}^x  dollars 
corporation  income  and  excess  profits  taxes  for  the  calendar  year  1917. 
The  last-named  company  is  a  subsidiary  of  the  former,  and  consolidated 
returns  for  the  income  of  both  corporations  were  made  and  the  tax  assessed 
upon  the  two  corporations  on  that  basis.  Owing  to  the  consolidation,  this 
case  will  be  treated  as  one  involving  a  single  claimant. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.  16. 


It  is  stated  in  a  memorandum  submitted  to  this  office  that  the  claims 
are  based  on  additional  information  furnished  in  conference  and  with  amended 
returns  relative  to  an  increase  in  depreciation  deduction,  and  an  increase  in 
paid-in  surplus  for  excess  value  of  water  power  rights  over  the  par  value  of 
capital  stock  issued  therefor.  It  does  not  appear  from  the  memorandum 
submitted  with  respect  to  what  property  deductions  for  depreciation  are 
claimed,  nor  the  amount  of  these  items  nor  the  basis  upon  which  such  items 
were  adjusted.  No  opinion,  therefore,  is  given  relative  to  the  adjustment  of 
depreciation  allowance. 

In  connection  with  the  water  power  values,  it  appears  that  in  190-  claim- 
ant acquired  the  property  of  several  companies  and  individuals,  which 
properties  were  used  in  the  operation  of  wing  dams  on  the  Y  River,  issuing 
in  payment  therefor  18j^x  dollars  par  value  of  its  stock.  In  190-  claimant 
removed  all  the  wing  dams  and  constructed  a  dam  across  the  entire  river, 
hereinafter  referred  to  as  the  O  Powers.  In  191—,  claimant  acquired  the  asset  s 
and  assumed  the  liabilities  of  the  P  Company  operating  the  R  dam  and  issued 
its  stock  in  payment  therefor.  In  both  cases  claimant  owns  the  land  adjacent 
to  the  dam  where  the  power  is  developed. 

Claimant  submitted  evidence  in  support  of  the  contention  that  the 
water  powers  in  question  were  of  an  actual  value  of  I05x  dollars  at  the  time 
the  purchase  thereof  was  made  with  the  capital  stock  of  the  corporation, 
and  in  computing  its  invested  capital,  included  85x  dollars  as  paid-in  surplus. 
In  the  memorandum  submitted  to  this  office  it  is  recommended  that  44%x 
dollars  be  allowed  as  paid-in  surplus,  for  the  reason  that  such  amount  repre- 
sents the  excess  in  the  actual  value  (as  accepted  in  conference)  of  the  water 
power  rights  acquired  over  the  par  value  of  the  capital  stock  issued  therefor. 

Under  section  207(a)  2,  3,  of  the  Revenue  Act  of  1917,  and  article  63  of 
Regulations  41,  and  also  under  section  326(a)2,  of  the  Revenue  Act  of  1918, 
and  articles  836  and  837  of  Regulations  45,  the  value  of  tangible  property 
clearly  and  substantially  in  excess  of  the  par  value  of  stock  issued  in  exchange 
therefor  by  a  corporation  may  be  treated  as  paid-in  surplus.  Article  63, 
Regulations  41,  provides: 

Art.  63.  When  tangible  property  may  be  included  in  surplus. — -Where  it  can  be  shown 
by  evidence  satisfactory  to  the  Commissioner  of  Internal  Revenue  that  tangible  property 
has  been  conveyed  to  a  corporation  or  partnership  by  gift  or  at  a  value,  accurately  ascer- 
tainable or  definitely  known  as  at  the  date  of  conveyance,  clearly  and  substantially  in 
excess  of  the  cash  or  the  par  value  of  the  stock  or  shares  paid  therefor,  then  the  amount 
of  the  excess  shall  be  deemed  to  be  paid-in  surplus.  The  adopted  value  shall  not  cover 
mineral  deposits  or  other  properties  discovered  or  developed  after  the  date  of  conveyance, 
but  shall  be  confined  to  the  value  accurately  ascertainable  or  definitely  known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under  these  circumstance^- 
must  be  as  of  the  date  of  conveyance,  and  may  consist,  among  other  things,  of  (1^  an 
appraisal  of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case 
of  real  estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

Article  836  of  Regulations  45  provides: 

Art.  836.  Tangible  property  paid  in:  value  in  excess  of  par  value  of  stock. — Evidence 
offered  to  support  a  claim  for  a  paid-in  surplus  must  be  as  of  the  date  of  the  payments, 
and  may  consist  among  other  things  of  (a)  an  appraisal  of  the  property  by  disinterested 
authorities  made  on  or  about  the  date  of  the  transaction;  (b^  certification  of  the  assessed 
value  in  the  case  of  real  estate;  and  (c)  proof  of  a  market  price  in  excess'of  the~par_value 
of  the  stock  or  shares.  The  additional  value  allowed  in  any  case  is  confined  to  the  value 
definitely  known  or  accurately  ascertainable  at  the  time  of  the  payment.  No  claim  will 
be  allowed  for  a  paid-in  surplus  in  a  case  in  which  the  additional  value  has  been  developed 
or  ascertained  subsequently  to  the  date  on  which  the  property  was  paid  in  to  the  corpora- 
tion, or  in  respect  of  property  which  the  stockholders  or  their  agents  on  or  shortly  before 
the  date  of  such  payment  acquired  at  a  bargain  price,  as  for  instance,  at  a  receiver's  sale. 
Generally,  allowable  claims  under  this  article  will  arise  out  of  transactions  in  which  there 
has  been  no  substantial  change  of  beneficial  interest  in  the  property  paid  in  to  the  corporn- 
tion,  and  in  all  cases  the  proof  of  value  must  be  clear  and  explicit. 

Supplementary  Bulletin  Ruling*. 


2-9-22. 

Sec.  326.    Art.  836.-17. 

The  questions  arise  in  this  case  as  to  whether  the  items  of  water  power 
involved  are  to  be  treated  as  tangible  property,* and  if  held  to  be  tangible 
property,  whether  it  has  been  established  that  they  had  a  value  at  the  time 
they  were  acquired  clearly  and  substantially  in  excess  of  the  par  value  of 
the  stock  issued  in  exchange  therefor. 

Section  325  of  the  Revenue  Act  of  1918  defines  intangible  property  as 
"patents,  copyrights,  secret  processes  and  formulae,  good  will,  trade-marks, 
trade  brands,  franchises,  and  other  like  property"  and  tangible  property 
as  "stocks,  bonds,  notes,  and  other  evidence  of  indebtedness,  bills  and  accounts 
receivable,  leaseholds  and  other  property  other  than  intangible  property." 

There  are  two  distinct  and  entirely  different  things  which  may  be  referred 
to  as  a  water  power.  First,  there  is  the  natural  condition  consisting  of  a 
fall  or  rapid  in  a  stream  and  which  may  be  regarded  as  latent  until  some  means 
are  created  to  utilize  it;  second,  when  water  has  been  accumulated  in  a  dam 
so  that  the  potential  power  has  become  a  reality  and  is  in  condition  so  that  it 
can  be  parceled  out  for  use,  this  is  also  referred  to  as  water  power,  and  is 
the  kind  of  a  water  power  involved  in  the  instant  case.  In  either  case,  how- 
ever, the  power  belongs  to  the  riparian  owner  by  virtue  of  his  ownership  of 
the  riparian  land. 

Under  the  common  law,  every  riparian  proprietor  is  entitled  to  the  natural 
flow  of  any  stream  through  or  along  his  land  in  the  accustomed  channels, 
undiminished  in  quanity  and  unimpaired  in  quality,  except  as  may  be  occas- 
sioned  by  the  reasonable  use  of  the  stream  by  other  like  proprietors.  (Farn- 
ham  on  Waters,  Vol.  I,  p.  63;  27  E.  C.  F.  Waters,  p.  11;  Crawford  Co.  v. 
Nathaway,  67  Nebr,,  325;  93  N.  W.,  781;  Sanborn  v.  Peoples  Ice  Co.,  82 
Minn.,  43;  84  N.  W.,  641.)  In  some  States  this  rule  is  not  followed,  and  there 
is  what  is  called  the  doctrine  of  prior  application,  and  then  again  in  other 
States  there  is  a  mixed  application  of  the  two  doctrines.  The  doctrine  of 
prior  application  prevails  generally  in  the  Pacific  States.  According  to  this 
doctrine,  the  person  who  first  appropriates  the  waters  of  a  stream  for  a 
beneficial  use  has  the  first  right  thereto,  whether  he  be  a  riparian  owner  or 
not. 

In  the  State  of  Wisconsin  the  common-law  rule  is  in  force.  (Lawson  v. 
Mowry,  52  Wis.,  219;  9  N.  W.,  230;  A.  C.  Cann  Co.  v.  Lumber  Co.,  74  Wis., 
652;  43  N.  W.,  660;  Kaukeums  Power  Co.  v.  Green  Bay  Co.,  75  Wis.,  385; 
44  N.  W.,  638;  Fox  River  Co.  v.  Kelly,  70  Wis.,  387;  35  N.  W.,  744.)  In  the 
case  of  State  v.  Bancroft  (148  Wis.,  124),  the  court  in  speaking  of  the  right 
of  a  riparian  proprietor  referred  to  it  as  "unquestionably  a  private  right 
appurtenant  to  the  land."  Riparian  rights  are  generally  referred  to  as 
incorporeal  hereditaments,  appurtenant  to  the  land  through  which  the 
water  flows,  which  will  pass  with  a  conveyance  of  the  land  without  any 
designation.  (27  R.  C.  L.,  1340.)  Farnham  on  Waters  (vol.  2,  p.  1567) 
states: 

While  the  water  right  is  incorporeal,  it  is  not  personal  property,  but  is  a  parcel  of  the 
estate  and  therefore  partakes  of  the  nature  of  real  estate  and  in  so  far  a  part  of  the  estate 
to  which  it  is  attached  that  it  is  an  incident  of,  and  will  pass  with  it. 

Riparian  rights  are  reflected  in  the  value  of  the  land  to  which  they  attach 
and  often  give  the  land  its  chief  value.  These  rights  are  property  rights 
and  can  not  be  taken*:  from  the  owners  without  just  compensation.  State 
v.  Bancroft,  supra.  The  property  of  the  owner  consists  not  in  the  water 
itself  but  in  the  added  value  which  the  stream  gives  to  the  land  through 
which  it  flows.  While  water  power  itself  is  simply  energy  generated  by  flowing 
water,  we  are  here  dealing  with  the  ownership  of  that  energy,  which  involves 
the  ownership  of  tangible  property  inseparably  connected  therewith. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.— 18. 


In  valuing  the  land  and  physical  property  thereon  necessary  for  power 
generation,  no  line  can  be  drawn  between  the  value  of  the  land  and  physical 
property  on  the  one  hand  and  the  water  power  on  the  other.  It  can  be  not 
said  in  placing  a  value  upon  an  entire  dam  that  the  water  rights  are  reflected 
in  the  value  of  the  land  only  to  a  certain  point  and  that  any  value  of  the  dam 
in  excess  thereof  must  be  valued  separately  as  power.  The  combination 
of  the  water  rights,  the  land,  machinery,  and  equipment  combined  together 
make  up  the  power  which  may  be  valued  at  so  much  per  horsepower  and  the 
water  power  can  only  be  valued  as  a  separate  item  to  the  extent  that  ji  m 
enhances  the  value  of  the  land  and  the  other  physical  property  necessary 
for  power  generation. 

Where,  as  in  this  case,  a  person  owns  the  land  upon  which  a  dam  is  built 
and  owns  the  water  power  developed  by  virtue  of  his  riparian  rights  in  the 
land,  it  is  the  opinion  of  this  office  that  such  power  is  so  connected  with  the 
land  to  which  it  is  appurtenant  that  it  should  be  treated  as  tangible  propertv 
to  determine  invested  capital.  ^ 

Having  determined  that  water  power  should  be  treated  as  tangible 
property,  we  come  to  the  question  of  whether  or  not  it  has  been  established 
in  this  case  that  the  water  powers  in  question  had  a  value  at  the  time  of  their 
acquisition  in  excess  of  the  par  value  of  the  capital  stock  issued  therefor, 

This  value  in  the  case  of  the  O  Power  must  be  as  of  190-,  and  the  P  Power 
as  of  191—,  as  those  are  the  dates  the  respective  properties  were  acquired. 
(Art.  63,  Regulations  41,  and  art.  836,  Regulations  45.)  The  computation 
in  the  memorandum  is  based  on  an  estimated  power  at  the  O  dam  of  3%x 
horsepower  and  at  the  R  dam  of  2x  horsepower,  and  while  there  is  evidence 
upon  which  to  base  the  findings  of  value  as  agreed  upon  in  conference  of  r 
dollars  per  horsepower,  the  record  does  not  disclose  that  this  amount  of  power  % 
was  ever  developed  at  either  of  these  dams  at  the  date  of  their  acquisition. 
The  O  Power  was  created  through  the  consolidation  of  several  small  com- 
panies, each  developing  power  by  means  of  wing  dams.  The  record  does  not 
disclose  how  much  power  each  of  these  companies  was  developing  or  could 
develop.  Claimant,  after  acquiring  the  properties  of  the  companies  operating 
the  small  wing  dams,  in  190-  constructed  a  dam  across  the  river  and  the 
estimates  of  power  developed  seem  to  relate  to  the  power  capable  of  being 
developed  after  the  construction  of  such  dam,  as  none  of  the  companies 
could  develop  more  than  an  j-foot  head,  while  if  combined,  a  head  of  4s  feet 
could  be  developed. 

The  increase  in  power  which  could  be  developed  by  a  consolidation  of  ^ 
all  the  powers  at  this  point  was  not  a  reality  until  after  the  acquisition  of 
the  property  necessary  to  construct  the  entire  dam.  There  was  no  doubt 
an  appreciation  in  the  value  of  the  property  purchased  by  claimant  which 
could  be  measured  by  the  increased  power  capable  of  development,  but  the 
appreciation  arose  by  reason  of  the  combination  of  several  powers  which 
necessarily  could  not  take  place  until  after  their  acquisition.  The  proper 
valuation,  therefore,  to  be  given  to  the  O  Power  for  the  purpose  of  deter-  ^ 
mining  the  invested  capital  is  the  total  value  of  all  of  the  powers  acquired 
valued  separately. 

In  the  case  of  the  R  Power  acquired  in  191-  it  appears  that  it  was  neces- 
sary to  expend  the  sum  of  \\Ylx  dollars  additional  after  the  purchase  for 
the  purpose  of  acquiring  riparian  rights,  and  since  the  acquisition  of  the 
property  the  claimant  has  obtained  the  permission  of  the  water  power  com- 
mission to  hold  the  water  at  3s  feet,  instead  of  2s  feet,  the  limit  of  the  fran-  to. 
chise  which  had  heretofore  existed  at  the  place.  The  allowance  of  invesnvi 
capital  in  this  case  was  based  on  2z  horsepower,  but  it  does  not  appear  in 

Supplementary  Bulletin  Rulings. 


5  5-22. 


Sec.  326.    Art.  836.  — 1«. 


the  record  that  the  2z  horsepower  was  developed  at  the  R  dam  at  the  date 
of  its  acquisition  and  prior  to  the  time  the  above  changes  were  made.  If  a 
water  power  is  to  be  valued  by  the  number  of  horsepower  developed,  it  must 
relate  to  the  horsepower  developed  at  the  date  of  the  valuation  and  not  to 
the  estimated  potential  power  which  may  be  developed  at  some  future  time 
under  changed  conditions.  Article  836,  Regulations  45,  above  quoted., 
provides  that  no  claim  will  be  allowed  for  a  paid-in  surplus  in  a  case  in  which 
the  additional  value  has  been  developed  or  ascertained  subsequently  to 
the  date  on  which  the  property  was  paid  in  to  the  corporation.  It  is  the 
opinion  of  this  office  that  this  provision  has  application  to  valuation  of  a 
water  power,  and  that  in  valuing  a  power  at  a  certain  sum  per  horsepower, 
it  should  relate  only  to  the  actual  power  developed  at  the  time  of  the  acquisi- 
tion of  the  property.  Any  other  method  would  be  too  speculative  and  uncer 
tain  to  meet  the  requirements  of  the  law  that  the  value  must  be  established 
"clearly  and  substantially"  in  excess  of  the  capital  stock  issued  in  exchange 
therefor.  The  record  does  not  show  that  the  amount  of  horsepower  claimed 
by  taxpayer,  or  as  allowed  in  conference,  was  developed  at  the  dams  on  the 
dates  of  their  acquisition,  and  it  is  the  opinion  of  this  office  that  it  has  not 
been  established  by  claimant  that  the  power  in  question  had  any  value  in 
excess  of  the  value  of  the  capital  stock  issued  in  exchange  therefor. 

Carl  A.  Mapes,  Solicitor  of  Internal  Revenue. 

1 1 


(See  A.  R.  R.  844;  sec.  331,  art.  941.    Ruling  No.  16.)    Value  in  excess 
of  par  value  of  stock  upon  reincorporation  which  effected  merely  a  change 
of  domicile. 
12 


I  ('22)-16-231:  I.  T.  1285 

Revenue  Act  of  1918. 

The  M  corporation  acquired  from  a  partnership  a  lease  to  certain  property 
at  a  cost  of  100*  dollars,  which  amount  represented  the  cost  of  the  lease 
to  the  partnership,  and  paid  for  the  lease  in  stock,  so  that  the  members  of 
the  partnership  thereby  became  minority  stockholders  of  the  corporation. 
An  appraisal  was  made,  immediately  after  incorporation,  of  the  value  of  the 
lease,  which  showed  it  to  be  worth  in  excess  of  300*  dollars,  and  thereupon 
the  corporation  made  a  book  entry  increasing  its  paid-in  surplus  by  200* 
dollars,  representing  the  excess  value  of  the  lease  over  its  cost  price. 

It  is  held,  that  the  amount  of  200*  dollars  added  to  the  book  value  of 
the  lease  does  not  constitute  paid-in  surplus,  and  that  the  transaction  should 
be  considered  as  a  purchase  and  sale  between  a  vendee  corporation  and  a 
vendor  partnership  which  resulted  in  a  substantial  change  of  beneficial 
interest.  The  fact  that  the  corporation  may  have  acquired  a  bargain  by  the 
purchase  of  the  lease  does  not  authorize  it  to  increase  its  surplus  by  reason 
of  the  alleged  excess  value  of  the  lease  over  the  amount  which  was  paid 
for  it. 
13 


Supplementary  Bulletin  Rulings, 


Sec.  326.    Art.  836.— 20. 


I  ('22)-18-258:  A.  R.  R.  761 
Revenue  Act  of  1918. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  unit  in  disallowing  the  claim  for  additional  invested  capital  in  the  amount  of 
1,291*  dollars  for  the  year  1919  be  sustained  and  the  appeal  denied. 

The  Committee  has  carefully  considered  the  appeal  of  the  M  Company, 
of  L,  from  the  action  of  the  Income  Tax  Unit  in  disallowing  a  claim  for 
additional  invested  capital  for  the  year  1919  in  the  amount  of  1,291*  dollars. 

In  190-  there  was  organized  under  the  laws  of  the  State  of  Z,  the  O 
Company  for  the  purpose  of  manufacturing  machines.  In  190-  the  0  Com- 
pany reorganized  under  the  laws  of  the  same  State  as  the  R  Company,  with 
an  authorized  capital  stock  of  8,000*  dollars.  The  following  year  the  N 
Company  was  organized  under  the  laws  of  the  State  of  L,  with  an  authorized 
capitalization  of  6,000*  dollars,  and  with  practically  the  same  stockholders, 
for  the  purpose  of  manufacturing  and  selling,  within  the  United  States  and 
dependencies  and  Canada,  machines  under  the  patents  held  by  the  R  Com- 
pany. Working  capital  for  the  N  Company  was  secured  by  the  sale  of  pre- 
ferred stock  to  the  stockholders  of  the  R  Company.  These  two  affiliated 
corporations  continued  business  until  October,  1913,  when  the  N  Company, 
being  in  financial  difficulties,  its  affairs  were  turned  over  to  a  bondholders' 
committee.  At  the  same  time  the  R  Company  was  dissolved  and  its  prop- 
erties were  taken  over  by  its  directors  as  trustees  (in  dissolution). 

In  October,  1913,  the  aggregate  outstanding  capital  stock  of  the  two 
corporations  was  9,449*  dollars  and  their  net  assets  were  980*  dollars,  divided 
as  follows:  Tangibles,  542*  dollars;  intangibles,  438*  dollars.  In  June,  1914, 
a  new  corporation,  known  as  the  M  Company,  was  incorporated  under  the 
laws  of  the  State  of  L  with  an  authorized  capital  stock  of  1,500*  dollars, 
divided  as  follows:  2y  shares  of  common  stock  of  the  par  value  of  $100  each 
and  y  shares  of  deferred  stock  of  a  like  par  value.  The  assets  of  the  R 
Company  were  sold  by  the  trustees  (in  dissolution)  on  March  — ,  1914, 
through  A,  as  agent,  to  B  at  public  sale.  On  October  — ,  1913,  D,  upon 
application  of  the  bondholders'  committee,  was  appointed  receiver  for  the 
N  Company  of  L,  by  the  District  Court,  and  in  accordance  with  an  order 
of  that  court  he,  as  receiver,  sold  on  April  — ,  1914,  all  the  assets  of  the  X 
Company  to  E  and  on  the  —  day  of  April  did  assign,  transfer,  and  set  over 
to  the  said  E  all  right,  title,  and  interest  in  and  to  the  assets  and  property 
of  the  said  N  Company.  B  and  E,  upon  the  organization  of  the  M  Company, 
assigned  all  the  assets  of  the  R  Company  and  the  N  Company,  purchased  by 
them  as  above  stated,  to  the  new  company  for  capital  stock  of  the  new 
company  in  the  amount  of  980*  dollars. 

It  is  alleged  by  the  M  Company  that  the  actual  cash  investments  in  the 
R  Company  and  the  N  Company  aggregated  2,271*  dollars,  and  it  is  con- 
tended that  the  excess  of  this  amount  over  the  amount  of  stock  issued  for  the 
assets  of  the  two  companies,  to  wit,  1,291*  dollars,  should  be  included  in 
invested  capital  as  paid-in  surplus  for  the  year  1919. 

Section  326(a)  of  the  Revenue  Act  of  1918,  approved  February  24,  1919. 
provides : 

That  as  used  in  this  title  the  term  "invested  capital''  for  any  year  means  (except  as 
provided  in  subdivisions  (b)  and  (c)  of  this  section): 

(1)  Actual  cash  bona  fide  paid  in  for  stock  or  shares; 

(2)  Actual  cash  value  of  tangible  property,  other  than  cash  bona  lide  paid  in  for  stock 
or  shares,  at  the  time  of  sucii  payment,  but  in  no  case  to  exceed  the  par  value  of  the  original 
stock  or  shares  specifically  issued  therefor,  unless  the  actual  cash  value  of  such  tangible 
property  at  the  time  paid  in  is  shown  to  the  satisfaction  of  the  Commissioner  to  have  been 


Supplementary  Bulletin  Rulings. 


f-7-22. 

Sec.  326.   Art.  836.— 21. 

clearly  and  substantially  in  excess  of  such  par  value,  in  which  case  such  excess  shall  be 

treated  as  paid-in  surplus;    *    *  * 

******* 

(4)  Intangible  property  bona  fide  paid  in  for  stock  or  shares  prior  to  March  3,  1917, 
in  an  amount  not  exceeding  (a)  the  actual  cash  value  of  such  property  at  the  time  paid  in, 
(b)  the  par  value  of  the  stock  or  shares  issued  therefor,  or  (c)  in  the  aggregate  25  per  centum 
of  the  par  value  of  the  total  stock  or  shares  of  the  corporation  outstanding  on  March  3, 
1917,  whichever  is  lowest.    *    *  * 

From  the  above  statement  of  facts,  it  appears  that  the  intangible  assets 
of  the  R  Company  and  the  N  Company  were  paid  in  for  stock  prior  to  March 
3,  1917.  The  invested  capital  of  the  M  Company,  therefore,  for  the  year 
1919  must  consist  of  the  actual  cash  value  of  the  tangible  property  paid  in 
for  stock  or  shares  at  the  time  of  such  payment  (sec.  326(a)2)  plus  an  amount 
of  intangibles  fixed  by  the  limitations  prescribed  by  section  326(a)4.  The 
statute  provides  for  a  paid-in  surplus  only  in  connection  with  tangible  prop- 
erty paid  in  (sec.  326(a)2)  and  by  its  terms  (sec.  32fj(a)4)  expressly  excludes 
from  invested  capital  any  amount  in  excess  of  the  par  value  of  the  stock  or 
shares  issued  for  intangibles.  This  has  been  the  uniform  holding  of  the 
Bureau.  As  the  total  value  of  the  tangible  assets  paid  in  for  stock  or  shares 
was  less  than  the  par  value  of  the  stock  or  shares  issued,  it  is  clear  that  a 
claim  for  paid-in  surplus  based  upon  the  original  cost  of  the  assets  to  the 
original  companies  can  not  be  allowed. 

The  taxpayer  contends  that  the  beneficial  ownership  in  the  new  company 
and  the  former  companies  is  substantially  the  same,  and  that,  therefore,  the 
new  company  is  but  a  continuation  of  the  former  companies  and  entitled  to 
the  same  invested  capital.  The  soundness  of  this  contention  can  not  be 
conceded.  The  present  company  was  organized  as  a  new  company  under  its 
own  charter  and  is  not  a  continuation  of  the  N  Company,  which  remained 
in  existence.  Neither  did  it  acquire  the  assets  of  the  N  Company  through 
succession  to  that  company  but  by  purchase  at  a  receiver's  sale  authorized 
by  the  United  States  District  Court.  There  is  still  less  ground  for  con- 
tending that  the  present  company  is  in  any  way  a  continuation  of  the  R 
Company.  The  present  company  is  organized  under  the  laws  of  a  different 
State  and  acquired  the  assets  of  the  first-named  company  through  purchase 
at  a  sale  by  the  trustees  (in  dissolution)  and  its  title  is  in  no  sense  a  con- 
tinuation of  the  title  of  the  former  company.  The  identity  of  the  stockholders 
does  not  destroy  the  separate  entity  of  the  corporations  nor  constitute  one 
a  successor  of  the  others.  As  stated  in  the  case  of  Pittsburgh  and  Buffalo 
Company  v.  Duncan  (232  Fed.,  584,  587): 

The  mere  fact  that  the  stockholders  in  two  corporations  are  the  same,  *  *  *  does 
not  make  either  the  agent  of  the  other,  nor  does  it  merge  them  into  one,  *  *  *  where 
each  corporation  is  separately  organized  under  a  distinct  charter. 

This  is  but  a  statement  of  the  principle  which  has  been  consistently 
recognized  by  the  Federal  courts.  See  Peterson  v.  Chicago,  Rock  Island  & 
Pacific  Railroad  (205  U.  S.,  364);  Conley  v.  Mathieson  Alkali  Works  (190 
U.  S.,  406,  409);  Pullman  Car  Company  v.  Missouri  Pacific  Co.  (115  U.  S., 
587,  597).  And  it  is  the  position  taken  by  the  Bureau.  Law  Opinion  1062 
(C.  B.  4,  p.  168). 

The  cases  of  Southern  Pacific  Company  v.  Lozve  (247  U.  S.,  330)  and 
Gulf  Oil  Corporation  v.  Lewellyn  (248  U.  S.,  71),  referred  to  by  counsel  for 
the  taxpayer  as  involving  a  departure  from  this  principle  are,  as  pointed  out 
by  the  Supreme  Court,  based  upon  their  peculiar  facts  and  are  believed  to 
be  readily  distinguishable  from  the  instant  case.  As  stated  in  Eisner  v. 
Macomber  (252  U.  S.?  189,  213,  214): 

*    *    *    looking  through  the  form,  we  can  not  disregard  the  essential  truth  disclosed; 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-22. 


ignore  the  substantial  ui Terence  between  corporation  and  stockholder;  treat  the  entire 
organization  as  unreal;  look  upon  stockholders  as  partners,  when  they  are  not  such; 
treat  them  as  having  in  equity  a  right  to  a  partition  of  the  corporate  assets,  when  they  have 
none.  *  *  *  We  must  treat  the  corporation  as  a  substantial  entity  separate  from  the 
stockholder,    *    *  *. 

Upon  full  consideration  the  Committee  accordingly  recommends,  in  the 
appeal  of  the  M-  Company,  that  the  action  of  the  Income  Tax  Unit  in  dis- 
allowing the  claim  for  additional  invested  capital  in  the  amount  of  1,291* 
dollars  for  the  year  1919  be  sustained  and  the  appeal  denied. 

14 


I  ('22)-27-386:  A.  R.  R.  944 
Section  207,  Revenue  Act  of  1917,  Section  326,  Revenue  Act  of  1918. 
Section  203,  Revenue  Act  of  1918. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the 
Income  Tax  Unit  in  excluding  from  invested  capital  for  1917  and  subsequent 
years  approximately  300x  dollars  as  paid-in  surplus  and  in  increasing  income  for 
1918  by  2x  dollars  representing  an  adjustment  of  inventory  at  December  31,  1918, 
be  sustained  and  the  appeal  be  denied. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  excluding  from  invested  capital 
for  1917  and  subsequent  years  approximately  300x  dollars  claimed  as  paid-in 
surplus  and  in  increasing  income  for  1918  by  2x  dollars  representing  an 
adjustment  of  inventory  as  at  December  31,  1918. 

The  M  Company  was  organized  in  190-  and  acquired  the  assets  and  bus- 
iness of  the  N  Company  under  the  circumstances  briefly  stated  as  follows: 

The  business  conducted  by  the  N  Company  had  been  in  existence  for  a 
great  many  years  and  the  stock  of  the  company  was  widely  scattered,  being 
held  mostly  by  small  stockholders  and  trustees.  Of  the  stockholders  at  date 
of  organization,  76  per  cent  owned  less  than  five  shares  each  or  were  fiduciaries. 
The  management  of  the  affairs  of  the  corporation  seems  to  have  been  centered 
in  the  A  and  B  interests,  which  actually  owned  a  small  minority  of  the 
stock. 

Prior  to  190-  it  appears  that  the  business  of  the  N  Company  had  been 
steadily  unprofitable.  Accordingly,  the  stockholders  at  an  adjourned  special 
meeting  held  in  1 90-: 

Voted,  that  the  directors  shall  have  authority  to  liquidate  the  company  and  to  sell  any 
or  all  of  its  plant  and  property,  except  its  corporate  franchise,  at  public  or  private  sale  from 
time  to  time  in  such  manner,  upon  such  terms,  and  for  such  considerations  as  shall  seem 
to  them  to  be  for  the  best  interests  of  the  stockholders. 

The  A  interest  through  C,  an  attorney  and  also  son-in-law  of  A,  in  whose 
hands,  as  stated  above,  the  management  of  the  company  seems  to  have 
been  centered,  immediately  instituted  a  scheme  of  reorganization.  Under 
date  of  January,  190-,  the  directors,  under  authority  of  the  action  of  the 
stockholders  above  quoted,  gave  to  C  an  option  to  purchase  for  60.v  dollars 
cash,  within  30  days,  all  of  the  assets  of  the  company  excepting  the  mer- 
chandise inventory  on  hand  or  in  process.  In  order  to  raise  the  money 
necessary  to  exercise  this  option,  C  set  about  securing  subscriptions  to  stock 
in  a  new  company  which  he  proposed  to  organize  for  the  purpose  of  acquiring 
the  assets  and  operating  the  business  of  the  old  company.  Under  date  of 
February  — ,  190-,  these  subscribers  entered  into  a  so-called  "underwriting 
agreement,"  wherein  they  pledged  to  pay  into  the  new  company,  or  to  C  for 
the  company,  the  sum  set  opposite  their  respective  names.  The  total  amount 
pledged  was  100*  dollars,of  which  only  31*  dollars  represented  subscriptions 

Supplementary  Bulletin  Rulings. 


7-7-22. 

Sec.  326.    Art.  836.-23. 

by  stockholders  in  the  old  company.  Several  pertinent  clauses  of  this  agree- 
ment are  here  quoted: 

Said  C  shall  endeavor  to  acquire  the  plant  and  assets  of  said  N  Company  at  a  price 
not  exceeding  60*  dollars  for  everything  except  the  franchise  of  the  company  and  except 
stock,  raw,  wrought,  and  in  process,  and  articles  of  supply  and  repairs  on  hand;  and  he 
shall  use  subscriptions  received  hereunder  for  the  purposes  of  such  acquisition. 

Should  he  so  acquire  the  property,  he  is  to  cause  a  new  corporation  to  be  organized 
under  the  laws  of  Y,  with  a  capital  stock  not  to  exceed  \20x  dollars  (one  class),  and  transfer 
all  the  said  property  and  the  cash  capital  herein  provided  for  to  such  new  company,  taking 
such  capital  stock  in  payment. 

The  subscribers  hereto  shall  be  entitled  to  shares  of  the  new  company  of  a  par  value 
equal  to  the  amounts  of  their  respective  subscriptions,  or  the  proceeds  thereof  at  par  as 
herein  provided. 

All  the  stock  so  received  by  said  C  shall,  however,  be  first  offered  by  him,  in  such  reason- 
able manner  as  he  may  determine  (and  with  or  without  assignable  rights),  to  the  existing 
shareholders  of  said  N  Company  for  subscription  at  par  within  such  time  as  he  may  limit. 

At  a  meeting  of  the  board  of  directors  of  the  N  Company  held  in  Feb- 
ruary, 190-,  the  treasurer  was  authorized  and  empowered  "to  seal  with  the 
corporate  seal,  acknowledge  and  deliver  at  the  present  time  or  any  future 
time  in  the  name  and  on  behalf  of  the  corporation  a  deed  or  deeds  and  an 
assignment  or  assignments  of"  all  of  the  assets  of  the  company  except  those 
specifically  named  "to  the  M  Company,  a  corporation  duly  organized  under 
the  laws  of  Y."  Pursuant  to  the  stipulation  in  the  "underwriting  agreement," 
a  part  of  which  is  quoted  above,  C,  under  date  of  February,  190-,  sent  a  cir- 
cular letter  to  each  stockholder  in  the  N  Company,  notifying  him  or  her  that 
he  (C)  had  purchased  all  of  the  assets  of  the  corporation  and  had  caused  the 
same  to  be  conveyed  to  a  new  corporation  known  as  the  M  Company;  that 
the  capital  stock  of  the  new  company  was  120*  dollars  (par  value  of  each 
share  $100);  that  each  stockholder  in  the  N  Company  was  offered  the  un- 
assignable right  to  purchase  for  cash  at  par  stock  in  the  new  company  in  the 
proportion  of  five  shares  in  the  new  company  for  each  share  in  the  old  com- 
pany, and  that  such  offer  must  be  accepted  and  the  cash  remitted  before 
March,  190-,  failing  in  which  it  would  be  conclusively  presumed  that  the  offer 
was  declined.  A  few  of  the  stockholders  in  the  old  company  availed  them- 
selves of  the  opportunity  thus  afforded  and  purchased  stock  in  the  new 
company.    After  subscriptions  were  all  in  it  is  shown  that  the  stock  was  taken 


as  follows: 

Per  cent. 

By  stockholders  in  the  N  Company   423^ 

By  outsiders   573^2 

The  new  company  thus  had  paid-in  capital  stock  of  120a;  dollars  repre- 
sented by: 

Dollars. 

Plant   60* 

Cash  working  capital   58* 

Organization  expenses   2x 

(C  was  paid  2x  dollars  for  his  services.) 


The  old  company  was  then  liquidated,  the  stockholders  receiving  in 
liquidation  about  5  cents  on  the  dollar  invested. 

A  few  months  after  the  acquisition  of  the  assets  here  in  question  the 
appellant  (the  new  company)  had  an  appraisal  made  for  insurance  purposes. 
This  appraisal,  a  copy  of  which  is  in  the  file,  shows  a  total  asset  value  of 
approximately  440x  dollars,  and  the  company^claims  J:hat  after  providing  for 
proper  depreciation,  these  assets  had  an  actual  cash  va^.ue  at  date  of  acquisition 
of  365a:  dollars,  and  that  inasmuch^ as^only  60x  dollars  in  stock  ^was  issued 
therefor,  it  is  entitledjto  include  in  invested  capital  the  excess  value,  or  305* 
dollars,  as  paid-in  surplus.] 

Supplementary  Bulletin  Rulings, 


Sec.  326.    Art.  836.-24. 


The  Committee  has  given  very  careful  consideration  to  the  elaborate 
arguments,  oral  and  written,  advanced  by  the  appellant's  representatives  in 
connecton  with  the  provisions  of  the  Revenue  Acts  of  1917  and  1918,  and 
finds  itself  utterly  unable  to  agree  with  their  claim  that  a  substantial  com- 
pliance with  the  necessary  conditions  for  allowing  paid-in  surplus  has  been 
effected.  Both  section  207  of  the  Revenue  Act  of  1917  and  section  326  of 
the  Revenue  Act  of  1918  provide  that  invested  capital  means  the  actual 
cash  paid  in  for  stock  or  snares  and  (or)  the  actual  cash  value  of  tangible 
property  paid  in  for  stock  or  shares.  In  the  opinion  of  the  Committee,  the 
facts  in  this  case  show  conclusively  that  the  M  Company  was  organized  with 
120*  dollars  cash  paid  in,  57^  per  cent  of  which  was  supplied  by  outside 
interests,  and  that  60x  dollars  of  this  cash  was  paid  to  the  N  Company  for 
the  assets  of  the  latter.  It  is  further  shown  that  only  approximately  20  per 
cent  of  the  stockholders  in  the  N  Company  became  stockholders  in  the  M 
Company.  It  seems  fallacious,  therefore,  to  argue  that  the  assets  of  the  N 
Company  were  paid  in  to  the  M  Company  for  stock  of  the  latter  when  80 
per  cent  of  the  stockholders  of  the  former  received  none  of  this  stock.  For  the 
same  reason  the  argument  that  the  N  Company  or  the  stockholders  thereof 
contributed  to  the  M  Company  value  which  was  not  paid  for  appears  to  be 
equally  untenable.  All  of  this  only  emphasizes  the  soundness  of  the  pro- 
visions of  article  836,  Regulations  45,  which  lays  down  the  rule  that: 

Generally,  allowable  claims  under  this  article  will  arise  out  of  transactions  in  which 
there  has  been  no  substantial  change  of  beneficial  interest  in  the  property  paid  in  to  the 
corporation  and  in  all  cases  the  proof  of  value  must  be  clear  and  explicit. 

The  Committee  is  therefore  forced  to  the  conclusion  that  the  action  of  the 
Unit  in  rejecting  this  claim  for  paid-in  surplus  was  correct  and  should  be 
sustained.  5 

The  facts  relative  to  the  second  point  before  the  Committee  on  appeal 
are  briefly  as  follows: 

During  1918,  due  to  war  conditions,  the  company  was  obliged  to  take 
deliveries  as  they  could  be  obtained.  Storage  facilities  near  the  plant  being 
inadequate,  it  was  necessary  to  store  some  material  outside  the  premises  and 
about  a  quarter  of  a  mile  from  the  plant.  In  taking  the  inventory  at  De- 
cember 31,  1918,  the  company  deducted  therefrom  the  amount  of  2x  dollars 
as  the  estimated  expense  of  hauling  this  material  from  the  place  where  it 
was  stored  to  the  regular  storage  space  within  the  premises.  The  corporation 
states  that  it  uses  the  cost  or  market,  whichever  is  lower,  basis  for  its  in- 
ventories and  contends  that  upon  this  basis  it  was  correct  to  inventory  the 
material  stored  outside  the  mill  premises  at  cost,  less  the  estimated  expense 
of  hauling  it  from  the  ground  where  it  was  stored  to  the  regular  storage  space 
at  the  plant. 

The  Committee  feels  that  this  contention  is  entirely  without  merit  and 
fails  to  meet  the  two  essential  tests  to  which  inventories  must  conform  as 
laid  down  in  article  1582,  Regulations  45,  as  amended  by  Treasury  Decision 
3296. 

It  is  therefore  recommended,  in  the  appeal  of  the  M  Company,  that  the 
action  of  the  Income  Tax  Unit  in  excluding  from  invested  capital  for  1917  and 
subsequent  years  approximately  300*  dollars  as  paid-in  surplus  and  in  in- 
creasing income  for  1918  by  2x  dollars,  representing  an  adjustment  of  in- 
ventory at  December  31,  1918,  be  sustained  and  the  appeal  be  denied. 

15 


Supplementary  Bulletin  Rulings 


Sec.  326.  Art.  836.-25. 


I  ('22)-5 1-650:    A  R.  R.  1276. 
Act  October  3,  1917,  Section  207.    Act  February  24,  1919,  Section  326. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  reducing  the  appellant's  invested  capital  as  of  July  I — ■,  1914,  to  63.29* 
dollars  be  reversed  and  that  the  appraisal  as  of  that  date,  now  filed,  subject  to 
check  as  to  individual  items,  be  made  the  basis  of  the  computation  of  invested 
capital. 

The  Committee  has  carefully  considered  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  reducing  its  invested  capital  as 
of  July  — ,  1914,  from  158.35a:  dollars  to  63.29*  dollars. 

The  N  Company,  which  had  operated  as  a  domestic  corporation  for  a 
number  of  years,  was  declared  bankrupt  in  1913  and  was  in  the  hands  of 
receivers  in  bankruptcy  until  July  — ,  1914.  A  creditors'  committee  was 
appointed  and  a  proposed  plan  of  organization  adopted  under  date  of  Sep- 
tember — ,  1913.   The  plan  of  reorganization  provided: 

The  new  corporation  shall  issue  such  amount  of  first  preferred  stock  as  shall  be  neces- 
sary for  the  distribution  to  creditors  as  hereinafter  provided. 

The  new  corporation  shall  also  issue  approximately  20x  dollars  par  value  of  common 
stock  or  such  other  amount  as  the  committee  may  deem  proper. 

In  order  to  raise  additional  working  capital  the  committee  may  offer  to  preferred 
stockholders  of  the  N  Company  a  right  to  acquire,  for  each  two  shares  of  the  preferred 
stock  of  the  N  Company  now  held  by  them,  one  share  of  first  preferred  stock  and  one  share 

of  6  per  cent  second  preferred  stock  (of  the  par  value  of  $  )  of  the  new  corporation 

upon  payment  of  an  amount  equal  to  the  par  value  of  the  new  first  preferred  stock  so 
acquired.  In  such  case  the  new  corporation  shall  issue  such  additional  amount  of  first 
preferred  stock  and  such  amount  of  second  preferred  stock  as  may  be  required  for  the  above 
purposes.  Such  second  preferred  stock,  if  issued,  shall  not  entitle  the  holders  to  voting 
rights  in  any  event  for  five  years,  and  thereafter  only  if  dividends  then  accruing  remain 
unpaid. 

The  reorganization  plan  further  provided  that  each  creditor  who  entered 
into  it  should  receive  an  amount  of  first  preferred  stock  equal  in  par  value 
to  the  amount  of  his  claim  at  the  date  of  bankruptcy  with  interest  at  the 
rate  of  6  per  cent  from  said  date  to  the  date  when  dividends  began  to  accrue 
on  such  preferred  stock. 

As  to  the  common  stock,  the  reorganization  plan  provided: 

The  committee  shall  itself  hold  the  common  stock  of  the  new  corporation,  or  cause 
the  same  to  be  held  by  such  persons  as  it  may  deem  proper  under  a  voting-trust  agreement, 
such  voting-trust  agreement  to  be  continued  for  a  period  of  not  more  than  10  years,  or  for 
such  shorter  period  as  they  may  deem  proper.  Such  voting  trust  agreement  may  provide 
that  the  committee  holding  such  stock  may  agree  with  A  (subject  to  such  other  conditions 
and  limitations  as  the  committee  may  deem  proper  for  the  protection  or  benefit  of  first 
preferred  stockholders  or  as  such  agreement  may  provide)  that  if  the  new  corporation  shall 
redeem  all  of  said  first  preferred  stock  at  par  with  all  accumulated  dividends  within  five 
years  of  the  date  as  of  which  the  same  is  issued,  said  common  stock  shall  be  delivered  to 
him  as  his  own  property.  If  no  such  agreement  is  made,  or  if  the  common  stock  is  not  so 
disposed  of,  the  committee  holding  the  same  shall  within  10  years  dispose  of  or  use  the  same 
for  the  benefit  of  the  first  preferred  stockholders,  or  for  the  protection  or  benefit  of  the 
new  corporation  in  such  manner  as  in  the  committee's  sole  discretion  it  may  deem  proper 
or  as  said  voting-trust  agreement  shall  otherwise  provide. 

Pursuant  to  the  last  quoted  provision,  voting  trustees  were  appointed 
by  the  creditors'  committee  and  an  agreement  was  entered  into  between 
the  voting  trustees  and  the  M  Company,  in  which  it  was  recited: 

Whereas  in  pursuance  of  said  plan,  a  new  corporation  has  been  formed  called  the  M 
Company,  which,  in  accordance  with  the  direction  of  the  committee,  has  issued  all  its 
capital  stock  (except  w  shares  of  common  stock  subscribed  for  in  cash)  for  the  purpose  of 

acquiring  substantially  all  the  property  (except  $  )  of  said  N  Company,  bankrupt,  or 

of  the  trustees  in  bankruptcy  thereof;  and 

Whereas  nearly  all  the  preferred  stock  of  said  M  Company,  has  been  or  is  to  be  trans- 
ferred to  the  parties  to  said  agreement  of  reorganization  in  proportion  to  their  claims 
against  said_bankrupt,  as  provided  in  said  agreement,  any  balance  of  the  total  authorized 
preferred  stock  of  the  company  not  so  transferred  to  be  held  as  treasury  stock  or  otherwise 
for  the  benefit  of  the  corporation;  and  * 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-26. 


Whereas  all  of  the  common  stock  of  said  M  Company,  namely  50w  shares  of  the  par 

value  of  $          each,  is  now  held  by  B  for  the  benefit  of  said  committee  and  the  persons 

whom  they  represent; 

And  in  which  it  was  agreed  among  other  things  that: 

At  any  time  before  July  — ,  1919,  the  trustees  may,  in  their  absolute  discretion,  by  an 
affirmative  vote  of  or  writing  signed  by  four  of  their  number,  make  an  agreement  with  A 
(former  proprietor  of  the  N  Company)  that  if  the  M  Company,  a  State  of  U  corporation, 
shall,  before  July  — •,  1919,  redeem  all  of  its  outstanding  preferred  stock  at  par  with  all 
accumulated  and  unpaid  dividends  thereon,  and  if  such  other  conditions  and  limitations 
as  the  trustees  may  insert  in  said  agreement  for  the  protection  or  benefit  of  said  preferred 
stockholders  shall  be  fulfilled,  then,  upon  the  fulfillment  of  all  the  conditions  and  limitations 
above  referred  to,  the  trustees  will  convey  all  the  shares  held  in  trust  hereunder  to  said 
A  upon  his  written  request.  Said  agreement  shall  not  extend  in  any  manner  beyond 
July  — •,  1919,  and  if  not  then  performed  shall  immediately  expire. 

The  agreement  with  A  thus  authorized  appears  to  have  been  made. 

Pursuant  to  the  plan  of  reorganization,  the  assets  of  the  N  Company 
were  on  July  — ,  1914,  taken  over  by  the  M  Company,  which  assumed  all 
the  former  corporation's  liabilities  and  issued  preferred  stock  for  the  amount 
of  their  claims  proven  in  bankruptcy,  aggregating  in  all  146.84a:  dollars  par 
value  of  preferred  stock  and  1.51a;  dollars  of  preferred  scrip,  in  all  148.35a: 
dollars,  and  10a;  dollars  of  common  stock  was  issued  to  the  voting  trustees 
in  pursuance  to  the  agreement  above  stated. 

From  the  statement  of  facts  filed  in  support  of  the  appeal  it  appears  that: 

Just  prior  to  the  reorganization,  the  books  of  the  N  Company  showed  total  assets  of 
263.3*  dollars  and  total  liabilities,  excluding  capital  stock,  of  218.7*  dollars.  When  the 
new  corporation's  books  were  set  up,  the  plant  was  taken  at  a  nominal  valuation.  Real 
estate  carried  on  the  former  books  at  79.58*  dollars  was  set  up  on  the  new  books  at  35.6* 
dollars;  machinery  and  equipment  carried  on  the  old  books  at  94*  dollars  was  set  up  on 
the  new  books  at  14*  dollars;  an  inventory  of  finished  goods  carried  on  the  pld  books  at 
11.1*  dollars  was  set  up  on  the  new  books  at  5.55*  dollars,  one-half  the  former  book  value. 
The  plant  account  was  thus  marked  down  123.99*  dollars  and  the  inventory  5.55*  dollars, 
making  a  total  reduction  of  assets  of  129.55a*  dollars.  The  preferred  stock  took  the  place 
of  nearly  all  of  the  accounts  and  notes  payable  of  the  old  corporation  and  the  new  corpora- 
tion began  business  with  a  book  deficit  of  95*  dollars,  created  by  the  process  of  writing  down 
assets  as  before  mentioned. 

In  its  returns  for  1917,  the  appellant  increased  the  items  of  machinery 
and  real  estate  taken  over  from  14a:  dollars  to  60a;  dollars  and  from  35.6a: 
dollars  to  40a:  dollars,  respectively.  The  increased  values  thus  claimed  were 
disallowed  by  the  Income  Tax  Unit,  only  the  amount  of  49.6a;  dollars  set 
up  on  the  opening  account  of  the  new  corporation  being  allowed  on  account 
of  these  items. 

There  has  now  been  filed  a  complete  appraisal  of  the  assets  of  the  appellant 
company  made  on  January  — ,  1920,  as  of  July  — ,  1914.  This  appraisal 
shows  the  cost  as  of  July  — ,  1914,  and  accrued  depreciation  as  of  the  same 
date  as  follows: 


Assets. 

Cost  July 
— ,  1914. 

Accrued 
deprecia- 
tion July 
— ,  1914. 

Dollars. 
10.24* 
63.26* 
88.01* 

Dollars. 

10.5* 
15.38* 

Total  

161.51* 

25 . 88* 

Sound  value  July  — ,  1914,  135.63*  dollars. 

The  affidavit  on  behalf  of  the  appraisal  company  states  as  to  the  method 
of  making  the  appraisal: 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  836.-27. 


The  object  of  making  this  inventory  was  to  determine  the  actual  cash  value  of  (the 
physical  property  as  of  July  — ,  1914.  A  complete  inventory  of  all  items  of  plant  and 
equipment  on  hand  and  in  active  use  at  January  — ,  1920,  was  taken.  The  date  of  installa- 
tion of  all  items  added  since  July  ■ — ,  1914,  has  been  determined  from  the  records  of  the 
company,  careful  analysis  of  plant  and  expense  accounts  having  been  made  by  accountants. 
These  items  were  further  checked  by  information  obtained  from  employees  in  the  plant 
and  the  remaining  items  are,  therefore,  considered  to  be  the  items  which  must  necessarily 
have  been  in  place  on  July  — ,  1914.  The  prices  applied  to  the  items  acquired  from  July 
— ,  1914,  to  January  — ,  1920,  have  been  actual  cost  prices  taken  from  the  records  of  the 
company  by  the  accountants  who  worked  in  conjunction  with  the  engineers. 

It  was  then  necessary  to  determine  the  value  of  the  remaining  items  of  equipment  in 
the  inventory  as  of  July  — .  1914. 

The  first  step  was  to  determine  the  reproduction  cost  of  these  items  as  of  July  — ,  1914,. 
This  was  done  by  using  the  records  of  the  previous  corporation  and  the  records  of  the  O 
Company.  Preference  was  given  to  records  of  the  previous  corporation  when  these  were 
available,  with  the  exception  of  the  buildings  of  the  plant  which  were  acquired  at  a  bank- 
rupt sale.  Pvecords  of  the  O  Company  are  made  up  almost  wholly  of  actual  sales  to  numerous 
corporations  and  are  not  based  on  quotations  or  prices  given  "for  appraisal  purposes" 
and  are,  therefore,  we  believe,  the  best  evidence  of  the  market  price.  Every  effort  has  been 
made  to  have  the  prices  applied  conservative. 

The  reproduction  cost  having  been  determined,  the  next  step  was  to  determine  the 
depreciated  value  and  this  was  arrived  at  as  follows:  Competent  engineers  made  careful 
examinations  of  each  item  of  equipment  to  determine  its  actual  condition  and  the  accrued 
depreciation  as  of  January  — ,  1920,  was  thus  determined.  Yearly  depreciation  rates 
were  then  determined  and  the  entire  plant  worked  back  to  January — ,  1914,  all  as  shown  by 
accompanying  schedules. 

In  explanation  of  the  method  adopted,  the  appraiser  has  sworn: 
I  have  investigated  the  accounts  of  the  predecessor  corporation  of  the  M  Company 
and  in  my  opinion  it  is  impossible  to  correctly  determine  the  plant  value  as  of  July  — , 
1914,  from  their  books  of  account. 

The  method  of  accounting  then  in  use  does  not  show,  and  it  is  impossible  to  determine 
from  the  books,  the  expenditures  made  for  rebuilding,  renewals,  replacements,  and  extra- 
ordinary repairs.  Plant  items  also  were  charged  to  expense  in  some  cases,  and  no  consistent 
method  of  depreciating  the  property  was  ever  used. 

It  is  now  contended  by  the  appellant  that  the  value  of  the  buildings 
and  machinery  and  equipment  as  of  July  — ,  1914,  as  shown  by  the  appraisal, 
should  be  employed  in  computing  the  invested  capital  and  that  in  addition 
there  should  be  included  the  par  value  of  the  lOx  dollars  common  stock, 
for  the  reason  that  it  respresented  the  value  to  the  company  of  the  five- 
year  agreement  with  A  which  was  reasonably  worth  the  par  value  of  the 
stock. 

Transmitting  the  appeal  the  Unit  states: 

The  Unit  has  taken  the  stand  that  the  values  established  by  the  corporation  and  set 
up  on  its  book  should  be  used  in  the  absence  of  more  definite  proof  of  the  value  of  the 
property  involved.  The  values  shown  on  the  books  can  not  be  analyzed  and  it  is  a  well 
recognized  fact  that  the  assets  of  bankrupt  concerns  are  very  often  inflated. 

With  this  in  mind,  we  find  that  the  officers  of  the  new  corporation  revalued  the  assets 
and  wrote  them  down  to  such  an  extent  that  a  capital  impairment  of  over  60  per  cent 
resulted.  The  Unit  contends  that  the  officers  of  the  corporation  would  not  reduce  the 
book  values  of  its  assets  to  a  figure  below  the  actual  worth  of  the  assets,  if  by  so  doing 
a  substantial  capital  impairment  was  shown,  unless  the  original  values  of  the  assets  were 
inflated. 

The  Committee  has  carefully  examined  the  appraisal  submitted  in  this 
case  and  finds  that  it  has  been  prepared  in  the  manner  stated  by  the  ap- 
praisers, that  the  rates  of  depreciation  used  were  liberal,  and  that  it  complies 
with  the  requirements  of  T.  D.  3367  (Internal  Revenue  Bulletin  1-30,  p.  17) 
fl[1288  herein]. 

It  is,  therefore,  believed  that  the  appraisal  constitutes  sufficiently  definite 
proof  of  the  value  of  the  property  involved  as  of  the  date  paid  in  for  the 
purpose  of  computing  invested  capital,  subject,  of  course,  to  check  by  the 
Unit  as  to  the  particular  items  and  rates  of  depreciation. 

The  contention  of  the  appellant,  however,  that  the  par  value  of  the  lOx 


Supplementary  iiulictin  Rulings. 


Sec.  326.    Art.  836.  28. 


dollars  of  common  stock  should  be  added  m  computing  invested  capital  does 
not  appear  to  be  well  taken.  As  shown  by  the  above  recitation  of  facts,  all 
the  capital  stock,  including  the  common  stock  with  the  exception  of  w  shares 
which  were  issued  for  cash,  wa,s  issued  for  the  assets  of  the  N  Company 
and  not  in  consideration  of  services  rendered  or  to  be  rendered  by  A.  It  is 
expressly  provided  in  the  contract  entered  into  between  the  creditors'  com- 
mittee and  A  that  the  common  stock  was  to  be  turned  over  to  him  only 
upon  the  redemption  of  the  preferred  stock  within  a  period  of  five  years  and 
not  otherwise.  In  other  words,  it  was  to  be  used  to  pay  him  a  bonus  for 
retiring  the  preferred  stock  within  the  period  stated.  Until  the  stock  was 
actually  retired,  no  title  whatever  vested  in  A,  and  the  only  thing  back  of 
it  was  the  assets  of  the  N  Company,  the  value  of  which  as  of  July  — ,  1914, 
for  the  purpose  of  invested  capital  has  already  been  allowed  in  full  in  this 
recommendation. 

It  is,  therefore,  recommended,  in  the  appeal  of  the  M  Company,  that  the 
action  of  the  Income  Tax  Unit  in  reducing  the  appellant's  invested  capital 
as  of  July  — -j  1914,  to  63.29x  dollars  be  reversed  and  that  the  appraisal  as 
of  that  date,  now  filed,  subject  to  check  as  to  individual  items,  be  made  the 
basis  of  the  computation  of  invested  capital. 

1  6 


Supplementary  Bulletin  Rulings. 


2-20-22. 

.S— .Vt8  Ark    .6S.I  .oe'd 


Sec.  326.    \ft:  337.-  1. 


Law  Section  326.-  Invested  Capital  (1918  Act— 11555  ante):  (1921  Act— 
^1035,  post). 

Article  837. — Surplus  and  Undivided  Profits;  Paid-in  Surplus  (Reg.  45, 
^760,  ante) :  (Reg.  62—^1193,  post). 

So  much  of  a  replacement  fund  for  steamers  lost  established  in  accordance 
with  article  50,  Regulations  45,  as  represents  excess  of  the  amount  of  insur- 
ance received  over  the  book  value  of  the  steamers  at  the  time  of  their  de- 
struction may  not  be  included  in  invested  capital  for  the  purpose  of  war  and 
excess  profits  taxes,  even  though  the  interest  received  from  the  investment 
of  such  excess  is  reported  as  taxable  income,  because  such  excess  is  not"paid-in 
or  earned  surplus"  within  the  meaning  of  section  326  of  the  Revenue  Act  of 
1918. 
1 


17-20-882:  A.  R.  R.  70. 

REVENUE  ACT  OF  1917. 

The  principal  stockholder  of  a  close  corporation  invented  a  certain  article 
and  turned  over  to  the  corporation  his  rights  to  the  invention.  After  some 
litigation,  a  patent  was  granted  to  the  inventor  who  turned  it  over  to  the 
corporation  without  consideration.  The  corporation  was  engaged  in  the 
manufacture  and  sale  of  the  article  both  before  and  since  the  patent  was 
issued.  The  questions  presented  are  whether  the  value  of  the  patent  may 
be  included  by  the  corporation  in  its  invested  capital  for  1017,  since  it  was 
not  paid  in  for  stock  but  without  consideration,  and  assessment  of  its  excess 
profits  tax  for  1917  under  section  210  of  the  Revenue  Act  of  1917. 

Section  207  of  the  Revenue  Act  of  1917,  defining  invested  capital,  pro- 
vides for  three  classes  of  such  capital,  following  the  earlier  Act  of  March  3, 
1917,  as  actual  cash  paid  in,  tangible  property  paid  in  for  stock  or  shares, 
and  paid  in  or  earned  surplus.  Then  follows  a  proviso  not  contained  in  the 
Act  of  March  3,  1917,  providing  for  two  classes  of  property  as  to  the  classi- 
fication of  some  items  of  which  there  has  been,  in  the  courts  of  the  country, 
considerable  dispute.  The  first  provides  that  the  actual  cash  value  of  patents 
and  copyrights  paid  in  may  be  included  in  invested  capital  not  to  exceed  the 
par  value  of  stock  issued  therefor;  the  second  provides  that  good  will,  trade- 
marks, trade  brands,  etc.,  may  be  taken  into  invested  capital  only  to  a 
limited  extent  as  intangible  property.  It  will  be  seen  by  this  division  that 
Congress  manifestly  intended  in  the  Revenue  Act  of  1917,  to  classify  patents 
and  copyrights  as  tangible  property  and  trade-marks,  good  will,  and  other 
property  as  intangible;  and  it  also  provided  that  where  patents  were  turned 
in  for  stock  the  figure  at  which  they  could  be  taken  into  invested  capital  is 
the  actual  cash  value  or  the  par  value  of  the  stock  issued  therefor,  whichever 
is  lower,  but  this  does  not  necessarily  preclude  the  recognition  of  actual 
value  of  patents  turned  in  as  paid-in  surplus. 

The  Committee  is  therefore  of  the  opinion  that  under  the  Revenue  Act 
of  1917,  the  corporation  would  be  entitled,  upon  establishing  the  value  of  the 
patent  turned  over  to  the  company  without  consideration,  to  include  such 
value  as  invested  capital.  In  the  present  case,  however,  it  is  apparent  that 
the  inventor  turned  over  to  the  company  the  rights  to  his  invention  long  prior 
to  the  issuance  of  letters  patent  covering  same,  in  fact,  immediately  after  the 
invention  of  the  device.  The  amount  which  could  be  recognized,  therefore, 
as  paid  in  surplus  would  be  the  value  of  the  invention  at  the  time  it  was 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  837.-2. 


turned  over  to  the  company  and  before  commercial  development  rather  than 
its  value  when  letters  patent  were  issued  and  at  which  time  development  had 
proceeded  sufficiently  to  possibly  justify  the  valuation  claimed  by  the  com- 
pany. What  that  value  was  at  the  time  of  the  invention,  is  in  the  judgment 
of  the  Committee,  a  fact  which  can  not  be  satisfactorily  determined,  and  it 
seems  clear  that  it  would  be  impossible  to  prove  a  value  at  that  time  in  excess 
of  the  value  given  to  it  in  practical  effect  by  the  application  of  section  210; 
that  is  to  say,  the  difference  between  the  statutory  capital  and  the  constructed 
capital  under  that  section. 

The  Committee  is  therefore  of  the  opinion  that  the  action  of  the  Income 
Tax  Unit  in  assessing  the  tax  under  the  provisions  of  section  210  was  proper 
and  works  no  injustice  upon  the  taxpayer. 

For  the  same  reasons  that  section  210  was  applied  under  the  1917  Act, 
it  is  recommended  that  the  company  be  assessed  for  1918  and  subsequent 
years  under  the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of  1918. 
2 


19-20-925:  A.  R.  R.  86. 

REVENUE  ACT  OF  1917. 

Held  in  the  appeal  of  the  M  Company  that  a  claim  for  paid-in  surplus  in 
1917  can  not  be  allowed  in  the  case  of  appreciated  value  in  a  leasehold  which  was 
acquired  by  the  company  as  original  lessee  without  cost  and  which  was  not  paid 
in  at  a  fixed  value  for  stock  or  shares. 

The  M  Company  has  appealed  from  the  decision  of  the  Income  Tax  Unit 
in  connection  with  its  income  and  excess  profits  tax  for  1917.  Amended 
returns  were  filed  by  the  company,  in  which  the  invested  capital  for  1917 
was  increased  by  including  therein  as  paid-in  surplus  the  appreciated  value 
of  a  lease,  which  was  acquired  by  the  company  as  original  lessee,  and  which 
was  not  paid  in  for  stock  or  shares  in  such  company.  This  leasehold  was  not 
carried  as  an  asset  bv  the  company,  and  was  not  entered  on  its  books  until 
1918. 

It  appears  that  subsequent  to  the  time  of  filing  its  return,  and  during  the 
early  part  of  1919,  the  company  had  an  appraisal  made  for  the  purpose  of 
fixing  the  value  of  this  leasehold.  This  appraisal  furnishes  estimated  values 
as  at  the  time  of  the  renewal  of  the  lease  in  1916,  and  values  for  years  subse- 
quent thereto.  The  company  claims  in  its  presentation  of  the  case  that 
article  63  of  Regulations  41  permits  the  inclusion  in  invested  capital  as  paid-in 
surplus  the  appreciated  value  of  the  leasehold  as  ascertained  by  the  appraisal. 
The  original  lease,  which  was  acquired  without  cost,  carried  an  option  of 
renewal,  which  was  exercised  by  the  company  in  1916.  This  renewal,  under 
the  option  of  the  original  lease,  was  obtained  without  cost. 

The  term  "invested  capital"  as  used  in  the  excess  profits  tax  law  for  1917 
means  the  invested  capital  of  the  present  owner.  The  starting  point  in  the 
computation  of  invested  capital  is  the  amount  of  cash  and  other  property 
paid  in.  In  the  ascertainment  of  the  correct  invested  capital,  surplus  and 
undivided  profits  are  taken  into  consideration,  and  also  depletion,  deprecia- 
tion, or  obsolescence  of  the  property  originally  acquired  for  cash,  or  for  stock 
or  shares,  or  in  any  other  manner. 

***  The  taxpayer  relies  on  the  provisions  of  article  55  of  Regulations  41, 
reading  as  follows: 

Tangible  property  paid  in  for  stock  or  shares  prior  to  January  1,  1914,  must  be  valued 
at  either  (a)  the  actual  cash  value  of  such  property  on  January  1,  1914,  or  (b)  the  pax 

value  qf  the  stock  or  shares  specifically  issued  therefor,  whichever  is  lower.    This  is  one 


Supplementary  Bulletin  Rulings. 

.•tfrfiiuM  pi!  situ  a  x1*Jn,rn3'<rT"2 


,V£8  .HA    .dSE  .d»8 


Sec.  326.    Art.  837.— .3 


of  the  few  cases  in  which  the  law  permits  allowance  to  be  made  for  appreciation,  and  here 
no  appreciation  can  be  recognized  unless  the  original  stock  or  shares  were  specifically 
issued  in  exchange  for  such  tangible  property. 

Tangible  property  paid  in  for  stock  or  shares  on  or  after  January  1,  1911,  will  betaken 
at  the  actual  cash  value  of  such  property  at  the  time  of  payment,  irrespective  of  the  par 
value  of  the  stock  or  shares. 

The  taxpayer  also  relies  on  the  provisions  of  article  63,  which  reads  as 
follows: 

Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner  of  Internal 
Revenue  that  tangible  property  has  been  conveyed  to  a  corporation  or  partnership  by 
gifr  or  at  a  value,  accurately  ascertainable  or  definitely  known  as  at  the  date  of  conveyance, 
clearly  and  substantially  in  excess  of  the  cash  or  the  par  value  of  the  stock  or  shares  paid 
therefor,  then  the  amount  of  the  excess  shall  be  deemed  to  be  paid  in  surplus.  The  adopted 
value  shall  not  cover  mineral  deposits  or  other  properties  discovered  or  developed  after 
the  date  of  conveyance,  but  shall  be  confined  to  the  value  accurately  ascertainable  or 
definitely  known  at  that  time. 

Evidence  tending  to  support  a  claim  for  a  paid-in  surplus  under  these  circumstances 
must  be  as  of  the  date  of  conveyance,  and  may  consist,  among  other  things,  of  (1)  an 
appraisal  of  the  property  by  disinterested  authorities,  (2)  the  assessed  value  in  the  case  of 
real  estate,  and  (3)  the  market  price  in  excess  of  the  par  value  of  the  stock  or  shares. 

The  Committee  in  the  consideration  of  this  case  has  applied  the  law  to 
the  statement  of  facts  and  is  of  the  opinion  that  the  instant  case  does  not 
fall  within  the  provisions  of  articles  55  and  63  as  contended  by  the  taxpayer. 

The  articles  of  the  regulations  quoted  above  are  specific  and  correctly 
interpret  the  statute.  The  taxpayer,  by  its  admission,  bars  any  claim  for 
paid-in  surplus.  The  company  having  acquired  the  leasehold  as  original 
lessee  without  cost  and  later  renewing  same  without  cost  had  nothing  which 
could  be  paid  in  for  stock  or  shares.  Any  value  appreciation  in  such  lease- 
hold must  be  eliminated  from  the  computation  of  invested  capital. 


40-20-1227:  A.  R.  R.  233. 
REVENUE  ACT  OF  1917. 

The  committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Income  Tax  Unit  in  assessing  additional  tax 
based  upon  the  disallowance  of  a  portion  of  the  company's  claim  for  invested 
capital. 

The  facts  with  regard  to  this  case  appear  to  be  that  the  plant  of  the  M 
Company  is  located  some  miles  from  a  railroad  or  other  transportation  facili- 
ties, and  that  it  is,  therefore,  dependent  for  its  supply  of  raw  material  upon 
the  product  raised  in  the  vicinity.  The  plant  has  a  capacity  of  approximately 
Zy  tons,  which  is  about  the  production  of  the  tributary  territory.  Of  this 
Zy  tons,  y  tons  are  produced  by  several  large  plantation  owners,  the  other  y 
tons  being  produced  by  plantations  owned  by  the  company  itself,  and  by 
small  farmers.  The  transportation  conditions  are  such,  as  before  stated, 
that  the  plant  can  be  operated  successfully  only  if  it  obtains  the  entire  output 
of  the  vicinity. 

In  1912,  the  manager  of  the  corporation  which  has  been  operating 
this  plant  died,  and  some  differences  arose  between  the  large  plantation 
owners  and  the  owners  of  the  plant.  The  plantation  owners  who  were  dis- 
satisfied made  tentative  arrangements  for  the  erection  of  a  smaller  plant 
intended  to  produce  the  finished  article  on  a  co-operative  basis,  only  utilizing 
the  raw  material  which  they  produced.  As  the  old  company  could  not 
operate  economically  upon  what  was  left  of  the  field's  production,  it  became 
at  once  involved  in  financial  difficulties,  with  the  result  that  the  holder  of  a 

.v-::rh/fl  mj^lU'H  '„    .     '    ,.  r. 
Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  837.-4. 


mortgage  on  the  property,  foreclosed  it,  the  old  manufacturing  company 
thus  becoming  defunct.  Negotiations  were  thereupon  opened  between  this 
creditor  and  the  plantation  owners  for  the  sale  of  the  plant  to  a  new  corpora- 
tion to  be  formed  by  them.  These  negotiations  were  finally  completed  by 
the  organization  of  a  company  with  a  capital  stock  of  1  x  dollars,  6x  dollars 
of  which  was  paid  in  in  equal  shares  in  cash  by  the  plantation  owners,  and 
the  other  x  dollars  was  issued  to  the  negotiator  for  his  services  in  organiza- 
tion. The  plant  was  transferred  to  the  new  corporation  in  consideration  of 
the  company's  notes  secured  by  mortgage  upon  the  plant,  and  in  consideration 
of  the  agreement  that  the  owners  would  each  individually  contract  with  the 
new  corporation  to  sell  to  it  all  of  his  product  for  a  period  of  iive  years,  the 
period  during  which  the  purchase  money  notes  would  mature.  It  is  claimed 
that  by  reason  of  the  bringing  together  of  the  plant,  which  shortly  before 
foreclosure  was  appraised  at  200r  dollars,  and  the  contracts  for  raw  material, 
that  the  plant  was  at  once  restored  to  its  appraised  value,  and  that  these 
contracts  made  with  the  company  were  so  closely  related  to  rights  in  the 
tangible  property,  to-wit,  the  plant,  as  to  constitute  contracts  recognizable 
as  tangible  property  within  the  meaning  of  article  811,  justifying  treatment 
of  them  as  paid-in  surplus.  The  difficulty  with  this  argument  is  that  it  is 
based  upon  a  false  premise.  Paid-in  surplus,  as  its  name  implies,  must  be 
some  tangible  property  transferred  from  the  owners  to  a  corporation,  either 
as  a  gift  or  at  a  value  less  than  the  actual  cash  value  of  the  property  trans- 
ferred, and  in  practically  all  cases  where  allowable,  involves  no  substantial 
change  in  beneficial  interest.  In  this  case,  the  plant  itself  was  not  transferred 
to  the  company  as  a  gift  or  for  stock,  but  was  bought  by  the  company  from 
an  owner,  not  a  stockholder  in  the  company,  for  its  notes,  which  notes  have 
subsequently  been  paid  off  through  earnings.  Neither  can  contracts  made 
with  the  company  itself,  and  to  which  it  is  one  of  the  parties,  be  held  to  be 
paid-in  surplus.  Contracts  in  any  event,  and  where  they  may  be  regarded 
under  the  regulations  as  tangible  assets,  can  only  constitute  paid-in  surplus 
if  the  contracts  were  made  between  outside  parties  and  the  rights  of  either 
of  those  parties  is  then  transferred  to  a  corporation  without  adequate  com- 
pensation. 

The  Committee  is,  therefore,  compelled  to  recommend  that  the  claim  for 
paid-in  surplus  be  rejected. 
4 


47-21-1936:    A.  R.  R.  678. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  denying  the  right  to  include  in  the  computation  of  invested  capital 
as  paid-in  surplus  3}?£x  dollars,  representing  claims  owed  to  and  canceled  by 
creditor  stockholders,  be  reversed,  and  accordingly  that  the  taxpayer's  appeal  be 
sustained. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  holding  that  an  item  of 
3}4x  dollars  may  not  properly  be  treated  as  paid-in  surplus  for  the  purpose 
of  computing  invested  capital. 

A  review  of  the  record  in  the  case  discloses  the  following  relevant  facts 
which  do  not  appear  to  be  disputed.  The  M  Company  was  incorporated 
in  190 —  with  a  paid-in  capital  of  5x  dollars,  and  since  that  time  has  under- 
gone no  corporate  change;  and  in  1913  stockholders,  with  claims  amounting 
to  3J4*  dollars  for  goods  and  materials  furnished  to  the  company  in  the  course 
of  business,  canceled  their  claims.  It  appears  that  the  company  was  orig- 
inally organized  in  190 —  by  the  heirs  of  A,  the  founder  of  the  business,  and 


Supplementary  Bulletin  Rulings. 


E8  JiA    .dS£  .098 


Sec.  326.    Art.  837.-5. 


that  his  son  had  control  of  the  business  until  1913;  further,  that  the  com- 
pany operated  consistently  at  a  loss  up  to  1913,  when  it  was  placed  in  the 
hands  of  a  receiver,  at  which  time  it  was  rehabilitated  without  corporate 
reorganization  through  the  transfer  of  capital  stock  to  creditors.  It  is  shown 
that  creditors'  claims  amounting  to  334*  dollars  were,  as  before  stated,  can- 
celed, and  at  the  same  time  there  was  a  transfer  to  said  creditors  o  3x  dol- 
lars par  value  of  the  company's  capital  stock  from  the  members  of  A's  family; 
also  further  shares  were  transferred  and  sold  to  obtain  financial  aid  neces- 
sary to  place  the  company  and  its  business  on  a  working  basis.  As  a  result 
of  such  transfers,  the  control  of  the  corporation  since  1913  has  been  in  the 
hands  of  B  and  C,  of  the  O  Company.  These  two  individuals,  it  appears, 
were  the  principal  creditors  of  the  appellant  company  at  the  time  receiver 
was  appointed. 

It  is  the  claim  of  the  corporation  that  the  amount  of  debts  so  canceled 
constitutes  a  contribution  of  new  capital  invested  by  the  creditors  to  the 
extent  of  their  canceled  claims. 

The  view  expressed  by  the  Unit  in  its  memorandum  of  February  16,  1921, 
is  substantially  as  follows: 

Inasmuch  as  the  creditors  received  stock  for  the  cancellation  of  their  claims,  it  was 
the  opinion  of  the  representatives  of  the  Bureau  that  the  amount  involved  did  not  con- 
stitute paid-in  surplus  within  the  meaning  of  the  law. 

Upon  consideration  of  the  foregoing,  it  appears  to  the  Committee  that 
at  a  time  just  prior  to  the  receivership  the  appellant  company's  invested 
capital  was  5x  dollars,  provided  that  the  par  value  of  the  total  capitalization 
of  the  company  was  fully  paid  in  at  the  time  of  organization,  and  this  is  true 
despite  the  fact  that  at  a  time  just  prior  to  the  receivership  the  company 
showed  a  large  operating  deficit.  In  this  connection  attention  is  called  to 
the  fact  that  the  Bureau  has  consistently  held  that  the  original  amount  of 
capital  paid  in  for  stock  subscriptions  shall  never  be  reduced  for  purposes  of 
computing  invested  capital  by  reason  of  an  operating  deficit.  Conceded, 
then,  that  the  invested  capital  at  a  time  just  prior  to  the  receivership  in 
1913  was  5x  dollars,  what  effect,  if  any,  had  the  stock  transactions  between 
stockholders  upon  invested  capital?  The  Committee  can  see  no  change 
in  invested  capital  resulting  thereby.  The  transfer  of  stock  between  the 
several  stockholders  of  the  corporation  or  between  stockholders  and  persons 
who  have  not  prior  to  such  action  been  stockholders,  whether  for  a  valuable 
consideration  in  excess  of  or  less  than  the  par  value  or  market  value  of  the 
corporate  stock,  or  for  no  consideration  whatsoever,  can,  in  the  opinion  of 
the  Committee,  have  no  effect  upon  the  measure  to  be  assigned  to  the  original 
paid-in  capital  for  the  purpose  of  computing  invested  capital. 

It  is  pointed  out  in  the  instant  case  that  the  principal  creditors  of  the 
corporation  at  the  time  of  the  receivership  received  by  transfer  from  the 
majority  stockholders  3x  dollars  par  value  of  the  capital  stock.  It  does  not 
appear  whether  a  consideration  of  any  description  entered  into  this  transac- 
tion. However,  the  Committee  can  see  no  possible  effect  which  such  transac- 
tion could  have  upon  the  original  paid-in  capital  for  the  purpose  of  deter- 
mining invested  capital. 

With  respect  to  the  cancellation  of  the  claims  of  creditors  who  were 
themselves  stockholders  and  assumed  control  by  reason  of  the  transfer  afore- 
said, it  is  the  opinion  of  the  Committee  that  such  action  clearly  resulted  in 
an  additional  contribution  to  capital  which  assumed  the  character  of  paid- 
in  surplus.  The  situation  seems  to  be  that  these  stockholders  made  numer- 
ous advances  either  in  money  or  money's  worth  to  the  corporation  which  gave 
rise  to  an  existing  liability  constituting  a  charge  against  the  corporate  assets. 


Supplementary  Bulletin  Ruling*. 


.fc— .V€8  JiA    .dS6  .992 


Sec.  326.   Art.  837  —6. 


By  the  cancellation  of  such  claims  a  condition  arose  whereby  the  corporate 
liabilities  were  correspondingly  reduced  and  the  assets  correspondingly 
increased. 

It  is  true  that  this  action  on  the  part  of  said  stockholders  effected  no 
change  in  the  corporate  surplus  for  the  reason  that  an  operating  deficit 
existed.  However,  the  applicable  rule  in  this  connection  is  found  in  article 
860  of  Regulations  45,  which  provides  in  part  that: 

Capital  or  surplus  actually  paid  in  is  not  required  to  be  reduced  because  of  an  impair- 
ment of  capital  in  the  nature  of  an  operating  deficit. 

A  careful  study  of  the  above  matters  leads  the  Committee  to  conclude 
that  the  cancellation  by  stockholders  of  3^x  dollars  of  claims  owing  to 
such  stockholders  resulted  in  effect  in  an  additional  contribution  to  the 
corporation's  capital  account  which  assumed  for  the  purposes  of  invested 
capital  the  nature  of  paid-in  surplus;  further,  that  this  is  true  regardless 
of  any  transfers  of  stock  as  between  the  stockholders  which  may  or  may 
not  have  been  a  consideration  moving  to  the  cancellation  of  said  claims. 

It  follows  obviously  that  the  corporation's  invested  capital  is  at  least 
the  5x  dollars  fully  paid-up  capital  as  it  existed  just  prior  to  the  receivership, 
plus  the  3j<£#  dollars  paid-in  surplus,  which  was  effected  by  reason  of  the 
cancellation  of  the  stockholding  creditors'  claims,  or  a  total  of  8%x  dollars.- 
Therefore,  it  is  recommended  in  the  appeal  of  the  M  Company  that  the 
action  of  the  Income  Tax  Unit  in  denying  the  right  to  include  in  the  com- 
putation of  invested  capital  as  paid-in  surplus  2>}/ix  dollars  representing  claims 
owed  to  and  canceled  by  creditor  stockholders  be  reversed,  and  accordingly 
that  the  taxpayer's  appeal  be  sustained. 


101 


Supplementary  Bulletin  Rulings 


2-20-22. 

Sec.  326.    Art.  838.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act- 
ios, post). 

Article  838. — Surplus  and  Undivided  Profits;  Earned  Surplus  (Reg.  45 — 
<[761,  ante) :  (Reg.  62— 1fll94,  post). 

1-19-121:  O.  D.  82. 

Good  will  created  to  offset  impaired  capital  has  no  effect  on  invested 
capital.  Subsequent  earnings  must  be  used  first  to  restore  impaired  capital; 
excess  may  be  added  to  original  investment  as  invested  capital. 

1 


1-19-130:  O.  D.  91. 

Any  portion  of  surplus  or  undivided  profits  representing  unearned  interest 
or  discount  which  has  not  been  reported  as  taxable  income,  must  be  excluded 
in  the  computation  of  invested  capital  for  war  profits  and  excess  profits 
purposes. 
2 


1-19-131:  O.  D.  92. 

If  a  taxpayer  reports  profits  on  installment  sales  on  the  basis  of  the  pro- 
portionate part  of  each  installment  received  representing  profit,  his  surplus 
account  as  at  the  beginning  of  the  taxable  year  must  be  reduced  in  computing 
invested  capital  to  the  extent  that  the  surplus  account  includes  profit  on 
such  sales  which  has  not  been  reported  as  taxable  income. 
3 


22-19-538:  T.  B.  R.  67. 

Revenue  Act  of  1917. — Treatment,  for  the  purpose  of  determining  the  invested 
capital  of  a  domestic  corporation,  of  shares  of  stock  in  a  foreign  corporation  de- 
riving no  income  from  sources  within  the  United  States,  acquired  for  cash  and  in 
exchange  for  a  patent  right. 

The  M  Company,  a  domestic  corporation,  organized  the  O  Company  a 
foreign  corporation.  The  O  Corporation  issued  stock  of  the  par  value  of  10* 
dollars  to  the  M  Corporation  for  5x  dollars  cash  and  for  the  right  to  use  cer- 
tain patents,  which  right  was  worth  at  least  5*  dollars.  None  of  the  income 
of  the  O  Corporation  for  the  year  1917  was  derived  from  sources  within  the 
United  States.  The  question  is  as  to  the  method  of  treatment  of  the  shares 
of  stock  of  the  O  Corporation  in  determining  the  invested  capital  of  the  M 
Corporation  for  the  year  1917,  under  the  Revenue  Act  of  that  year. 

In  computing  the  surplus  and  undivided  profits  of  the  M  Company 
the  shares  of  stock  in  the  O  Corporation  are  to  be  valued  at  cost,  with  proper 
adjustments,  if  any.  (The  method  of  computing  surplus  and  undivided 
profits  under  the  Revenue  Act  of  1918,  laid  down  in  article  838  of  Regulations 
45,  is  equally  applicable  to  the  computation  of  surplus  and  undivided  profits 
under  the  Revenue  Act  of  1917.)  In  the  cost  of  the  shares  of  stock  of  the 
O  Corporation  are  to  be  included  the  cash  payment  of  5*  dollars,  and  the 
patent  right  at  its  value  at  the  time  of  the  exchange,  which  value  can  not  be 
taken  as  exceeding  the  value  of  the  shares  of  stock  received  in  exchange 
therefor.    The  effect  of  the  transaction  may  be  to  increase  or  decrease  the 


Supplementary  Bulletin  Rulings. 


.1    .SIB  AtA    .dS£  .398 


Sec.  320.    Art.  838.-2. 


amount  of  the  surplus  and  undivided  profits  of  the  M  Corporation,  though 
the  assets  which  ultimately  give  value  thereto;  to  wit,  the  cash  and  the  patent 
right,  remain  the  same.  Such  increase  or  decrease,  however,  is  due  to  such  a 
change  in  the  situation  as  amounts  to  a  realization  of  gain  or  loss,  and  any 
gain  so  realized  is  earned  surplus,  as  any  loss  so  realized  effects  a  decrease  in 
earned  surplus.  (See  Art.  1565,  Regs.  45,  as  amended  by  T.  D.  2924.) 
Since  earned  surplus  is  considered  in  determining  invested  capital  regardless 
of  the  time  when  it  was  earned,  it  is  immaterial  that  the  gain  or  loss  realized 
from  the  transaction  was  due  to  appreciation  or  depreciation  which  in  part 
occurred  prior  to  March  1,  1913.  In  this  respect  the  principles  applicable 
to  the  computation  of  invested  capital  differ  from  those  applicable  to  the 
determination  of  taxable  income  for,  while  such  part  of  the  realized  appre- 
ciation, if  any,  as  is  attributable  to  the  period  after  March  1,  1913,  is  taxable 
income,  such  part  as  is  attributable  to  the  period  before  March  1,  1913, 
though  considered  in  the  computation  of  invested  capital,  escapes  taxation. 

The  shares  of  stock  of  the  O  Corporation  constitute  "admissible  assets" 
of  the  M  Corporation  for  the  year  1917.  The  0  Corporation  derived  no 
income  from  sources  within  the  United  States,  and  consequently  was  not 
subject  to  income  tax  under  Title  I  of  the  Revenue  Act  of  1916,  as  amended 
by  the  Revenue  Act  of  1917.  (Sec.  10.)  The  dividends  received  by  the  M 
Corporation  upon  its  stock  in  the  O  Corporation  should,  therefore,  be  in- 
cluded in  the  income  of  the  M  Corporation  for  purposes  of  the  excess  profits 
tax.  They  are  not  "amounts  received  *  *  *  as  dividends  upon  the  stock 
*  *  *  of  other  corporation  *  *  *  subject  to  the  tax  imposed  by  Title  I  of 
such  act  of  September  8,  1916,"  within  the  meaning  of  section  206  of  the 
Revenue  Act  of  1917  which  authorized  the  deduction  of  such  amounts  from 
the  income  of  a  domestic  corporation  in  order  to  determine  the  amount  of 
income  of  such  corporation  subject  to  the  excess  profits  tax.  Consequently, 
the  stock  of  the  O  Corporation  does  not  constitute  "inadmissible  assets" 
under  the  provision  of  section  207  of  Title  II  of  the  Revenue  Act  of  1917  that — 

As  used  in  this  title  "invested  capital"  does  not  include  stocks?  bonds  (other  than  obli- 
gations of  the  United  States),  or  other  assets,  the  income  from  which  is  not  subject  to  the 
tax  imposed  by  this  title. 

It  is  held,  therefore,  that  for  the  purpose  of  determining  the  invested 
capital  of  the  M  Corporation  (a)  in  computing  its  surplus  and  undivided 
profits  its  shares  of  stock  in  the  0  Corporation  are  to  be  valued  at  cost  with 
proper  adjustments,  if  any,  such  cost  being  5*  dollars  plus  the  value  at  the 
time  of  the  exchange  therefor  of  the  patent  rights  owned  by  the  M  Corpora- 
tion; and  (b)  such  shares  of  stock  are  to  be  regarded  as  "admissible  assets." 


18-20-906:  A.  R.  R.  71. 

The  Committee  is  of  the  opinion  that  appreciation  is  in  no  event  a  part 
of  earned  surplus  and  therefore  can  not  offset  depreciation  in  the  value  of 
assets  through  wear,  tear,  and  exhaustion.  Depreciation  must  first  be 
figured  in  order  to  determine  true  earned  surplus.  In  other  words,  earned 
surplus  is  believed  to  consist  of  realized  gains  or  profits  and  while  such  realized 
g^ins  or  profits  must  be  reduced  by  any  depreciation  in  value  through  use 
or  exhaustion  of  the  assets  in  which  they  are  invested,  any  appreciation  in 
value  of  those  assets  which  is  not  yet  realized  can  not  be  taken  into  considera- 
tion for  the  purpose  of  offsetting  such  decrease. 

A  corporation  owns  patents  covering  certain  inventions  made  by  its  em- 


Supplf-mpntary  Bulletin  Rulings. 


Sec.  326.    Art.  838.-3. 


ployees.  The  cost  of  securing  the  patents  and  the  salaries  of  the  employees 
whose  inventions  were  patented  were  paid  by  the  corporation  and  charged 
to  expense  account.  The  corporation  may  not  include  in  its  invested  capital 
any  amount  representing  either  the  cost  of  the  patents  or  appreciation  in 
their  value. 
6 


29-20-1081:  A.  R.  M.  71. 

Advice  is  requested  as  to  the  proper  treatment  of  credit  balances  of  stock- 
holders' accounts  in  the  case  of  the  M  Company. 

The  facts  appear  to  be  that  no  formal  declaration  of  dividends  has  been 
made  by  this  company,  but  a  book  entry  has  been  made  noting  and  crediting 
to  each  stockholder  the  share  of  each  year's  earnings  to  which  he  would  be 
entitled  under  a  dividend  declaration,  the  individual  shareholders  having 
returned  their  shares  of  such  earnings  in  their  personal  returns  and  paid  the 
income  tax  thereon. 

Reference  is  made  to  Appeals  and  Review  Recommendation  102  as  sup- 
porting the  view  that  balances  to  the  credit  of  individual  stockholders  are 
not  invested  capital.  In  that  case,  however,  the  balances  standing  to  the 
credit  of  individual  stockholders  were  not  in  proportion  to  their  stockholdings, 
whereas  it  appears  in  the  present  case  each  stockholder  has  been  credited  with 
the  amount  of  the  earnings  attributable  to  his  stock.  No  interest  has  been 
or  is  to  be  paid  upon  the  amounts  standing  to  the  credit  of  these  stockholders, 
no  formal  declaration  of  a  dividend  has  been  made  by  the  board  of  directors, 
and  it  appears  that  under  the  State  law  the  stockholders  do  not  rank  with 
general  creditors  with  respect  to  such  credits. 

Under  these  circumstances  the  case  is  clearly  distinguishable  from  the 
one  covered  by  Recommendation  102,  and  in  the  judgment  of  the  Committee 
the  amounts  so  credited  should  be  regarded  as  being  a  part  of  the  earned  sur- 
plus of  the  corporation  to  be  included  in  invested  capital. 
6 


22-21-1667:  A.  R.  R.  517. 

REVENUE  ACT  OF  1917. 
Recommended,  in  the  appeal  of  the  M  Company,  that  a  mining  corporation, 
in  computing  its  invested  capital  for  the  purpose  of  the  war  excess  profits  tax, 
be  required  to  reduce  its  earned  surplus  by  the  amount  of  its  sustained  depletion 
to  the  beginning  of  the  year  for  which  the  tax  is  computed;  and,  under  normal 
conditions,  to  inventory  its  metals  on  hand  and  not  sold  at  the  close  of  its  annual 
accounting  period,  at  cost  or  cost  or  market,  whichever  is  lower. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  holding  that  the  surplus  earnings 
of  the  taxpayer  at  the  beginning  of  the  taxable  year  1917,  amounting  to 
I6}^x  dollars,  which  the  company  claimed  as  a  part  of  its  invested  capital 
for  the  taxable  year,  and  which  represented  the  undistributed  accumulations 
of  mining  and  incidental  profits  during  several  years,  are  overstated  to  the 
extent  of  9^2*  dollars;  and  from  the  expressed  purpose  of  the  Unit  to  revise 
the  valuation  of  the  taxpayer's  inventory  of  metals  on  hand  at  the  beginning 
of  the  year  1917. 

The  questions  involved  being  wholly  ones  of  law,  the  case  was  referred  to 
the  Solicitor  of  Internal  Revenue  for  his  consideration,  and  his  conclusions 
are  quoted  below: 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  838.-4. 


You  present  for  consideration  the  questions  whether  the  M  Company  is  re- 
quired, in  computing  its  invested  capital  for  the  purpose  of  the  war  excess 
profits  tax  imposed  by  the  Revenue  Act  of  1917,  to  reduce  the  amount  of  its 
earned  surplus  by  the  amount  of  any  sustained  depletion  to  the  beginning  of 
the  year  for  which  the  tax  is  computed,  and  whether  it  is  permitted  to  inven- 
tory metals  on  hand  at  the  date  of  the  inventory,  and  not  sold,  at  the  selling 
price. 

Section  207  of  the  Revenue  Act  of  1917  provides  in  part  that: 

As  used  in  this  title  "invested  capital"  does  not  include  stocks,  bonds  (other  than 
obligations  of  the  United  States),  or  other  assets,  the  income  from  which  is  not  subject  to 
the  tax  imposed  by  this  title  nor  money  or  other  property  borrowed,  and  means,  subject 
to  the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  (2)  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash  for  stock  or  snares  in  such  corpora- 
tion or  partnership  at  the  time  of  such  payment  (but  in  case  such  tangible  property  was 
paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of  such 
property  as  of  January  first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed  the 
par  value  of  the  original  stock  or  shares  specifically  issued  therefor),  and  (3)  paid  in  or 
earned  surplus  and  undivided  profits  used  or  employed  in  the  business,  exclusive  of  un- 
divided profits  earned  during  the  taxable  year:    *    *  * 

Section  10  of  the  Revenue  Act  of  1916,  as  amended  by  section  1206  of  the 
Revenue  Act  of  1917,  provides: 

(a)  That  there  shall  be  levied,  assessed,  collected,  and  paid  annually  upon  the  total 
net  income  received  in  the  preceding  calendar  year  from  all  sources  by  every  corporation 
*    *    *    organized  in  the  United  States,  no  matter  how  created  or  organized,    *    *  * 
a  tax  of  two  per  centum  upon  such  income;  and  a  like  tax  shall  be  levied,  assessed,  collected,  • 
and  paid  annually  upon  the  total  net  income    *    *  * 

Section  13  (d)  of  the  Revenue  Act  of  1916,  which  was  not  modified  by  the 
Revenue  Act  of  1917,  provides  that: 

A  corporation,  joint-stock  company  or  association,  or  insurance  company,  keeping 
accounts  upon  any  basis  other  than  that  of  actual  receipts  and  disbursements,  unless  such 
other  basis  does  not  clearly  reflect  its  income,  may,  subject  to  regulations  made  by  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
make  its  return  upon  the  basis  upon  which  its  accounts  are  kept,  in  which  case  the  tax  shall 
be  computed  upon  its  income  as  so  returned. 

The  X  mine  was  discovered  prior  to  1883.  The  N  company  was  organized 
with  a  capitalization  of  3*  dollars  to  develop  and  operate  the  mine.  In  1886 
additional  capital  was  put  into  the  development  of  the  mine  and  from  that 
time  it  has  proved  immensely  profitable,  in  1889  the  profits,  without  allowing 
for  depletion,  amounting  to  approximately  4x  dollars.  In  1900,  the  M 
Company  acquired,  through  purchase,  the  mines  and  works  of  the  N  Com- 
pany; also  the  entire  issue  of  the  stocks  and  bonds  of  the  O  Company; 
also  all  of  the  real  and  personal  property  of  the  N  Company,  comprising  lands, 
mining  claims,  buildings,  machinery,  tools,  ore  on  dumps  and  in  the  works, 
and  supplies  and  stores  of  all  kinds;  also  the  right  to  receive  what  was  paid 
in  the  distribution  of  the  remaining  assets  of  the  N  Corporation  in  disso- 
lution. 

The  consideration  paid  by  the  M  Company  for  the  above  property  was 
(a)  the  issue  and  delivery  of  its  capital  stock  consisting  of  y  shares,  par  value  of 
$10  per  share,  (b)  3x  dollars  of  its  income  bonds  in  exchange  for  the  transfer 
of  x  dollars  of  the  cash  assets  of  the  N  Corporation,  and  (c)  the  assumption  of 
all  contracts,  debts,  and  obligations  of  the  N  Corporation,  amounting,  as 
shown  by  the  accounts,  to  1-7*  dollars. 

Upon  the  evidence  filed  the  Income  Tax  Unit  allowed  the  M  Company  a 
paid-in  surplus  as  of  the  date  of  its  organization  in  1900  of  23^2-v  dollars, 
giving  it  an  invested  capital  of  263^2*  dollars.  At  the  beginning  of  the  taxable 
year  1917  the  company  had  on  hand  surplus  earnings  to  the  amount  of  \6l/2X 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  838  —5. 


dollars.  In  its  return  for  the  year  1917  the  company  deducted  from  its  in- 
vested capital  the  sum  of  V/^x  dollars,  being  the  amount  of  the  deductions 
for  depletion  allowed  it  under  the  Act  of  October  3,  1913,  and  the  Act  of 
September  8,  1916.  The  Bureau  claims  that  the  amount  of  the  deductions 
should  be  increased  by  9%x  dollars,  making  a  total  deduction  of  llx  dollars, 
the  amount  of  the  sustained  depletion  from  the  date  of  the  acquisition  of  the 
property  to  1917,  based  upon  the  original  capital  investment  value  of  26}/2X 
dollars. 

At  the  close  of  the  year  1917  the  M  Company  had  on  hand  some  20z 
pounds  of  metals  produced  during  that  year,  which  it  valued  on  a  basis  of 
cost  of  production.  At  the  close  of  the  year  1916  the  company  had  on  hand 
some  14z  pounds  of  metals  ready  for  sale,  some  of  which  had  already  been  sold 
for  future  delivery,  and  following  the  method,  which  it  alleges  it  had  con- 
sistently followed  since  1902,  it  valued  all  such  metals  in  its  closing  inventory 
for  the  year  1916  at  the  prices  actually  obtained  for  the  metals  sold  (about  40 
per  cent  of  the  whole),  and  the  prices  which,  it  was  estimated,  could  be 
counted  upon  for  the  remainder  of  such  metals,  less  the  cost  of  marketing. 

In  making  its  return  for  1917  the  company  protested  against  being 
required  to  value  at  cost  its  inventory  of  bullion  and  contended  that  it  should 
be  allowed  to  continue  its  long  established  accounting  method  and  value  its 
inventory  of  metals  on  hand  at  the  end  of  the  year  1917  on  the  basis  of  the 
value  to  a  going  concern,  to  wit,  at  prevailing  selling  prices. 

The  questions  presented  will  be  considered  in  the  order  in  which  they  were 
stated. 

Article  42  of  Regulations  41,  relative  to  war  excess  profits  tax  imposed  by 
the  Revenue  Act  of  1917,  provides: 

The  term  "invested  capital"  as  used  in  the  excess  profits  tax  law  means  the  invested 
capital  of  the  present  owner.  The  basis  or  starting  point,  in  the  computation  of  invested 
capital  is  found  in  the  amount  of  cash  and  other  property  paid  in,  the  original  values  of  such 
other  property  being  determined  in  accordance  with  the  rules  laid  down  in  these  regulations. 
But  the  computation  does  not  stop  with  such  original  entries  or  amounts;  it  must  take 
properly  into  account  the  surplus  and  undivided  profits.  In  the  computation  of  surplus 
and  undivided  profits,  however,  full  recognition  must  first  be  given  to  expenses  incurred 
and  losses  sustained  from  the  original  organization  of  the  business  concern  down  to  the 
taxable  year,  including  among  such  expenses  and  losses  a  reasonable  allowance  for  depletion, 
depreciation,  or  obsolescence  of  property  originally  acquired  for  cash  or  for  stock  or  shares 
or  in  any  other  manner.    *    *  *. 

Article  64  of  Regulations  41  provides  that: 

Where  through  failure  to  provide  for  depletion,  depreciation,  obsolescence,  or  other 

expenses  or  losses,  or  where  for  any  other  cause  or  reason  the  books  of  account  of  the 

taxpayer  do  not  show  the  true  paid-in  or  earned  surplus  and  undivided  profits,  in  the 

computation  of  invested  capital  such  adjustments  shall  be  made  as  are  necessary  to  arrive 

at  a  statement  of  the  correct  amount. 

*  *  *  *  * 

(5)  The  taxpayer  shall  also  show  that  adequate  provision  has  been  made  for  the 
depletion,  depreciation,  or  obsolescence  of  such  of  the  assets  so  acquired  as  are,  under  the 
rulings  of  the  department,  subject  to  recognized  depreciation. 

Regulations  45  (1920  edition),  construing  the  very  similar  provision  of  the 
Revenue  Act  of  1918,  provide  (article  838): 

Only  true  earned  surplus  and  undivided  profits  can  be  included  in  the  computation  of 
invested  capital,  and  if  for  any  reason  the  books  do  not  properly  reflect  the  true  surplus 
such  adjustments  must  be  made  as  are  necessary  in  order  to  arrive  at  the  correct  amount, 
in  the  computation  of  earned  surplus  and  undivided  profits  full  recognition  must  first  be 
given  to  all  expenses  incurred  and  losses  sustained  from  the  original  organization  of  the 
corporation  down  to  the  taxable  year,  including  among  such  expenses  and  losses  reasonable 
allowances  for  depreciation,  obsolescence,  or  depletion  of  property  (irrespective  of  the 
manner  in  which  such  property  was  originally  acquired),  and  for  the  amortization  of  any 
discount  on  its  bonds.  There  can,  of  course,  be  no  earned  surplus  or  undivided  profits 
until  any  deficit  or  impairment  of  paid-in  capital  due  to  depletion,  depreciation,  expense, 
osses,  or  any  other  cause  has  been  made  good.    *    *  *. 

Supplementary  Bulletin  Rulings- 


Sec.  326.    Art  838.-6. 


Article  839  of  Regulations  45  (1920  edition)  further  provides  that: 
Depletion,  like  depreciation,  must  be  recognized  in  all  cases  in  which  it  occurs. 
Depletion  attaches  to  each  unit  of  mineral  or  other  property  removed,  and  the  denial  of  a 
deduction  in  computing  net  income  under  the  Act  of  August  5,  1909,  or  the. limitation  upon 
the  amount  of  the  deduction  allowed  under  the  Act  of  October  3,  1913,  does  not  relieve 
the  corporation  of  its  obligation  to  make  proper  provision  for  depletion  of  its  property  in 
computing  its  surplus  and  undivided  profits.    *    *  *. 

This  article  is  equally  applicable  under  the  Act  of  1917. 

It  is  contended  by  the  taxpayer  that,  owing  to  the  peculiar  character  of 
mining  properties,  there  is  no  depletion  so  long  as  "discovery  and  development 
outrun  depletion,"  and  that  any  actual  prior  depletion  is  taken  care  of  by  the 
provision  for  the  valuation  of  tangible  property  paid  in  as  of  January  1,  1914. 

The  peculiar  character  of  mining  property  was  well  stated  in  Stratton's 
Independence  v.  Howbert,  231  U.  S.  399,  413,  as  follows: 

The  peculiar  character  of  mining  property  is  sufficientlyobvious.  Prior  to  development 
it  may  present  to  the  naked  eye  a  mere  tract  of  land  with  barren  surface,  and  of  no  practical 
value  except  for  what  may  be  found  beneath.  Then  follow  excavation,  discovery,  develop- 
ment, extraction  of  ores,  resulting  eventually,  if  the  process  be  thorough,  in  the  complete 
exhaustion  of  the  mineral  contents  so  far  as  they  are  worth  removing.  Theoretically,  and 
according  to  the  argument,  the  entire  value  of  the  mine,  as  ultimately  developed,  existed 
from  the  beginning.  Practically,  however,  and  from  the  commercial  standpoint,  the  value 
— that  is,  the  exchangeable  or  market  value — depends  upon  different  considerations. 
Beginning  with  little,  when  the  existence,  character,  and  extent  of  the  ore  deposits  are 
problematical,  it  may  increase  steadily  or  rapidly  so  long  as  discovery  and  development 
outrun  depletion,  and  the  wiping  out  of  the  value  by  the  practical  exhaustion  of  the  mine 
may  be  deferred  for  a  long  term  of  years. 

This  statement  contains  the  answer  to  the  contention  of  the  taxpayer. 
The  reason  that  in  the  case  of  mines  the  Supreme  Court  has  consistently  held 
that  no  deduction  for  depletion  or  depreciation  in  computing  net  income  can  be 
allowed,  in  the  absence  of  statutory  authority,  is  that  by  reason  of  the  fact 
that  discovery  and  development  may  outrun  depletion  there  is  not  necessarily 
any  actual  decrease  in  the  value  of  the  taxpayer's  property,  and,  therefore,  the 
entire  net  receipts  may  well  be  considered  income.  The  rule  is  not  new  but 
has  come  down  to  us  from  the  common  law  of  England.  This,  however,  does 
not  negative  the  fact  that  the  removal  of  each  ton  of  ore  depletes  pro  tanto  the 
ore  originally  known  to  exist  in  the  mine  and  which  was  originally  valued. 
The  maintenance  or  increase  of  the  original  value  is  solely  due  to  the  fact  that 
the  loss  of  value  through  depletion  is  equalled  or  exceeded  by  the  appreciation 
in  value  through  discovery  or  development.  To  treat  the  entire  net  income  as 
earnings  and  as  constituting  earned  surplus  in  the  succeeding  year  when  not 
distributed  by  the  company  would,  therefore,  to  the  extent  of  the  depletion 
actually  sustained  during  the  year,  be  to  permit  the  inclusion  of  appreciation 
in  the  value  of  the  mine,  by  reason  of  development  and  discovery,  in  invested 
capital,  a  thing  which  is  not  contemplated  by  the  statute  nor  permitted  by  the 
regulations.  This  was  clearly  pointed  out  in  Tax  Reviewer's  Memorandum 
of  January  29,  1919,*  approved  and  followed  in  Law  Opinion  753  (not  pub- 
lished in  the  Bulletin  Service). 

While  the  provision  in  section  207(a)  for  the  inclusion  in  invested  capital 
of  the  actual  cash  value  as  of  January  1,  1914,  of  tangible  property  paid  in 
prior  to  that  date  permits  the  inclusion  of  appreciation  up  to  the  par  value  of 
the  capital  stock  for  which  such  property  was  paid  in  (see  article J55,  Regu- 
lations 41),  it  clearly  contemplates  that  in  valuing  the  property  as  of  that 
date  any  depletion  or  depreciation  shall  have  been  made  up  out  of  earnings, 
and,  therefore,_such  a  valuation  does  not  involve  a^second  deduction  for  de- 
pletion.  NHflfftfSfC  IVfcf  <*>'■  8*»  ^  J9***?  *P*>-Z      ^T-'5?rV::  • 

Regulations  33,^revised,  construing  the^Revenue  Actjof^^  as'amended 
by  the  Revenue  Act  of  1917,  contains  no  provision  relating  to  inventories  of 


Supplementary  Bulletin  Ruling*. 


4-19-22. 

Sec.  326.    Art.  833.-7. 

mining  companies,  but  article  91  governing  inventories  by  manufacturing 
corporations,  to  which  mining  companies  are  closely  analagous,  provides  that: 
Gross  income  for  the  purpose  of  returns  of  manufacturing  companies  shall  consist  of  the 
total  sales  plus  the  inventory  at  the  end  of  the  year  less  the  sum  of  the  cost  of  goods  or 
materials  purchased  during  the  year  and  the  inventory  at  the  beginning  of  the  year.  In- 
structions as  to  how  inventories  shall  be  taken  will  be  included  in  special  regulations  to  be 
furnished  upon  application  to  the  collector  of  internal  revenue    *    *  *. 

The  special  regulations  referred  to  are  contained  in  Treasury  Decision 
2609,  which  provides  in  part  as  follows: 

(1)  For  the  purposes  of  income  and  excess  profits  tax  returns,  inventories  of  merchandise 
etc.,  and  of  securities  will  be  subject  to  the  following  rules: 

A.  Inventories  of  supplies,  raw  materials,  work  in  process  of  production,  and  unsold 
merchandise  must  be  taken  either  (a)  at  cost  or  (b)  at  cost  or  market  price,  whichever  is 
lower,  provided  that  the  method  adopted  must  be  adhered  to  in  subsequent  years,  unless 
another  be  authorized  by  the  Commissioner  of  Internal  Revenue. 

The  regulations  relating  to  inventories  under  the  Revenue  Act  of  1918 
(Regulations  45,  1920  edition),  are  much  more  extensive  but  are  general  and 
equally  applicable  under  the  Acts  here  considered.  Article  1581  of  these 
regulations  provides  in  part  that: 

Title  to  the  merchandise  included  in  the  inventory  should  be  vested  in  the  taxpayer 
and  goods  merely  ordered  for  future  delivery  and  for  which  no  transfer  of  title  has  been 
effected  should  be  excluded.  The  inventory  should  include  merchandise  sold  but  not 
shipped  to  the  customer  at  the  date  of  the  inventory,  together  with  any  merchandise  out 
upon  consignment,  but  if  such  goods  have  been  included  in  the  salet  of  the  taxable  year  they 
should  not  be  taken  in  the  inventory.    *    *  * 

Article  1582  provides  that: 

Inventories  must  be  valued  at  (a)  cost  or  (b)  cost  or  market,  as  defined  in  article  1584 
as  amended,  whichever  is  lower.    *    *  * 

Article  1584  provides  that: 

Under  ordinary  circumstances,  "market"  means  the  current  bid  price  prevailing  at 
the  date  of  the  inventory  for  the  particular  merchandise  in  the  volume  in  which  ordinarily 
purchased  by  the  taxpayer,  and  is  applicable  in  the  cases  (a)  of  goods  purchased  and  on  hand, 
and  (b)  of  basic  elements  of  cost  (materials,  labor  and  burden),  in  goods  in  process  of  manu- 
facture and  in  finished  goods  on  hand;  exclusive,  however,  of  goods  on  hand  or  in  process  of 
manufacture  for  delivery  upon  firm  sales  contracts  at  fixed  prices  entered  into  before  the 
date  of  the  inventory,  which  goods  must  be  inventoried  at  cost.    *    *  * 

This  article  also  provides  for  valuing  goods  in  process  of  manufacture  and 
finished  goods  on  hand  at  sales  price  where  "owing  to  abnormal  conditions,  the 
taxpayer  has  regularly  sold  such  merchandise  at  prices  lower  than  the  current 
bid  price  as  above  defined."  But  this  provision  can  have  no  application  in  the 
instant  case  since  the  evidence  shows  that  the  M  Company  at  the  close  of  the 
year  1917  was  selling  its  copper  at  prices  which  included  abnormally  large 
profits. 

Under  these  regulations  a  mining  company  is  required  to  inventory  all 
metals  on  hand  at  the  date  of  the  inventory,  including  goods  sold  but  not 
shipped  to  customers,  at  cost,  or  cost  or  market  whichever  is  lower,  except  in 
the  case  of  metals  on  hand  for  delivery  "upon  firm  sales  contracts  at  fixed 
prices  entered  into  before  the  date  of  the  inventory"  which  it  is  required  to 
inventory  at  cost.  Article  1581,  however,  recognizes  the  right  of  a  mining 
company,  which  keeps  its  accounts  upon  an  accrual  basis,  to  include  its  metals 
sold,  but  not  shipped,  in  its  accounts  receivable  rather  than  in  its  inventory 
if  it  elects  so  to  do.  This  provision,  however,  can  have  no  application  to  goods 
on  hand  at  the  date  of  the  inventory  which  have  not  been  sold. 

It  is  recognized  that,  as  contended  by  the  taxpayer,  to  require  an  inventory 
at  the  close  of  1917  to  be  made  upon  the  basis  of  cost,  or  cost  or  market,  which- 
ever  is  lower,  while  leaving  the  inventory  at  the  beginning  of  the  year  as  it 
was  originally  made — that  is,  upon  the  basis  of  the  selling  price  of  all  metals  on 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  836. —8. 


hand,  sold,  or  unsold — would  lead  to  a  distorted  statement  of  income.  The 
inventory  at  the  beginning  of  the  year,  which  was  the  same  as  the  closing  in- 
ventory of  the  year  1916,  must,  therefore,  be  reconstructed,  and  amended  re- 
turns made  for  the  year  1916.  If  the  adjustment  due  to  the  amended  returns 
occasions  an  inequality  in  the  tax  prior  to  the  year  1916,  such  inequality  may 
be  remedied  in  the  return  for  1916  by  the  deduction  from  or  addition  to  the 
tax  accruing  in  that  year  of  an  amount  equal  to  the  net  amount  overpaid  or 
underpaid  in  prior  years,  such  amount  to  be  determined  by  filing  with  the  re- 
turn for  1916  a  composite  return  for  all  prior  years,  accompanied  by  a  state- 
ment showing  the  total  adjustment  for  each  of  the  years  and  the  net  income 
for  the  entire  period. 

It  is  accordingly  held  that  a  mining  corporation,  in  computing  its  invested 
capital  for  the  purpose  of  the  war  excess  profits  tax,  is  required  to  reduce  its 
earned  surplus  by  the  amount  of  its  sustained  depletion  to  the  beginning  of  the 
year  for  which  the  tax  is  computed,  and,  under  normal  conditions,  to  inventory 
its  metals  on  hand  at  the  close  of  its  annual  accounting  period  and  not  sold,  at 
cost  or  cost  or  market,  whichever  is  lower. 

The  Committee  concurs  in  this  conclusion  of  the  Solicitor,  and  recom- 
mends its  adoption. 

7 


I  ('22)-16-232:  I.  T.  1286 

Revenue  Act  of  1918. 

On  January  1,  1918,  the  M  Company  had  capital  stock  amounting  to 
2x  dollars  and  surplus  amounting  to  11a:  dollars,  most  of  which  was  earned 
surplus.    During  1918  the  company  suffered  an  operating  loss  of  4x  dollars. 

Inquiry  is  made  whether  the  invested  capital  of  the  company  as  at  January 
1,  1919,  should  be  reduced  because  of  the  operating  loss.  It  is  contended 
that  section  326(a)3  of  the  Revenue  Act  of  1918  makes  no  distinction  between 
"paid-in  surplus"  and  "earned  surplus"  and  that  surplus  having  once  been 
earned  and  invested  in  the  business  is  just  as  much  a  part  of  the  capital  invest- 
ment as  paid-in  surplus  or  cash  paid  in  for  stock,  and  that  consequently  in 
computing  invested  capital  no  reduction  of  earned  surplus  is  required  because 
of  an  operating  deficit. 

Section  326(a)  of  the  Revenue  Act  of  1918  provides,  in  part,  that  "*  *  * 
as  used  in  this  title,  the  term  'invested  capital'  for  any  year  means  *  *  * 
(3)  paid-in  or  earned  surplus  and  undivided  profits;  not  including  surplus 
and  undivided  profits  earned  during  the  year;   *    *  Under  this  pro- 

vision of  the  statute,  only  true  earned  surplus  and  undivided  profits  can  be 
included  in  the  computation  of  invested  capital.  (See  Regulations  45,  article 
838.)  There  is  nothing  in  the  statute  defining  the  term  earned  surplus  and 
undivided  profits  or  modifying  what  must  otherwise  be  accepted  as  the 
guiding  principle  to  be  applied  in  determining  what  is  surplus.  Under  the 
statute,  therefore,  surplus  in  any  case  must  be  determined  in  accordance  with 
the  accepted  principles  of  accounting.  It  is  an  accepted  accounting  principle 
that  the  surplus  of  a  corporation  is  the  excess  of  the  net  assets  over  the  total 
par  or  face  value  of  the  shares  of  capital  stock.  The  excess  of  the  assets 
over  the  liabilities  constitutes  the  net  assets  of  a  corporation.  It  follows 
that  if  an  operating  loss  occurs  during  the  year,  other  things  being  equal, 
the  surplus  at  the  end  of  the  year  is  less  than  at  the  beginning  of  the  year. 
The  M  corporation  had  on  January  1,  1918,  an  earned  surplus  of  approxi- 
mately llx  dollars.  During  that  year  the  operating  expenses  exceeded  the 
income  from  operations  by  approximately  4x  dollars.    If  such  excess  expenses 

Supplementary  Bulletin  Rulings. 


G-26-22. 

Sec.  326.    Art.  838.-9. 

were  paid  with  assets,  the  assets  were  actually  reduced  by  such  payments, 
resulting  in  a  corresponding  decrease  in  the  net  assets  and  in  the  surplus. 
If  such  excess  expenses  were  not  paid  but  were  set  up  on  the  books  as  liabilities 
the  resulting  increase  in  the  liabilities  would  also  reduce  the  net  assets  and 
consequently  the  surplus  by  a  corresponding  amount.  It  is  clear,  therefore, 
that  the  surplus  and  undivided  profits  of  the  corporation  on  January  1,  1919, 
were  approximately  4x  dollars  less  than  on  January  1,  1918,  by  reason  of  the 
operating  deficit  occurring  in  1918. 

It  is  held,  therefore,  that  the  portion  of  the  surplus  of  the  corporation  on 
January  1,  1918,  representing  earned  surplus  must  be  reduced  by  the  oper- 
ating deficit  in  computing  the  invested  capital  of  the  corporation  as  at  January 
1,  1919,  but  that  portion  representing  paid-in  surplus  need  not  be  reduced 
on  account  of  the  operating  deficit  for  1918  unless  dividends  were  paid 
during  the  existence  of  the  operating  deficit  in  excess  of  the  earnings  available 
for  distribution  at  the  time  the  dividends  were  paid,  as  determined  in  accord- 
ance with  articles  857  and  858  of  Regulations  45. 
3 


Act  February  24,  1919,  Sections  214fa)8  and  234(a)7.    Act  November  23, 
1921,  Sections  214(a)8  and  234(a)7. 

Recommended,  upon  the  reconsideration  of  A.  R.  R.  27  (C.  B.  2,  p.  139) 
that  obsolescence  upon  bulk  freight  vessels  upon  the  Great  Lakes  be  accepted  as 
established  by  the  evidence  now  on  file;  that  such  obsolescence  be  computed  in  the 
case  of  the  various  types  and  sizes  of  such  vessels  in  accordance  with  the  fol- 
lowing recommendation;  that  Solicitor's  Opinion  114  (C.  B.  5,  p.  148)  be  adhered 
to;  and  that  the  owners  of  such  bulk  freight  vessels  be  not  required  to  readjust  their 
invested  capital  to  allow  for  the  obsolescence  accrued  up  to  and  including  December 
31,  1917. 

In  December,  1919,  a  hearing  was  held  by  this  Committee  at  which  the 
representatives  of  the  various  steamship  companies  engaged  in  bulk  trans- 
portation of  ore,  coal,  stone,  and  grain  upon  the  Great  Lakes  presented 
affidavits,  and  oral  testimony  was  taken  relating  to  the  depreciation  and 
obsolescence  of  bulk  freighters  on  the  Great  Lakes.  As  a  result  of  that  hearing 
the  Committee  held  (A.  R.  R.  27)  that  the  maximum  life  of  such  vessels 
without  rebuilding  was  33  years  and  that,  therefore,  a  deduction  of  3  per 
cent  on  account  of  depreciation  should  be  allowed  thereon. 

The  recommendation  added: 

The  committee  is  therefore  of  the  opinion  that  obsolescence  should  be  limited  to  those 
cases  where  it  can  be  shown  that  a  type  of  vessel  has  been  developed  so  much  more  econ- 
omical than  existing  types  that  no  other  than  the  new  type  will  be  built  in  future,  and  that 
a  sufficient  number  of  the  new  type  to  meet  traffic  requirements  will  in  all  reasonable  prob- 
ability be  built  within  a  certain  definite  period,  thereby  forcing  the  older  type  out  of  useful 
existence. 

Where  in  any  case  this  condition  can  be  shown  to  exist  and  where  moreover  it  can  be 
definitely  determined  that  the  established  rate  of  depreciation  will  not  be  sufficient  to  return 
all  of  the  capital  invested  as  at  the  date  of  acquisition  or  March  1,  1913,  whichever  was 
later,  by  the  time  the  vessel  will  be  rendered  useless,  an  addition  to  the  regular  rate  to  cover 
this  obsolescence  may  probably  be  allowed,  thus  permitting  the  spread  of  the  foreseen  loss 
over  the  period  from  the  present  time  until  the  loss  occurs  instead  of  requiring  the  entire 
amount  of  such  loss  to  be  deducted  in  the  year  in  which  the  vessel  is  finally  scrapped  or 
salvaged.  The  amount  of  this  allowance,  however,  must  be  determined  upon  the  basis  of 
the  facts  in  each  particular  case;  that  is,  the  type  of  the  vessel  in  question,  the  fitness  for 
possible  use  in  other  lines  of  transportation,  and  the  date  when  it  can  be  definitely  foreseen 
that  she  will  be  no  longer  commercially  useful  in  this  particular  line  of  traffic. 

In  accordance  with  this  recommendation  the  owners  of  the  bulk  freighters 
were  called  upon  by  the  Unit  to  establish  the  facts  indicated  therein  as 
essential  to  the  allowance  of  a  deduction  for  obsolescence.    At  the  same  time 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  833.— 10. 


these  owners  were  advised,  as  a  result  of  the  opinion  of  the  Solicitor  of  the 
Bureau  rendered  June  23,  1921  fSol.  Op.  114),  that,  if  deductions  for  ob- 
solescence were  claimed  for  the  year  1918  and  subsequent  years,  they  would 
be  required  to  adjust  their  invested  capital  for  the  year  1917  by  deducting 
therefrom  the  obsolescence  which  had  accrued  up  to  and  including  December 
.31,  1917.  The  owners  took  the  position  that  no  readjustment  of  invested 
capital  for  the  years  prior  to  1918  was  contemplated  or  required  either  by 
A.  R.  R.  27  or  Sol.  Op.  114  and  petitioned  the  Committee  for  a  reconsideration 
of  A.  R.  R.  27  and  a  restatement  of  the  rule  as  to  treatment  of  obsolescence 
in  more  definite  form. 

In  connection  with  their  petition  the  representatives  of  the  owners  filed 
numerous  affidavits.  These  affidavits  were  supplemented  by  an  oral  hearing 
held  by  the  Committee  in  January,  1922. 

At  the  oral  hearing  there  were  present  individuals  representing  directly 
or  indirectly  75  per  cent  of  the  bulk  freight  traffic  on  the  Great  Lakes. 

The  testimony  of  all  the  witnesses  is  in  striking  accord  as  to  existence, 
date  of  commencement,  date  of  termination,  and  method  of  computation  of 
obsolescence  for  the  various  types  of  Great  Lake  freighters,  and  the  evidence 
may  be  briefly  summarized  as  follows: 

Up.  .-to  ,190^  all  bulk  freighters  on  the  Great  Lakes  were  of  the  beam  and 
stanchion  type  of  construction  and.  ranged  in  carrying  capacity  from  5,000 
to  6,900  tons.  About  1905  the  arch  type  of  construction  was  introduced  and 
larger  vessels,  ranging  from  7,000  to  10,000  tons  carrying  capacity,  began  to 
be  constructed.  Owing  to  the  change  of  type,  the  depth  of  the  channels  and 
the  size  of  the  wharfing,  loading,  and  unloading  facilities,  doubts  for  some  time 
were  entertained  as  to  the  practicability  of  the  larger  boats  and  they  did  not 
demonstrate  their  practicability  and  dominate  the  lake  traffic  until  the 
year  1910.  Since  1910,  vessels  ranging  from  11,000  to  13,000  tons  capacity 
have  been  built,  the  average  date  of  construction  being  1914,  and  there  are 
now  57  of  these  largest  size  vessels  in  service.  No  vessels  larger  than  these 
have  yet  made  their  appearance.  There  is  no  obsolescence  of  any  of  the:.e 
vessels  for  the  first  five  years  from  the  average  date  of  construction,  ob- 
solescence for  the  next  five  years  is  slight,  and  from  the  tenth  year  on  the 
obsolescence  becomes  more  rapid  and  is  progressive  throughout  the  remainder 
of  the  useful  life  of  the  vessel,  but  any  attempt  to  compute  the  actual  rate  of 
progression  would  be  too  complicated  for  practical  use,  and,  therefore,  ob- 
solescence should  be  computed  at  a  uniform  rate  over  the  entire  period  of 
its  existence,  or  for  such  portion  thereof  as  the  law  allows.  The  average 
term  of  usefulness  of  all  of  these  vessels  is  approximately  20  years  and  at  the 
end  of  20  years  they  have  a  remaining  value  of  20  per  cent  of  their  original 
cost.  If  they  are  retained  in  service  beyond  the  twentieth  year,  they  lose 
value  at  the  rate  of  one-thirteenth  of  the  remaining  value  of  the  20  per  cent. 
If  they  become  obsolete  and  are  junked  in  less  than  20  years,  4  per  cent  of 
the  cost  should  be  added  to  the  value  at  the  end  of  20  years  for  each  year  less 
than  20  years.' 

The  following  composite  table  compiled  from  figures  furnished  by  c>_:  \  Y. 
of  the  companies  shows  the  average  gross  freights  per  mile,  expenses,  and  net 
earnings  for  the  various  classes  of  vessels: 


Supplementary  Bulletin  Rulings. 


6  26-22 


Sec.  326.    Art.  838.— 11. 


Gross 
freights  pci 
mile. 


Expenses. 


Cents. 


Over  10,000  tonners. . . 

10,000  tonners  

9,000  to  9,500  tonners. 
8,000  to  8,500  tonners. 
7,000  to  7,500  tonners. 
6,000  to  6,500  tonners. 
5,000  to  5,500  tonners. 


11.9* 
10.0* 


Cents. 
11.2* 


A  table  showing  the  corresponding  figures  for  the  intermediate  tonnages 
was  found  to  be  too  complicated  and  to  show  no  material  variations. 

A  statement  furnished  by  A,  auditor  for  the  M  Company,  showed  some- 
what higher  figures  in  all  instances,  but  the  increases  were  shown  to  be  due 
to  the  fact  that  the  M  Company  does  not  carry  total  loss  insurance,  which  is 
generally  carried  on  these  vessels,  resulting  in  a  saving  of  about  x  cents  a 
mile,  and  to  more  efficient  operation.  With  the  necessary  allowance  for 
these  factors,  the  figures  corresponded  very  closely  to  those  shown  by  the 
composite  figures  of  the  companies  named  and  the  proportions  as  between  the 
various  classes  of  vessels  were  closely  preserved. 

An  examination  of  this  table  shows  clearly  that  so  soon  as  enough  vessels 
of  a  larger  class,  say  of  the  10,000  tonners,  capable  of  earning  5.2.Y  cents  net 
gross  freight  per  mile,  to  meet  the  requirements  of  the  traffic,  have  been 
constructed,  the  5,000  tonners  having  a  net  earning  capacity  of  only  x  cents 
will  become  economically  impossible  and  will  be  driven  out  of  business,  and 
that  if  this -occurs  prior  to  the  expiration  of  the  period  of  33  years,  which  has 
been  accepted  as  the  physical  life  of  this  class  of  vessels,  there  will  be  an 
amount,  in  excess  of  the  junk  value  plus  the  depreciation  which  has  been  taken, 
for  which  no  deduction  will  have  been  allowed.  To  illustrate:  A  10,000-ton 
vessel  built  in  December,  1910,  will  become  obsolete  on  January  1,  1935. 
She  will  then  be  24  years  old,  and,  if  the  original  owner  continued  in  such 
ownership,  he  will  have  deducted  72  per  cent  for  physical  depreciation.  By 
the  time  this  10,000-ton  vessel  is  24  years  old  she  has  a  residual  value  of  14 
per  cent  of  the  cost  (computed  on  the  basis  of  20  per  cent  residual  value 
when  20  years  old).  Adding  together  the  72  per  cent  for  depreciation  and 
the  14  per  cent  of  residual  value,  we  have  86  per  cent  of  her  cost  accounted 
for  and  there  remains  14  per  cent  to  be  deducted  for  obsolescence,  to  be 
spread  evenly  over  the  years  1917  to  1934,  inclusive,  or  over  such  portion 
thereof  as  the  law  may  provide.  Again,  a  5,000-ton  vessel  built  in  December, 
1900,  will  become  obsolete  on  January  1,  1922.  She  will  then  be  21  years 
old,  and,  if  the  original  owner  remains  in  such  ownership,  he  will  have  deducted 
63  per  cent  for  physical  depreciation.  By  the  time  this  vessel  is  21  years  of 
age  she  has  a  residual  value  of  about  18  per  cent  of  cost  (computed  on  the 
basis  of  20  per  cent  residual  value  when  20  years  old).  Adding  together  the 
63  per  cent  for  depreciation  and  the  18  per  cent  of  residual  value,  we  have 
81  per  cent  of  her  cost  accounted  for  and  there  remains  19  per  cent  to  be 
deducted  for  obsolescence,  to  be  spread  over  the  years  1910  to  1921,  in- 
clusive, or  such  portion  thereof  as  the  law  may  provide. 

The  evidence  as  to  the  average  dates  of  construction  and  the  dates  of 
commencement  and  dates  of  determination  of  obsolesecnce  for  the  various 
classes  of  vessels  may  be  summarized  as  follows: 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  838.  -12. 


Tons. 


Average 
date  of  con- 
struction. 


Date  obsoles- 
cence attaches 


Date  when 
vessels  will 
be  obsolete. 


5,000  to  5,900 
6,000  to  6,900 
7,000  to  7,900 
8,000  to  8,900 
9,000  to  9,900 

10,000  

Over  10,000.  . 


1901 
1903 
1908 
1908 
1909 
1909 
1914 


Jan.  1,  1910 
Jan.  1,  1910 
Jan.  1,  1915 
Jan.  1,  1915 
;Jan.  1,  1917 
Jan.  1,  1917 


Jan.  1,  1922 
Jan.  1,  1923 
Jan.  1,  1925 
Jan.  1,  1927 
Jan.  1,  1930 
Jan.  1,  1935 


The  uniformity  of  the  testimony  upon  the  above  points  and  the  character 
and  qualifications  of  the  witnesses  lead  the  Committee  inevitably  to  the  con- 
clusion that  these  figures  may  be  accepted  for  the  purpose  of  computing 
obsolescence  upon  the  various  classes  of  vessels.  The  Committee  is  also 
convinced  by  the  evidence  that  it  is  impracticable  and  unnecessary  to  compute 
the  dates  for  smaller  classes  or  for  individual  vessels. 

In  Sol.  Op.  114,  rendered  at  the  request  of  the  Income  Tax  Unit  following 
A.  R.  R.  27,  the  Solicitor  of  the  Bureau  of  Internal  Revenue  held  that  ob- 
solescence should  be  spread  over  the  entire  period  from  date  of  commence- 
ment to  the  date  it  matured  into  obsolescence  and  that  only  that  portion  of 
obsolescence  which  accrued  subsequent  to  January  1,  1918,  could  be  taken 
in  the  returns  for  1918  and  subsequent  years,  any  obsolescence  not  thus 
deductible  being  deducted  as  a  loss  in  the  year  in  which  the  vessel  was 
junked. 

The  correctness  of  this  ruling  is  attacked  in  the  motion  for  reconsideration, 
it  being  contended  that  it  was  the  purpose  and  intent  of  the  provisions  of 
section  214(a)8  and  section  234(a)7  of  the  Act  of  February  24,  1919,  that  all 
of  the  obsolescence  should  be  deducted  in  the  period  subsequent  to  January 
1,  1918. 

The  Committee  has  carefully  considered  the  ruling  laid  down  in  Sol.  Op. 
114  and  has  reached  the  conclusion  that  the  rule  there  stated  is  the  only  one 
possible  under  the  law.  The  Act  of  August  5,  1909,  section  38  (second), 
provided  for  the  deduction,  in  ascertaining  net  income,  of  "all  losses  actually 
sustained  within  the  year  and  not  compensated  by  insurance  or  otherwise, 
including  a  reasonable  allowance  for  depreciation  of  property ,  if  any,  *  *  *." 
The  Act  of  October  3,  1913,  provided  (Section  II,  Subdivision  B)  among  other 
deductions  "a  reasonable  allowance  for  exhaustion,  wear  and  tear  of  property 
arising  out  of  its  use  or  employment  in  the  business,"  and  Subdivision  G  (b) 
provided,  in  the  case  of  corporations,  for  the  deduction  of  "all  losses  sustained 
within  the  year  and  not  compensated  *  *  *  including  a  reasonable 
allowance  for  depreciation  by  use,  wear  and  tear  of  property,  if  any"  The  Act 
of  September  8,  1916,  allowed,  in  the  case  of  individuals,  among  other  de- 
ductions (sec.  5,  seventh)  a  reasonable  allowance  for  exhaustion,  wear  and 
tear  of  property  arising  out  of  its  use  or  employment  in  a  business  or  trade  and, 
in  the  case  of  corporations  (sec.  12(a)  second),  "all  losses  actually  sustained 
and  charged  off  within  the  year  *  *  *  including  a  reasonable  allowance 
for  exhaustion,  zvear  and  tear  of  the  property  arising  out  of  its  use  or  employ- 
ment in  the  business  or  trade." 

Under  these  several  Acts  the  Bureau  had  uniformly  held  that  the  de- 
ductions for  "depreciation,"  "exhaustion,  wear  and  tear"  were  annual 
deductions  to  be  made  in  the  computation  of  annual  net  income  and  that  the 


Supplementary  Bulletin  Rulings. 


6-26-22. 

Sec.  326.    Art.  838.-13. 

depreciation,  or  exhaustion,  wear  and  tear,  which  was  not  charged  off  in  one 
year  could  not  be  accumulated  and  taken  as  a  deduction  in  a  following  year. 
With  knowledge,  it  must  be  assumed,  of  the  established  practice  of  the  Bureau 
in  this  matter  the  Congress  included  in  the  deductions  which  might  be  here 
taken  for  depreciation  or  exhaustion,  wear  and  tear  "a  reasonable  allowance 
for  obsolescence"  (sees.  214(a)8,  and  234(a)7,  Act  of  February  24,  1919). 
The  language  employed  is  significant,  "a  reasonable  allowance  for  exhaustion, 
wear  and  tear  of  property  used  in  the  trade  or  business,  including  a  reasonable 
allowance  for  obsolescence."  This  language  signifies  that  it  was  not  the 
intent  to  add  a  new  kind  of  deduction  but  to  permit  the  inclusion  of  a  different 
element,  to  wit,  "obsolescence,"  in  exhaustion,  wear  and  tear.  No  different 
method  of  computing  the  deduction  for  obsolescence  than  that  theretofore 
used  in  the  case  of  exhaustion,  wear  and  tear  was  prescribed,  and  the  pre- 
sumption from  the  language  employed  in  permitting  this  deduction  clearly 
indicates  that  a  different  method  was  not  contemplated. 

The  existence  of  obsolescence  under  the  earlier  Acts  was  recognized  but, 
as  it  was  held  not  to  be  included  in  the  terms  "depreciation"  or  "exhaustion, 
wear  and  tear,"  a  deduction  on  account  of  obsolescence  was  only  permitted 
when  it  had  ripened  into  obsoleteness.  Article  178  of  Regulations  33,  revised, 
thus  provides: 

Amounts  representing  losses  on  account  of  obsolescence  of  physical  property  may  be 
included  as  a  deduction  from  gross  income  as  a  loss,  provided  such  amounts  have  been  re- 
corded in  the  books  following  the  condemnation  and  withdrawal  from  use  of  the  obsolete 
property. 

As  this  resulted  in  throwing  the  total  deduction  for  obsolescence  as  dis- 
tinguished from  depreciation  into  one  year  it  frequently  happened  that  the 
then  income  was  less  than  the  allowable  deduction  and  the  cost  on  March  1, 
1913,  value  was  not  fully  returned  to  the  taxpayer.  To  relieve  in  a  measure 
this  situation  Congress  provided  for  the  recognition  of  obsolescence  as  a 
progressive  process  as  distinguished  from  obsoleteness  which  wasTaccomp- 
lished  status,  but,  as  clearly  pointed  out  in  Sol.  Op.  114,  there  is  nothing  in  the 
Act  to  indicate  that  Congress  intended  that  this  provision  should  have  a 
retroactive  effect.  The  language  of  sections  2 14(a) 8  and  234(a) 7  of  the  Act 
of  November  23,  1921,  which,  so  far  as  here  pertinent,  does  not  vary  from  the 
language  of  the  coiresponding  sections  of  the  Act  of  February  24,  1919,  con- 
firms the  Bureau  in  the  correctness  of  the  conclusion  heretofore  reached  upon 
this  point. 

The  Committee  has  carefully  considered  the  contention  made  on  behalf 
of  the  owners  of  these  lake  freighters  that  the  right  to  deduct  accumulated 
obsolescence  in  succeeding  years  was  recognized  in  T.  B.  R.  44  (C.  B.  1, 
p.  133)  in  the  case  of  good  will,  trade-marks,  and'  trade  brands.  The  language 
of  the  concluding  paragraph  of  that  recommendation  must  be  admitted  to 
lend  some  support  to  the  contention,  but  a  careful  examination  of  the  whole 
recommendation  clearly  shows  that  such  was  not  the  intent.  On  page  136 
it  is  stated: 

The  trend  of  sentiment  was  early  shown  by  the  action  of  several  States  upon  which  the 
distillers  and  dealers  in  liquors  were  counting  for  success,  and  which  were  classed  as  doubtful 
by  the  prohibition  forces.  Thus  in  January,  1918,  Massachusetts,  Maryland,  and  Kentucky, 
the  first  two  of  which  were  considered  very  doubtful  by  the  prohibitionists,  voted  in  favor 
of  the  prohibition  amendment  by  a  decisive  vote.  Louisiana,  another  doubtful  State, 
deadlocked  in  January  upon  the  amendment,  and  later  in  the  year  ratified.  It  seems  certain 
that  an  unprejudiced  observer  would,  in  view  of  the  history  of  the  movement  and  the 
decisive  action  taken  by  these  doubtful  States  in  January,  have  concluded  that  prohibition 
was  a  certain  event,  which,  under  the  terms  of  the  amendment,  would  become  effective 
within  a  year  from  its  final  adoption.  The  conclusion  is,  therefore,  reached  that  it  is 
reasonable  to  allow  distillers  and  dealers  in  liquors  to  make  a  deduction  in  computing 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  838.— 14. 


net  income  under  the  provisions  of  the  Revenue  Act  of  1918  for  any  taxable  year  ending 
on  or  after  January  31,  1918,  and  that  the  end  of  the  period  be  fixed  at  the  date  upon  which 
a  taxpayer  engaged  as  distiller  or  dealer  in  liquors  discontinues  such  business,  such  date 
being  in  no  case  later  than  January  16,  1920,  the  date  upon  which  prohibition  by  con- 
stitutional amendment  becomes  effective. 

It  is  clear  from  this  language  that  the  Advisory  Tax  Board  did  not  rec- 
ognize obsolescence  within  the  meaning  of  the  statute  as  beginning  prior  to 
1918,  when  the  adoption  of  the  constitutional  amendment  became  a  certainty. 
T.  B.  R.  44,  therefore,  is  no  authority  for  permitting  the  deduction  of  ob- 
solescence which  had  accrued  prior  to  1918,  in  that  and  subsequent  years, 
but  must  be  considered  only  as  dealing  with  the  method  of  spreading  the 
deduction  over  the  period  of  obsolescence.  In  the  method  adopted  it  is  the 
opinion  of  the  Committee  that  it  must  be  held  to  have  been  based  wholly 
upon  its  peculiar  facts  and  that  the  rule  there  laid  down  is  not  to  be  followed 
in  other  than  identical  cases. 

The  contention  on  behalf  of  the  owners  of  lake  freighters^based  upon  the 
regulations  governing  deduction  for  amortization  permitted  by  sections 
214(a)9  and  234(a)8  of  the  Act  of  February  24,  1919,  is  without  merit  since 
the  deduction  expressly  allowed  by  the  statute  is  "of  such  part  of  the  cost  of 
such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer,"  showing  that  a 
deduction  of  the  entire  amount  was  contemplated  by  the  Congress. 

The  conclusion,  however,  which  was  drawn  by  the  Unit  from  Sol.  Op.  114, 
that,  if  the  deduction  for  obsolescence  were  taken  for  the  year  1918  and  the 
following  years,  the  invested  capital  for  the  preceding  year  must  be  readjusted 
to  allow  for  the  accrued  obsolescence  up  to  1918,  finds  no  support  in  that 
opinion  or  in  A.  R.  R.  27,  nor  is  it  believed  to  be  correct. 

In  article  42  of  Regulations  41  it  was  provided: 

In  the  computation  of  surplus  and  undivided  profits,  however,  full  recognition  must 
first  be  given  to  expenses  incurred  and  losses  sustained  from  the  original  organization  of 
the  business  concern  down  to  the  taxable  year,  including  among  such  expenses  and  losses 
a  reasonable  allowance  for  depletion,  depreciation,  or  obsolescence  of  property.    *    *  * 

But  it  is  clear  that  the  word  obsolescence  here  was  incorrectly  used. 
Deductions  for  obsolescence  were  not  permitted  in  terms  by  the  Act  of  October 
3,  1917,  and  in  article  178  of  Regulations  33,  revised,  construing  the  term 
"obsolescence"  for  the  purpose  of  the  income  tax,  it  was  prescribed: 

Amounts  representing  losses  on  account  of  obsolescence  of  physical  property  may  be 
included  as  a  deduction  from  gross  income  as  a  loss,  provided  such  amounts  have  been 
recorded  in  the  books  following  the  condemnation  and  withdrawal  from  use  of  the  obsolete 
property. 

Showing  clearly  that  the  word  "obsolescence"  was  there  construed  as  meaning 
obsoleteness,  and  there  is  no  authority  for  adopting  a  different  meaning  for 
the  purpose  of  computing  invested  capital  under  the  War  Excess  Profits  Tax 
title  of  the  Act. 

Article  838,  Regulations  45  (1920  edition),  provides: 

In  the  computation  of  earned  surplus  and  undivided  profits  full  recognition  must  first 
be  given  to  all  expenses  incurred  and  losses  sustained  from  the  original  organization  of  the 
corporation  down  to  the  taxable  year,  including  among  such  expenses  and  losses  reasonable 
allowances  for  depreciation,  obsolescence,  or  depletion  of  property  (irrespective  of  the 
manner  in  which  such  property  was  originally  acquired).    *    *  * 

But  this  is  no  authority  for  requiring  a  deduction  of  accrued  obsolescence 
prior  to  the  year  1918.  The  article  in  question  construes  the  Act  of  1918, 
which  expressly  permitted  deductions  for  obsolescence.  And,  too,  the  allow- 
ance provided  by  the  statute  on  account  of  obsolescence  is  a  "reasonable 
allowance."  In  A.  R.  M.  106  (C.  B.  4,  p.  390)  the  Committee  expressly 
recognized  that  it  would  be  unreasonable  to  require  the  reduction  of  earned 
surplus  unless  the  depreciable  assets  of  the  corporation  were  valued  on  its 


Supplementary  Bulletin  Rulings. 


9-8-22. 


Sec.  326.    Art.  838.-15. 


books  at  the  beginning  of  the  taxable  year  at  an  amount  in  excess  of  their 
actual  value  at  that  time  and  quoted  with  approval  the  following  from  article 
839  of  Regulations  45  (1920  edition): 

Adjustments  in  respect  of  depreciation  or  depletion  in  prior  years  will  be  made  or 
permitted  only  upon  the  basis  of  affirmative  evidence  that  as  at  the  beginning  of  the 
taxable  year  the  amount  of  depreciation  or  depletion  written  off  in  prior  years  was  in- 
sufficient or  excessive,  as  the  case  may  be. 

And  in  an  informal  memorandum  the  Committee  has  expressed  an  opinion 
that: 

No  reduction  in  earned  surplus  should  be  made  in  any  case  where,  because  of  repairs, 
renewals  and  replacements,  the  property  as  a  whole  remains  unimpaired  either  in  intrinsic 
value  or  efficiency. 

The  principle  last  stated  is  peculiarly  applicable  to  obsolescence.  Ob- 
solescence, of  which  the  case  here  presented  is  typical,  is  not  like  depre- 
ciation, a  matter  of  decrease  in  earning  power  or  in  absolute  efficiency,  but 
only  in  relative  efficiency.  It  has  its  origin  in  the  fact  that  although  the  orig- 
inal efficiency  be  maintained,  yet,  owing  to  improvements  in  the  art  or  changed 
economic  conditions,  a  device  or  factor  in  production  will  eventually  have  to 
be  discarded.  The  loss  is  a  future  loss,  but  for  equitable  reasons  the  statute 
permits  it  to  be  spread  over  the  period  for  which  it  can  be  foreseen,  and  allows 
the  portion  assignable  to  the  period  subsequent  to  December  31,  1917,  to  be 
deducted  pro  rata  over  such  period. 

In  the  instant  case  the  vessels  of  the  5,000-ton  class  will  to-day  net  x  cents 
freight  per  mile,  as  when  they  were  first  constructed.  Their  intrinsic  value 
is  unimpaired,  but,  because  the  newer  and  larger  type  will  earn  from  six  to 
eight  times  as  much,  it  is  evident  that,  when  the  number  of  larger  vessels 
becomes  sufficient  to  handle  the  carrying  trade  of  the  Great  Lakes,  the  smaller 
vessels  will  become  economically  impossible  of  operation  and  will  necessarily 
be  discarded  or  junked.  Under  the  principle  laid  down  in  A.  R.  M.  106,  as 
subsequently  explained,  therefore,  there  is  neither  justification  nor  reason  in 
requiring  the  reduction  of  the  invested  capital  in  the  case  of  these  bulk 
freighters  prior  to  the  time  such  deductions  were  actually  taken  in  the  com- 
putation of  net  income. 

It  is,  therefore,  recommended,  upon  reconsideration  of  A.  R.  R.  27,  that 
obsolescence  upon  bulk-freight  vessels  upon  the  Great  Lakes  be  accepted  as 
established  by  the  evidence  now  on  file;  that  such  obsolescence  be  computed 
in  the  case  of  the  various  types  and  sizes  of  such  vessels  in  accordance  with 
the  above  recommendation;  that  Solicitor's  Opinion  114  be  adhered  to;  and 
that  the  owners  of  such  bulk-freight  vessels  be  not  required  to  readjust  their 
invested  capital  to  allow  for  the  obsolescence  accrued  up  to  and  including 
December  31,  1917. 
9 


I  ('22)-36-494:  I.  T.  1440 
Revenue  Acts  of  1917,  1918,  and  1921. 

Depreciation  of  fixed  assets  continues  whether  a  taxpayer  earns  an  income 
or  suffers  a  loss,  and  its  earned  surplus  should  be  reduced  on  account  of 
depreciation,  although  it  sustained  a  loss  for  the  taxable  year.  In  determining 
invested  capital  for  subsequent  years,  the  paid-in  capital  and  surplus  of  the 
taxpayer  are  not  affected  by  such  depreciation,  but  if  this  depreciation  has 
more  than  exhausted  earned  surplus,  the  deficit  thus  caused  must  be  made 
good  out  of  the  earnings  of  the  company  before  any  earned  surplus  can  be 
included  in  invested  capital. 
10 

Supplementary  Bulletin  Rulings. 


- 


2-20-22. 

Sec.  326.    Art.  839.— 1. 

Law  Section  326— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
^[1035,  post). 

Article  839. — Surplus  and  undivided  profits:  allowance  for  depletion 
and  depreciation  (Reg.  45— 1[762,  ante):  (Reg.  62— If  1195, 
post). 

9-21-1489:  O.  D.  833. 

Amounts  charged  off  for  depletion  of  stumpage  during  the  years  1909 
to  1913,  and  disallowed  as  a  deduction  from  gross  income  can  not,  merely 
because  of  the  disallowance,  be  restored  to  invested  capital.  Adjustments 
in  respect  to  depletion  will  be  made  only  in  accordance  with  Article  839  of 
Regulations  45. 
1 


18-21-1614:  A.  R.  M.  106. 

[For  this  Committee  on  Appeals  and  Review  Memorandum  No.  106  see 
Service  Tf877j 
2 


30-21-1748:  A.  R.  M.  106  Explained. 
[For  this  explanation  of  Committee  on  Appeals  and  Review  Memorandum 
.No.  106,  see  Service  1f879.] 
3 


46-21-1927:  O.  D.  1104. 

[For  this^O.  D.,  further  relating  to  A.  R.  M.  106,  above,  see  Service  ^[885.] 

4 


Supplementary  Bulletin  Rulings. 


i 

i 


Sec.  326.    Art.  840.— 1. 


Law  Section  326.— Invested  Capital  (1918  AcMf555,  ante):  (1921  Act-^1035, 

post). 

Article  840. — Surplus  and  Undivided  Profits:  Additions  to  Surplus 
Account  (Reg.  45-^764,  ante):  (Reg.  62-^1196  post). 

2-19-151:  T.  B.  R.  6. 

(1)  Where  a  distilling  corporation  pursuant  to  a  resolution  of  the  hoard 
of  directors  charged  against  surplus  in  1912  and  191 3  amounts  aggregating 
 dollars  on  the  ground  of  alleged  obsolescence  of  apart  of  its  equip- 
ment and  the  entire  equipment  was  continued  in  use  the  same  as  previously, 
no  reduction  of  output  being  made  and  no  portion  of  the  property  having 
been  retired  or  scrapped,  in  fact,  no  change  being  made  beyond  the  arbitrary 

reduction  of  the  surplus  and  invested  capital  by  charging  off  the  

dollars  on  the  books  of  the  corporation,  it  having  been  shown  that  these 
charges  were  made  only  for  the  consideration  of  the  corporation  and  that 
they  did  not  enter  into  the  corporation's  income  tax  returns,  the  amounts 
so  charged  off  may  be  restored  to  invested  capital,  less  proper  allowance  for 
ordinary  depreciation. 
1 


15-19-452:  T.  B.  M.  56. 
Amortization  allowances  deducted  in  ascertaining  net  profits  for  the  purpose 
of  the  munition  manufacturer's  tax  act  (Title  III  of  the  Revenue  Act  of  1916) 
do  not  affect  "invested  capital"  under  the  Revenue  Act  of  1918. 

The  munition  manufacturer's  tax  was  laid  "upon  the  entire  net  profits 
actually  received  or  accrued"  from  the  sale  or  disposition  of  specific  munitions, 
and  it  was  provided  in  section  202: 

That  in  computing  net  profits  under  the  provisions  of  this  title  for  the  purpose  of  the 
tax  there  shall  be  allowed  as  deductions  from  the  gross  amount  received  or  accrued  for  the 
taxable  year  from  the  sale  or  disposition  of  such  articles  manufactured  within  the  United 
States,  the  following  items:  *  *  *  (f)  A  reasonable  allowance  according  to  the  conditions 
peculiar  to  each  concern,  for  amortization  of  the  values  of  buildings  and  machinery,  account 
being  taken  of  the  exceptional  depreciation  of  special  plants. 

It  is  apparent  from  this  language  that  the  amortization  allowance  in 
question  was  authorized  for  the  purpose  of  computing  "net  profits,"  not 
"net  income."  The  right  to  make  a  deduction  for  amortization  in  computing 
net  income  for  the  income  tax  did  not  exist  and  was  repeatedly  denied  by  the 
bureau  prior  to  the  passage  of  the  Revenue  Act  of  1918.  It  is  to  be  noted 
further  that  the  taxes  imposed  by  Title  II  of  the  Revenue  Act  of  1917  and 
Title  III  of  the  Revenue  Act  of  1918  were  explicitly  laid  upon  "net  income," 
and  were  in  a  variety  of  ways  impressed  with  the  stamp  and  character  of  an 
income  rather  than  a  munition  manufacturer's  tax.  They  are  in  no  sense 
mere  continuations  or  expansions  of  the  tax  imposed  by  Title  III  of  the 
Revenue  Act  of  1916.  It  follows,  therefore,  that  the  deduction  for  amorti- 
zation under  the  munition  manufacturer's  tax  law  was  not  allowed  for  income 
tax  purposes  and  should  not  now  be  permitted  to  affect  the  surplus  or  any 
other  element  entering  into  the  "invested  capital"  employed  for  purposes  of 
the  war  profits  and  excess  profits  taxes. 

This  conclusion  is  supported  by  the  character  of  the  amortization  allow- 
ance in  question.  It  was  in  many  respects  quite  dissimilar  from  the  depre- 
ciation and  depletion  allowances.  It  was  not  based  upon  the  fact  that  plant 
and  equipment  acquired  in  the  year  1916  or  earlier  for  the  manufacture  of 
munitions,  actually  depreciated  in  use  or  market  value  during  the  taxable, 
year  1916..    There  was  in  general  no  such  depreciation  m  value  or  impair- 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  840.— 2. 


merit  of  useful  life.  Account  was  taken  "of  the  exceptional  depreciation  of 
special  plants"  but  the  principal  allowance  was  "for  the  amortization  of  the 
values  of  buildings  and  machinery,"  whether  those  values  increased  or  de- 
creased in  the  immediate  future.  The  principal  amortization  allowance 
looked  to  the  establishment  of  a  special  fund  to  recoup  exceptional  war  costs 
when  war  uses  had  ceased;  it  did  not  imply  that  there  had  been  or  would  be 
any  immediate  impairment  of  physical  assets,  such  as  is  covered  by  the 
depletion  allowance,  or  any  immediate  exhaustion,  wear,  tear,  or  obsolescence 
in  excess  of  the  amount  covered  by  the  depreciation  allowance.  It  was,  as 
stated,  a  special  allowance  peculiar  to  this  tax,  designed  possibly  to  moderate 
the  (then)  exceptionally  high  rates  of  the  munition  manufacturer's  tax. 

Reference  has  been  made  in  this  connection  to  the  wording  of  section  214 
(a)  (9)  and  section  234  (a)  (8)  authorizing  a  deduction  for  amortization 
under  the  Revenue  Act  of  1918;  but  upon  careful  examination  these  para- 
graphs are  found  to  have  no  bearing  upon  the  present  case. 

It  is  the  opinion  of  the  Advisory  Tax  Board,  therefore,  that  deductions 
for  amortization  taken  under  the  munition  manufacturer's  tax  act  do  not 
affect  the  computation  of  the  invested  capital  under  the  Revenue  Act  of  1918 
of  the  corporations  which  took  such  deductions. 
2 


19-20-926:  A.  R.  R.  100. 

REVENUE  ACTS  OF  1916  AND  1917. 

In  re:  Additional  income  and  excess  profits  taxes  for  1917  and  1918  anJ 
munition  taxes  for  1916  and  1917  assessed  against  the  M  Company. 

The  Committee  has  had  under  consideration  the  informal  appeal  of  the 
M  Company  against  the  assessment  of  additional  income  and  excess  profits 
taxes  for  1917  and  1918  and  of  munition  taxes  for  1916  and  1917. 

Four  questions  were  raised  by  the  taxpayer:  (1)  Liability  to  munition 
taxes;  (2)  value  of  assets  turned  over  to  the  corporation  on  organization; 
(3)  a  deduction  taken  in  1918,  covering  so-called  copper  replacement  liability: 
and  (4)  losses  upon  the  sale  of  the  property.  The  Unit  concedes  the  cor- 
rectness of  the  deduction  for  loss  on  the  sale  of  the  property,  and  upon  the 
argument  of  the  case  before  the  Committee  the  appeal  relative  to  the  copper 
replacement  liability  was  abandoned  by  the  attorney  for  the  company,  leaving 
only  two  questions  to  be  decided. 

*      *      *      *      *      *      *      *      *  *      *      *      *  * 

The  second  question  relates  to  invested  capital.  It  appears  that  A,  in 
the  early  part  of  1916,  purchased  the  plant  and  sundry  assets  for  11*  dollars, 
and  that  in  September,  1916,  after  rearranging  and  modifying  the  machinery 
and  equipment  and  securing  contracts  for  the  manufacture  of  shell  rings, 
sold  the  property  to  the  M  Company,  receiving  payment  therefor  in  stock, 
the  revenue  agent  stating  that  2,750  shares  of  the  total  issue  of  3,000  were 
turned  over  to  A  for  this  property.  It  is  presumed  that  the  other  250  shares 
were  issued  for  cash,  and  upon  the  theory  that  the  assets  turned  in  for  stock 
under  such  conditions  had  an  actual  cash  value  equal  to  the  par  of  the  stock 
issued  therefor,  the  value  of  tangibles  and  intangibles  acquired  from  A  would 
be  14*  dollars.  Claim  is  made  that  the  value  of  the  intangibles  was  increased 
by  A  after  the  purchase  by  himself  by  reason  of  his  personal  services  as  an 
engineer  in  developing  the  property  and  perfecting  certain  processes  for 
which  he  did  not  credit  himself  when  constructing  the  plant  and  organizing 
the  business. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  840.— 3. 

The  Unit  concedes  that  so  much  of  the  increased  value  as  represents 
actual  additions  and  betterments  to  the  plant  may  be  regarded  as  invested 
capital  and  in  this  view  the  Committee  concurs.  However,  in  the  absence 
of  proof  as  to  additions  and  betterments  made,  the  Committee  is  of  the  opinion 
that  the  difference  between  the  purchase  price  of  11*  dollars  in  the  early- 
part  of  1916  and  the  selling  price  in  September,  1916,  constitutes  an  intangible 
asset  or  good  will  subject  to  the  20  per  cent,  limitation  under  the  1917  Act. 

The  Committee  therefore  recommends  that  the  action  of  the  Unit  with 
respect  to  invested  capital  be  sustained. 
3 


50-20-1347:  A.  R.  R.  337 

Held,  that  appreciation  of  good  will  and  tangible  property  determined  by 
appraisal  against  which  a  stock  dividend  was  issued  can  not  be  allowed  under 
article  42  of  Regulations  41  and  840  of  Regulations  45  as  invested  capital  for 
excess  profits  tax  purposes. 

The  M  Company  was  incorporated  in  188-.  In  189-  the  corporation 
purchased  from  the  N  Company,  a  separate  corporation,  its  assets  valued 
at  150a;  dollars,  including  good  will  of  65*  dollars  for  which  there  was  issued 
150*  dollars  in  common  stock.  The  item  of  good  will  was  subsequently 
written  down  to  *  dollars. 

In  1912  the  corporation  had  an  appraisal  made  and  increased  its  surplus 
through  this  appraisal  by  setting  up  good  will  at  500*  dollars  and  tangible 
assets  at  150*  dollars.  Against  this  increase  in  surplus  there  was  issued, 
by  way  of  stock  dividend,  400*  dollais  in  preferred  stock  and  250*  dollars 
in  common  stock.  The  revenue  agent,  who  made  an  examination  of  the 
taxpayer's  books,  disallowed  all  of  the  appreciation  for  good  will  except 
65*  dollars,  which  had  been  acquired  by  the  issuance  of  stock  in  the  purchase 
of  the  assets  of  the  N  Company  in  189-,  and  all  of  the  appreciation  in  tangible 
property  which  was  not  clearly  shown  to  have  been  paid  in  and  thereby 
properly  credited  to  surplus 

The  taxpayer,  in  filing  his  returns  for  1917  and  1918,  claimed  the  total 
appreciation  both  for  good  will  and  tangible  property,  applying,  however 
the  statutory  limitation  of  20  per  cent  for  good  will  in  1917  and  25  per  cent 
in  1918. 

Under  assessment  by  the  Income  Tax  Unit,  which  sustained  the  findings 
of  the  revenue  agent,  the  taxpayer  submitted  evidence  in  the  form  of  an 
affidavit  signed  by  the  president  of  the  company,  showing  that  good  will 
aggregating  in  value  95*  dollars  had  been  actually  acquired  for  cash  in  addi- 
tion to  the  65*  dollars  good  will  acquired  for  stock  as  above  stated.  The 
Income  Tax  Unit  thereupon  revised  its  assessment  and  allowed  the  tax- 
payer for  invested  capital  purposes  a  total  good-will  valuation  of  160*  dollars. 
The  taxpayer  has  appealed  from  this  revised  assessment  and  now  claims  the 
full  appreciation  made  in  1912  for  both  tangible  and  intangible  properties, 
subject  only  to  the  statutory  limitations  of  20  per  cent  and  25  per  cent  for 
the  years  1917  and  1918,  respectively. 

Article  42  of  Regulations  41  provides  that — 

If  value  appreciation  of  a  kind  not  subject  to  income  tax  (other  than  that  allowed  under 
article  55)  has  been  taken  up  in  the  accounts  a  deduction  must  be  made  in  respect  of  such 
appreciation  so  taken  up. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  840. 


Article  55  provides  that — 

Tangible  property  paid  in  for  stock  or  shares  prior  to  January  1,  1914,  must  be  valued 
at  either  (a)  the  actual  cash  value  of  such  property  on  January  1,  1914,  or  (b)  the  par 
value  of  the  stock  or  shares  specifically  issued  therefor,  whichever  is  lower.  This  is  one 
of  the  few  cases  in  which  the  law  permits  allowance  to  be  made  for  appreciation,  and  here 
no  appreciation  can  be  recognized  unless  the  original  stock  or  shares  were  specifically 
issued  in  exchange  for  such  tangible  property. 

It  must  be  observed,  first,  that  the  appreciation  of  taxpayers  assets 
as  of  January  31,  1912,  was  not  subject  to  income  tax,  and,  second,  that  only 
tangible  property  may  be  appreciated  to  (a)  the  actual  cash  value  of  such 
property  on  January  1,  1914,  or  to  (b)  the  par  value  of  the  stock  specifically 
issued  therefor,  whichever  is  lower.  It  can  not  be  claimed  that  a  stock 
dividend  issued  against  a  surplus  reflecting  an  appraisal  of  both  tangible 
and  intangible  property  is  an  original  issue  of  stock  specifically  exchanged  for 
tangible  property. 

Article  64  (2)  provides  that — 

Amounts  expended  in  the  past  for  good  will,  trade-marks,  trade  brands,  franchises, 
and  other  intangible  assets  of  a  like  character,  are  controlled  by  the  language  of  the  statute 
which  provides  that  such  assets  "shall  be  included  in  invested  capital  if  the  corporation 
or  partnership  made  payment  bona  fide  therefor  specifically  as  such  in  cash  or  tangible 
property."  The  Commissioner  of  Internal  Revenue  will  recognize  additions  to  invested 
capital  on  account  of  intangible  assets  only  if  such  assets  have  been  explicitly  paid  for  in 
the  manner  prescribed  by  the  statute.  Where  expenditures  have  been  made  for  the 
general  development  of  intangible  assets  and  charged  as  current  expense,  no  readjustment 
thereof  will  be  allowed. 

From  the  facts  as  stated,  the  Income  Tax  Unit,  in  its  revised  assessment 
letter,  allowed  an  aggregate  for  good  will  of  160#  dollars.  With  the  exception 
of  65*  dollars  of  this  amount,  the  good  will  so  allowed  was  acquired  for  cash 
prior  to  March  1,1913,  according  to  affidavit  of  the  president  of  the  company. 
These  items  were  properly  restored  to  invested  capital  under  article  64(2) 
and  (3).  The  item  65*  dollars  for  good  will  on  the  books  of  the  N  Company 
was  acquired  for  stock.  The  value  of  this  item  at  date  of  acquisition  is  a 
matter  of  proof.  Under  article  57  of  Regulations  41  evidence  sufficient  to 
determine  proper  allowance  as  invested  capital  has  not  been  submitted  to  the 
Committee. 

The  Committee  therefore  sustains  the  action  of  the  Income  Tax  Unit  in 
disallowing,  under  article  42  of  Regulations  41  and  under  article  840  of  Regu- 
lations 45,  appreciation  of  either  good  will  or  tangible  property.  The 
Committee  further  sustains  the  Unit  in  allowing,  under  article  64(2)  and 
(3)  of  Regulations  41  and  article  842  of  Regulations  45,  the  good  will  acquired 
for  cash  prior  to  March  1,  1913.  Allowance  for  invested  capital  of  tangible 
or  intangible  property  acquired  for  stock  is  subject  to  the  limitations  pre- 
scribed by  articles  55  and  57  of  Regulations  41. 
4 


52-20-1367:  A.  R.  R.  349 
The  opinion  of  the  Committee  is  requested  whether  the  M  Company 
should  receive  the  benefit  of  an  addition  to  invested  capital,  for  ex- 
cess profits  tax  purposes,  by  submitting  amended  returns  for  the  years 
1916  and  1917;  in  which  returns  a  deduction  for  amortization,  claimed 
and  allowed  in  the  original  returns,  should  be  eliminated. 

The  facts  as  stated  are  that  the  above-mentioned  company  manufac- 
tured munitions.  In  its  income  tax  returns  for  the  years  1916  and  1917, 
the  company  has  claimed  amortization  of  the   facilities   for  their 

*  „»  -        %,  Supplementary  Bulletin  Ruling*. 


Sec.  326.    Art.  840.— 5. 

manufacture  in  the  same  amount  as  appeared  upon  their  munition  manu- 
facturer's returns  and  the  taxpayer  now  seeks  to  eliminate  from  its 
income  tax  returns  the  amount  of  such  amortization  which,  it  is  said, 
has  been  included  therein. 

This  request  on  the  part  of  the  taxpayer  has  heretofore  been  denied 
by  the  Unit. 

Title  III  of  the  Revenue  Act  of  1916,  known  as  the  "Munition  Manu- 
facturer's Tax,"  imposes  a  tax  upon  the  entire  net  profits  received  or 
accrued  from  the  sale  or  disposition  of  certain  specified  articles  of 
munitions  manufactured  within  the  United  States,  and  for  the  purpose 
of  computing  such  net  profits  permits  certain  deductions,  among  which, 
under  section  302  (f),  is — 

A  reasonable  allowance  according  to  the  conditions  peculiar  to  each  concern, 
for  amortization  of  buildings  and  machinery,  account  being  taken  of  the  excep- 
tional depreciation  of  special  plants; 

and  Regulations  39  promulgated  under  the  provisions  of  the  Act,  provide 
more  specifically,  in  article  21,  what  shall  constitute  such  "amortization" 
and  how  the  amount  thereof  shall  be  determined. 

The  Revenue  Act  of  1916,  both  as  passed  originally  and  as  amended 
by  the  Revenue  Act  of  1917,  not  only  does  not  provide  specifically  for 
any  allowance  for  amortization  for  income  tax  purposes,  but  in  Regu- 
lations 33,  revised,  promulgated  thereunder,  specifically  prohibits  such 
an  allowance  although  recognizing  an  allowable  deduction  on  account  of  depre- 
ciation in  the  value  of  any  class  of  property  subject  to  wear  and  tear. 

Article  162  of  Regulations  33,  revised,  provides  that: 

The  deduction  to  be  allowed  relates  solely  to  loss  due  to  use,  wear  and  tear, 
and  the  matter  of  obsolescense  is  not  relevant  inasmuch  as  when  the  property 
becomes  obsolete  a  deduction  for  the  loss  sustained  thereby,  representing  the 
difference  between  the  cost  and  the  amount  of  depreciation  previously  charged 
off  or  which  should  have  been  charged  off  in  prior  years,  will  be  allowed. 

It  appears  that  in  preparing  its  munitions  tax  returns  and  its  income 
and  excess  profits  tax  returns,  this  taxpayer  deducted  in  its  income  tax 
return  the  same  amount  which  had  been  deducted  in  its  munitions  tax 
return;  such  amount  including  a  charge  for  amortization  (or  obsoles- 
cence), as  well  as  a  charge  for  depreciation,  and  this  charge,  in  the  audit 
of  the  taxpayer's  income  tax  return  by  the  Unit,  was  allowed  as  a 
deduction  although  obviously  the  Unit  was  in  error  in  making  such  an 
allowance. 

It  is,  therefore,  recommended  that  this  taxpayer  be  permitted  to  file 
amended  income  tax  returns  for  the  years  affected,  from  which  returns 
shall  be  excluded  as  deductions  the  charges  for  amortization  included 
within  the  returns  as  originally  filed,  and  that  the  deductions  thus  ex- 
cluded shall  be  allowed  as  additions  to  the  invested  capital  of  the 
taxpayer  for  profits  tax  purposes. 
5 


18-21-1615:  O.  D.  901 

Where  a  corporation  claims  as  an  addition  to  its  invested  capital  for 
1917  and  subsequent  years  the  excess  of  the  value  of  its  patterns  over  the 
value  at  which  they  have  been  carried  on  its  books,  and  such  claim  comes 
within  the  provisions  of  articles  840  (2)  and  841  (1)  of  Regulations  45, 
amended  returns  may  be  filed  for  each  year  for  which  an  erroneous  return 
has  been  made  both  before  and  after  March  1,  1913.  Any  overpayment 
of  taxes  for  the  years  1917  to  1920  shown  on  the  basis  of  the  amended  re^ 
turns  may  be  made  the  subject  of  a  claim  for  refund. 

Supplementary  Bulletin  Rulings, 


Sec.  326.    Art.  840.— 6. 

sir  sis^^xi^r^snM^^^te? 

Recommended,  that  the  action  of  the  Income  Tax  Unit  in  disallowing  the  IV1 
Company  its  claim  for  capitalization  of  amounts  expended  prior  to  January  1, 
1909,  for  the  purpose  of  increasing  the  circulation  of  its  paper  be  sustained  under 
articles  840  and  841  of  Regulations  45. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  the  right  to  capitalize 
amounts  expended  prior  to  January  1,  1909,  which  the  corporation  claims 
were  for  the  purpose  of  increasing  the  circulation  of  the  newspaper  published 
by  it. 

The  M  Company  was  incorporated  in  188 —  with  a  capital  stock  of 
x  dollars,  and  has  been  since  its  inception  a  close  corporation.  It  is  claimed 
that  the  profits  of  the  company  have  been  used  to  build  up  its  business  and 
that  no  additional  capital  has  ever  been  paid  in.  It  is  further  stated  that 
due  to  the  fact  that  the  corporation  stock  has  always  been  closely  held  no 
distinct  effort  has  been  made  to  separate  capital  expenditures  from  current 
expenses  in  years  gone  by.  The  company  proposed  to  include  in  invested 
capital  an  item  of  20x  dollars  as  an  intangible  asset  representing  the  cost  of 
acquiring  its  circulation  list.  This  amount  is  determined  by  an  analysis  of 
the  records  of  expenditures  of  the  company  from  the  beginning  of  its  business 
to  December  31,  1908.  It  is  stated  this  analysis  separates  all  expenditures 
which  have  been  made  for  maintenance  of  old  circulation  and  for  the  acquire-, 
ment  of  additional  circulation  and  all  expenditures  which  can  be  properly 
classed  as  chargeable  to  advertising. 

In  the  cost  of  circulation  the  appellant  has  included  cost  of  gathering  and 
disseminating  news,  cost  of  editorials,  and  other  features  and  general  expenses. 
Expenses  have  been  apportioned  between  "advertising"  and  "cost  of  circula- 
tion" on  the  basis  of  the  column  devoted  to  each  in  the  daily  issues.  In 
setting  up  the  capital  expenditures  of  each  year  to  cover  the  "cost  of  in- 
creased circulation"  the  appellant  has  used  as  a  baisis  that  portion  of  the  entire 
circulation  cost  of  each  year  as  is  represented  by  the  average  daily  increase 
over  the  previous  year  divided  by  the  average  daily  circulation  of  the  current 
year.  On  this  basis  of  apportionment  exhibits  have  been  submitted  for  each 
year  from  188 —  to  1908,  inclusive,  and  on  basis  of  these  exhibits  its  original 
claim  for  invested  capital  amounting  to  20x  dollars  has  been  amended  to 
\0x  dollars. 

The  company  claims  to  have  made  a  consistent  effort  to  increase  the 
circulation  of  its  publication,  through  the  inclusion  in  its  columns  of  certain 
special  features  which,  in  themselves  while  nonrevenue  producing,  appealed 
to  the  home.  The  company  claims  never  to  have  abnormally  increased  the 
cost  of  acquiring  circulation  by  spectacular  methods  such  as  offering  of  prem- 
iums, prizes,  bonuses,  etc.,  and  that  as  a  result  the  newspaper  has  a  stable 
home  circulation  and  an  advertising  clientele  consisting  of  not  only  local 
advertising  but  those  located  in  a  near-by  city.  It  is  noted  the  amount  claimed 
as  invested  capital  on  account  of  its  expenditures  for  circulation  is  limited 
to  the  period  prior  to  the  year  1909. 

The  Income  Tax  Unit  does  not  question  the  value  of  the  circulation  in 
commanding  high  rates  for  advertising,  nor  does  it  question  the  propriety 
of  capitalizing  such  amounts  as  can  be  determined  to  have  been  expended 
specifically  for  the  increase  in  circulation,  but  contends  that  it  is  not  prac- 
ticable to  ascribe  the  increase  in  circulation  to  any  specific  part  of  the  paper 
or  to  any  particular  feature  or  features,  notwithstanding  the  fact  that  the 
features  appear  to  have  been  used  with  that  sole  end  in  view. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  840.— 7. 


This  Committee  has,  in  several  instances,  stated  that  in  its  opinion 
expenditures  made  prior  to  1909  in  the  development  of  an  intangible  asset 
and  distinctly  set  aside  at  the  time  and  capitalized  by  the  issuance  of  stock 
gave  a  definite  right  to  a  claim  for  additional  invested  capital.  •  In  the  instant 
case,  however,  the  corporation  exercised  its  option  in  charging  to  current 
expenses  not  only  the  cost  of  publication  but  whatever  direct  cost  there  may 
have  been  incident  to  building  up  a  large  circulation  list. 

Article  840  of  Regulations  45  provides,  in  part,  as  follows : 

(3)  Amounts  which  have  been  expended  in  the  past  for  intangible  property  of  any 
kind  can  be  restored  to  capital  or  surplus  account  only  to  the  extent  that  the  corporation 
specifically  paid  such  amounts  for  the  intangible  property  as  such. 

Article  841  makes  further  provision  that: 

Additions  to  surplus  which  a  corporation  may  desire  to  make  under  the  preceding 
article  (840)  fall  broadly  into  two  classes: 

(1)  To  correct  returns  of  net  income  for  prior  years  in  which  actual  errors  have  been 
made,  as,  for  example,  where  excessive  depreciation  has  been  deducted,  additions  to  plant 
and  equipment  or  other  capital  charges  have  been  charged  off  as  an  expense,  inventories 
have  been  taken  upon  a  wrong  basis  of  valuation,  etc. 

(2)  To  reinstate  in  surplus  deductions  from  income  which  are,  as  a  matter  of  good 
accounting,  to  some  extent  optional,  such  as  experimental  expenses,  patent  litigation, 
development  of  good  will  through  advertising  or  otherwise,  etc. 

Appellant's  claim  must  of  necessity  rest  on  the  conditions  stated  in 
paragraph  3  of  article  840,  but  the  article  further  provides  that: 

Adjustments  falling  in  class  (2)  can  not  be  permitted,  as  in  such  cases  it  is  considered 
that  the  corporation  has  exercised  a  binding  option  in  deducting  such  expenses  from 
income.  An  election  of  this  sort  which  was  made  concurrently  with  the  transaction  can 
not  now  be  revised,  and  amended  returns  in  respect  thereof  can  not  be  accepted. 

In  the  instant  case  the  taxpayer  has  not  shown  the  extent  to  which 
the  corporation  specifically  paid  amounts  for  intangible  property  as  such 
or  for  the  development  of  an  intangible  asset,  nor  has  it  shown  that  such 
expenditures,  when  made,  were  currently  set  aside  and  capitalized.  The 
expenditures  have  been  apportioned  under  the  exhibit  submitted  between 
"advertising"  and  "cost  of  circulation"  on  the  basis  of  the  columns  devoted 
to  each  in  the  daily  issues,  and  the  entire  circulation  cost  of  each  year  is 
represented  by  the  average  daily  increase  over  the  previous  year  divided 
by  the  average  daily  circulation  of  the  current  year.  As  above  suggested, 
such  a  basis  of  claim  for  an  intangible  value  does  not  meet  the  requirements  of 
the  regulations. 

The  Committee,  accordingly,  recommends  that  the  action  of  the  Income 
Tax  Unit  in  disallowing  the  M  Company  its  claim  for  capitalization  of 
amounts  expended  prior  to  January  1,  1909,  for  the  purpose  of  increasing 
the  circulation  of  its  paper,  be  sustained  under  articles  840  and  841  of  Regula- 
tions 45. 

7 


47-21-1937:  A.  R.  M.  141. 
Held,  in  the  matter  of  the  contention  of  the  M  Company  and  the  O  Com- 
pany, taxpayers  engaged  in  the  publication  of  newspapers,  that  moneys  expended 
out  of  earned  surplus  or  current  earnings  for  the  sole  purpose  of  building  up  the 
circulation  structure  may  be  added  to  capital  invested  when  proper  proof  of 
such  expenditures  is  made  and  amended  returns  for  prior  years  have  been  filed, 
and  that  the  circulation  structure  so  built  up  is  intangible  property  as  defined 
in  the  regulations. 

The  Committee  has  had  under  consideration  the  general  question  pre- 
sented by  the  M  Company  and  the  O  Company,  taxpayers  engaged  in  the 
publication  of  newspapers,  as  to  whether  items  expended  for  circulation 

Supplementary  Bulletin  Ruling*. 


Sec.  326.    Art.  840.— 8. 


building  are  part  of  invested  capital;  also  whether  the  circulation  structure 
should  be  considered  as  tangible  or  intangible  property. 

During  the  latter  part  of  July  a  hearing  was  granted  to  the  parties,  at 
which  time  they  were  represented  by  attorneys. 

It  appears  that  many  corporations  engaged  in  the  publication  of  news- 
papers have  built  their  circulation  structure  through  the  expenditure  of 
earnings.  Some  papers,  however,  acquired  for  a  cash  consideration  this 
structure.  It  is  contended  that  a  newspaper  concern  can  not  make  any 
money  until  the  circulation  structure  is  established.  The  extent  to  which 
it  can  sell  advertising  space  and  the  price  which  it  can  get  for  that  space 
are  dependent  on  the  size  and  character  of  that  structure — that  is,  the  form 
of  circulation.  There  is  no  doubt  that  this  structure  is  property  which  pro- 
duces earnings  on  which  the  corporation  pays  tax,  and  there  is  no  doubt 
that  the  amount  of  the  earnings  is  measured  to  a  great  extent  by  the  charac- 
ter of  the  circulation  structure,  and  that  the  extent  and  character  of  the 
structure  are  dependent  on  the  expenditures  made  to  build  or  to  purchase  it. 

It  was  pointed  out  that  in  the  sale  of  newspaper  property  the  principal 
thing  considered  by  the  purchaser  is  the  circulation  structure,  in  many 
cases  the  expenditures  made  for  this  structure  have  not  been  reflected  in 
surplus,  due  to  the  concern's  bookkeeping  practice. 

It  has  been  the  policy  of  the  Bureau  in  instances  where  the  expenditures 
made  in  building  the  circulation  structure  are  not  reflected  in  surplus  on  the 
books  of  account,  to  give  special  treatment  and  assess  the  taxes  under  the 
provisions  of  section  210  of  the  1917  Act  and  sections  327  and  328  of  the 
1918  Act.  It  is  now  contended  that  this  practice  should  be  discontinued 
and  that  corporations  publishing  newspapers  should  be  permitted  to  in- 
crease the  surolus  account  by  an  amount  sufficient  to  cover  the  expenditures 
for  building  the  circulation  structure,  and  that  the  regulations  which  classify 
the  circulation  structure  as  intangible  property  should  be  repealed. 

In  order  to  reach  a  correct  conclusion  in  this  matter  it  is  necessary  to 
examine  the  provisions  of  the  statute  defining  tangible  and  intangible  prop- 
erty; also  the  provisions  defining  invested  capital. 

Section  207  of  the  Revenue  Act.  of  1917  provides  that  capital  invested 
includes  the  following: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  (2)  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash  for  stock  or  shares  in  such  cor- 
poration or  partnership  at  the  time  of  such  payment  (but  in  case  such  tangible  property 
was  paid  in  prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value 
of  such  property  as  of  January  first,  nineteen  hundred  and  fourteen,  but  in  no  case  to 
exceed  the  par  value  of  the  original  stock  or  shares  specifically  issued  therefor),  and  (3) 
paid  in  or  earned  surplus  and  undivided  profits  used  or  employed  in  the  business,  exclu- 
sive of  undivided  profits  earned  during  the  taxable  year:    *    *  * 

(b)  The  good  will,  trade-marks,  trade  brands,  the  franchise  of  a  corporation  or  part- 
nership, or  other  intangible  property,  shall  be  included  as  invested  capital  if  the  corpora- 
tion or  partnership  made  payment  bona  fide  therefor  specifically  as  such  in  cash  or  tangible 
property,  the  value  of  such  good  will,  trade-mark,  trade  brand,  franchise,  or  intangible 
property,  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible  property  paid 
therefor  at  the  time  of  such  payment    *    *  *. 

Article  47.  Regulations  41,  defines  tangible  property  and  intangible 
property  as  follows: 

The  term  "other  intangible  property"  as  used  in  section  207  will  be  construed  to  mean 
property  of  a  character  similar  to  good  will,  trade-marks,  and  the  other  specific  kinds  of 
property  enumerated  in  the  same  clause.  With  respect  to  property  not  clearly  of  such 
a  character,  rulings  will  be  issued  as  occasion  may  demand  to  indicate  whether  it  shall 
be  regarded  as  tangible  or  intangible. 


Supplementary  Bulletin  Rulintrs. 


Sec.  326.    Art.  840.— 9. 

Section  326(a)  of  the  Revenue  Act  of  1918  provides  that  invested  capital 
includes  the  following: 

(1)  Actual  cash  bona  fide  paid  in  for  stoclcTor  shares: 

(2)  Actual  cash  value  of  tangible  property,  other  than  cash,  bona  fide  paid  in  for 
stock  or  shares,  at  the  time  of  such  payment,  but  in  no  case  to  exceed  the  par  value  of  the 
original  stock  or  shares  specifically  issued  therefor    *    *  *: 

(3)  Paid  in  or  earned  surplus  and  undivided  profits;  not  including  surplus  and  un- 
divided profits  earned  during  the  year. 

Section  325(a)  of  the  Revenue  Act  of  1918  provides,  in  part,  as  follows: 
The  term  "intangible  property"  means  patents,  copyrights,  secret  processes  and  form- 
ulae, good  will,  trade-marks,  trade  brands,  franchises,  and  other  like  property; 

The  term  "tangible  property"  means  stocks,  bonds,  notes,  and  other  evidences  of  in- 
debtedness, bills  and  accounts  receivable,  leaseholds  and  other  property  other  than  intan- 
gible property. 

Article  811  of  Regulations  45  provides,  in  part,  as  follows: 

*  *  *  Associated  Press,  United  Press,  and  similar  franchises,  and  subscription  lists 
and  mailing  lists  are  intangible  property. 

Article  840,  Regulations  45,  provides  in  part  as  follows: 

A  corporation's  books  of  account  will  be  presumed  to  show  the  facts.    If  it  claims 

that  its  capital  or  surplus  account  is  understated  the  burden  of  proof  will  rest  upon  it. 

Additions  to  such  accounts  will  be  accepted  to  the  following  extent: 

********* 

(3)  Amounts  which  have  been  expended  in  the  past  for  intangible  property  of  any 
kind  can  be  restored  to  capital  or  surplus  account  only  to  the  extent  that  the  corporation 
specifically  paid  such  amounts  for  the  intangible  property  as  such.  For  provisions  relat- 
ing to  patents  see  article  843. 

(4)  Adjustments  necessary  to  correct  other  errors  found  in  the  books  of  account  may 
be  made.     But  see  the  following  article. 

Article  841,  Regulations  45,  reads  in  part  as  follows: 

Additions  to  surplus  which  a  corporation  may  desire  to  make  under  the  preceding 
article  fall  broadly  into  two  classes: 

(1)  To  correct  returns  of  net  income  for  prior  years  in  which  actual  errors  have  been 
made,  as  for  example  where  excessive  depreciation  has  been  deducted,  additions  to  plant 
and  equipment  or  other  capital  charges  have  been  charged  off  as  an  expense,  inventories 
have  been  taken  upon  a  wrong  basis  of  valuation,  etc. 

(2)  To  reinstate  in  surplus  deductions  from  income  which  are  as  a  matter  of  good 
accounting  to  some  extent  optional,  such  as  experimental  expenses,  patent  litigation,  de- 
velopment of  good  will  through  advertising  or  otherwise,  etc. 

Adjustments  falling  in  class  (1)  will  be  permitted  for  all  years  whether  before  or  after 
March  1,  1913,  provided  amended  returns  of  net  income  are  filed  for  each  year  in  which 
an  erroneous  return  has  been  made.  *  *  *  Adjustments  falling  in  class  (2)  can  not 
be  permitted,  as  in  such  cases  it  is  considered  that  the  corporation  has  exercised  a  binding 
option  in  deducting  such  expenses  from  income.  An  election  of  this  sort  which  was  made 
concurrently  with  the  transaction  can  not  now  be  revised,  and  amended  returns  in  respect 
thereof  can  not  be  accepted. 

From  the  foregoing  it  will  be  noted  that  earned  surplus  is  a  part  of  the 
invested  capital.  It  does  not  matter  whether  this  earned  surplus  is  invested 
in  plant  and  equipment  or  is  retained  in  cash.  The  Bureau  has  consistently 
held  that  amounts  which  have  been  expended  in  the  past  for  intangible 
property  of  any  kind  can  be  restored  to  surplus  account  to  the  extent  that 
the  corporation  specifically  paid  such  amounts  in  cash  for  the  intangible 
property  as  such.  Restoration  to  surplus  account  can  be  made  only  when 
the  amounts  expended  can  be  identified.  The  corporation  must,  in  order 
to  restate  the  surplus  account,  show  that  the  amounts  expended  were  ex- 
pended specifically  for  an  asset  whether  tangible  or  intangible. 

In  a  recent  case  decided  by  the  Committee  it  was  held  that  expenditures 
made  for  building  up  the  circulation  structure  may  be  added  to  capital 
invested  when  proper  proof  is  made.  In  that  case  the  expenditures  asserted 
were  for  inclusion  in  the  columns  of  certain  special  features,  the  companv 


Supplementary  Bulletin  Rulings. 


Sec.  326.   Art.  840.-10. 


claiming  not  to  have  resorted  to  any  "spectacular  methods  such  as  offering 
of  premiums,  prizes,  bonuses,  etc."  The  propriety  of  capitalizing  such 
amounts  as  can  be  determined  to  have  been  expended  for  the  increase  in 
circulation  can  not  be  questioned,  but  in  most  cases  which  have  come  before 
the  Committee  it  has  not  been  practicable  to  ascribe  the  increase  in  circula- 
tion to  any  specific  part  of  the  expenditure.  The  difficulty  in  most  cases 
seems  to  be  that  the  taxpayer  can  not  furnish  satisfactory  evidence  to  prove 
its  case.  Each  case  must  be  adjusted  and  settled  upon  its  own  merits  and 
if  a  taxpayer  can  prove  the  case,  then  the  matter  of  restating  the  surplus 
is  a  simple  one.  If  the  records  of  any  taxpayer  are  so  kept  that  proof  of  the 
amount  invested  in  the  circulation  structure  can  be  made  in  actual  figures 
and  can  be  identified  as  specifically  paid  in  building  up  the  circulation  struc- 
ture, the  Committee  can  not  see  any  reason  for  denying  such  taxpayer  the 
right  to  restate  the  surplus. 

Taxpayers  of  this  class  who  have  not  kept  sufficient  records  and  who  are 
unable  to  prove  their  cases  are  entitled  to  the  benefit  of  section  210  of  the 
Revenue  Act  of  1917  and  sections  327  and  328  of  the  Revenue  Act  of  1918. 
The  tax  in  these  cases  must  be  established  on  a  comparative  basis.  The 
only  proper  comparatives  would  be  such  concerns  as  could  show  the  cost 
of  the  circulation  structure  and  in  this  way  the  entire  capital  invested  may 
be  recognized  in  computing  the  tax  of  a  concern  which  can  not  properly 
prove  its  case. 

The  Committee  does  not  think  favorably  of  the  suggestion  made  by  the 
attorneys  that  affidavits  should  be  secured  from  a  large  number  of  publishers 
showing  the  cost  per  subscriber  of  their  circulation  structure  and  the  use 
of  these  affidavits  in  arriving  at  a  cost  per  unit  per  subscriber  for  the  pur- 
pose of  invested  capital.  This  basis  is  too  speculative  for  use  in  the  com- 
putation of  invested  capital. 

After  making  an  exhaustive  study  of  the  principle  involved  and  the 
assessment  of  taxes  against  taxpayers  engaged  in  the  business  of  publishing 
newspapers,  the  Committee  must  decline  to  accept  the  view  of  the  attorneys 
for  the  taxpayers  with  respect  to  the  classification  of  circulation  structure. 
The  regulations  properly  classify  such  property  as  "intangible  property." 
However,  expenditures  of  an  investment  nature  may  be  made  a  part  of 
earned  surplus  upon  submission  of  appropriate  proof  and  the  amounts  so 
expended  may  be  included  in  earned  surplus  whether  expended  for  tangible 
or  intangible  property. 

In  view  of  the  foregoing,  the  Committee  is  of  the  opinion  in  the  matter 
of  the  argument  of  the  M  Company  and  the  O  Company,  taxpayers  engaged 
in  the  publication  of  newspapers,  that  moneys  expended  out  of  earned  sur- 
plus or  current  earnings  for  the  sole  purpose  of  building  up  the  circulation 
structure  may  be  added  to  capital  invested  when  proper  proof  of  such  ex- 
penditures is  made  and  amended  returns  for  prior  years  have  been  filed, 
and  that  the  circulation  structure  so  built  up  in  intangible  property  as  defined 
in  the  regulations. 
8 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  840— 11. 


I  ('22)-15-219:    L  T.  1278. 
Revenue  Act  of  1921. 

Inquiry  is  made  as  to  whether  the  cost  of  rotogravure  supplements  comes 
within  the  purview  of  A.  R.  M.  141  [Ruling  No.  8,  above],  which  permits 
taxpayers  engaged  in  the  publication  of  newspapers  to  include  in  their  in- 
vested capital,  for  tax  purposes,  moneys  expended  out  of  earned  surplus  or 
current  earnings  for  the  sole  purpose  of  building  up  the  circulation  structure. 
It  is  stated  that  newspaper  publishers  employ  rotogravure  supplements 
largely  as  a  circulation  stimulant. 

The  question  to  be  determined  in  cases  affected  by  the  ruling  above 
referred  to  is  whether  the  amounts  claimed  as  an  addition  to  invested  capital 
can  be  identified  as  having  been  expended  out  of  earned  surplus  or  current 
earnings  for  the  sole  purpose  of  building  up  the  circulation  structure.  It 
is  believed  that  rotogravure  supplements  constitute  a  part  of  the  news 
service  furnished  by  newspapers  to  their  subscribers  and  are  not  of  such  a 
nature  that  the  expense  thereof  can  be  said  to  be  incurred  solely  for  the 
purpose  of  building  up  the  circulation  structure.  It,  therefore,  follows  that 
the  moneys  expended  therefor  may  not  be  added  to  invested  capital. 
9 


I  ('22)-49-629:  I.  T.  1524. 

Revenue  Act  of  1921. 

A  reserve  for  bad  debts  carried  by  a  corporation  on  December  31,  1920, 
may  be  included  in  invested  capital  for  1921,  subject  to  proper  adjustment 
during  the  year  to  the  extent  thereafter  utilized  to  liquidate  debts  outstanding 
on  December  31,  1920,  subsequently  determined  to  be  worthless.  Any 
portion  of  such  reserve  which  the  taxpayer  considers  not  necessary  for  bad 
debt  purposes  may  be  restored  to  surplus. 
10 


Supplementary  Bulletin  Rulings. 


c 


( 

\ 


{ 


2-20-22. 

Sec.  326.    Art.  841—  1. 

Law  Section  326— Invested  Capital  (1918  Act— 1[555,  ante):  (1921  Act- 
ios, post). 

Article  841. — Surplus  and  Undivided  Profits;  Limitations  of  Additions 
to  Surplus  Account  (Reg.  45— H769,  ante):  (Reg.  62— 1f  1201, 
post) . 

3-19-206:  T.  B.  R.  19. 

A  corporation  acquiring  with  stock  the  assets  of  a  previously  existing 
corporation,  among  which  assets  are  included  trade-marks,  good  will,  etc., 
can  not  claim  as  an  addition  to  invested  capital  amounts  expended  by  the 
predecessor  corporation  for  the  general  development  of  such  intangibles  and 
charged  by  it  as  current  expense. 
1 


(See  8-19-319;  Section  311,  Article  781.)    Adjustment  of  salaries  paid 
during  prewar  period. 
2 


2-20-679:  A.  R.  M.  12. 

At  the  request  of  the  Commissioner  this  Committee  has  given  an  oral 
hearing  to  representatives  of  the  proprietary  medicine  manufacturers  in 
general,  and  of  the  M  Company  in  particular,  upon  the  question  of  an  addi- 
tion to  invested  capital  through  the  recognition  of  a  portion  of  the  amounts 
spent  in  prior  years  for  advertising  and  developing  trade-marks  and  trade 
brands. 

It  was  stated  at  the  hearing  that  the  methods  pursued  by  the  company 
named  above  are  essentially  similar  to  those  followed  by  many  other  manu- 
facturers engaged  in  the  same  industry,  and  that  this  case  is  a  typical  one. 
The  asset  of  greatest  value  of  the  M  Company  is  a  formula  and  trade-mark. 
When  this  asset  was  acquired,  the  product  had  a  certain  sale  in  limited  terri- 
tory. Profits  from  the  sale  of  the  product  were  reinvested  in  development 
of  new  territory.  For  instance,  if  the  company  decided  that  it  would  under- 
take to  develop  any  territory  where  it  had  previously  sold  no  goods,  it  would 
institute  an  intensive  advertising  campaign  in  that  territory  by  newspaper 
and  other  advertising  agencies,  distribution  of  samples,  etc.  The  next  year 
some  other  territory  would  be  chosen.  During  this  period  of  development 
it  is  claimed  that  the  amount  expended  in  advertising  in  a  given  territory 
was  far  in  excess  of  the  profits  made  from  sales  in  such  territory,  and  it  is, 
therefore,  claimed  that  a  portion  of  all  such  expenditures  is  in  reality  a  capital 
investment  and  not  merely  expense  of  selling,  since  it  is  an  investment  from 
which  returns  are  to  be  expected  in  the  future  rather  than  in  the  immediate 
present.  It  must  be  conceded  that  in  theory  some  proportion  of  all  adver- 
tising is  in  effect  the  building  up  of  good  will,  but  it  is  the  judgment  of  the 
Committee  that  it  is  impossible  to  allocate  any  definite  percentages  as  between 
capital  investment  and  selling  costs. 

It  seems  clear  to  the  Committee  that  no  court  would  permit  the  dis- 
allowance of  a  proportion  of  reasonable  advertising  in  a  return  of  income  on 
the  ground  that  such  advertising  was  a  capital  investment  and  not  an  actual 
necessary  expense  of  business,  and  if  that  be  true  the  converse  must  follow, 
namely:  that  the  corporation  can  not  claim  that  any  proportion  of  such  expense 
is  capital  investment  and  not  business  expense. 

It  was  also  brought  out  at  the  hearing  that  there  have  been  a  number  of 
wideiy  advertised  trade-marks  of  this  character  sold  within  recent  years  and 
that  such  sales  were  usuallv  made  upon  the  basis  of  aporoximatelv  a  five-year 


Supplementary  Bulletin  Rutins;-- 


Sec.  326.    Art.  841.— r° 


return;  that  is  to  say,  for  a  price  hve  times  the  annual  earning  capacity. 
There  are,  therefore,  satisfactory  comparatives  in  the  event  that  it  is  desired 
to  treat  other  cases  where  there  have  heen  no  sales  as  special  cases  under 
sections  327  and  328,  since  the  cash  paid  for  tangibles  and  intangibles  affords 
a  fair  invested  capital  basis.  It  also  seems  reasonable  to  regard  those  cases 
where  large  sums  have  been  spent  in  advertising,  thereby  creating  a  good 
wiil  or  earning  capacity  far  in  excess  of  recognizable  invested  capital,  as  being 
cases  in  which  there  are  abnormal  conditions  affecting  invested  capital. 

The  Committee,  therefore,  recommends  that  the  percentage  of  tax  to 
income  in  the  cases  of  those  corporations  which  have  an  adequate  recognizable 
invested  capital  be  determined,  and  that  other  cases  which  have  no  such 
invested  capital  be  regarded  as  coming  within  the  scope  of  section  327  and 
the  tax  properly  to  be  computed  under  section  328. 
3 


8-21-1472:  A.  R.  R.  394. 

Recommended  that  a  corporation  which  issued  bonds  at  a  discount  in  January, 
1900,  and  elected  then  to  charge  such  discount  to  profit  and  loss  for  the  year  of  issue 
and  the  next  two  succeeding  years,  may  not  now  revise  its  accounts  and  file 
amended  returns  for  the  purpose  of  reinstating  to  invested  capital  the  unexpired 
portion  of  such  discount  and  claiming  as  a  deduction  from  income  that  portion 
applicable  to  each  year. 

It  appears  from  the  records  that  the  M  Company  issued  bonds  on  January 
1,  1900,  to  the  amount  of  70#  dollars  at  a  discount  of  7x  dollars  and  charged 
such  discount  to  profit  and  loss  in  1900,  1901  and  1902. 

The  accountants  writing  in  behalf  of  the  corporation  stated  that  it  was 
their  understanding  that  for  the  purpose  of  computing  net  income  the  case 
was  covered  by  article  544  (3)  (a)  of  Regulations  45.  The  M  Company  in 
its  appeal  contends,  in  effect,  that  it  did  not  follow  good  accounting  practice 
in  charging  off  the  discount  in  question  to  profit  and  loss  during  the  years 
1900,  1901,  and  1902;  that  recognized  accounting  authorities,  some  of  whom 
are  named  and  quoted,  hold  that  discount  on  bonds  issued  should  be  spread 
over  the  term  of  the  bonds,  and  the  installments  thereof  charged  against 
income  each  year,  and  that,  under  article  544,  it  did  not  have  an  option  of 
treating  all  of  such  discount  as  interest  expense  at  the  date  of  issuance  of 
the  bonds. 

Article  544  (3)  (a)  of  Regulations  45,  reads: 

If  bonds  are  issued  by  a  corporation  at  a  discount,  the  net  amount  of  such  discount 
is  deductible  as  interest  and  should  be  prorated  or  amortized  over  the  life  of  the  bonds. 

The  Unit,  in  its  reply  of  June  30,  1920,  contended  that  article  544(3)  (a) 
must  be  considered  in  connection  with  article  841,  which  latter  article, 
bearing  the  caption  "Surplus  and  undivided  profits:  limitations  of  addition 
to  surplus  account,"  provides,  in  part,  that  deductions  which  have  been  taken 
from  income  and  which  are  as  a  matter  of  good  accounting  to  some  extent 
optional,  such  as  experimental  expenses,  patent  litigation,  development  of 
good  will  through  advertising  or  otherwise,  can  not  be  reinstated  in  surplus, 
as  in  such  cases  it  is  considered  that  the  corporation  has  exercised  a  binding 
option  in  deducting  such  expenses  from  income,  and  an  election  of  this  sort 
which  was  made  concurrently  with  the  transaction  can  not  now  be  revised 
and  amended  returns  in  respect  thereto  can  not  be  accepted. 

The  Solicitor  of  Internal  Revenue,  in  a  memorandum  dated  May  13. 
1919,  commenting  on  a  ruling  in  a  case  similar  to  the  one  under  consideration 
stated : 

Supplementary  Bulletin  Rulings. 


6-9-22. 

Sec.  326.    Art.  841—  3. 

It  appears  that  the  corporation  in  this  case  had  an  option  as  to  the  method  it  would 
adopt  in  handling  entries  of  the  discount  on  the  bonds  which  it  issued.  Two  methods 
were  available: 

First.  To  treat  the  discount  as  interest  paid  in  advance  to  be  amortized  over  the  life 
of  the  bonds. 

Second.   To  charge  the  discount  as  a  loss  in  its  profit  and  loss  account. 

The  corporation  exercised  its  option  by  adopting  the  second  method.  It  did  so  appar- 
ently to  lessen  its  income  for  the  year  the  transaction  took  place.  It  now  seeks  to  adopt 
the  first  method  and  desires  to  amend  its  1917  return  accordingly.  The  effect  of  this 
procedure  would  be  that  the  discount  item  would  be  taken  from  the  losses  (profit  and  loss 
account),  thus  diminishing  the  losses  and  thereby  increasing  its  surplus  account,  and 
indirectly  its  invested  capital. 

Where  a  corporation  has  exercised  an  option  as  to  accounting  practice  and  such  option 
was  concurrent  with  the  transaction,  amended  returns  are  not  permissible.  See^article 
841  of  Regulations  45. 

While  the  Committee  is  in  accord  with  the  contention  of  the  M  Company 
that  it  did  not  follow  the  more  generally  approved  accounting  method  in 
charging  off  the  discount  on  its  bonds  of  January  1,  1900,  as  it  did,  that  fact 
alone  does  not  entitle  it  now  to  adopt  another  method  and  adjust  its  accounts 
for  the  purpose  of  filing  amended  income  and  profits  tax  returns.  There 
were  at  the  time  said  bonds  were  issued  no  income  tax  regulations  prescribing 
a  method  to  be  followed  in  the  treatment  of  bond  discount.  It  was  entirely 
optional  with  the  taxpayer  as  to  the  method  it  would  adopt  in  handling 
entries  of  discount  on  bonds  issued,  and  inasmuch  as  that  option  was  exercised 
at  the  time  the  bonds  were  issued  a  different  method  of  accounting  can  not 
now,  in  the  opinion  of  the  Committee,  be  adopted  for  tax  purposes,  which 
opinion  is  sustained  by  the  decision  in  the  case  of  the  C.  &  A.  Railroad  v. 
United  States  Court  of  Claims  (see  article  149,  Regulations  33,  revised,  issued 
under  the  provisions  of  the  Revenue  Act  of  1916,  as  amended  by  the  Revenue 
Act  of  1917). 

The  Committee,  therefore,  recommends  that  the  ruling  of  the  Unit  be 
sustained. 

4 


1-23-336:  I.  T.  1347 

Revenue  Act  of  1918. 

If  a  corporation  employed  its  own  labor  in  the  construction  of  its  plants 
such  as  building  of  machine  foundations  and  in  the  installation  and  assembling 
of  machines  and  other  equipment,  the  value  of  the  labor  so  employed  rep- 
resented a  capital  expenditure  which  may  be  included  in  invested  capital. 
If  the  value  of  such  labor  was  deducted  as  an  expense  in  excise  and  income 
tax  returns  for  years  prior  to  1917,  it  may  be  restored  to  invested  capital  at 
its  depreciated  value,  provided  amended  returns  are  filed  for  each  year  during 
which  a  deduction  from  income  was  made,  in  which  returns  the  amended  net 
income  shall  be  increased  by  the  value  of  the  labor  previously  deducted  as  an 
expense. 
5 


Supplementary  Bulletin  Rulings. 


2-20-22. 


Sec.  326.    Art.  843.  -1. 

Section  326.    Invested  Capital  (1918  Act    1(555,  ante):  (1921  Act    1|  1035, 
post). 

Article  843.- Surplus  and  Undivided  Profits  (Reg.  45—11776.  ante): 
(Reg.  62  -U1209,  post). 

47-20-1312:  A.  R.  M.  95. 

REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Income  Tax  Unit  in  disallowing  for  the  taxable 
year  1917,  an  item  of  50x  dollars  covering  depreciation  on  certain  patents. 

In  January,  1902,  the  M  Company,  then  a  newly  organized  corporation, 
acquired  ownership  of  eight  patents  issuing  therefor  to  A,  the  patentee 
900*  dollars  of  stock  of  the  corporation.  This  amount  was  subsequently 
increased  2x  dollars  by  expenses  of  acquisition.  The  patents  so  acquired, 
except  one,  issued  in  1900,  had  expired  prior  to  January  1,  1917,  but  as  of 
March  1,  1913,  all  but  one  were  in  effect.  Fifteen  new  patents  had,  however, 
been  added  to  the  company's  patents  between  date  of  incorporation  and 
March  1,  1913.  These  additional  patents  were  not  capitalized.  No  depre- 
ciation was  taken  by  the  taxpayer  on  the  patents  which  were  capitalized, 
until  the  year  1917,  when  1/17  of  the  book  value  was  charged  to  expenses 
notwithstanding  the  fact  that  all  except  one  of  them  had  expired  prior  to 
January  1,  1917. 

The  taxpayer  relies  upon  articles  167  and  843  of  Regulations  45,  and  upon 
Treasury  Decision  2929,  amending  article  163  of  Regulations  45,  in  support 
of  his  action. 

It  is  assumed  the  actual  value  at  date  of  acquisition  of  the  patents  by 
the  issuance  of  stock  has  been  determined  by  the  Income  Tax  Unit,  since 
this  question  is  not  at  issue  before  the  Committee. 

The  case  then  comes  clearly  under  the  provisions  of  article  174,  paragraph 
552,  and  article  167,  paragraph  494,  Regulations  33,  revised,  governing  the 
collection  of  the  income  tax  imposed  by  the  Revenue  Act  of  1917. 

Article  174,  paragraph  552,  provides: 

An  allowable  deduction  for  any  given  year  for  return  of  capital  invested  in 
patents  at  time  of  issue,  will  be  an  amount  equal  to  1/17  of  the  actual  cost  in 
cash  or  its  equivalent  of  such  patents. 

This  paragraph  of  article  174,  was  subsequently  amended  by  Advisory 
Tax  Board  Recommendation  59,  September  9,  1919,  to  provide  as  follows: 

Depreciation  of  patents  acquired  prior  to  March  1,  1913,  should  be  taken  on 
the  basis  of  their  fair  market  value  as  of  that  date,  if  affirmative  and  satisfac- 
tory evidence  of  such  value  is  offered. 

Article  167,  paragraph  494,  provides: 

Good  will  represents  the  value  attached  to  a  business  over  and  above  the 
value  of  the  physical  property  and  is  such  an  intangible  asset  that  it  is  not  sub- 
ject to  wear  and  tear  and  no  claim  for  depreciation  in  connection  therewith  can 
be  allowed.  Any  loss  resulting  from  or  on  account  of  investment  of  good  will  can 
be  determined  only  when  the  property  or  business  to  which  the  good  will  at- 
taches, is  sold  or  disposed  of,  in  which  case  the  profit  or  loss  will  be  determined 
upon  the  basis  of  the  value  of  the  assets,  including  good  will,  if  acquired  prior 
to  March  1,  1913,  or  their  cost  if  acquired  subsequent  to  that  date. 

The  basis  for  deduction  authorized  under  the  provisions  of  article  174 
is  the  return  of  capital  on  an  asset,  the  use  of  which  in  the  trade  or  business 
is  definitely  limited  in  duration.  The  taxpayer  did  not  elect,  during  the 
life  of  the  patents  acquired  in  1902,  to  provide  for  this  return  of  capital. 
Had  he  made  this  provision  his  surplus  for  invested  capital  purposes  under 
the  Revenue  Act,  would  have  been  correspondingly  reduced. 

He,  therefore,  can  not  now  claim  in  a  high  taxable  year,  after  the  expira- 
tion of  the  life  of  the  patents,  an  amount  equivalent  to  1/17  of  thu  co?t? 
thereby  touring  the  beneit  not  ©sly  ©I  a  r#ductio©  m  hh  ta*al£fe  bi€£me 

Supplementary  Bulletin  Rutins* 


Sec.  326.    Art.  843.-2 


for  the  year  1917,  but  the  advantage  of  the  investment  which  in  value  is 
subject  only  to  the  definite  limitations  prescribed  by  the  Act  and  the  regula- 
tions. 

The  Committee  therefore  sustains  the  action  of  the  Income  Tax  Unit 
in  disallowing  the  item  of  50*  dollars  claimed  by  the  taxpayer  in  the  taxable 
year  1917,  as  a  deduction  based  on  1/17  of  the  cost  of  said  patents. 
1 


13-21-1536:  A.  R.  R.  436 

Recommended  that  48*  dollars  be  allowed  as  the  value  of  patents  acquired 
for  stock  on  the  basis  that  the  preferred  stock  was  worth  par  and  the  common 
about  one-third  of  par  per  share  as  disclosed  by  collateral  stock  market  quotations 
at  the  date  of  the  organization  of  the  M  Company  in  189-  and  that  the  invested 
capital  should  not  be  reduced  by  the  value  of  patents  expired. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Unit  in  reducing  the  company's  invested  capital 
for  191/. 

A  single  issue  is  presented  in  the  appeal,  namely,  the  amount  of  invested 
capital  represented  by  patents  acquired  on  organization  of  the  company 
in  189-,  but  this  issue  has  two  aspects:  (1)  Whether  or  not  the  company  is 
entitled  to  any  invested  capital  by  reason  of  the  original  issue  of  stock  for 
patents  which  have  long  since  expired,  and  (2)  what  was  the  value  of  the 
patents  at  the  time  of  organization. 

The  stock  of  the  M  Company  was  issued  for  stock  of  five  other  companies 
but  under  the  authority  of  Regulations  41,  as  amended  by  Treasury  Deci- 
sion 2901,  the  Income  Tax  Unit  has  considered  the  acquisition  of  all  of  the 
stock  of  these  five  companies  as  being  in  effect  the  acquisition  of  their  assets, 
and  it  has  therefore  gone  behind  the  acquisition  of  stock  to  determine  the 
character  of  the  various  groups  of  assets  acquired.  One  of  the  principal 
groups  is  patents,  and  the  question  of  the  value  of  such  patents  at  the  time 
therefore  becomes  material. 

The  company  has  filed  numerous  affidavits  and  statements  claiming  a 
value  of  12x  dollars,  representing  the  par  value  of  the  stock  issued  therefor. 
In  the  opinion  of  the  Committee,  however,  appraisals,  either  by  a  board  of 
directors  at  the  time  of  purchase,  which  notoriously  fixes  the  value  as  equal 
to  the  par  value  of  the  stock  issued  therefor  irrespective  of  actual  market 
value  of  assets  so- acquired,  or  by  individual  appraisers  at  a  later  date,  are 
not  so  reliable  as  those  made  by  the  public  at  the  time  through  the  purchase 
and  sale  of  the  stock  at  or  about  the  time  of  issuance. 

The  Unit  has  filed  a  supplemental  memorandum  made  subsequent  to  the 
hearing  of  the  case  in  which  it  gives  a  valuation  on  the  basis  of  collateral 
stock  market  transactions  at  the  date  of  the  organization  of  the  company 
as  36x  dollars.  This  accords  very  closely  with  its  revised  valuation  on  the 
basis  of  royalties,  which  is  37x  dollars,  and  in  the  light  of  earnings  appears 
to  be  a  much  more  reliable  estimate  of  value  than  that  claimed  by  the  com- 
pany. The  value  of  the  patents  is  fully  demonstrated  by  prior  earnings  of 
the  predecessor  corporations  and  is  supported  by  the  earnings  subsequent 
to  date  of  acquisition  by  the  present  owner. 

p  I  However,  at  a  meeting  of  the  board  of  directors  in  April,  1899,  at  which 
the  president  submitted  certain  correspondence  with  the  N  Company  in 
reference  to  the  particular  business,  it  appears  that  the  promoters  agreed  to 
subscribe  to  or  cause  to  be  subscribed  to  y  shares  of  the  preferred  stock  at 
par,  that  such  stock  was  subscribed  to  at  par  and  the  amount  received  therefor 
paid  into  the  treasury  of  the  company  as  working  capital.   The  balance  of  the 

Supplementary  Bulletin  Ruling*. 


Sec.  326.    Art.  843.-3. 


shares  of  stock  issued,  7y  shares  preferred  of  the  par  value  of  35*  dollars, 
and  8y  shares  common  of  the  par  value  of  40*  dollars,  was  paid  over  to  the 
various  companies  for  their  assets,  which  consisted  chiefly  of  patents.  It  is 
reasonable  to  assume  that  since  outsiders  subscribed  for  y  shares  of  preferred 
stock  at  par  and  paid  5*  dollars  cash  into  the  treasury  of  the  company,  the 
remaining  shares  of  the  preferred  stock  were  worth  par. 

No  evidence  has  been  submitted  to  show  that  any  of  the  shares  of  common 
stock  were  sold  to  the  public  prior  to  or  at  the  date  of  organization  of  the 
new  company.  However,  it  is  disclosed  that  the  shares  of  common  stock 
were  selling  on  a  stock  exchange  soon  after  the  new  company  has  been  organ- 
ized at  about  one-third  of  par  per  share.  Accepting  this  as  a  basis,  the  8y 
shares  of  common  stock  issued  to  the  various  companies  had  a  fair  market 
value  of  13*  dollars.  Arguments  and  affidavits  have  been  submitted  and 
numerous  court  decisions  have  been  cited  to  substantiate  the  claim  that  the 
judgment  of  the  board  of  directors  fixing  the  value  of  the  patents  acquired 
at  approximately  75*  dollars  represented  a  true  value  of  such  patents. 

The  Committee  can  not  concur  in  this  contention  for  the  reason  stated 
above  and,  therefore,  recommends  that  the  value  of  the  assets  (patents) 
acquired  be  fixed  at  48*  dollars,  such  valuation  being  based  on  the  theory 
that  if  y  shares  of  the  preferred  stock  were  sold  for  par  and  the  cash  paid 
into  the  treasury  of  the  company,  the  remaining  7y  shares  were  worth  par 
and  the  assets  transferred  in  exchange  for  these  shares  were  worth  35*  dol- 
lars. No  better  evidence  being  available,  the  collateral  transactions  in  the 
common  stock  soon  after  the  organization  of  the  corporation  at  about  one- 
third  of  par  per  share  have  been  accepted  as  establishing  the  value  of  the 
common  stock  paid  over  to  the  various  corporations  in  part  payment  for 
the  patents  in  question. 

The  Committee,  therefore,  recommends  that  48*  dollars  be  regarded  as 
the  value  of  the  patents  at  the  time  of  acquisition. 

The  next  question  is  whether  or  not  the  company  is  entitled  to  retain 
this  full  valuation  in  its  invested  capital,  notwithstanding  the  patents  have 
expired. 

At  the  outset  it  must  be  recognized  that  invested  capital  originally  paid 
in  can  be  reduced  under  only  one  condition — that  is,  that  it  has  been  returned 
to  the  stockholder  through  liquidation.  The  loss  of  the  original  capital  or 
its  exhaustion  in  the  business  does  not  alter  its  recognizable  status.  The  only 
thing  which  can  be  affected  by  an  exhaustion  of  capital  is  the  earned  surplus, 
which  may  be  adjusted,  if  necessary,  to  cover  any  loss  or  exhaustion  of  original 
values. 

The  Unit  in  treating  this  case  recognized  the  principle  in  article  843  of 
Regulations  45,  namely,  that  patent  values  gradually  merge  into  good  will. 
It  has  sought,  however,  to  apply  the  20  per  cent  limitation  provided  by  sec- 
tion 207  of  the  Revenue  Act  of  1917  to  the  good  will  so  created.  In  the 
opinion  of  the  Committee  this  application  is  not  warranted  by  law,  since 
under  the  express  terms  of  the  statute  it  is  applicable  only  where  good  will 
is  acquired  for  stock. 

As  stated  in  Regulations  45  and  in  several  of  the  decisions  of  the  Advisory 
Tax  Board  and  the  Tax  Reviewers,  patent  value  is  closely  analogous  to  good 
will,  both  in  fact  representing  the  estimated  worth  of  a  monopoly — in  one 
case  a  monopoly  created  by  law;  in  the  other  a  monopoly  due  to  circum- 
stance. 

In  Tax  Reviewers'  Recommendation  1  (not  published),  approved  by  the 
former  Commissioner,  it  was  held  as  follows: 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  843.-4. 


From  the  standpoint  of  assets  a  patent,  and  more  particularly  a  group  of  patents,  is 
closely  analogous  to  good  will.  Their  value  is  contingent  upon  and  measured  by  their  earn- 
ing power,  and  whilst  patents  have  a  definite  life  there  is  a  common  tendency  to  extend  that 
life  by  improvements  upon  the  original  patent,  and  in  a  successful  business  the  patent  value 
merges  more  or  less  completely  into  a  trade  name  or  other  form  of  good  will.  Therefore 
whilst  deductions  in  respect  of  depreciation  of  patents  based  upon  a  normal  life  period  of 
seventeen  years  are  allowable  in  computing  net  income  under  the  several  income  tax  Acts, 
such  deductions  are  not  obligatory,  but  are  optional  with  each  taxpayer.  Where,  since 
January  1,  1909,  a  taxpayer  has  exercised  that  option  to  his  own  benefit  in  computing  his 
taxable  net  income,  an  amount  so  deducted  can  not  now  be  restored  in  computing  invested 
capital.  Where  the  cost  of  patents  has  been  charged  against  surplus  or  otherwise  disposed 
of  in  such  a  manner  as  not  to  benefit  the  taxpayer  in  computing  his  taxable  net  income  since 
January  1,  1909,  any  amount  so  written  off  may  be  restored  in  computing  invested  capital 
if  it  be  shown  to  the  satisfaction  of  the  Commissioner  that  the  amount  so  written  off  repre- 
sented a  mere  book  entry  ascribable  to  a  conservative  policy  of  management  or  accounting 
and  did  not  represent  a  realized  shrinkage  in  the  value  of  such  assets.  Any  amount  so 
restored  may  not  be  written  off  by  way  of  deductions  from  taxable  net  income  in  any  subse- 
quent year  or  years.  Where  a  taxpayer  has  charged  to  current  expenses  the  cost  of  develop- 
ing or  protecting  patents,  no  amount  in  respect  thereof  expended  since  January  1,  1909, 
can  be  restored  in  computing  invested  capital,  and  in  respect  to  expenditures  made  prior 
to  January  1,  1909,  the  taxpayer  now  seeking  to  restore  them  must  be  prepared  to  show  to 
the  satisfaction  of  the  Commissioner  of  Internal  Revenue  that  all  such  items  are  proper 
capital  expenditures. 

The  correct  computation  of  surplus  and  undivided  profits  can  not  be  said  to  require  a 
deduction  in  respect  of  expiration  of  patents,  and  it  follows  therefore  that  where  a  taxpayer 
in  the  exercise  of  his  option  has  not  written  down  the  cost  of  patents,  it  is  unnecessary  to 
reduce  the  surplus  and  undivided  profits  in  computing  invested  capital  whether  the  patents 
have  been  acquired  for  stock  or  shares  or  for  cash  or  other  tangible  property.  Due  consider- 
ation will  be  given  to  the  facts  in  any  case  in  which  the  foregoing  rule  is  obviously  unreason- 
able. 

This  conclusion  is  supported  by  Advisory  Tax  Board  Memoranda  17 
and  22  (not  published),  and  is  not  inconsistent  with  articles  839  and  840  of 
Regulations  45.  There  is  no  warrant  in  the  law  or  regulations  for  reducing 
earned  surplus  by  an  amount  greater  than  is  necessary  to  make  good  the 
impaired  cost  of  the  original  asset. 

The  Committee  therefore  recommends  that  the  value  herein  fixed  as  the 
original  value  of  the  patents  at  the  time  paid  in  for  stock  be  recognized  in 
the  invested  capital  for  the  year  1917. 
2 


Supplementary  Bulletin  Rulings. 

.8gnilu.H  ntlsllufl  x-1-  rfnntfqq .•? 


2-20-22. 

Sec.  326.    Art.  844.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— 1f555,  ante):  (1921  Act— 
1[1035,  post). 

Article  844. — Surplus  and  Undivided  Profits.  Reserve  for  Depreciation 
or  depletion  (Reg.  45— ^[778,  ante):  (Reg.  62—^1210,  post). 

7-19-308:  T.  B.  M.  41. 

The  claim  of  the  X  Company  for  the  inclusion  in  its  invested  capital  for  the  year  1917 
of  the  amount  of  6x  dollars,  representing  appreciation  in  the  value  of  its  property,  which 
appreciation  had  been  taken  up  on  its  books  in  1914  and  returned  as  taxable  income  for 
that  year,  should  be  denied  for  the  reason  that  such  tax  was  erroneously  assessed  and 
collected.    The  taxpayer  is  entitled  to  a  claim  for  refund. 

Reference  is  made  to  the  claim  of  the  X  Company  for  the  inclusion 
in  its  invested  capital  for  the  year  1917  of  an  amount  of  x  dollars  repre- 
senting appreciation  in  the  value  of  a  certain  part  of  its  property  which 
was  taken  up  on  the  books  in  1914  and  returned  as  a  part  of  its  taxable  net 
income  for  that  year,  in  accordance  with  article  107  of  Regulations  33, 
which  reads  as  follows: 

Art.  107.  It  will  be  noted  from  these  definitions  that  the  gross  income  embrace! 
not  only  the  operating  revenues  but  also  income,  gains,  or  profits  from  all  other  sources, 
such  as  rentals,  royalties,  interest  and  dividends  from  stock  owned  in  other  corporations,  and 
appreciation  in  values  of  assets  if  taken  up  on  the  books  of  account  as  gain;  also  profits 
made  from^the  saleW  assets,  investments,  etc. 

This  item  was  brought  to  the  attention  of  the  Bureau  during  1918  and 
was  disallowed  in  the  computation  of  invested  capital  for  the  year  1917. 
An  appeal  was  made  to  the  Advisory  Tax  Board,  but  no  evidence  has  been 
found  that  would  warrant  a  change  in  the  original  decision  of  this  office. 

Regulations  33,  from  which  article  107  is  quoted  above,  were  issued  in 
January,  1914,  and  in  March,  1915,  the  question  of  the  taxability  of  appre- 
ciation of  property  when  taken  up  on  the  books  of  a  taxpayer  was  decided 
adversely  to  the  Government  by  the  United  States  Circuit  Court  of  Appeals 
in  the  case  of  the  Baldwin  Locomotive  Works  v.  McCoach,  Collector  (221 
Fed.,  59).  This  decision  was  embodied  in  Treasury  Decision  2185,  issued 
April,  1915,  which  held  that  an  "increase  in  the  valuation  of  assets  on  the 
books  of  the  corporation  is  not  income  received  during  the  year,  where 
there  is  no  addition  to  the  plant  and  all  that  was  done  was  to  revalue  the 
property."  It  appears,  therefore,  that  the  return  for  1914  was  made  in 
accordance  with  the  regulations  of  the  department,  but  that  shortly  after 
the  riling  of  the  return  the  court  decision  above  mentioned  made  it  neces- 
sary for  the  Treasury  Department  to  rescind  the  provisions  of  article  107, 
of  Regulations  33,  in  so  far  as  they  related  to  the  taxation  of  unrealized 
appreciation.  Between  April  1,  1915,  and  the  date  upon  which  the  tax 
for  1914  became  due  and  payable  a  claim  might  have  been  filed  for  abate- 
ment of  the  proportion  of  the  tax  represented  by  the  item  of  appreciation, 
and  since  the  date  of  the  payment  of  the  tax  the  company  was  entitled  to 
file  a  claim  for  refund.  This  right  continues  for  a  period  of  five  years  from 
date  upon  which  the  return  was  due. 

The  computation  of  invested  capital  for  the  year  1917  is  to  be  determined 
in  accordance  with  the  provisions  of  the  Act  of  October  3,  1917,  and  Regula- 
tions No.  41,  issued  thereunder.  In  article  42  of  these  Regulations  it  is 
provided,  inter  alia,  that— 

If  value  appreciation  of  a  kind  not  subject  to  income  tax  (other  than  that  allowed 
under  article  55)  has  been  taken  up  on  the  accounts,  a  deduction  must  be  made  in  respect 
of  such  appreciation  so  taken  up. 

As  shown  above,  the  appreciation  written  up  on  the  books  in  1914  was 
not  properly  subject  to  income  tax.    The  exception  to  this  rule  as  found 
in  article  55  referred  to  in  the  quotation  above  reads  as  follows: 
~  ^Tangible  property  paid  in  for  stock  or  shares  prior  to  January  1,  1914,  must  pe  valued 

Supplementary  Bulletin  Rulings., 


Sec.  326.    Art.  844.-2. 


at  cither  (a)  the  actual  cash  value  of  such  property  on  January  1,  1914,  or  (b)  the  par 
value  of  the  stock  or  shares  specifically  issued  therefor,  whichever  is  lower. 

This  regulation  is  based  upon  the  statutory  provision  defining  invested 
capital,  which  is  found  in  section  207  (a)  (2)  of  the  Act  of  October  3,  1917: 

The  actual  cash  value  of  tangible  property  paid  in  other  than  cash,  for  stock  or  shares 
tn"such  corporation  or  partnership,  at  the  time  of  such  payment  (but  in  case  such  tangible 
property  was  paid  in  prior  to  January  1,  1914,  the  actual  cash  value  of  such  property  as 
of  January  1,  1914,  but  in  no  case  to  exceed  the  par  value  of  the  original  stock  or  shams 
specifically  issued  therefor). 

This  provision  of  the  law  does  not  allow  for  any  general  appreciation  of 
property  as  at  January  1,  1914,  and  the  inclusion  of  appreciation  in  invested 
capital  is  limited  in  effect  to  cases  where  capital  stock  has  been  issued 
specifically  in  payment  for  tangible  assets  in  an  amount  which  at  par  ex- 
ceeded the  actual  cash  value  of  the  property  at  the  date  of  the  transaction, 
but  where  between  such  date  and  January  1,  1914,  the  property  had  appre- 
ciated in  value.  In  such  a  case  appreciation  in  an  amount  not  in  excess  of 
the  difference  between  the  actual  cash  value  of  such  property  at  the  date  of 
its  acquisition  and  the  par  value  of  the  stock  issued  specifically  for  the 
property  may  be  included  in  invested  capital.  The  case  does  not  come  within 
this  exception. 

The  claim  for  inclusion  in  invested  capital  of  x  dollars  representing  appre- 
ciation in  value  of  property  can  not  be  allowed. 

I 


Sttpplen>enttrr  Bvlletia  Ruling*. 


2-20-22. 

Sec.  326.  Art.845.~l. 

Law  Section  326.— Invested  Capital  (1918  Act— 1[555,  ante):  (1921  Act— 
H1035,  post). 

Article  845. — Surplus  and  Undivided  Profits;  Reserve  for  Income  and 
Excess  Profits  Taxes  (Reg.  45—11782,  ante):  (Reg.  62— 1(1214, 
post). 

5-19-265:  T.  B.  R.  17. 
Treasury^Decision  2791  and  article  845  of  Regulations  should  not  be  modified. 

Numerous  protests  against  the  validity  of  the  principle  first  adopted  in 
Treasury  Decision  2791,  approved  February  17,  1919,  and  subsequently 
embodied  in  Article  845  of  Regulations  45,  have  been  made.  A  hearing 
upon  the  question  was  held  before  the  Advisory  Tax  Board  at  the  request 
of  the  X  Company,  at  which  time  its  general  counsel  appeared  and  argued 
against  the  power  of  the  Commissioner  to  make  this  regulation,  which 
requires  that  surplus  and  undivided  profits  as  of  the  end  of  the  preceding 
year  must  be  reduced  as  of  the  date  or  dates  when  Federal  income  and 
excess  profits  taxes  become  due  and  payable,  by  the  amount  of  such  taxes 
for  that  year. 

In  the  original  and  supplemental  memoranda  filed  by  the  X  Company 
counsel  has  set  forth  at  length  the  several  arguments  of  greater  or  less 
weight  in  support  of  the  position  urged  by  that  taxpayer. 

In  the  opinion  of  the  board  the  Commissioner  and  Secretary  in  pro- 
mulgating Treasury  Decision  2791  and  article  845  have  placed  the  whole 
matter  upon  what  is  the  only  basis  which  accords  with  the  requirements  of 
the  statute  and  meets  the  demands  of  proper  accounting,  although  it  is 
true  that  the  arguments  advanced  by  counsel  for  the  taxpayer  in  this  case 
are  well  presented  and  at  first  blush  seem  convincing  and  persuasive. 

Article  845  of  Regulations  45  provides: 

For  the  purpose  of  computing  invested  capital,  Federal  income,  and  war  profits  and 
excess  profits  taxes  are  deemed  to  have  been  paid  out  of  the  net  income  of  the  taxable  year 
for  which  they  are  levied.  It  is  immaterial,  therefore,  whether  reserves  for  the  pay- 
ment of  such  taxes  for  the  preceding  year  have  been  set  up  or  not,  or  if  set  up  whether 
such  taxes  when  paid  have  actually  been  charged  against  such  reserves.  Amounts  payable 
on  account  of  such  taxes  for  the  preceding  year  may  be  included  in  the  computation  of 
invested  capital  only  until  such  taxes  become  due  and  payable.  A  deduction  from  the 
invested  capital  as  of  the  beginning  of  the  taxable  year  must  therefore  be  made  for  such 
taxes  or  any  installment  thereof,  averaged  for  the  proportionate  part  of  the  taxable  year 
after  the  date  when  the  tax  or  the  installment  is  due  and  payable. 

The  provisions  of  Treasury  Decision  2791  relating  to  the  tax  under 
Title  II  of  the  Revenue  Act  of  1917  are  substantially  the  same. 

The  relevant  provisions  of  the  statute  are  found  in  section  207  of  the 
Revenue  Act  of  1917 — 

As  used  in  this  title  "invested  capital"  does  not  include  *    *    *  money  or  other  prop- 
erty borrowed,  and  means,  subject  to  the  above  limitations:  *    *    *  (3)  paid  in  or  earned 
surplus  and  undivided  profits  used  or  employed  in  the  business,  exclusive  of  undivided 
profits  earned  during  the  taxable  year, 
and  in  section  326  of  the  Revenue  Act  of  1918 — 

Sec.  326.  (a)  That  as  used  in  this  title  the  term  "invested  capital"  for  any  year 
means  *  *  *  (3)  paid  in  or  earned  surplus  and  undivided  profits;  not  including  surplus 
and  undivided  profits  earned  during  the  year;  *  *  *  but  (b)  as  used  in  this  title  the 
term  "invested  capital"  does  not  include  borrowed  capital. 

The  term  "earned  surplus  and  undivided  profits''  used  in  both  acts  is 
brief  but  full  of  import.  In  effect,  it  incorporates  into  the  law  by  reference 
the  entire  body  of  principles  of  accounting  relative  to  the  determination  of 
surplus.  There  is  in  neither  act  any  provision  defining  this  term  or  modi- 
fying what  must  otherwise  be  accepted  as  the  guiding  principle  to  be  applied 
in  determining  what  is  surplus.  The  statute,  therefore,  requires  that  the 
surplus  in  any  case  shall  be  determined  exactly  in  accordance  with  the 
accepted  principles  of  accounting;  and  it  is  to  those  principles  that  both  the 
Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  845.-2. 

— loA  tSQt)  :(q)si&  «6S?.f  —  ioA  8IQI)  laJiqfiD  bdtgovnl- -.dSfc  nciiidS  wbJ 

taxpayer  and  the  Government  must  turn  for  light  upon  the  meaning  of  this 
provision  of  the  law. 

The  application  of  these  principles  "to  the  question  at  issue  brings  a 
speedy  response  and  permits  of  only  one  answer.  A  tax  levied  as  these  taxes 
are,  for  a  definite  period,  must  be  considered  as  a  liability  which  has  fully 
accrued  at  the  end  of  that  period;  and  if  not  already  paid,  provision  for  its 
payment  must  be  made  before  there  can  be  any  true  surplus  or  undivided 
profits.  This  is  especially  true  in  the  case  of  an  income  tax — and  excess 
and  war  profits  taxes  are  income  taxes — which  must  be  considered  as  a  sharing 
by  the  Government  in  the  income  of  the  taxpayer  for  the  taxable  year. 
The  fact  that  the  tax  is  in  terms  of  the  statute  imposed  "upon"  the  net  income 
and  that  there  is  no  specific  provision  that  it  is  to  be  paid  "out  of"  net 
income  can  not  change  its  inherent  nature. 

The  amount  of  these  taxes  for  any  year  can  not,  therefore,  after  the 
conclusion  of  such  year  be  considered  as  a  part  of  the  surplus,  but  is  rather 
in  the  nature  of  a  liability,  and  if  this  regulation  is  open  to  criticism  at  all, 
such  criticism  might  much  more  properly  be  directed  against  its  further 
provision  permitting  the  amount  of  such  tax  to  be  included  as  surplus  until 
such  time  as  the  tax  becomes  due  and  payable. 

It  is  true  that  in  every  case  the  situation  is  not  such  that  it  will  be  vitally 
affected  by  a  failure  to  apply  sound  principles,  and  as  a  result  the  develop- 
ment of  the  rulings  already  referred  to  as  unsound  was  very  easy,  but  when 
the  situation  happens  to  be  such  that  the  effect  of  the  application  of  a  wrong 
principle  would  be  critical  the  difference  between  the  sound  and  the  unsound 
principle  is  apparent  at  once.  A  single  example  will  suffice  to  illustrate 
what  is  meant:  Thus,  if  a  business  continues  to  be  owned  from  year  to  year 
by  substantially  the  same  interests  it  becomes  relatively  unimportant 
whether  such  taxes  are  charged  against  the  income  upon  which  they  are 
levied  or  against  other  funds;  but  if  the  control  of  that  business  changes 
hands  and  it  thus  becomes  important  to  charge  the  taxes  against  the  proper 
funds,  there  would  never  be  any  question  but  that  they  are  properly  charge- 
able against  the  income  for  which  levied.  The  purchaser  would  never  for 
a  moment  admit  that  they  might  equally  as  well  be  charged  against  his 
future  earnings  or  that  he  should  become  liable  to  raise  them  by  borrowing 
from  the  bank  or  otherwise,  without  allowance  being  made  in  the  considera- 
tion which  he  pays  for  the  business. 

In  the  opinion  of  the  board  the  provisions  quoted  above  from  section 
207  of  the  Revenue  Act  of  1917  and  from  section  326  of  the  Revenue  Act 
of  1918  are  controlling  and  sustain  the  interpretation  which  has  been  em- 
bodied in  the  form  of  a  regulation  in  Treasury  Decision  2791  and  in  article 
845  of  Regulations  45.  It  is  accordingly  recommended  that  no  modifica- 
tion in  these  regulations  be  made. 


11-19-392:  O.  D.  222 


The  rule  expressed  in  article  845,  Regulations  45,  that  taxes  are  deemed 
to  be  paid  out  of  earnings  for  the  year  for  which  levied,  applies  to  any  year 
of  the  prewar  period  as  well  as  to  the  taxable  year.  In  such  cases  the  amount 
or  amounts  payable  in  a  succeeding  year  on  account  of  such  taxes  may  be 
included  in  the  computation  of  invested  capital  until  due  and  payable.  ^ 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  845,— 3. 


12-19-411:  T.  B.  M.  51.. 
Effect  of  assessment  of  additional  income  and  excess  profits  taxes[foi\ prior 
years  upon  invested/capital. 

The  rulings  contained  in  Treasury  Decision  2791  and  article  845  of 
Regulations  45  require  income  and  excess  profits  taxes  levied  for  the  par- 
ticular year  to  be  considered  as  liabilities  which  have  accrued  at  the  end  of 
such  year  and  which  must  be  taken  into  account  in  determining  the  surplus 
and  undivided  profits  which  may  thereafter  be  included  in  invested  capital, 
and  state  that  such  taxes  may  be  included  in  the  surplus  until  they  become 
due  and  payable.  These  rulings  are  in  general  applicable  to  additional 
assessments. 

It  is  the  essence  of  any  system  of  accrued  accounting  that  items  of  income 
and  outgo  be  estimated  as  they  accrue  and  that  the  proper  entries  be  made 
upon  the  books  at  that  time.  The  books  for  any  fiscal  period  are  deemed 
to  clearly  reflect  the  history  of  that  period  and  are  not  changed  even  though 
subsequent  events  demonstrate  that  certain  accruals,  to  a  minor  degree, 
were  incorrectly  estimated.  The  necessary  adjustments  to  correct  such 
errors  are  made  in  the  current  accounts.  It  is  only  where  major  adjust- 
ments are  necessary  that  it  is  good  accounting  practice  to  make  adjustments 
for  past  errors  in  the  surplus  account. 

For  these  reasons  the  Advisory  Tax  Board  recommends  that  additional 
assessments  of  income  and  excess  profits  taxes,  for  prior  years  which  are 
relatively  small  or  unimportant  be  considered  paid  from  current  earnings; 
but  that  where  the  additional  assessment  is  relatively  large  and  important 
such  assessment  be  considered  a  liability  of  the  taxable  year  in  question  and 
that  the  necessary  adjustments  of  the  surplus  account  be  made.  In  such 
cases  the  phrase  "due  and  payable"  in  article  845,  Regulations  45,  means 
the  due  date  for  taxes  of  the  taxable  year  and  not  the  date  fixed  for  the 
payment  of  the  additional  assessment. 

It  is  suggested  that  in  all  cases  in  which  the  additional  assessment  is 
less  than  5  per  cent  of  the  original  assessment  or  is  less  than  $5,000  it  be 
considered  paid  out  of  current  earnings  and  that  no  adjustment  of  invested 
capital  be  made. 
3 


11-20-788:  O.  D.  410. 

Where  a  corporation  has  filed  a  claim  for  determination  of  war-profits 
and  excess  profits  tax  for  1918  under  section  328  and  has  made  payments  on 
the  basis  of  50  per  cent  of  the  net  income,  the  claim  not  having  been  acted 
upon  when  its  1919  return  is  due,  the  invested  capital  for  1919  should  be 
adjusted  on  the  basis  of  the  tax  payments  actually  made,  subject,  however, 
to  readjustment  when  the  correct  amount  of  tax  for  1918  is  determined. 
4 


45-20-1299:  A.  R.  M.  87. 

Held  in  the  case  of  corporations  which  filed  returns  for  a  fiscal  year  ended 
June  30,  1917,  under  the  Revenue  Act  of  1916,  and  the  tax  thereon  became  due 
and  payable  on  December  12,  1917,  that  the  additional  raxes  imposed  by  the 
Revenue  Act  of  1917  shall  be  deemed  to  be  due  and  payable  on  the  same  date. 

The  Committee  is  in  receipt  of  a  memorandum  from  the  Income  Tax 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  845.-^1. 


Unit  in  which  advice  is  requested  as  to  the  basis  on  which  invested  capital 
should  be  adjusted  in  connection  with  a  corporation's  income  and  excess 
profits  taxes  for  the  fiscal  year  ended  June  30,  1917.  This  adjustment 
is  necessary  in  order  to  determine  the  correct  invested  capital  of  the  cor- 
poration for  the  fiscal  year  ended  June  30,  1918. 

The  point  On  which  advice  is  sought  resolves  itself  into  the  question  of 
when  the  income  and  excess  profits  taxes  for  the  fiscal  year  ended  June 
30,  1917,  were  due  and  payable.  It  appears  that  under  the  Revenue  Act 
of  1916  corporations  having  a  fiscal  year  which  ended  June  30,  1917,  were 
required  to  file  returns  sixty  days  after  the  close  of  the  fiscal  year  and  that 
the  taxes  became  due  and  payable  105  days  after  the  due  date  of  the  return. 
A  corporation  having  a  fiscal  year  ended  June  30,  1917,  was  required  to 
file  a  return  on  Form  1031  under  the  Revenue  Act  of  1916  and  also  an  excess 
profits  tax  return  on  Form  1095  under  the  provisions  of  the  Act  of  March  3, 
1917,  sixty  days  after  the  close  of  the  fiscal  year.  The  taxes  as  shown  by 
these  returns  became  due  and  payable  on  December  12,  1917,  and  in  deter- 
mining the  invested  capital  of  the  corporation  for  the  fiscal  year  ended 
June  30,  1918,  the  invested  capital  would  be  reduced  by  the  above  taxes 
prorated  from  December  12,  1917,  to  June  30,  1918. 

In  addition  to  the  above  returns  it  was  necessary  for  the  corporation  to 
file  supplemental  returns  covering  the  additional  income  and  excess  profits 
taxes  imposed  by  the  Revenue  Act  of  1917.  The  time  for  filing  the  supple- 
mental returns  in  question  was  extended  by  various  Treasury  Decisions  to 
March  1,  1918;  hence  the  question  presents  itself  as  to  when  such  taxes 
should  be  considered  due  and  payable  in  adjusting  the  capital  for  the  fiscal 
year  ended  June  30,  1918. 

In  order  to  pass  upon  the  question  presented  it  is  necessary  to  examine 
the  provisions  of  the  law  and  regulations  on  this  point.  Section  212  of  the 
Revenue  Act  of  1917  reads  as  follows: 

That  all  administrative,  special,  and  general  provisions  of  law,  including  the  laws  in 
relation  to  the  assessment,  remission,  collection,  and  refund  of  internal  revenue  taxes 
not  heretofore  specifically  repealed,  and  not  inconsistent  with  the  provisions  of  this  title 
are  hereby  extended  and  made  applicable  to  all  the  provisions  of  this  title  and  to  the  tax 
herein  imposed,  and  all  provisions  of  Title  I  of  such  Act  of  September  8,  1916,  as  amended 
by  this  Act,  relating  to  returns  and  payment  of  the  tax  therein  imposed,  including  penalties, 
are  hereby  made  applicable  to  the  tax  imposed  by  this  title. 

Section  14(c)  of  the  Revenue  Act  of  1916  reads  in  part  as  follows: 
*    *    *    Provided,  That  the  Commissioner  of  Internal  Revenue  shall  have  authority, 

in  the  case  of  either  corporations  or  individuals,  to  grant  a  reasonable  extension  of  time 

in  meritorious  cases,  as  he  may  deem  proper. 

It  was  under  this  provision  of  the  statute  that  the  various  extensions 
were  granted  by  the  Commissioner  for  the  filing  of  the  supplemental  returns 
required  by  the  provisions  of  the  Revenue  Act  of  1917. 

Section  14(a)  of  the  Revenue  Act  of  1916  reads  in  part  as  follows: 

All  assessments  shall  be  made  and  the  several  corporations,  joint-stock  companies  or 
associations,  and  insurance  companies  shall  be  notified  of  the  amount  for  which  they  are 
respectively  liable  on  or  before  the  ist  day  of  June  of  each  successive  year,  and  said  assess- 
ment shall  be  paid  on  or  before  the  15th  day  of  June:  Provided,  That  every  corporation, 
joint-stock  company  or  association,  and  insurance  company,  computing  taxes  upon  the 
income  of  the  fiscal  year  which  it  may  designate  in  the  manner  hereinbefore  provided,  shall 
pay  the  taxes  due  under  its  assessment  within  one  hundred  and  five  days  after  the  date  upon 
which  it  is  required  to  file  its  list  or  return  of  income  for  assessment;  *    *  * 

Reading  this  provision  of  the  statute  in  connection  with  the  facts  sub- 
mitted upon  which  advice  is  requested,  and  that  part  of  section  13(a) 
which  fixes  the  due  date  for  filing  returns,  it  appears  that  a  definite  date 
is  fixed  upon  which  the  taxes  of  a  corporation  filing  its  returns  upon  the 
basis  of  a  fiscal  year  become  due  and  payable. 

The  question  of  reserves  for  taxes  and  the  adjustment  of  invested  capital 

Supplementary  Bulletin  Rulings. 


7-27-22!. 

Sec.  326.    Art.  845.— 5. 

on  account  of  such  reserves  was  first  considered  by  the|Tax  Reviewers  and 
the  following  ruling  is  found  in  their  minutes: 

Reserves  set  aside  out  of  surplus  or  undivided  profits  of  preceding  years  for  payment 
of  Federal  or  State  taxes  not  yet  due  can  be  included  in  invested  capital  for  the  taxable 
year  if  and  to  the  extent  that  such  taxes  were  not  allowable  deductions  in  computing  net 
income  for  the  preceding  year. 

Thus,  if  a  taxpayer  makes  his  return  on  an  accrual  basis,  his  State  taxes  which  havt 
accrued  during  the  preceding  year  constitute  allowable  deductions  for  the  preceding  year, 
and  hence  can  not  be  included  in  capital.  But,  if  his  return  is  on  the  cash  basis,  in  which 
case  such  taxes  are  not  deductible  until  paid,  then  reserves  set  aside  for  that  purpose  may 
be  included  in  the  invested  capital. 

Inasmuch  as  Federal  income  and  excess  profits  taxes  (irrespective  of  the  accounting 
basis  employed)  are  not  deductible  in  computing  the  respective  net  incomes  subject  to 
such  taxes,  reserves  set  aside  for  the  payment  of  such  taxes  may  be  included  in  invested 
capital. 

On  February  17,  1919,  this  ruling  was,  in  substance,  embodied  in  Treasury 
Decision  2791,  which  reads  as  follows: 

For  the  purpose  of  determining  invested  cap  tal  under  Tide  II  of  the  Revenue  Act  of 
1917,  income  and  excess  profits  taxes  shall  be  deemed  to  have  been  paid  out  of  the^net  in- 
come for  the  taxable  year  for  which  such  taxes  are  levied.  Amounts  payable  on  account 
of  income  and  excess  profits  taxes  for  any  year  may  be  included  in  computing  surplus  and 
undivided  profits  for  the  succeeding  year  only  for  the  proportionate  part  of  the  year  repre- 
sented by  the  period  of  time  between  the  close  of  the  taxable  year  and  the  date  or  dates 
upon  which  such  taxes  become  due  and  payable. 

The  same  principle  is  carried  forward  and  is  covered  by  articles  845  and 
845(a)  of  Regulations  45. 

The  question  of  reserves  for  income  and  excess  profits  taxes  and  the 
effect  of  such  reserves  on  invested  capital  was  presented  to  the  Advisory 
Tax  Board  for  consideration.  In  Tax  Board  Memorandum  51  (ruling 
12-19-411,  p.  296,  Cumulative  Bulletin,  December,  1919)  the  effect  of 
assessment  of  additional  income  and  excess  profits  taxes  for  prior  years 
upon  invested  capital  was  discussed.  The  conclusion  reached  in  this  mem- 
orandum with  respect  to  adjustments  on  account  of  additional  assessments 
is,  in  the  judgment  of  the  Committee,  sound  and  should  be  adhered  to  by 
the  Unit. 

Looking  further  it  is  noted  that  article  230  of  Regulations  33,  revised, 
provides  in  part  as  follows: 

In  the  case  of  returns  made  on  the  basis  of  a  calendar  year,  the  corporations  against 
which  taxes  are  assessed  shall  be  notified  of  the  amount  thereof  on  or  before  June  1  of  each 
successive  year,  and  the  taxes  shall  be  paid  on  or  before  June  15  of  the  year  in  which  th« 
assessment  is  made. 

Corporations  making  returns  on  the  basis  of  a  fiscal  year  other  than  the  calendar  year 
shall  be  notified  of  the  amount  assessed  against  them  on  or  before  the  last  day  of  the  90-day 
period  next  following  the  date  when  the  return  was  due,  and  the  taxes  shall  be  paid  within 
105  days  from  the  due  date  of  the  return. 

Any  extension  granted  by  the  collector  or  Commissioner  of  the  time  within  which  to 
file  returns  will  not  be  construed  to  correspondingly  extend  the  time  for  the  payment  of  the 
tax.  If  for  any  reason  a  return  should  not  be  made  until  the  time  fixed  by  law  for  the  payment 
of  the  tax  has  passed,  the  tax  assessed  on  the  basis  of  such  return  shall  be  paid  upon  notice 
and  demand. 

Under  the  above-quoted  provisions  of  the  Revenue  Act  of  1916,  it  is 
noted  that  the  Commissioner  is  authorized  to  grant  extensions  of  time  in 
certain  cases,  but  nowhere  is  there  found  a  provision  of  law  whereby  the 
Commissioner  may  extend  the  due  date  fixed  by  the  Statute  for  the  pay- 
ment of  taxes.  In  all  cases  where  the  taxes  imposed  by  the  Revenue  Act  of 
1916,  and  the  Excess  Profits  Tax  Act  of  March  3,  1917,  fall  due  after  October 
3,  1917,  the  total  amount  of  such  taxes,  together  with  the  additional  income 
and  excess  profits  taxes  imposed  by  the  Revenue  Act  of  1917,  shall  be  deemed 
to  become  due  and  payable  on  the  date  fixed  by  the  Statute;  that  8,  165 
days  after  the  close  of  the  fiscal  year  ended  in  1917. 

Upon  the  statement  of  facts  presented  the  Committee,  therefore,  is  of 


Supplementary  Bulletin  Ruling?. 


Sec.  426.    Art.  845.  -6. 


the  opinion  that  the  taxes  imposed  by  the  Revenue  Act  of  1916,  the  Excess 
Profits  Tax  Act  of  March  3,  1017,  and  the  additional  taxes  imposed  by  the 
Revenue  Act  of  1917  were  due  and  payable  on  December  12,  1917,  in  accord- 
ance with  the  above-quoted  provisions  of  the  Statute  fixing  the  due  date 
for  the  payment  of  taxes. 

In  view  of  the  foregoing  provisions  of  law  and  regulations,  it  is  held 
that  the  invested  capital  of  a  corporation,  the  fiscal  year  of  which  ended 
June  30,  1918,  shall  be  reduced  by  the  amount  of  taxes  imposed  by  the 
various  Acts  referred  to  above  on  December  12,  1917,  prorated  to  the  close 
of  the  fiscal  year  June  30,  1918. 
5 


43-21-1889:  O.  D.  1079. 

A  taxpayer  made  an  overpayment  of  income  taxes  for  the  year  1917  in 
1918,  which  amount  was  refunded  to  him  in  the  year  1921. 

The  question  presented  is  whether  the  taxpayer  may  include  in  its  invested 
capital  the  amount  so  refunded  for  the  calendar  year  1921. 

Held,  that  under  the  provisions  of  article  845  of  Regulations  45  the 
amount  of  tax  overpaid  for  1917  and  refunded  may  be  included  in  the  invested 
capital  of  the  taxpayer  for  1918  and  subsequent  years. 

6   

I('22)-13-191:  I.  T.  1261. 

Revenue  Act  of  1921. 

Invested  capital  is  not  reduced  in  those  cases  where  taxes  due  on  returns 
for  previous  years  were  not  determined  and  assessed  within  the  time  limit 
prescribed  by  section  250(d)  of  the  Revenue  Act  of  1921. 

Where  an  excess  payment  of  tax  is  credited  or  refunded,  in  accordance  with 
the  second  proviso  of  section  252  of  the  Revenue  Act  of  1921,  the  amount  of 
invested  capital  is  increased  by  the  amount  so  refunded,  or,  in  case  of  a  credit, 
by  the  amount  so  credited  up  to  the  date  such  overpayment  is  actually 
applied  against  additional  taxes  due. 

7   

I  ('22)-30-432:  L  T.  1400. 

Revenue  Act  of  1921. 

Ad  vice  has  been  requested  as  to  the  effect  of  Treasury  Decision  3310 
(Bulletin  1-15-214,  p.  11)  on  t lie  invested  capital  of  corporations  subject  to 
its  provisions. 

A  case  is  cited  of  a  corporation  whose  fiscal  year  ended  June  30,  1921, 
and  which  is  subject  to  additional  tax  under  the  Revenue  Act  of  1921.  In- 
formation is  desired  as  to  whether  this  tax,  which  is  payable  in  four  install- 
ments commencing  with  May  15,  1922,  has  any  effect  upon  the  invested 
capital  of  the  corporation  for  the  fiscal  year  beginning  July  1,  1921. 

The  tax  due  on  the  new  return  is  not  to  be  considered  as  an  additional 
tax  due  under  the  Revenue  Act  of  1918,  with  reference  to  its  effect  upon 
invested  capital,  inasmuch  as  it  is  an  original  tax  due  under  the  Revenue 
Act  of  1921,  and  as  such  has  the  effect  of  reducing  the  invested  capital  of 
the  corporation  for  the  fiscal  year  beginning  in  1921  to  the  extent  that  it  is 
due  and  payable  during  such  taxable  year.  A  deduction  from  invested 
capital  as  of  the  beginning  of  such  taxable  year  must  therefore  be  made  for 
the  installments  of  such  tax  becoming  due  and  payable  within  the  taxable 
year  averaged  in  the  usual  manner. 
8 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  845.-7. 


Revenue  Act  of  1921. 

I  ('22)  51-643:    I.  T.  1532. 

On  January  1,  1921,  the  M  Company's  business  was  the  property  of 
an  individual.  On  September  1,  1921,  a  corporation  having  the  same  name 
as  that  under  which  this  business  had  been  previously  conducted  took  over 
the  entire  assets  and  liabilities  of  the  business.  The  individual  income  tax 
return  of  the  individual  owner  included  the  income  from  the  business  for 
the  period  from  January  1  to  August  31,  1921,  while  a  corporation  income 
and  profits  tax  returns  was  filed  by  the  corporation  for  the  period  from  Sep- 
tember 1  to  December  31,  1921.  In  preparing  an  amended  return  in  which 
the  income  from  the  business  for  the  entire  year  was*to  be  returned  as  the 
income  of  the  corporation,  under  the  provisions  of  section  229  of  the  Revenue 
Act  of  1921,  it  was  found  that  the  withdrawal  account  of  the  former  owner 
of  the  business  for  the  period  from  January  1  to  August  31,  1921,  included 
an  item  paid  by  him  to  the  collector  of  internal  revenue  in  settlement  of  his 
individual  income  tax  for  the  year  1920. 

The  question  was  raised  as  to  whether  the  entire  withdrawal  account 
of  the  individual  owner  should  be  considered  as  a  dividend  paid  to  him  by 
the  corporation  or  whether  the  Federal  income  tax  item  should  be  eliminated 
from  the  withdrawal  account  and  be  considered  as  an  item  of  Federal  income 
tax  paid  and  not  as  a  dividend. 

Held,  that  the  item  of  the  individual  owner's  withdrawal  account  rep- 
resenting the  amount  paid  in  discharge  of  his  individual  Federal  income 
tax  for  1920  should  be  prorated  so  as  to  represent  amounts  which  will  be 
proportionate  to  the  amount  of  his  net  income  for  1920  which  was  derived 
from  the  M  Company's  business  and  to  the  remaining  amount  of  his  net 
income  which  was  derived  from  other  sources,  respectively. 

The  portion  of  the  withdrawal  made  for  income  tax  payment  which  is  pro- 
portionate to  the  individual  owner's  net  income  derived  from  the  M  Com- 
pany's business  should  not  be  considered  as  a  dividend  received  by  him 
from  the  corporation  and  it  is  not  subject  to  tax  as  such.  It  is  to  be  con- 
sidered as  a  payment  from  the  capital  of  the  M  Company's  business  as  at 
December  31,  1920,  and  must  be  excluded  from  the  amount  of  the  assets 
received  by  the  corporation  in  determining  its  invested  capital  at  January 
1,  1921. 

The  balance  of  the  withdrawal  made  for  the  income  tax  payment  which 
is  proportionate  to  the  individual  owner's  net  income  derived  from  sources 
other  than  the  M  Company's  business,  if  any,  is  to  be  considered  as  a  divi- 
dend paid  by  the  corporation  during  1921  and  will  be  taxable  as  such. 

All  other  funds  withdrawn  by  the  individual  owner  for  personal  use 
during  the  period  from  January  1  to  August  31,  1921,  must  be  considered 
as  dividends  paid  to  him  by  the  corporation. 
9 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.   Art.  846.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— H555,  ante):  (1921  Act— 
If 1035,  post).  *jqg 
Article  846. — Surplus  and  Undivided  Profits;  Insurance  on  Officers 
(Reg.  45—11787,  ante):  (Reg.  62—^1215,  post). 

7-19-309:  O.  D.  179. 

The  cash  surrender  value  of  a  life  insurance  policy  which,  under  article 
846  of  Regulations  45,  constitutes  surplus  as  at  the  beginning  of  the  taxable 
year  for  invested  capital  purposes,  retains  its  character  as  surplus  even 
though  the  policy  consituting  the  admissible  asset  upon  the  basis  of  which 
the  surplus  was  determined,  is  terminated  and  paid. 

1 


41-20-1239:  A.  R.  R.  229. 
The  M  Company  through  its  attorney  contends  that  its  invested  capital 
should  be  increased  as  at  December  31,  1916,  by  the  cash  surrender  value 
of  certain  insurance  policies  carried  on  the  life  of  its  president.  In  this 
connection  it  appears  that  the  corporation  has  regularly  deducted  as  an 
operating  expense  for  each  year  prior  to  1917,  the  amount  of  premiums 
paid  on  such  insurance  policies  and  that  on  January  1,  1917,  such  policies 
had  a  cash  surrender  value  of  1J^#  dollars  which  it  is  urged  should  be 
restored  to  the  invested  capital  of  the  corporation  inasmuch  as  such  amount, 
with  the  exception  of  x  dollars,  had  been  disallowed  by  the  Income  Tax 
Unit. 

The  question  here  presented  for  decision  is  whether  the  cash  surrender 
value  of  the  insurance  policies  on  the  lives  of  officers  of  corporations  may  be 
included  in  the  computation  of  invested  capital,  irrespective  of  the  fact 
that  the  premiums  paid  on  such  policies  have  been  regularly  deducted  as 
an  expense  in  the  computation  of  the  net  income  of  the  corporation  for 
prior  years.  In  this  connection  the  Income  Tax  Unit  interpreting  article 
846  of  Regulations  45  has  held  that  only  the  cash  surrender  value  of  policies 
of  insurance  upon  the  lives  of  officers  of  corporations  attributable  to  premiums 
paid  in  prior  years  which  have  not  been  deducted  as  an  expense  can  be 
included  in  the  computation  of  invested  capital. 

The  Committee  desires  to  call  to  the  attention  of  the  Unit  the  following 
ruling  stated  in  Tax  Reviewers'  minutes  with  respect  to  this  question  under 
the  provisions  of  the  1917  Act: 

As  premiums  paid  by  a  corporation  for  insurance  on  the  lives  of  its  officers  or  employees 
payable  to  it  can  not  be  deductecPas  expenses  incomputing  taxable  income,  such  insurance 
policies  shall  be  considered  tangible  property  under  article  47  of  Regulations  41  and  may 
be  included  as  invested  capital  of  such  corporation  at  their  cash  surrender  value  at  the 
beginning  of  the  taxable  year. 

The  above-quoted  ruling  made  by  the  Tax  Reviewers  has  been  carried 
forward  and  the  same,  in  substance,  is  stated  in  article  846  of  Regulations 
45.  Considering  the  above-quoted  ruling  made  by  the  Tax  Reviewers  in 
connection  with  article  846  of  Regulations  45,  the  Committee  is  clearly  of 
the  opinion  that  the  total  cash  surrender  value  of  the  policies  in  question 
should  be  restored  to  the  invested  capital  of  this  corporation  for  1917.  On 
this  point  the  Committee  feels  that  the  contention  of  the  corporation  is  well 
taken  and  recommends  that  the  action  of  the  Income  Tax  Unit  in  reducing 
the  invested  capital  by  the  amount  of  the  cash  surrender  value  of  certain 
insurance  policies  carried  on  the  life  of  the  president  of  this  corporation 


Supplementary  Bulletin  Rulings. 


Sec  326.    Art  846—2. 


be  reversed  and  the  amount  of  13^*  dollars  be  restored  to  the  invested 

capital  of  the  corporation. 

2 


49-20-1338:    O.  D.  745. 

Where  insurance  is  carried  by  a  corporation  on  the  life  of  an  officer  or 
employee,  the  policy  may  be  included  as  an  admissible  asset  and  reflected  in 
the  surplus  account  at  its  cash  surrender  value,  or  if  it  has  no  cash  surrender 
value  then  its  loan  value,  as  of  the  beginning  of  the  taxable  year. 


47-21-1938:    O.  D.  1109. 

The  O  Corporation  took  out  a  policy  of  insurance  on  the  life  of  A,  who 
had  guaranteed  the  accounts  of  the  corporation  against  the  M  Company. 
Subsequently  A,  by  reason  of  the  guaranty,  became  individually  liable  for 
the  claims  against  the  M  Company.  The  O  Corporation  paid  premiums 
on  the  policy  and  received  a  distribution  of  a  20-year  surplus  from  the  in- 
surer in  1919.  Upon  the  death  of  A,  the  O  Corporation  received  the  face 
value  of  the  policy. 

It  is  held  that  where  insurance  is  taken  out  by  a  corporation  on  the  life 
of  the  guarantor  of  a  debt  to  the  corporation,  the  surrender  value  of  the 
policy  can  not  be  included  in  invested  capital,  but  the  premiums  paid  may 
be  deducted  as  a  business  expense. 

The  amount  received  as  a  distribution  of  surplus  by  the  insurance  com- 
pany should  be  treated  as  income  and  included  in  the  gross  income  of  the 
O  Corporation  for  the  year  in  which  received,  subject  to  both  income  and 
excess  profits  tax. 

As  the  premiums  paid  are  deductible  as  business  expenses,  the  amount 
received  on  the  policy  in  excess  of  the  cash  surrender  value  of  the  policy  on 
March  1,1913,  must  be  accounted  for  as  income  of  the  year  in  which  received 
4 


■4 


Supplementary  Bulletin  Rulings. 


4-14-22. 

Sec.  326.    Art  850.— 1. 

Section  326.— Invested  Capital  (1918  Act— Tf555,  ante):  (1921  Act— 1fl035, 
post). 

Article  850.— Surplus'and  Undivided  Profits;  Current  Profits  (Reg.  45— 
1f803,  ante)  f  (Reg.  62—^1219,  post). 

(See  42-20-1252;  Section  33.1,  Article  941.)  Current  profits  of  dissolved 
corporation  in  connection  with  invested  capital  of  successor  corporation. 

1 

I  ('22)-15-220:    A.  R.  R.  853. 
Revenue  Acts  of  1916  and  1917. 

.Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the 
Income  Tax  Unit  in  assessing  the  excess  profits  tax  for  the  fiscal  year  ended 
October  31,  1917,  upon  the  basis  of  the  full  fiscal  year,  excluding  from  invested 
capital  net  earnings  for  the  months  of  November  and  December,  1916,  be  sus- 
tained. 

The  Committee  has  considered  the  appeal  of  the  M  Company  from  the 
action  of  the  Income  Tax  Unit  in  assessing  the  excess  profits  tax  for  the 
fiscal  year  ended  October  31,  1917,  upon  the  basis  of  the  full  fiscal  year, 
excluding  from  invested  capital  the  net  earnings  for  the  months  of  Novem- 
ber and  December,  1916. 

Owing  to  a  delay  in  the  preparation  of  the  blank  forms  of  returns,  the 
M  Company  was  granted  an  extension  of  time  for  filing  its  return  for  the 
fiscal  year  ended  October  31,  1917,  and  the  original  return  covering  the 
income  for  the  entire  fiscal  year  filed  was  on  March  30,  1918.  An  amended 
return  was  filed  on  April  1,  1918,  in  which  the  tax  upon  the  profits  earned 
in  the  months  of  November  and  December,  1916,  was  computed  at  the 
flat  rate  of  2  per  cent  and  for  the  10  months  of  the  fiscal  year  falling  within 
the  calendar  year  1917  upon  the  basis  of  the  invested  capital  shown  as  of 
January  1,  1917,  including  the  net  earnings  for  November  and  December, 
1916.  The  Income  Tax  Unit  computed  the  tax  for  the  year  in  question 
upon  the  basis  of  the  average  invested  capital  for  the  full  fiscal  year  and 
assessed  an  additional  tax  in  the  amount  of  x  dollars.  The  claim  for  abate- 
ment of  this  additional  tax  was  rejected  under  date  of  May  25,  1921,  hence 
this  appeal. 

Under  section  13(b)  of  the  Act  of  September  8,  1916,  the  return  of  the 
appellant  was  due  within  60  days  after  the  close  of  its  fiscal  year. 

Section  207  of  the  Act  of  October  3,  1917,  provides  that  the  term  "in- 
vested capital"  shall  include  among  other  things  "paid-in  or  earned  surplus 
and  undivided  profits  used  or  employed  in  the  business,  exclusive  of  undivided 
profits  earned  during  the  taxable  year." 

Section  200  of  the  Act  of  October  3,  1917,  defines  the  term  "taxable 
year"  as  meaning  the  12  months  ending  December  31,  except  in  case  of  a 
corporation  or  partnership  which  has  fixed  its  own  fiscal  year,  in  which  case 
it  is  defined  to  mean  such  fiscal  year,  and  provides: 

The  first  taxable  year  shall  be  the  year  ending  December  31st,  1917,  except  that  in 
the  case  of  a  corporation  or  partnership  which  has  fixed  its  own  fiscal  year,  it  shall  be  the 
fiscal  year  ending  during  the  calendar  year  1917.  If  a  corporation  or  partnership,  prior 
to  March  1st,  1918,  makes  a  return  covering  its  own  fiscal  year,  and  includes  therein  the 
income  received  during  that  part  of  the  fiscal  year  falling  within  the  calendar  year  1916, 
the  tax  for  such  taxable  year  shall  be  that  proportion  of  the  tax  computed  upon  the  net 
income  during  such  full  fiscal  year  which  the  time  from  January  1st,  1917,  to  the  end  of 
such  fiscal  year  bears  to  the  full  fiscal  year;    *    *  *. 


Supplementary  Bulletin  Rulings. 


i 


Sec.  326.    Art.  850.— 2. 


The  Congress  in  the  above  section  of  the  Act  expressly  considered  a 
fiscal  year  a  portion  of  which  fell  within  the  year  1916,  and  in  terms  so  clearly 
as  to  permit  of  no  other  construction  provided  that  the  tax  imposed  by  that 
Act  should  be  "computed  upon  the  net  income  during  such  full  fiscal  year," 
and  as  clearly  provided  that  "undivided  profits  earned  during  the  taxable 
year"  should  be  excluded  from  the  invested  capital  used  in  the  computation 
of  the  tax.  The  Bureau  had,  therefore,  no  option  to  compute  the  tax  in 
any  other  manner  than  that  which  is  prescribed  by  the  statute  and  which 
was  followed  by  it.  That  such  a  method  of  computation  results  in  some 
instances  to  the  disadvantage  of  taxpayers  having  a  fiscal  year  as  compared 
with  taxpayers  making  returns  upon  the  basis  of  a  calendar  year  is  recog- 
nized, but  the  evil  is  one  which  can  be  remedied  only  by  the  legislative 
branch  of  the  Government.  It  can  not  be  cured  by  construction  of  an  Act 
so  clear  as  to  admit  of  no  construction. 

The  contention  of  the  appellant,  at  an  oral  hearing,  that  its  case  was  not 
covered  by  section  200  of  the  Act  of  October  3,  1917,  for  the  reason  that  it 
did  not  make  its  return  prior  to  March  1,  1918,  can  not  be  conceded.  Under 
the  provision  of  section  13(b)  of  the  Act  of  September  8,  1916,  which  Was 
not  amended  by  the  Act  of  October  3,  1917,  the  returns  of  every  corporation 
having  a  fiscal  year  ending  within  the  calendar  year  1917  were  due  prior 
to  March  1,  1918,  and  it  is  not  to  be  presumed  that  Congress  intended  that 
a  taxpayer  who  was  delinquent  in  filing  his  return  or  toward  whom  the 
Bureau  had  been  lenient  in  this  matter  should  be  taxed  upon  a  different 
basis  than  those  who  complied  strictly  with  the  letter  of  the  statute.  The 
language  of  section  200  of  the  Act  of  October  3,  1917,  "makes  a  return," 
must  at  this  time  be  construed  to  mean  "was  due  to  make  a  return."  The 
Act  nowhere  contained  any  provision  for  computing  the  excess  profits  tax 
of  a  corporation  having  a  fiscal  year  ending  in  1917  upon  the  basis  contended 
for  by  the  taxpayer,  and  the  conclusion  that  Congress  did  not  intend  to  grant 
such  a  right  in  any  case  is  strengthened  by  the  fact  that  section  335(a)  of 
the  Act  of  February  24,  1919,  contains  a  similar  provision  for  computing 
the  tax  of  a  corporation  having  a  fiscal  year  falling  partly  within  the  calendar 
year  1917  and  partly  within  the  calendar  year  1918,  but  makes  no  reference 
to  the  time  of  filing  the  return.  The  Bureau  has  never  recognized  any 
exception  to  the  method  prescribed  for  computing  the  tax  in  the  case  of  the 
fiscal  year  falling  within  the  calendar  years  in  which  the  rates  of  tax  were 
different,  either  under  the  Act  of  1917  or  the  Act  of  1918,  by  reason  of  the 
fact  that  the  return  was  filed  after  the  due  date. 

It  is,  therefore,  recommended,  in  the  appeal  of  the  M  Company,  that 
the  action  of  the  Income  Tax  Unit  in  assessing  the  excess  profits  tax  for  the 
fiscal  year  ended  October  31,  1917,  upon  the  basis  of  the  full  fiscal  year, 
excluding  from  invested  capital  net  earnings  for  the  months  of  November 
and  December,  1916,  be  sustained. 
2 


Sty  pj  l<  meivtm  y  Liulkiin  Rulings 


2-2-022. 

Sec.  326.    Art.  851.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— 1f555,  ante):  (1921  Act— 
1fl035,  post). 

Article  851— Intangible  Property  Paid  in  (Reg.  45—^804,  ante):  (Reg. 
62—H1220,  post). 

23-19-554:  T.  B.  M.  81. 

The  fact  that  a  corporation  issues  stock  as  a  bonus  to  its  three  principal 
officers  to  secure  their  services  and  participation  in  the  business  is  not  ipso 
facto  sufficient  evidence  of  the  existence  of  good  will  for  which  values  can  be 
recognized  in  connection  with  the  computation  of  invested  capital. 

Such  three  principal  officers  were  the  principal  stockholders  and  were 
active  salesmen  and  the  only  salesmen  employed  directly  by  the  corporation. 
Each  was  allotted  certain  exclusive  territory  in  which  he  might  employ 
subagents;  all  sales  made  by  or  through  these  three  principal  salesmen  con- 
stituted the  basis  on  which  their  commissions  or  bonuses  were  calculated. 
There  were  certain  other  sales  made  directly  by  the  house  which  were  not 
subject  to  any  bonus  or  commission  deduction.  The  business  of  the  cor- 
poration appeared  to  be  dependent  almost  solely  upon  the  personal  efforts 
of  these  three  principal  officers  and  stockholders.  The  rates  of  commission 
and  the  salaries  for  their  services  were  properly  voted. 

In  this  case  it  was  deemed  that  commission  and  salary  aggregating  50 
per  cent  of  the  gross  margin  on  the  business  developed  by  each  was  not 
unreasonable. 

1 


30-19.644:  O.  D.  348. 

Invested  capital  on  account  of  intangibles  bona  fide  paid  in  for  stock  or 
shares  is  limited  to  25  per  cent  of  stock  with  par  value  plus  25  per  cent  of 
the  amount  fixed  in  articles  authorizing  no  par  value  stock  as  the  capital 
with  which  the  corporation  may  do  business.  If  the  laws  of  any  State 
authorize  issuance  of  true  no  par  value  stock  with  no  amount  of  fixed  capital 
such  no  par  value  stock  may  be  taken  into  consideration  in  measuring  the 
value  of  intangibles,  at  the  fair  market  value  as  of  the  date  or  dates  of  issue 
of  such  stock  or  shares. 

2 


1-20-665:  A.  R.  R.  9. 

A  and  B,  who  own  most  of  the  stock  of  the  M  Company,  invented  certain 
machinery,  for  which  patents  were  issued  to  them.  The  cost  of  obtaining 
these  patents  was  paid  by  the  company.  It  does  not  appear  whether  at 
that  time  the  patents  were  formally  assigned  to  the  corporation,  but,  in  all 
events,  the  corporation  had  the  use  of  the  patents  as  though  they  were  its 
own,  without  compensation  to  the  inventors.  The  patents  at  that  time 
being  undeveloped,  their  value  was,  of  course,  problematical,  but  by  1916 
they  had  been  sufficiently  developed  to  prove  of  considerable  value. 

In  1916  the  corporation  desired  to  increase  its  capital,  and  in  order  to 
do  so,  the  patents  in  question  were  put  upon  the  books  at  a  value  of  2x 
dollars  and  a  stock  dividend  was  declared. 

Upon  the  basis  of  the  above  statement  of  facts  the  Committee  is  clearly 
of  the  opinion  that  the  patents  were  not  specifically  paid  for  by  the  issuance 
of  stock,  nor  by  any  payment]  of  cash.    They  were  apparently  treated  as 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art  851.— 2. 


though  they  belonged  to  the  corporation  which  had  paid  the  cost  of  then 
issuance  from  the  time  of  issuance,  and  it  is  not  shown  that  anything  wras 
paid  for  them  at  the  time  other  than  cost,  nor  that  they  had  any  value  at 
that  time  in  excess  of  cost.  Even  assuming  that  they  were  not  formally 
assigned  until  1916,  it  does  not  appear  that  any  stock  was  issued  in  payment 
therefor,  except  such  stock  as  was  issued  as  a  stock  dividend  to  all  stock- 
holders, including  those  who  had  no  interest  in  the  patents,  as  well  as  to  the 
original  patentees. 

The  conclusion  reached,  therefore,  is  that  the  value  of  the  patents  as 
carried  upon  the  books,  2x  dollars,  can  not  be  included  in  invested  capital, 
and  that  the  decision  of  the  Income  Tax  Unit  must  be  affirmed. 
3 


9-20-776:  A.  R.  R.  29 

RULING  UNDER  REVENUE  ACT  OF  1917. 
Held,  that  the  M  Company  can  not  include  in  its  invested  capital  for  1917 
an  amount  representing  secret  formulas  paid  in  for  stock  or  shares  in  excess  of 
20  per  cent  of  the^outstanding  capital  stock  of  the  company  on  March  3,  1917. 


The  M  Company  was  organized  in  1909,  with  an  authorized  capital 
stock  of  lOx  dollars,  which  was  issued  for — 

Cash   x  dollars 

Secret  formulas   9*  dollars 

On  July  1,  1917,  the  company  issued  additional  stock  of  the  par  value  of 

90*  dollars  for — 

Cash..   S*  dollars 

Capitalization  of  good  will   40*  dollars 

Appreciation  in  value  of  secret  formulas   45*  dollars 


The  record  in  the  case  does  not  show  whether  tins  increase  of  90.r  dollars 
in  capital  stock  was  made  through  the  appreciation  of  assets  and  the  declara- 
tion of  a  stock  dividend,  but  it  appears  that  this  method  of  increasing  capital 
stock  has  been  used.  The  appreciation  in  the  value  of  the  processes  was 
largely  due  to  the  further  development  of  the  formulas.  The  cost  of  this 
development  was  paid  by  the  company  and  deducted  as  business  expenses. 

In  the  computation  of  changes  in  invested  capital,  Schedule  D.  Form 
1103,  for  the  year  1917,  the  company  eliminated  the  item  of  40#  dollars  on 
account  of  good  will,  but  claimed  that  the  balance  of  50x  dollars  should  be 
prorated  for  six  months  and  25x  dollars  admitted  as  an  addition  to  invested 
capital.   The  return  was  prepared  on  that  basis. 

An  examination  of  the  return  for  1917  shows  that  the  company  sustained 
a  loss  for  1911  and  made  profits  in  1912  and  1913  and  that  the  90*  dollars 
increase  in  capital  stock  was  made  as  of  July  1,  1917,  and  distributed  pro 
rata  to  the  various  stockholders  on  the  basis  of  their  respective  stockholdings, 
thus  indicating  that  the  increase  in  capital  stock  was  made  through  the  dis- 
tribution of  a  stock  dividend. 

In  the  audit  of  the  return  for  1917  the  Income  Tax  Unit  rejected  the 
claim  for  addition  to  invested  capital  in  the  amount  of  25*  dollars  and 
allowed  the  prorated  amount  of  5*  dollars  cash  paid  in  July  1,  1917.  The 
Unit  also  allowed  20  per  cent  of  the  capital  stock  outstanding  on  March  3, 
1917,  as  representing  the  secret  formulas. 

In  the  presentation  of  the  case,  it  was  strongly  argued  that  the  secret 
formulas  are  tangible  property;  that  the  Unit  was  in  error  in  disallowing  7x 
dollars  of  the  capital  account  in  order  to  conform  with  the  limitation  pre- 
scribed by  the  statute  and  that  the  total  amount  of  25x  dollars  should  have 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  851— 3. 

been  allowed  to  stand  for  che  reason  that  the  secret  formulas  had  a  value 
greatly  in  excess  of  the  value  used  when  they  were  turned  in  to  the  company 
for  stock  at  the  time  of  its  organization.  The  value  can  not  be  Hxed  for  the 
secret  processes  at  the  time  they  were  paid  in  for  stock;  neither  can  the 
cost  of  development  be  established.  The  company  urges  that  since  A,  a 
stockholder,  was  able  to  sell  x  dollars  of  stock  at  par  the  9.x  dollars  retained 
by  him  was  worth  par,  thus  establishing  the  value  of  the  processes  at  the 
time  they  were  paid  in  for  stock.  It  should  be  noted  a  great  deal  of  stress 
is  laid  upon  the  value  of  the  processes. 

It  is  claimed  further  that  the  increase  in  value  of  secret  processes,  is 
due  to  the  fact  that  they  had  previously  been  carried  at  a  low  valuation  on 
the  books,  and  that  the  earnings  of  the  company  depend  to  a  very  large 
degree  on  these  secret  processes  and  formulas,  which  are  being  constantly 
improved  year  after  year  for  the  benefit  of  the  business.  It  was  deemed, 
therefore,  only  fair  that  such  processes  be  carried  at  a  value  which  more 
truly  represents  their  earning  power,  as  compared  with  the  other  tangible 
assets  of  the  business. 

While  it  is  not  so  stated,  it  would  indicate  that  a  stock  dividend  was 
declared  against  the  appreciated  assets  of  the  company.  The  conference 
had  with  the  attorneys  tends  to  substantiate  this  view.  J  f  this  be  true, 
then  the  principle  that  the  distribution  of  a  stock  dividend  does  not  increase 
nor  decrease  invested  capital  would  be  applicable. 

The  question  as  to  whether  or  not  the  secret  formulas  can  be  considered 
as  tangible  property  is  presented.    Section  207  of  the  Revenue  Act  of  1017 

provides  in  part  as  follows: 

*  *  *  the  good  will,  trade-marks,  trade  brands,  the  franchise  of  a  corporation^or 
partnership,  or  other  intangible  property,  shall  be  included  as  invested  capital  if  the  cor- 
poration or  partnership  made  payment  bona  fide  therefore  specifically  as  such  in  cash  or 
tangible  property,  the  value  of  such  good  will,  trade-mark,  trade  brand,  franchise,  or 
intangible  property,  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible 
property  paid  therefor  at  the  time  of  such  payment;  but  good  will,  trade-marks,  trade 
brands,  franchise  of  a  corporation  or  partnership,  or  other  intangible  property,  bona  fide 
purchased,  prior  to  March  third,  nineteen  hundred  and  seventeen,  for  and  with  interest 
or  shares  in  a  partnership  or  for  and  with  shares  in  the  capital  stock  of  a  corporation  (issued 
prior  to  March  third,  nineteen  hundred  and  seventeen),  in  an  amount  not  to  exceed,  on 
March  third,  nineteen  hundred  and  seventeen,  twenty  per  centum  of  the  total  interests 
or  shares  in  the  partnership  or  of  the  total  shares  of  the  capital  stock  of  the  corporation, 
shall  be  included  in  invested  capital  at  a  value  not  to  exceed  the  actual  cash  value  at  the 
time  of  such  purchase,  and  in  case  of  issue  of  stock  therefor  not  to  exceed  the  par  value 
of  such  stock. 

Article  47  of  Regulations  41  provides: 
The  term  "other  intangible  property"  as  used  in  section  207  will  be  construed  to  mean 
property  of  a  character  similar  to  good  will,  trade-marks,  and  the  other  specific  kinds 
of  property  enumerated  in  the  same  clause.    *    *  * 

^ticles  57  and  58  of  Regulations  41  provide  respectively  as  follows: 
If  good  will,  trade-marks,  trade  brands,  franchises  of  a  corporation  or  partnership,  or 
other  intangible  property  has  been  purchased  with  stock  or  shares  issued  prior  to  March 
3,  1917,  the  amount  that  may  be  included  in  invested  capital  must  not  exceed  (a)  20  per 
cent  of  the  par  value  of  the  total  stock  or  shares  outstanding  on  that  date,  nor  (b)  the 
actual  value  of  the  asset  at  the  date  acquired,  not  (c)  the  par  value  of  the  stock  issued  in 
payment  for  the  asset. 

The  20  per  cent  limitation  upon  intangible  property  purchased  prior  to  March  3,  1917, 
for  or  with  stock  or  shares  of  the  corporation  or  partnership,  applies  not  to  each  item  or 
class  of  intangible  property  separately,  but  to  the  aggregate  amount  of  all  such  property 
so  purchased.  Such  intangible  property  may  be  included  in  the  invested  capital  only 
up  to  an  amount  not  exceeding  20  per  cent  of  the  total  stock  or  shares  of  the  corporation 
or  partnership  on  March  3,  1917,  even  though  the  aggregate  amounr  of  such  intantible 
property  be  greater  in  value  than  such  20  per  cent  of  the  par  value  of  the  total  stock  or 
■hares. 

Intangible  property  bona  fide  purchased  prior  to  March  3,  1917,  with  stock  having  no 
par  value  may  be  included  in  invested  capital  at  a  value  not  exceeding  the  actual  cash 

Supplementary  Bulletin  Rulings. 


Sec.  326.   Art.  851.— 4. 


value  of  such  intangible  property  at  the  time  of  the  purchase  and  in  an  amount  not  exceeding 
20  per  cent  of  the  total  shares  of  stock  outstanding  on  March  3,  1917,  measured  by  their 
value  as  at  the  date  or  dates  of  issue. 

The  Advisory  Tax  Board  in  Memorandum  5  (Cumulative  Bulletin, 
December,  1919,  page  286),  recommended  that  Ruling  24  issued  by  the 
Tax  Reviewers,  interpreting  article  58  quoted  above,  be  amended  to  read 
as  follows: 

Twenty  Per  Cent  Limitation  upon  Intangible  Property  in  Cases  where  Capital  Stock  has 
been  Increased  or  Reduced. — Where  since  the  organization  of  a  corporation  its  capital  stock 
has  been  increased  or  reduced  and  such  change  represents  an  actual  acquisition  of  new 
property  for  stock  or  an  actual  impairment  of  original  properties,  the  20  per  cent  limitation 
imposed  by  section  207  will  be  based  upon  the  par  value  of  the  total  stock  outstanding 
on  March  3,  1917. 

It  appears  to  the  Committee  that  the  value  of  the  formulas  at  the  time 
the  company  was  organized  was  apparently  largely  speculative  and  any 
increase  in  value  through  subsequent  development  could  not  properly 
be  included  by  way  of  an  addition  to  invested  capital. 

After  consideration  of  all  the  facts  presented  on  the  questions  at  issue 
and  the  definition  of  the  term  "intangible  property"  as  used  in  the  Revenue 
Act  of  1918,  the  Committee  has  reached  the  conclusion  that  the  secret 
formulas  cannot  be  considered  tangible  property,  and  that  additions  to 
invested  capital  in  1917  through  revaluation  of  the  intangible  assets  cannot 
be  permitted  under  the  law  and  the  regulations.  Therefore,  it  is  recom- 
mended that  the  decision  of  the  Unit  be  confirmed. 
4 


25-21-1698:  A.  R.  M.  131. 

Held,  that  intangible  property,  when  acquired  for  tangible  property,  must  be 
taken  into  account  at  the  value  of  such  intangible  property  at  date  of  acquisition, 
and  that  in  the  case  of  the  M  Company  such  value  is  measured  by  the  then  fair 
market  value  of  the  tangible  property  exchanged  therefor  and  not  by  the  original 
cost  of  such  tangible  property.  It  is  assumed  the  fair  market  value  of  the  lands 
at  time  of  transfer  will  be  satisfactorily  established  by  the  taxpayer. 

The  Income  Tax  Unit  has  submitted  the  following  issue  for  an  expression 
of  opinion  by  this  Committee: 

Whether  intangibles  can  be  included  in  invested  capital  at  a  value  representing  the  pre- 
vailing market  value  (as  at  the  date  of  transfer)  of  tangible  property  given  in  exchange  for 
intangible  property,  or  whether  the  company  transferring  tangible  for  intangible  property 
is  limited  to  the  cost  value  of  tangible  property  so  transferred. 

The  facts  on  which  the  issue  is  based  are  expressed  by  the  Unit  in  the 
following  language: 

The  taxpayer,  the  M  Company,  purchased  a  large  tract  of  land  about  the  year  188- 
upon  which  it  proposed  to  establish  and  operate  a  certain  business.  It  was  absolutely 
essential  to  successful  operation  that  business  houses  of  a  certain  character  be  established 
and  operated.  Therefore  the  M  Company  made  certain  offers  and  inducements  to  large 
owners  of  such  houses  to  locate  on  their  premises.  Contracts  were  made  from  time  to  time 
with  nearly  all  of  these  large  owners  of  such  business  houses  who  pursuant  to  their  contracts 
established  and  operated  plants. 

The  M  Company  agreed  among  other  things  to  deed  to  these  owners  a  portion  of  its 
lands.  The  consideration  received  by  the  M  Company  was  in  the  form  of  an  intangible 
asset,  namely,  the  trade  or  business  that  would  result  to  the  M  Company  by  the  location 
Df  these  large  plants  on  their  large  tract  of  land  above  mentioned. 

The  point  at  issue  is  whether  the  intangibles  may  be  included  in  invested 
capital  at  a  value  measured  by  the  original  cost  of  the  land  or  the  market 
value  of  the  land  at  time  of  transfer. 

The  issue  first  of  all  involves  the  question  of  income  resulting  from  the 
exchange  of  property  for  property.    Manifestly  there  was  a  conversion  of 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  851. —5. 


one  asset,  land,  into  another  form  of  asset  which  had  an  intangible  value. 
Article  1563  of  Regulations  45  provides  that: 

Gain  or  loss  arising  from  the  acquisition  and  subsequent  disposition  of  property  if 
realized  when  as  the  result  of  a  transaction  between  the  owner  and  another  person  the 
property  is  converted  into  cash  or  into  property  (a)  that  is  essentially  different  from  the 
property  disposed  of  and  (b)  that  has  a  market  value. 

In  the  instant  case  the  intangible  has  a  value  measured  by  the  consider- 
ation paid  therefor,  viz.,  tangible  property.  It  is  not  the  cost  of  this  tangible 
property  which  measures  the  value  of  this  intangible  asset,  but  its 
real  market  value  as  of  date  of  transfer.  When  the  value  of  the 
intangible  asset  is  so  determined  the  difference  between  such  value  and  the 
original  cost  of  the  land  exchanged  therefor  is  the  amount  of  profit  realized 
in  the  conversion  of  the  land  into  another  form  of  asset.  Nor  does  such  a 
transaction  involve  the  question  of  appreciation  because  it  is  not  the  value  of 
the  land  itself  which  is  written  up  on  the  books  of  the  corporation  but  the 
value  of  an  intangible  asset  measured  by  the  consideration  paid  therefor. 
An  exchange  of  this  land  for  cash  equivalent  to  the  present  market  value  of 
the  land  would  have  determined  a  profit  over  the  original  cost.  This  profit 
would  have  been  reflected  in  the  surplus  of  the  company.  In  a  similar 
manner  the  excess  of  the  value  of  the  intangible  acquired  over  the  cost  of  the 
land  given  in  exchange  therefor  is  a  proper  credit  to  the  surplus  of  the  corpo- 
ration. The  determination  of  a  current  value  in  the  instant  case  has  no 
relation  to  original  cost  because  it  must  be  assumed  that  the  land  before 
and  after  transfer  had  an  immediate  realizable  value. 

The  Committee  is  accordingly  of  the  opinion  that  intangible  property, 
when  acquired  for  tangible  property,  must  be  taken  into  account  at  the 
value  of  such  intangible  property  at  date  of  acquisition,  and  that  in  the 
instant  case  such  value  is  measured  by  the  then  fair  market  value  of  the 
tangible  property  exchanged  therefor  and  not  by  the  original  cost  of  such 
tangible  property.  It  is  assumed  the  fair  market  value  of  the  lands  at  time 
of  transfer  will  be  satisfactorily  established  by  the  taxpayer. 
6 


44-21-1893:  A.  R.[R.  520. 

REVENUE  ACT  OF  1917. 
Recommended  in  the  appeal  of  the  M  Company  that  there  be  allowed  as  a 
deduction  from  gross  income  in  the  company's  1917  return  a  depreciation  of  patent 
rights  in  an  amount  which  bears  the  same  ratio  to  the  established  cost  of  the 
patent  rights  as  12  months  (the  taxable  year)  bears  to  23.5  months  (the  total 
period  for  which  the  patent  rights  are  to  run);  and  that  the  valuation  assigned 
to  such  asset  as  of  January  1,  1917,  for  invested  capital  purposes  be  the  cost  of  the 
asset,  x  dollars,  minus  depreciation  for  one  and  one-half  months,  or  an  amount 
not  in  excess  of  20  per  cent  of  the  total  shares  of  stock  outstanding  on  March  3, 
1917,  measured  by  their  value  as  at  date  or  dates  of  issue,  whichever  is  lower. 
(See  art.  58,  Reg.  41.) 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Unit  in  making  certain  adjustments  respecting 
the  valuation  of  patent  rights  for  the  purpose  of  computing  invested  capital 
and  respecting  the  basis  of  computing  allowances  for  depreciation  of  such 
rights. 

The  records  in  the  case  indicate  that  patent  rights  were  acquired^ Novem- 
ber — ,  1916,  extending  to  November  — ,  1918  (a  period  of  23.5  months), 
by  the  taxpayer  for  a  consideration  of  x  dollars  cash  value  of  the  corpora- 
tion's capital  stock.  On  April  — ,  1917,  a  new  right,  to  begin  November 
— ,  1918,  and  extend  for  a  period  of  eight  years  was  secured.   It  is  shown 


Supplementary  Bulletin  Rul'ngs. 


Sec.  326.    Art.  851— 6. 


that  the  new  right  extending  for  the  additional  period  of  eight  years  was 
given  to  the  corporation  gratis.  Notwithstanding  the  receipt  of  the  new 
right  which  became  effective  November  — ,  1918,  the  corporation  continued 
during  the  year  1917  to  use  and  operate  under  the  first  right  acquired  as 
aforesaid. 

In  the  brief  submitted  by  the  taxpayer's  counsel  the  following  matter 
is  set  forth  with  respect  to  the  treatment  accorded  this  asset  (patent  right) 
in  the  preparation  of  income  and  excess  profits  tax  return  for  the  calendar 
year  1917: 

In  making  its  income  tax  return  the  corporation  considered  claiming  "depreciation" 
on  patent  rights  at  the  rate  of  12/23.5  per  year  during  the  entire  year  1917  at  which  rate 
in  fact  its  original  investment  should  be  amortized,  but  in  a  spirit  of  willingness  to  stand 
its  fair  share  of  war  taxation  it  conceived  that  it  would  take  such  "depreciation"  only 
up  to  April  ■ — ,  1917,  when  the  new  right  was  received  and  thereafter  "depreciate"  on  the 
basis  that  at  least  the  original  value  of  the  patent  right,  viz.,  x  dollars  had  been  restored 
and  "depreciation"  should  thereafter  be  claimed  upon  the  basis  of  a  life  from  April  — , 
1917,  to  November  — ,  1926. 

With  reference  to  the  so-called  "appreciation  of  patents"  the  corporation  simply  con- 
ceived that  the  gift  of  April  < — ,  1917,  restored  the  original  value  and  treated  the  gift  as 
"paid-in  surplus"  of  the  value  theretofore  lost  by  "depreciation"  for  five  months  from 
November  ■ — ,  1916,  at  the  rate  of  1/23.5  of  cost  per  month.  This  sum  averaged  over 
the  year  made  an  invested  capital  increase  of  \/6x  dollars  which  was  claimed  and  used 
as  an  element  in  computing  invested  capital. 

In  the  audit  of  the  return  the  Income  Tax  Unit  insisted  that  deprecia- 
tion should  be  on  the  basis  of  the  original  cost  of  x  dollars  spread  over  a 
ten-year  life,  embracing  the  two  separate  periods  for  which  rights  were 
granted,  November  — ,  1916,  to  November  — ,  1926,  and  accordingly  dis- 
allowed all  depreciation  claimed  in  excess  of  amounts  determined  on  that 
basis. 

The  Unit  also  eliminated  from  invested  capital  such  depreciation  as  had 
been  claimed  by  the  taxpayer  from  November  — ,  1916,  to  April  — ,  1917, 
and  which  was  sought  to  be  restored  to  the  value  of  the  asset  for  the  pur- 
pose of  subsequent  depreciation  allowances. 

The  taxpayer  contends  that  the  method  adopted  by  it  in  treating  this 
asset  in  the  manner  heretofore  outlined  in  the  preparation  of  its  income 
tax  return  for  1917  was  both  equitable  and  correct  under  the  law  and  regu- 
lations. Action  contrary  to  this  contention  has  been  taken  by  the  Unit 
in  adjusting  the  corporation's  tax  liability,  and  it  is  from  such  action  that 
the  taxpayer  appeals. 

In  the  opinion  of  the  Committee,  both  the  taxpayer  and  the  Unit  have 
erred  in  this  matter.  It  is  e^  ident  from  the  foregoing  statements  that  the 
taxpayer  acquired  on  November  — ,  1916,  an  intangible  asset  (patent  right) 
to  extend  to  November  — ,  1918,  a  period  of  approximately  23.5  months, 
and  that  such  asset  was  acquired  for  a  consideration  of  x  dollars  cash  value 
of  the  company's  capital  stock  at  that  date.  The  record  indicates  with 
respect  to  the  stock  issue  of  the  corporation  that  it  consisted  of  y  shares  of 
no  par  value. 

Article  58  of  Regulations  41,  pertaining  to  the  valuation  for  invested 
capital  purposes  of  intangible  property,  provides  in  part: 

Intangible  property  bona  fide  purchased  prior  to  March  3,  1917,  with  stock  having 
no  par  value  may  be  included  in  invested  capital  at  a  value  not  exceeding  trie  actual  cash 
value  of  such  intangible  property  at  the  time  of  the  purchase  and  in  an  amount  not  exceed- 
ing twenty  per  cent  of  the  total  shares  of  stock  outstanding  on  March  3,  1917,  measured 
by  their  value  as  at  the  date  or  dates  of  issue. 

There  is  nothing  in  the  record  which  indicates  the  method  by  which  a 
valuation  of  x  dollars  has  been  fixed  and  accepted  by  the  Unit,  but  for  the 
purpose  of  rendering  an  opinion  upon  the  point  at  issue,  the  Committee 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  851.— 7. 


assumes^ that  such  value  has  been  determined  in  accordance  with  the  law 
and  regulations  and  to  the  satisfaction  of  the  Unit. 

Article  163  of  Regulations  45,  issued  under  the  Revenue  Act  of  1918,  is 
equally  applicable  under  the  Revenue  Act  of  1917.  This  article  provides 
in  part: 

If,  however,  an  intangible  asset  acquired  through  capital  outlay  is  known  from  expe- 
rience to  be  of  value  in  the  business  for  only  a  limited  period,  the  length  of  which  can  be 
estimated  from  experience  with  reasonable  certainty,  such  intangible  asset  may  be  the 
subject  of  a  depreciation  allowance,    *    *  *. 

In  the  determination  of  the  depreciation  allowance  which  may  be  claimed 
in  the  1917  return  of  the  taxpayer,  two  factors  must  be  known  and  are 
apparent  in  the  record,  to  wit:  the  cost  of  the  asset,  and  its  life,  as  deter- 
mined by  the  period  for  which  the  right  under  which  the  company  operated 
in  1917,  was  to  run. 

These  factors  as  shown  by  the  record  are:  cost  of  asset,  x  dollars;  and 
life  of  asset,  23.5  months. 

It  is  the  opinion  of  the  Committee,  therefore,  that  the  depreciation  allow- 
ance to  which  the  taxpayer  is  entitled  for  the  calendar  year  1917  is  an  amount 
which  bears  the  same  ratio  to  x  dollars  as  twelve  months  (the  taxable  year) 
bears  to  23.5  months  (the  total  period  or  life  of  the  asset). 

In  line  with  this  opinion  there  appears  to  be  no  question  as  to  the  measure 
of  value  which  may  be  assigned  to  the  asset  (patent  right)  for  purposes  of 
invested  capital  as  of  January  1,  1917,  which  necessarily  must  be  x  dollars 
minus  depreciation  for  one  and  one-half  months  (November  — ,  to  Decem- 
ber 31,  1916),  or  an  amount  not  in  excess  of  20  per  cent  of  the  total  shares 
of  stock  outstanding  on  March  3,  1917,  measured  by  their  value  as  at  date 
or  dates  of  issue,  whichever  is  lower. 

It  is  recommended,  therefore,  in  the  appeal  of  the  M  Company  that  there 
be  allowed  as  a  deduction  from  gross  income  in  the  company's  1917  return 
a  depreciation  of  patent  rights  in  an  amount  which  bears  the  same  ratio 
to  the  established  cost  of  the  patent  rights,  x  dollars,  as  12  months  (the 
taxable  year)  bears  to  23.5  months  (the  total  period  for  which  the  patent 
rights  are  to  run);  and  that  the  valuation  assigned  to  such  asset  as  of  Jan- 
uary ;1,  1917,  for  invested  capital  purposes  be  the  cost  of  the  asset,  x  dollars 
minus  depreciation  for  one  and  one-half  months,  or  an  amount  not  in  excess 
of  20  per  cent  of  the  total  shares  of  stock  outstanding  on  March  3,  1917, 
measured  by  their  value  as  at  date  or  dates  of  issue,  whichever  is  lower. 
(See  art.  58,  Reg.  41.) 
6 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec,  326.    Art.  852.  -1. 

Law  Section  326.— Invested  Capital  (1018  Act-  if'SSS,  ante):  (1021  Act 
If  1035,  post). 

Article  852, — Percentage  of  Inadmissible  Assets  (Keg.  45  U 805,  ante) : 
(Reg.  62—^1221,  post). 

1-19-125:  O.  D.  86. 

Since  the  income  derived  from  Porto  Rico  bonds  is  not  subject  to  tax, 
the  bonds  are  inadmissable  assets  and  can  not,  therefore,  be  included  in 
invested  capital. 
1 


Supplementary  Bulletin  Rulings. 


2-20-22. 


Sec.  326.    Art.  853.-1. 


Law  Section  326— Invested  Capital  (1918  Act— 1f555,  ante):  (1921  Act— 
H1035,  post). 

Article  853. — Changes  in  invested  capital  dining  year  (Reg.  45 — ^[806, 
ante):  (Reg.  62— 1[1222,  post). 

27-21-1720:    O.  D.  969. 

Inasmuch  as  trustees  in  liquidation  are  required  to  file  a  corporate  return 
of  annual  net  income  and  excess  profits  for  the  entire  taxable  year,  including 
therein  the  gross  income  received  by  the  corporation  prior  to  their  appoint- 
ment and  also  the  gross  income  received  under  their  supervision,  thejnvested 
capital  should  be  computed  in  the  same  manner  as  in  the  case  of  an  active 
corporation,  making  due  allowance  for  any  amount  of  capital  assets  which 
have  been  liquidated  and  returned  to  the  stockholders  during  that  year. 

However,  if,  owing  to  abnormal  circumstances  affecting  the  capital  or 
income  of  the  corporation,  the  tax  computed  in  the  usual  manner  works 
upon  the  corporation  an  exceptional  hardship,  evidenced  by  gross  dispropor- 
tion between  the  tax  so  computed  and  the  tax  computed  by  reference  to 
representative  corporations  specified  in  section  328  of  the  Revenue  Act  of 
1918,  the  taxpayer  may  file  a  claim  for  special  assessment  in  accordance 
with  sections  327  and  328  of  the  Act. 
1 


Supplementary  Bulletin  Rulings. 


.(taoq  tSSSr?—Sd  .^951)  :  (etna" 


f 


7-27-22. 

Sec.  326.    Art.  854.  I. 

Law  Section  326.— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
H1035,  post). 

Article  854.— Computation  of  Average  Invested  Capital  (Reg.  45 — 
«!807,  ante):  (Reg.  62-  f  1223,  post). 

8-21-1473:  O.  D.  822. 

Inasmuch  as  1920  was  a  leap  year,  adjustments  of  invested  capital  under 
schedule  H,  page  2  of  Form  1120  for  1920,  should  be  made  on  the  basis  of  a 
year  of  366  days. 

1   

I  ('22)-30-433:  A.  R.  R.  979. 
Revenue  Acts  of  1917  and  1918. 

Recommended,  in  the  appeal  of  the  M  Company,  that  in  the  absence  of 
evidence  of  error  the  rates  of  depreciation  used  by  the  Unit  in  computing  allow- 
able depreciation  deductions  in  1917  and  1918  be  approved;  that  the  action  of  the 
Unit  in  considering  this  company's  prewar  period  as  covering  all  of  the  prewar 
years,  and  in  excluding  from  invested  capital  paid-in  surplus  with  respect  to 
intangible  assets  acquired  at  date  of  reorganization  in  1916,  be  sustained;  and 
that  because  of  the  exclusion  of  such  intangible  assets  it  be  recognized  that  an 
abnormality  exists  in  this  company's  invested  capital  which  entitles  it  to  special 
assessment  for  both  1917  and  1918,  and  that  assessment  be  made  on  the  basis  of 
comparatives  carefully  selected,  provided  any  relief  is  afforded  thereby. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  adjusting  its  returns  for  1917 
and  1918,  and,  on  the  basis  of  such  adjustments,  assessing  additional  taxes 
for  each  year. 

Following  an  audit  of  this  company's  books  in  December,  1919,  by  a 
revenue  agent,  the  Unit  in  March,  1920,  notified  the  company  that  additional 
taxes  amounting  to  Sx  dollars  for  1917  and  28x  dollars  for  1918  were  proposed. 
The  taxpayer  immediately  protested  the  assessment  of  these  taxes,  and  after 
considerable  correspondence  and  an  oral  hearing  before  the  Unit,  the  letter 
of  March,  1920,  was  modified  by  a  revised  letter  dated  September,  1920,  in 
which  the  proposed  assessments  were  reduced  to  4x  dollars  for  1917  and  \2x 
dollars  for  1918,  and  these  amounts  were  assessed.  The  company  has  ap- 
pealed to  this  Committee  on  three  points,  as  follows: 

1.  The  rates  of  depreciation  used  by  the  Unit. 

2.  The  deduction  allowable  under  section  203  of  the  Revenue  Act  of 
1917  and  the  war-profits  credit  provided  by  section  311  of  the  Revenue  Act 
of  1918. 

3.  The  exclusion  of  intangible  assets  alleged  to  have  been  acquired  for 
stock  at  date  of  reorganization  in  1916. 

1.  In  the  computation  of  the  allowable  deductions  for  depreciation  the 
Unit  used  the  same  rates  as  the  company  had  used  in  its  original  returns, 
the  total  allowance  being  less  due  to  the  fact  that  the  company  applied  the 
rates  to  the  total  asset  values  at  the  close  of  the  year  while  the  Unit  averaged 
the  assets  by  taking  the  sum  of  the  amounts  shown  on  the  opening  and  closing 
balance  sheets  and  dividing  this  by  two.  The  company  now  concedes  the 
correctness  of  the  Unit's  procedure,  but  contends  that  the  rates  originally 
used  and  allowed  by  the  Unit  were  too  low  to  cover  the  depreciation  actually 
sustained,  while  the  Unit  states  that  it  has  no  objection  to  allowing  the  full 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  354.- -2. 


amount  of  depreciation  actually  sustained  but  believes  that  the  evidence 
submitted  did  not  substantiate  a  greater  amount  than  that  allowed.  The 
Committee  accordingly  requested  the  appellant's  representatives,  at  a  recent 
oral  hearing  accorded  to  them,  to  submit  depreciation  schedules  for  all  years 
from  1912,  the  year  in  which  the  manufacture  of  its  leading  line  was  com- 
menced, showing  the  company's  past  experience  relative  to  normal  de- 
preciation and  reasons  for  claiming  accelerated  rates  in  1917  and  1918.  In 
response  to  this  request  the  Committee  has  received  a  revised  depreciation 
schedule  for  the  years  1917  and  1918  only,  which,  as  to  asset  values,  is 
identical  with  the  schedule  prepared  by  the  Unit,  the  only  difference  being 
that  higher  rates  are  claimed.  Relative  to  the  company's  past  experience 
under  normal  conditions  the  following  statement  is  made: 

This  company  acquired  its  original  assets  in  1916.  Its  predecessor's  records  do  not 
disclose  sufficient  data  from  which  to  ascertain  depreciation  actually  accrued  under  normal 
working  conditions  on  buildings  and  machinery  used  in  manufacturing. 

This  appears  to  be  a  rather  unusual  condition,  inasmuch  as  these  same 
books,  according  to  the  appellant's  contention  relative  to  invested  capital 
adjustments,  show  to  the  fraction  of  1  per  cent  the  actual  assets  employed 
in  the  manufacture  of  the  product  and  the  exact  income  received  from  that 
branch  of  the  business. 

The  Committee  is  of  the  opinion  that  the  rates  allowed  by  the  Unit  arc 
fair,  and  in  the  absence  of  evidence  to  show  that  the  use  of  such  rates  does  not 
provide  for  depreciation  actually  sustained,  recommends  that  these  rates  be 
approved. 

2.  The  appellant  was  organized  in  December,  1916,  and  took  over  the 
assets  and  business  of  the  N  Company.  The  predecessor  of  the  N  Company 
was  the  O  Company,  a  corporation  whose  only  business  was  manufacturing 
another  product.  In  February,  1912,  the  charter  of  the  last-named  company 
was  amended  changing  its  name  to  the  N  Company  and  authorizing  it  to 
change  its  business.  The  old  business  was  not  finally  closed  out  until  sub- 
sequent to  the  close  of  the  year  1913.  Thus,  during  the  year  1911,  the  pre- 
decessor of  the  present  corporation  was  in  the  business  of  manufacturing 
one  product  and  during  the  years  1912  and  1913  in  that  of  manufacturing 
two  products,  in  consequence  of  which  the  appellant  contends  that  it  had 
only  one  full  prewar  year,  1913,  inasmuch  as  the  business  of  manufacturing 
its  present  product,  its  business  during  the  taxable  years,  is  substantially  a 
continuation  only  of  that  part  of  the  business  conducted  during  the  whole 
of  one  prewar  year.  It  has  submitted  a  profit  and  loss  account  for  the  year 
1913  which  purports  to  show  the  allocation  of  all  items  of  gross  income  and 
expenses  as  between  the  two  kinds  of  business,  a  balance  sheet  as  at  De- 
cember 31,  1912,  showing  similar  allocation  of  all  assets  and  liabilities,  and 
contends  that  the  deduction  for  1917  and  the  war  profits  credit  for  191 S 
should  be  computed  on  the  basis  of  the  income  and  invested  capital  attribut- 
able to  the  present  business  only  in  1913.  In  passing  it  may  be  stated  that 
a  cursory  examination  of  the  statements  submitted  shows  them  to  be  nothing 
more  than  arbitrary  estimates  and  they  could  be  nothing  else  unless  the 
system  of  accounting  employed  was  on  a  very  elaborate  scale.  The  tax- 
payer's statement  quoted  above  relative  to  depreciation  does  not  indicate 
the  use  of  such  a  system. 

Section  201  of  the  Revenue  Act.  of  1917  provides  that  "For  the  purpose 
of  this  title"— that  is,  Title  II,  war  excess -profits  tax,  and  this  also  includes 
the  deduction  provided  by  section  203 — "every  corporation  or  partnership 
not  exempt  under  the  provisions  of  this  section  shall  be  deemed  to  be  en- 
Supplementary  Bulletin  Rulings. 


7-27-22. 


Sec.  326.    Art.  854.  3. 


gagied  in  business,  and  all  the  trades  and  businesses  in  whieh  it  is  engaged 
shall  be  treated  as  a  single  trade  or  business,  and  all  its  income  from  whatever 
source  derived  shall  be  deemed  to  be  received  from  such  trade  or  business." 

No  exactly  similar  provision  exists  in  the  1918  Act,  but  one  of  the  pro- 
visions for  the  war-profits  credit  is  based  on  the  net  income  and  invested 
capital  of  the  prewar  period  if  the  corporation  was  in  existence  during  such 
period  or  a  part  thereof. 

Section  320(b)  provides: 

The  average  net  income  for  the  prewar  period  shall  be  determined  by  dividing  the 
number  of  years  within  that  period  during  the  whole  of  which  the  corporation  was  in 
existence    *    *  *. 

Section  326  provides: 

The  average  invested  capital  for  the  prewar  period  shall  be  determined  by  dividing 
the  number  of  years  within  that  period  during  the  whole  of  which  the  corporation  was  in 
existence    *    *  *. 

Section  330  provides: 

That  in  the  case  of  the  reorganization,  consolidation,  or  change  of  ownership  after 
January  1,  1911,  of  a  trade  or  business  now  carried  on  by  a  corporation,  the  corporation 
shall  for  purposes  of  this  title  be  deemed  to  have  been  in  existence  prior  to  that  date,  and 
the  net  income  and  invested  capital  of  such  predecessor  trade  or  business  for  all  or  any 
part  of  the  prewar  period  prior  to  the  organization  of  the  corporation  now  carrying  on 
such  trade  or  business  shall  be  deemed  to  have  been  the  net  income  and  invested  capital 
of  such  corporation. 

Assuming  that  it  could  be  done,  the  Committee  knows  of  no  provision  of 
the  law  which  provides  that  in  determining  the  war-profits  credit  under  the 
1918  Act,  income  and  invested  capital  attributable  to  certain  abandoned 
branches  or  departments  of  a  business  conducted  during  the  prewar  period 
be  segregated  and  eliminated  from  prewar  data,  and  in  the  present  case  the 
Committee  can  not  concede  that  this  could  be  done  even  with  approximate 
accuracy. 

In  view  of  the  foregoing,  it  is  recommended  that  the  action  of  the  Unit 
in  considering  all  of  the  years  1911,  1912,  and  1913  as  this  company's  prewar 
period  be  sustained. 

3.  It  appears  to  be  unnecessary  to  discuss  at  length  the  third  contention 
raised  by  the  appellant,  for  the  reason  that  if  it  were  conceded  it  would  in 
effect  be  allowing  indirectly  a  paid-in  surplus  for  intangibles,  and  this  Com- 
mittee has  repeatedly  and  consistently  held  that  no  paid-in  surplus  can  be 
allowed  either  directly  or  indirectly  with  respect  to  intangible  assets  acquired. 

Briefly  the  facts  are:  The  M  Company  was  incorporated  in  December, 
1916,  and  acquired  the  assets  and  business  of  the  N  Company  for  80a;  dollars 
common  stock  and  20x  dollars  preferred  stock  and  the  assumption  by  the 
former  of  liabilities  of  the  latter  amounting  to  22. 3x  dollars.  The  tangible 
assets  acquired  were  appraised  by  an  appraisal  company  at  127.5v  dollars. 
After  deducting  the  liabilities  assumed,  22. 3x  dollars,  the  net  value  of  tangibles 
was  105. 2x  dollars,  for  which  stock  of  the  par  value  of  lOOv  dollars  was  issued, 
resulting  in  a  paid-in  surplus  of  5.2v  dollars.  The  Unit  has  allowed  this 
latter  amount.  The  company  contends  that  inasmuch  as  it  acquired  a  mixed 
aggregate  of  tangible  and  intangible  property  it  is  entitled  to  have  an  alloca- 
tion made  of  the  stock  issued  so  as  to  apply  a  fair  proportion  thereof  against 
the  intangible  property  acquired,  which  amount  should  be  included  in  in- 
vested capital  subject  to  the  limitations  prescribed  by  law,  and  a  like  fair 
proportion  to  tangible  property  which  would  result  in  a  paid-in  surplus  with 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  854.-  4, 


respect  to  such  tangible  property  equal  to  the  difference  between  the  actual 
value  thereof  and  the  par  value  of  the  stock  fairly  allocated  thereto. 

The  Committee  can  not  concede  this  contention,  and  in  line  with  its 
uniform  practice  heretofore  must  recommend  that  the  action  of  the  Unit  on 
this  point  be  sustained. 

The  company  contends,  and  the  evidence  in  the  file  abundantly  supports 
the  contention,  that  at  date  of  reorganization  in  1916  it  acquired  very  valuable 
intangible  assets.  There  seems  to  be  no  question,  therefore,  that  the  neces- 
sary exclusion  of  these  assets  from  invested  capital  created  an  abnormality 
therein  which  justifies  special  assessment.  The  excess  profits  tax  assessed  for 
1917  amounts  to  —  per  cent  plus  of  net  income  and  the  war  and  excess-profits 
taxes  for  1918  amounts  to  —  per  cent  plus  of  net  income.  The  Committee 
accordingly  recommends  that  proper  comparatives  be  carefully  selected 
for  both  1917  and  1918,  with  a  view  to  giving  effect  to  the  intangible  assets 
excluded  in  the  compulation  of  this  company's  invested  capital  and  that 
assessment  of  taxes  be  made  on  the  basis  of  such  comparatives,  provided 
any  relief  is  afforded  thereby. 

Summing  up:  It  is  recommended,  in  the  appeal  of  the  M  Company, 
that  in  the  absence  of  evidence  of  error  the  rates  of  depreciation  used  by  the 
Unit  in  computing  allowable  depreciation  deductions  in  1917  and  1918  be 
approved;  that  the  action  of  the  Unit  in  considering  this  company's  prewar 
period  as  covering  all  of  the  prewar  years,  and  in  excluding  from  invested 
capital  paid-in  surplus  with  respect  to  intangible  assets  acquired  at  date  of 
reorganization  in  1916,  be  sustained;  and  that  because  of  the  exclusion  of 
such  intangible  assets  it  be  recognized  that  an  abnormality  exists  in  this 
company's  invested  capital  which  entitles  it  to  special  assessment  for  both 
1917  and  1918  and  that  assessment  be  made  on  the  basis  of  comparatives 
carefully  selected,  provided  any  relief  is  thereby  afforded. 
2 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  326.    Art.  855.— 1. 

Law  Section  326— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
If  1035,  post). 

Article  855— Invested  Capital  for  Full  Year  or  Less  (Reg.  45—^808, 
ante):  (Reg.  62— 1fl224,  post). 

15-19-449:   O.  D.  255. 

A  telephone  company  should  make  a  1918  return  for  its  accounting  period, 
either  calendar  or  fiscal  year,  and  all  income  applicable  to  such  period  should 
be  included  in  the  corporation's  return  irrespective  of  the  portion  of  the  year 
during  which  it  may  have  been  operated  underJGovernment  control.  The 
invested  capital  should  be  computed  on  the  basis  of  a  12  months'  period 
and  not  prorated. 


Supplementary  Bulletin  Ruling*. 


■~g-2V~22. 

Sec.  326.    Art.  857.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
111035,  post). 

Article  857. — Method  of  Determining  Available  Net  Income  (Reg.  45— 
^810,  ante):  (Reg.  62— «f  1226,  post). 

nn&nduz  ni  wbiwt«  ahil-19-124:  O.  D.  85. 

The  entire  amount  of  Federal  income,  war  profits,  and  excess  profits 
taxes  accrued  for  the  taxable  year  remains  a  part  of  invested  capital  for  the 
succeeding  year  (since  it  is  not  deductible  from  gross  income  in  returns) 
until  the  taxes  become  due  in  the  succeeding  year.  Accrual  of  taxes  for  the 
taxable  year  does  not  affect  invested  capital  for  the  taxable  year,  except 
to  the  extent  that  the  accrual  of  such  taxes  will  cause  dividend  payments 
to  draw  on  surplus  as  at  the  beginning  of  the  year. 

"rf>rn3in  airfo  batasosfi  ,79v^/orf  .i^omo  artinirnsxd  aril  svodfi  z&  pzv 


18-19-491:  T.  B.  R.  54. 

Memorandum  accounts  of  estimated  earnings  not  considered  sufficiendy 
definite  to  be  used  instead  of  the  average  monthly  earnings  in  computing  invested 
capital  underjarticle  857,  Regulations  45. 

In  the  case  of  the  M  Company  three  points  are  presented  for  considera- 
tion and  decision:  (1)  Whether  an  accrual  of  taxes  for  the  months  of 
January,  February,  and  March  of  1917  is  properly  used  in  computing  the 
invested  capital  for  the  year  1917:  (2)  whether,  assuming  that  the  bureau 
was  warranted  in  taking  accrued  taxes  for  those  months  into  consideration, 
was  it  not  in  error  in  using  the  monthly  earnings  instead  of  the  average 
earnings  for  the  year;  and  (3)  whether  any  computation  can  reduce  the 
capital  below  the  actual  paid-in  capital  of  the  corporation. 

The  situation  presented  was  brought  about  in  the  following  manner: 
The  corporation  apparently  had  earnings  of  \\x  dollars  for  the  months  of 
January,  February,  and  March,  1917.  During  the  month  of  March  it 
declared  and  paid  a  dividend  of  10x  dollars,  which  amount,  taken  in  con- 
nection with  the  accrual  of  taxes  on  the  earnings  for  the  first  three  months 
of  1917,  exceeds  the  amount  of  earnings  for  that  period  and  the  balance  was 
construed  to  have  been  paid  out  of  accumulated  surplus  and  capital  of  the 
corporation  at  the  close  of  the  year  1916.  (Incidentallv  it  may  be  mentioned 
that  the  corporation  was  placed  in  the  position  of  distributing  surplus  and 
capital  because  at  the  time  of  the  payment  of  the  dividend  there  were 
apparently  sufficient  earnings  to  pay  the  dividend  and  also  to  take  care 
of  the  taxes  under  the  laws  then  enacted.) 

The  argument  of  the  corporation  relative  to  the  first  point  is  that  to  use 
the  accrual  of  taxes  in  the  manner  stated  is  to  create  a  situation  in  which 
.dividends  which  were  actually  paid  out  of  current  earnings  are  made  to 
appear  to  be  practically  paid  out  of  surplus  and  undivided  profits,  thus 
working  a  hardship  which  the  law  does  not  seem  to  impose.  It  is  presented 
that  the  accrued  taxes  were  not  paid  and  were  not  required  to  be  paid  until 
more  than  one  year  after  the  declaration  of  the  dividend.  This  point  may 
be  disposed  of  by  reference  to  article  857,  Regulations  45,  which  authorizes 
the  method  used  for  determining  the  aggregate  amount  of  earnings  of  the 
taxable  year  available  for  all  purposes  on  any  given  date.  The  grounds 
upon  which  this  article  rests  have  been  thoroughly  re-examined  in  connection 
with  this  case,  and  no  sufficient  reason  to  change  the  established  ruling  has 
been  found. 

The  other  two  points  are  disposed  of  by  the  disposition  of  the  second 
point  at  issue,  as  a  settlement  on  the  basis  recommended  will  raise  the 


Supplementary  Bulletin  RuHntr 


-.Tc8  .tiA    .oSE  .398 


Sec.  326.    Art.  857.-2. 


invested  capital  above  the  actual  paid-in  capital  and  thus  dispose  of  point 
three. 

The  second  point  presented  by  the  corporation  is  that,  assuming  that 
the  bureau  was  warranted  in  taking  accrued  taxes  into  consideration,  it 
was  in  error  in  using  the  monthly  earnings  instead  of  the  average  earnings 
for  the  year.  Article  857,  Regulations  45,  provides  in  substance  that 
average  earnings  shall  be  used  "unless  the  corporation  shows  from  its  books 
or  other  records  that  a  greater  proportion  of  its  earnings  for  the  year  was 
available  on  such  date."  The  agreed  statement  as  to  this  is  that  the  cor- 
poration did  not  close  its  books  each  month,  but  that  it  made  a  fairly  accurate 
memorandum  estimate  of  the  earnings  of  each  month  for  the  use  of  the 
officers  of  the  corporation.  This  estimate  was  not  carried  into  the  balance 
sheet  of  the  corporation,  but  is  asserted  to  be  simply  a  memorandum  for 
use  as  above  stated.  The  examining  officer,  however,  accepted  this  memo- 
randum as  a  sufficient  record  of  the  earnings  of  the  corporation  for  the  three 
months  in  question,  which  estimate  was  less  than  the  average  for  those  three 
months  would  show.  But  the  corporation  does  not  close  its  books  at  the 
end  of  each  month,  and  the  memorandum  in  question  was  an  informal 
approximation,  insufficient  to  overthrow  the  general  presumption  in  favor 
of  the  average  or  prorating  method,  which  in  this  and  many  other  similar 
situations  under  the  law  has  frequently  been  applied  against  the  desire  of 
the  taxpayer.  It  is  recommended,  therefore,  that  the  tax  liability  be  com- 
puted on  the  basis  of  average  monthly  earnings  instead  of  the  figures  shown 
by  the  memorandum. 
2 


31-20-1110:  O.  D.  619. 

In  the  last  sentence  of  article  857,  Regulations  45,  it  is  recognized  that 
in  some  cases  the  computation  of  the  amount  of  net  income  available  for 
distribution  as  dividends  will  be  indeterminate.  This  will  be  true  in  any 
case  in  which  the  amount  distributed  as  a  dividend  exceed  the  earnings  of 
the  taxable  year  to  the  date  of  the  dividend  payment  plus  the  accrued 
Federal  income  and  profits  taxes  on  such  earnings. 

The  computation  under  such   conditions   is   shown   in   the  following 


illustration: 

Capital  stock,  Jan.  1,  1919   $400,000.00 

Surplus,  Jan.  1,  1919   100,000.00 


Invested  capital,  Jan.  1,  1919   500,000.00 

Total  earnings  for  1919   120,000.00 

Dividend  paid  Apr.  1,  1919   40,000.00 

Proportionate  part  of  earnings  to  Apr.  1,  1919   30,000.00 

Income  and  profits  taxes  accrued  to  Apr.  1,  1919,  as  computed  below   7,315.00 

8  per  cent  of  invested  capital   40,000.00 

Specific  exemption   3,000.00 


Excess  profits  credit   43,000.00 

Proportionate  part  of  credit  to  Apr.  1,  1919   10,750.00 

20  per  cent^of  invested  capital   100,000.00 

Proportionate  part  of  $100,000  to  Apr.  1,  1919   25.000.00 

Tax  under  bracket,  1,  20  per  cent  of  $25,000— $10,750  ($14,250)   2,850.00 

Tax  under  bracket  2,  40  per  cent  of  $5,000    2,000.00 


Supplementary^Bulietin  Rulings. 


Sec.  326.    Art.  857.-3. 


\ccrued  excess  profit*  tax   4,850.00 

Net  income  to  April  1,  1919   30,000.00 

Excess  profits  tax   $4,850 

Proportionate  part  of  specific  exemption   ...  500 

  5,350.00 

Subject  to  income  tax  at  10  per  cent   24,650.00 

Accrued  income  tax   2,465.00 

Accrued  profits  tax   4,850.00 

Total  accrued  income  and  profits  tax   7,315.00 

Income  to  Apr.  1,  1919   30,000.00 

Reduced  by  taxes  to  Apr.  1,  1919   7,315.00 

Amount  net  income  available  for  dividend*   22,685.00 

Amount  of  dividend   40,000.00 

Amount  of  income  available   22,685.00 

Amount  chargeable  against  surplus    17,315.00 


The  adjustment  on  account  of  this  amount  ($17,315.00)  averaged  from 
April  1,  1919,  to  the  end  of  the  year  must  be  made  in  Schedule  H  of  Form 
1120. 
s 


30-21-1749:0.  D.  982. 

In  accordance  with  the  principle  set  out  in  article  857  of  Regulations  45, 
dividends  are  deemed  to  be  paid  from  true  earned  surplus.  In  carrying 
the  earnings  for  a  proportionate  part  of  the  year  to  surplus  account  for  the 
purpose  of  declaring  a  dividend,  the  earnings  so  carried  should  represent 
the  earnings  of  the  current  year  less  accrued  expenses.  Where  the  true 
'arned  surplus  of  the  current  year  proportioned  to  the  date  of  dividend  pay- 
ment is  not  sufficient  to  cover  such  payment,  the  true  earnings  included  in 
the  surplus  account  as  of  the  beginning  of  the  taxable  year  will  be  deemed  to 
cover  such  payment. 

This  does  not  conflict  with  the  principle  embodied  in  article  845  of  the 
regulations.  It  is  in  accord  with  the  accounting  principle  that  where  accounts 
are  kept  on  the  accrual  basis,  expenses  of  a  year  should  be  charged  against 
the  income  of  that  year.  In  order,  therefore,  to  apply  this  principle,  taxes 
of  the  current  year  should  be  charged  against  the  income  of  that  year,  and 
only  that  proportion  of  the  income  of  the  current  year  is  available  for  divi- 
dends which  is  in  excess  of  taxes  and  other  proper  charges  against  such  income. 
4 

l(322j-29-416:  1.  T.  1396. 

Revenue  Act  of  1918. 

In  computing,  under  the  provisions  of  article  857,  the  amount  of  earnings 
available  for  the  payment  of  dividends,  ali  income  for  the  taxable  year  over 
and  above  expenses,  taxes,  and  other  accrued  liabilities  of  such  year,  regardless 
of  whether  or  not  any  part  of  such  income  is  exempt  from  Federal  income  tax, 
should  be  considered. 

In  making  such  computation  donations  previously  paid  must  be  deducted. 

5 


Supplementary  Bulletin  Rulings. 


f 


f 


2-20-22. 

Sec.  326.    Art.  858— 1. 

Law  Section  326.— Invested  Capita!  (1918  Act— «"555,  ante):  (1921  Act— 
•1035,  post). 

Article  858.— Effect  of  Ordinary  Dividend  (Reg.  45— "  813,  ante):  (Reg. 
62—^1229,  post), 

26-19-598:  O.  942. 

The  exchange  of  x  shares  of  common  stock  for  one  of  preferred  stock  whereby 
the  capital  stock  is  reduced  is  a  capital  transaction  and  does  not  result  in  net 
income  or  earned  surplus.  Whether  such  a  transaction  gives  rise  to  a  paid-in 
surplus  not  decided. 

An  amount  taken  from  capital  ox  paid-in  surplus  to  meet  dividend  require- 
ments is  deemed  a  liquidation  of  capital  to  that  extent  and  necessitates  a  reduction 
in  the  invested  capital.  The  sum  so  received  by  a  stockholder  is  to  be  regarded 
as  a  return  of  capital  so' far  as  it  does  not  exceed  the  cost  of  the  stock  to  him, 
or  if  acquired  prior  to  March  1,  1913,  its  fair  market  value  on  that  date,  any 
excess  being  taxable  as  a  gain  or  profit.  In  case  of  subsequent  payments  from 
capital  or  liquidation  payments  upon  dissolution,  all  prior  distributions  from 
capital  should  be  considered  in  determining  whether  there  has  been  a  gain  over 
the  cost  of  the  stock  or  its  fair  market  value  as  of  March  1,  1913. 

Dividends  paid  while  there  is  an  operating  deficit  shall  be  deemed  to  be  from 
capital  or  paid-in  surplus,  even  though  there  are  earnings  of  the  taxable  year 
sufficient  to  pay  the  dividend  in  whole  or  in  part. 

The  taxpayer,  the  M  Company,  is  a  holding  company  owning  the  stock 
of  about  y  companies.  On  December  31,  1917,  the  taxpayer  had  a  surplus. 
Such  surplus  was  produced  in  past  years  largely  by  the  cancellation  of 
common  stock  in  this  manner — x  shares  of  common  exchanged  for  one  of 
preferred.  An  analysis  of  the  surplus  account,  it  is  stated,  will  show  that 
most  of  the  surplus  is  the  result  of  the  exchanges  of  stock,  and  if  such  items 
were  eliminated  there  would  be  a  deficit. 

The  questions  to  be  decided  are:  (1)  What  is  the  nature  and  the  result 
of  the  transaction  by  which  x  shares  of  common  stock  were  exchanged  for 
one  of  preferred?  (2)  What  is  the  effect  of  pajmnents  to  stockholders  from 
capital  or  paid-in  surplus?  (3)  What  is  the  nature  and  effect  of  the  divi- 
dend payment  in  this  case?  (4)  Does  the  fact  that  an  operating  deficit  would 
exist  if  the  items  in  the  surplus  account  resulting  from  such  exchange  of  stock 
were  eliminated  affect  the  result  in  this  case?  (5)  Whether  invested  capital 
can  be  increased  by  the  accumulation  of  an  earned  surplus  when  an  operating 
deficit  exists,  or  whether  current  earnings  must  first  be  applied  to  repair 
the  deficit? 

(1)  Wriat  is  the  nature  and  the  result  of  the  transaction  by  which  x 
shares  of  common  stock  were  exchanged  for  one  of  preferred  stock?  Such 
a  transaction  whereby  the  capital  stock  is  reduced  is  a  capital  transaction 
and  does  not  give  rise  to  net  income  or  earned  surplus.  (Article  542,  Regula- 
tions 45.)  Whether  such  a  surrender  of  stock  gives  rise  to  a  paid-in  surplus 
or  not  is  a  question  depending  upon  facts  which  are  not  disclosed  by  the 
taxpayer,  and  no  decision  is  made  upon  this  question.  (Article  561,  Regula- 
tions 45.) 

(2)  What  is  the  effect  of  payments  to  stockholders  from  capital  or  paid- 
in  surplus?  A  distribution  of  any  part  of  the  capital  or  paid-in  surplus  is  to 
be  regarded  as  a  return  to  the  stockholder  of  part  of  the  capital  represented 
by  his  shares  of  stock.  Upon  a  subsequent  sale  of  such  stock,  his  profit  wilt 
be  the  excess  of  the  selling  price  over  the  cost  to  him  of  such  stock  or  its 
fair  market  value  as  of  March  1,  1913,  after  applying  on  such  cost  or  value 
the  amount  of  any  such  capital  distribution.  (See  article  1549,  Regulations 
45.)  Profits  are  the  only  proper  source  of  dividends,  and  the  declaration 
of  dividends  when  there  are  no  profits  is  contrary  to  law.  (Conyington,. 

1  Corporate  Organization  and  Management,  p.  399;  Thompson  on  Corpora- 
tions, Article  5312.)   That  a  surplus  such  as  here  considered  is  capital  and 
not  subject  to  distribution  as  dividends  has  been  expressly  held  many  tsmes. 
Supplementary  Bulletin  Ruling*. 


Sec.  326.    Art.  858.-2. 


{See  Roberts  v.  Roberts-Wick  Co.,  184  N.  Y.  257,  77  N.  E.  13,  and  cases 
therein  cited.)    See  also  section  201  (a)  (1)  of  the  Revenue  Act  of  1918. 

(3)  What  is  the  nature  and  effect  of  the  dividend  payment  in  this  case? 
Ihe  dividend  paid  in  February,  1918  (assuming  that  the  taxable  year  of 
this  corporation  is  the  calendar  year),  is  deemed  to  have  been  paid,  first, 
from  earnings  and  profits  accumulated  since  February  28,  1913,  and  on 
hand  at  the  beginning  of  the  year;  second,  if  that  fund  is  insufficient,  from 
earnings  of  the  taxable  year  available  on  the  date  that  the  dividend  is  paid; 
third,  if  those  funds  are  insufficient,  from  earnings  and  profits  accumulated 
prior  to  March  1,  1913;  fourth,  if  those  funds  are  insufficient,  from  capital 
or  paid-in  surplus.  (See  section  201,  Revenue  Act  of  1918;  article  858, 
Regulations  45.) 

In  this  case  there  is  no  earned  surplus  on  hand  at  the  beginning  of  the 
year,  so  that  the  only  question  is  whether  the  earnings  of  the  taxable  year 
(class  2)  are  available  for  the  payment  of  dividends  when  there  is  an  operating 
deficit,  or  whether  such  dividends  must  be  deemed  to  be  a  distribution  of 
capital.  This  is  not  a  question  which  should  turn  upon  the  legality  of  such 
a  dividend  in  the  particular  jurisdiction,  but  is  a  question  depending  largely 
on  accounting  principles  and  business  practice.  From  that  standpoint 
there  is  no  doubt  but  that  current  profits  should  be  applied  to  make  good 
the  existing  deficit  before  any  dividends  are  distributed.  (Dickinson, 
Accounting,  p.  73.)  It  is  the  weight  of  authority  in  the  United  States, 
moreover,  that  the  declaration  of  a  dividend  out  of  current  profits,  while 
there  is  an  operating  deficit,  is  contrary  to  law.  (Conyington,  Corporate 
Organization  and  Managment,  p.  399.)  It  is,  therefore,  held  that  the 
dividend  in  this  case  was  the  distribution  of  capital.  It  reduces  the  invested 
capital  and  should  be  treated  as  a  return  of  capital  to  the  stockholder. 

This  decision  is  based  on  the  fact,  as  stated  by  the  taxpayer,  that  the 
M  Company  is  a  holding  company,  owning  the  stocks  of  y  different  corpora- 
tions. Whether  this  principle  is  applicable  to  a  corporation  operating  a 
property  where  the  investment  of  the  capital  in  wasting  assets  is  contem- 
plated, is  not  decided. 

(4)  Does  the  fact  that  an  operating  deficit  would  exist  if  the  items  in 
the  surplus  account  resulting  from  such  cancellation  of  stock  were  eliminated 
affect  the  result  in  this  case?  The  Regulations  do  not  require  a  reduction 
in  invested  capital  because  of  an  operating  deficit.  (Article  860,  Regula- 
tions 45.)  They  do  require,  however,  a  reduction  in  invested  capital  where 
there  has  been  a  distribution  in  liquidation,  or  a  return  of  capital  to  the 
stockholders.  The  existence  of  an  operating  deficit,  therefore,  does  not 
directly  affect  the  invested  capital  and  is  significant  in  this  case  only  as  it 
throws  light  upon  the  sources  from  which  the  dividend  here  in  question 
was  paid. 

(5)  May  invested  capital  be  increased  by  the  accumulation  of  an  earned 
surplus  when  an  operating  deficit  existed,  or  must  the  earnings  of  the  tax- 
able year  be  applied  to  repair  the  deficit?  The  law  defines  invested  capital 
as  cash  or  property  paid  in  for  stock,  earned  surplus,  and  undivided  profits 
and  paid-in  surplus.  The  act  does  not  require  a  reduction  of  invested  capital 
on  account  of  an  operating  deficit.  It  is  obvious,  however,  that  no  earned 
surplus  can  be  accumulated  until  the  deficit  or  impairment  of  paid-in  capital 
has  been  made  good.    (Article  838,  Regulations  45.) 

It  is  held,  therefore,  that  the  exchange  of  4#  shares  of  common  stock 
for  one  of  preferred  stock  whereby  the  capital  stock  is  reduced  is  a  capital 
transaction  and  does  not  result  in  net  income  or  earned  surplus.  Whether 
such  a  transaction  gives  rise  to  a  paid-in  surplus  not  decided. 

An  amount  taken  from  capital    or  paid-in  surplus  to  meet  dividend 

Supplementary  Bulletin  Rulings. 


.858  JtA    .dil  .098 


Sec.  326.    Art.  858.-3. 


requirements  is  deemed  a  liquidation  of  capital  to  that  extent  and  necessitates 
a  reduction  in  the  invested  capital.  The  sum  so  received  by  a  stockholder 
is  to  be  regarded  as  a  return  of  capital  so  far  as  it  does  not  exceed  the  cost 
of  the  stock  to  him,  or  if  acquired  prior  to  March  1,  1913,  its  fair  market 
value  on  that  date,  any  excess  being  taxable  as  a  gain  or  profit.  In  case  of 
subsequent  payments  from  capital  or  liquidation  payments  upon  dissolu- 
tion, all  prior  distributions  from  capital  should  be  considered  in  determining 
whether  there  has  been  a  gain  over  the  cost  of  the  stock  or  its  fair  market 
value  as  of  March  1,  1913. 

Dividends  paid  while  there  is  an  operating  deficit  shall  be  deemed  to  be 
from  capital  or  paid-in  surplus,  even  though  there  are  earnings  of  the  taxable 
year  sufficient  to  pay  the  dividend  in  whole  or  in  part. 

1 


20-20-943:  A.  R.  M.  51. 

REVENUE  ACT  OF  1917. 

The  Committee  is  in  receipt  of  a  request  for  advice  upon  certain  points, 
which  have  been  raised  in  connection  with  the  audit  of  the  return  of  the  M 
Copper  Company,  and  in  connection  with  the  audit  of  other  copper  companies. 

It  appears  that  during  the  year  1917,  and  prior  to  August  6,  1917,  the 
M  Company  paid  a  dividend  of  approximately  x  dollars,  which  was  declared 
to  have  been  paid  out  of  earnings  accumulated  prior  to  March  1,  1913. 
At  the  date  of  the  dividend  payment  the  excess  of  depletion  allowable  for 
1917  on  the  basis  of  March  1,  1913,  over  the  depletion  actually  sustained 
on  the  basis  of  cost,  was  an  amount  in  excess  of  the  dividend  declared  to 
have  been  paid  out  of  earnings  accumulated  prior  to  March  1,  1913.  The 
M  Company  therefore  contends  that  before  any  impairment  of  invested 
capital  as  of  December  31,  1916,  is  determined  because  of  the  dividend 
payment,  there  should  be  taken  into  consideration  the  realization  of  the 
appreciation  in  values  as  of  March  1,  1913,  which  has  been  converted  into 
cash  and  reflected  on  its  books  during  the  current  year. 

The  question  in  connection  with  the  other  copper  companies  involves 
essentially  the  same  point  without  the  complication  of  the  dividend.  In 
the  opinion  of  the  Committee,  neither  contention  is  well  taken.  The  M 
Company  having  by  appropriate  action  declared  the  dividend  out  of  earnings 
accumulated  prior  to  March  1,  1913,  and  so  advised  its  stockholders,  will 
not  now  be  heard  to  say  that  the  dividend  was  actually  paid  out  of  earnings 
of  the  current  year,  and  as  will  be  subsequently  developed  in  this  memo- 
randum the  Committee  is  clearly  of  the  opinion  that  appreciation  prior  to 
March  1,  1913,  realized  in  the  taxable  year,  is  an  earning  of  the  taxable 
year  and  not  an  earning  accumulated  prior  to  March  1,  1913. 

In  the  Baldwin  Locomotive  case  (Baldwin  Locomotive  Works  v.  McCoach, 
221  Fed.  59)  it  was  held  that  appreciation  in  values  is  not  earnings  or  profits 
until  realized.  This  decision  was  rendered  under  the  Act  of  1909,  and  follow- 
ing it  no  appreciation  in  the  value  of  corporate  properties  to  March  1,  1913, 
was  reported  or  tax  pakl  as  income  or  earnings  notwithstanding  the  Act 
of  October  3,  1913,  gave  to  such  corporations  the  right  to  fix  value  as  of 
March  1,  1913,  including  appreciation,  as  thejbasis  for  any  subsequent 
gain  or  loss. 

Following  this  decision  and  the  decisions  of  the  Supreme  Court  as  to 
the 'taxation  of  appreciation  to  March  1,  1913,  it  is  clear  that  the  realiza- 
tion of  such  appreciation  is  an  earning  of  the  year  in  which  such  apprecia- 
tion is  realized,  although  under  the  latter  decisions  it  is  not  a  taxable  earning. 


Supplementa.ry  Bulletin  Rulings, 


Sec.  326.    Art.  858.-4. 


Since  the  excess  profits  tax  law  definitely  holds  that  earnings  of  the  taxable 
year  are  not  to  be  included  in  earned  surplus  or  undivided  profits,  realization 
of  appreciation  in  values  to  March  1,  1913,  is  not  a  proper  addition  to  invested 
capital  as  the  realization  takes  place,  as  contended  for  by  the  companies. 

It  is  therefore  held  that  the  dividend  payment  of  the  M  Company  must 
be  deemed  to  have  been  paid  from  earnings  or  profits  realized  prior  to  March 
1,  1913,  and  therefore  that  the  invested  capital  of  the  company  must  be 
reduced  by  that  amount;  and  secondly,  that  realization  during  the  taxable 
year  of  appreciation  in  values  to  March  1,  1913,  can  not  be  included  in  the 
invested  capital  of  the  taxable  year. 

2 


9-21-1488:  A.  R.  R.  408. 

Held,  that  the  expression,  in  a  declaration  by  the  directors  of  a  corporation, 
that  a  dividend  is  "payable  as  convenient  to  the  funds  of  the  company"  creates  a 
condition  precedent.  Dividends  so  declared  are  not  necessarily  to  be  considered 
payable  as  of  the  date  of  the  declaration. 

The  Committee  has  under  consideration  the  appeal  of  the  M  Company 
from  an  additional  assessment  made  by  the  Income  Tax  Unit  for  the  years 
1917  and  1918.  The  single  question  at  issue  is:  Whether  the  declaration 
of  a  dividend  expressed  in  terms  to  be  payable  as  convenient  to  the  funds  of 
the  company  of  necessity  imported  a  diminution  of  invested  capital  and 
surplus  to  an  amount  commensurate  with  the  gross  sum  of  the  contem- 
plated dividend,  required  to  be  adjusted  as  of  the  date  of  the  dividend's 
declaration  instead  of  as  of  the  time  or  times  of  its  actual  payment. 

Dividends  were  declared  by  this  corporation  in  January,  April,  and  July, 
1917,  and  in  the  year  1918  in  June,  July,  and  October.  In  each  instance 
the  resolution  of  the  board  of  directors  was  expressed  in  the  terms  to  be 
"payable  as  convenient  to  the  funds  of  the  company."  The  first  dividend 
in  1917  was  actually  paid  in  10  installments  between  the  dates  of  January  23 
and  May  29,  inclusive,  and  the  payments  of  the  remaining  dividends  declared 
were,  with  the  exception  of  that  of  October,  1918,  made  over  similar  extended 
periods  of  time  and  in  varied  amounts.  The  dividend  declared  October,  1918, 
was  paid  November,  1918. 

In  the  current  adjustment  of  invested  capital  in  each  of  the  taxable 
years  the  Income  Tax  Unit  used  the  date  of  declaration  of  the  dividends  as 
the  date  of  payment.  The  corporation  contends  that  the  actual  dates  of 
payment  should  govern. 

It  is  not  shown  in  the  facts  submitted  in  this  case  whether  the  dividends 
were  actually  accrued  on  the  books  of  the  corporation  as  of  the  dates  when 
declared,  or  whether  the  charge  was  made  against  income  of  the  taxable 
years  at  the  time  the  payments  were  made. 

Article  858  of  Regulations  45,  on  which  the  Income  Tax  Unit  relied 
in  making  its  adjustment,  reads  as  follows: 

A  dividend  other  than  a  stock  dividend  affects  the  computation  of  invested  capital 
from  the  date  when  the  dividend  is  payable  and  not  from  the  date  when  it  is  declared, 
except  that  where  no  date  is  set  for  its  payment  the  date  when  declared  will  be  considered 
also  the  date  when  payable  for  the  purpose  of  this  article. 

The  regulations,  as  above  quoted,  clearly  contemplate  that  a  dividend 
must  not  affect  the  computation  of  invested  capital,  except  from  the  date 
when  the  dividend  is  payable.  In  the  instant  case,  the  date  payable  is 
when  the  funds  of  the  company  are  convenient.  It  is  considered  by  the 
Committee  that  the  expression  "except  where  no  date  is  set  for  its  payment 

Supplementary  Bulletin  Rulings. 


ft-10-22. 

.d  -.828 


Sec.  326.   Art  858. — 5. 


the  date  when  declared  will  be  considered  also  the  date  when  payable" 
is  on  the  assumption  that  the  corporation  has  resources  to  pay  and  does 
immediately  intend  to  pay.  When  the  corporation  can  conveniently  pay  the 
dividend,  so  declared  out  of  the  funds  of  the  company,  is  a  matter  of  admin- 
trative  decision  by  the  officers  of  the  company  and  until  such  decision,  as  a 
condition  precedent,  is  reached  there  is,  in  effect,  no  dividend  to  be  paid  and 
no  reciprocal  right  on  the  part  of  stockholders  to  immediately  exact  payment. 
The  dividend  resolutions  were  merely  tentative  declarations  of  the  corpora- 
tion's intent  to  pay  certain  dividends  at  a  subsequent  date  to  be  determined 
by  the  condition  of  the  company's  treasury. 

The  Committee  is  accordingly  of  the  opinion  that  the  Income  Tax  Unit 
erred  in  considering  the  dates  of  the  resolutions  of  the  directors  as  determining 
the  dates  when  the  dividends  were  payable  and  recommends  that  compu- 
tation of  invested  capital  be  revised  to  give  effect  to  the  condition  pre- 
cedent which  makes  the  dividend,  in  each  instance,  payable  when  the  funds 
are  convieniently  available. 
3 

(See  34-21-1786;  Sec.  325,  Article  813-9  (6).)     Dividend  credited  to 
stockholder  left  in  the  business. 
4 

42-21-1876:  O.  D.  1070. 

Where  a  corporation  issues  interest-bearing  notes  to  its  stockholders  in 
lieu  of  a  cash  dividend,  invested  capital  should  be  reduced  as  of  the  date  of  the 
notes,  provided  the  dividend  was  not  declared  from  current  earnings. 
5 


I  f22)-15-221:    I.  T.  1279. 
Revenue  Act  of  1918. 

The  payment  of  taxes  by  a  bank  on  behalf  of  its  shareholders  should  be 
treated,  as  respects  invested  capital,  in  the  same  manner  as  other  distribu- 
tions by  a  bank  to  its  shareholders,  and  if  the  payment  of  such  taxes  is  in 
an  amount  sufficient  to  have  caused  an  adjustment  in  invested  capital 
during  the  year  in  which  paid,  if  such  payment  had  been  in  the  form  of  a 
dividend,  an  adjustment  should  be  made  in  invested  capital  on  account  of 
the  taxes  paid  as  of  the  date  of  payment. 
6 


Revenue  Act  of  1918. 

(See  t  T.  1286;  Sec.  326,  Art.  838-8  (8).)    Dividends  paid  during  the 
existence  of  an  operating  deficit. 
7 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  858.-6. 


I  ('22)-19-263:  Sol.  Op.  140 
Revenue  Act  of  1918.    Dividends.    Invested  Capital. 

Where  earnings  and  profits  accumulated  from  March  1,  1913,  to  the  begin- 
ning of  the  taxable  year  are  insufficient  to  cover  dividends  during  the  first  60 
days  of  the  taxable  year  but  there  are  available  for  payment  of  such  dividends 
not  only  sufficient  earnings  and  profits  of  the  taxable  year  but  also  sufficient 
undivided  profits  accumulated  prior  to  March  1,  1913,  any  such  dividends  in  excess 
of  earnings  and  profits  accumulated  from  March  1,  1913,  to  the  beginning  of 
the  taxable  year  shall  be  considered  as  paid  from  earnings  and  profits  of  the 
taxable  year  and,  accordingly,  invested  capital  of  the  corporation  as  of  the 
beginning  of  the  taxable  year  shall  not  be  reduced  by  the  amount  of  such  excess. 

An  opinion  has  been  requested  upon  the  question  whether  dividends  paid 
by  the  M  Company  during  the  first  60  days  of  the  taxable  year  1918  should 
be  treated  as  paid  out  of  the  accumulated  earnings  and  profits  of  previous 
taxable  years.  This  corporation  had  on  December  31,  1917,  outstanding 
capital  stock  fully  paid  up  of  the  par  value  of  8x  dollars  and  undivided 
profits  amounting  to  87x  dollars.  It  paid  dividends  during  the  first  60  days 
of  1918  as  follows:  January  12,  1.2*  dollars;  January  18,  l.2x  dollars; 
February  4,  1.2x  dollars;  February  13,  l.2x  dollars;  February  21,  1.2* 
dollars;  and  February  28,  1.2a;  dollars;  a  total  of  7 .2x  dollars.  March  1, 
1913,  it  had  undivided  profits  amounting  to  approximately  82x  dollars.  It 
has  been  the  practice  of  this  corporation  since  1911  to  distribute  dividends  as 
fast  as  its  profits  were  earned.  The  dividends  have  been  uniformly  1.2* 
dollars  and  have  been  paid  at  intervals  varying  from  one  week  to  one  month. 
The  president  of  the  corporation  has  filed  an  affidavit  stating  that  the  divi- 
dends above  enumerated  were  paid  out  of  profits  earned  in  1918.  The  cor- 
poration seeks  exceptions  from  the  rule  stated  in  article  858  of  Regulations 
45  (1920  edition)  that— 

*  *  *  The  surplus  and  undivided  profits  as  of  the  beginning  of  the  taxable  year 
will  be  reduced  as  of  the  date  when  the  dividend  is  payable  by  the  entire  amount  of  any 
dividend  paid  during  the  first  60  days  of  the  taxable  year.    *    *  * 

on  the  ground  that  the  dividends  in  question  were  in  fact  out  of  current 
earnings. 

Section  201(e)  of  the  Revenue  Act  of  1918  provides: 

Any  distribution  made  during  the  first  60  days  of  any  taxable  year  shall  be  deemed 
to  have  been  made  from  earnings  or  profits  accumulated  during  preceding  taxable  years; 
but  any  distribution  made  during  the  remainder  of  the  taxable  year  shall  be  deemed  to 
have  been  made  from  earnings  or  profits  accumulated  between  the  close  of  the  preceding 
taxable  year  and  the  date  of  distribution,  to  the  extent  of  such  earnings  or  profits,  and 
if  the  books  of  the  corporation  do  not  show  the  amount  of  such  earnings  or  profits,  the 
earnings  or  profits  for  the  accounting  period  within  which  the  distribution  was  made  shall 
be  deemed  to  have  been  accumulated  ratably  during  such  period. 

The  question  is  whether  the  phrase  "shall  be  deemed"  as  used  in  the  first 
clause  of  section  201(e)  creates  a  conclusive  presumption.  It  will  be  observed 
that  the  phrase  is  used  three  times  in  the  subdivision.  It  is  used  six  times  in 
section  201,  and  many  times  in  other  parts  of  the  statute.  Nowhere  does  it 
appear  to  be  used  to  create  merely  a  rebuttable  presumption,  except  in 
section  402,  where  the  language  is  "shall,  unless  shown  to  the  contrary,  be 
deemed."   The  presumption,  therefore,  must  be  held  to  be  conclusive. 

While  the  presumption  is  held  to  be  conclusive,  the  statute  must  be  con- 
strued so  as  to  give  effect  to  all  its  provisions.  The  intention  of  section  201 
of  the  Revenue  Act  of  1918  was  to  relieve  from  the  tax  dividends  paid  by  a 
corporation  out  of  earnings  and  profits  accumulated  prior  to  March  1,  1913. 
The  Act  provides,  however,  that  before  such  earnings  and  profits  may  be 
distributed  (free  from  tax)  the  corporation  must  first  distribute  its  earnings 
and  profits  accumulated  since  March  1,  1913.  This  result  is  reached  by 
section  201(b),  which  provides: 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  858.-7. 

*  *  *  Any  distribution  made  in  the  year  1918  or  any  year  thereafter  shall  be  deemed 
to  have  been  made  from  earnings  or  profits  accumulated  since  February  28,  1913,  *  *  * 
but  any  earnings  or  profits  accumulated  prior  to  March  1,  1913,  may  be  distributed  *  *  * 
exempt  from  tax,  after  the  earnings  and  profits  accumulated  since  February  28,  1913, 
have  been  distributed. 

To  construe  the  language  of  section  201(e)  so  as  to  hold  that  a  distribution 
was  made  from  earnings  or  profits  accumulated  prior  to  March  1,  1913,  while 
there  was  still  on  hand  earnings  or  profits  accumulated  since  March  1,  1913, 
would  be  holding  that  this  paragraph  was  in  conflict  with  the  language  just 
quoted  from  paragraph  (b)  of  the  same  section.  However,  construing  the 
two  paragraphs  together,  they  provide  that  any  distribution  made  during 
the  first  60  days  of  the  taxable  year  shall  be  deemed  to  have  been  made  from 
earnings  and  profits  accumulated  during  preceding  taxable  years,  but  all 
earnings  and  profits  accumulated  since  March  1,  1913,  must  be  distributed 
before  earnings  and  profits  accumulated  prior  to  March  1,  1913,  may  be 
distributed  free  from  tax.  The  presumption  contained  in  the  first  part  of 
section  201(e)  therefore  applies  only  to  earnings  and  profits  accumulated 
between  February  28,  1913,  and  January  1,  1918,  and  has  no  application  to 
earnings  accumulated  in  any  other  period.  If  the  earnings  or  profits  ac- 
cumulated for  the  period  from  March  1,  1913,  to  January  1,  1918,  are  not 
sufficient  to  pay  the  dividends  declared  during  the  first  60  days  of  the  taxable 
year,  and  there  are  other  profits  accumulated  after  March  1,  1913,  such  earn- 
ings and  profits  are  to  be  applied  to  the  dividends  so  declared. 

In  Advisory  Tax  Board  Recommendation  43  (C.  B.  1,  pp.  26-27)  the 
case  considered  was  that  of  a  corporation  paying  dividends  during  the  first 
60  days  of  1918.  It  had  no  surplus  earned  between  March  1,  1913,  and 
January  1,  1918,  but  had  surplus  earned  prior  to  March  1,  1913,  and  also 
sufficient  earnings  accumulated  after  January  1,  1918,  and  prior  to  each  of 
such  dividends  out  of  which  to  pay  it.  It  was  held  that  the  60-day  pre- 
sumption was  inapplicable  and  that  the  dividends  were  paid  out  of  the 
earnings  of  1918. 

In  Law  Opinion  942  (C.  B.  1,  pp.  300-302)  a  case  was  considered  where 
a  corporation  paid  a  dividend  during  the  first  60  days  of  1918.  In  the  course 
of  the  opinion  it  was  ruled,  following  Advisory  Tax  Board  Recommendation 
43,  that  if  earnings  and  profits  accumulated  since  February  28,  1913,  and  on 
hand  at  the  beginning  of  the  taxable  year  were  insufficient  to  cover  such 
dividend,  a  dividend  paid  during  the  first  60  days  of  the  taxable  year  is 
deemed  to  be  paid  out  of  earnings  of  the  taxable  year. 

In  the  present  case  there  is  no  compelling  reason  for  departing  from  pre- 
vious rulings.  It  is  held,  therefore,  that  the  dividends  paid  by  the  taxpayer 
during  the  first  60  days  of  1918  were  paid  out  of  earnings  and  profits  accumu- 
lated during  the  period  from  March  1,  1913,  to  January  1,  1918,  to  the  extent 
of  such  earnings  and  profits  on  hand  on  January  1,  1918,  which  sum  is  to  be 
determined  by  deducting  from  the  earnings  and  profits  of  that  period  the 
dividends  paid  during  that  period,  and  that  the  balance  of  dividends  paid 
during  the  first  60  days  of  1918  were  paid  from  earnings  and  profits  of  1918. 
The  invested  capital  of  the  taxpayer  should  be  reduced  by  prorating  such 
dividends  paid  out  of  earnings  and  profits  accumulated  from  March  1,  1913, 
to  January  1,  1918,  but  not  such  dividends  paid  out  of  earnings  and  profits 
of  1918. 

CARL  A.  MAPES, 
Solicitor  of  Internal  Revenue. 

8 


Supplementary  Bulletin  Rulings, 


Sec.  326.    Art.  858.-8. 


I  ('22)-20-283:  I.  T.  1314 

Revenue  Act  of  1918. 

The  M  Company,  a  foreign  corporation,  is  a  subsidiary  of  the  O  Company 
(known  as  the  parent  company),  a  domestic  corporation.  All  of  the  stock  of 
the  former  company  is  owned  by  the  latter.  The  stock  of  the  foreign  company 
is  being  distributed  to  the  stockholders  of  the  domestic  company.  The 
question  is  presented  as  to  whether  the  distribution  of  the  stock  of  the  sub- 
sidiary company  among  the  stockholders  of  the  parent  company  reduces  the 
capital  and  surplus  account  of  the  parent  company  by  the  amount  of  the 
value  of  the  stock  so  distributed. 

Held,  in  view  of  the  conclusive  presumption  in  section  201  of  the  Revenue 
Act  of  1918  that  any  distribution  made  by  a  corporation  after  the  first  60 
days  of  any  taxable  year  shall  be  deemed  to  have  been  made  out  of  earnings 
and  profits  accumulated  since  the  close  of  the  preceding  taxable  year,  that 
such  distribution  will  not  affect  the  invested  capital  of  the  parent  company, 
provided  the  earnings  for  the  current  year  as  of  the  date  of  the  distribution 
available  for  dividend  purposes  equaled  the  amount  at  which  such  stock  was 
included  in  the  invested  capital  of  the  company  as  of  the  beginning  of  the 
current  year. 

If  the  available  earnings  for  the  current  year  as  of  the  date  when  the  dis- 
tribution took  place  were  not  sufficient,  the  invested  capital  as  of  the  beginning 
of  the  year  would  be  reduced  accordingly. 

9 


I('22)-26-377:  I.  T.  1375 

Revenue  Act  of  1921. 

With  reference  to  a  corporation  having  a  fiscal  year  ending  November  30, 
which  discontinued  its  business  and  sold  its  plant  in  December,  1920,  and 
which  went  into  liquidation  and  paid  a  dividend  on  December  15,  1920, 
from  the  profits  in  part  from  the  sale  of  the  plant,  it  was  held: 

That  under  the  provisions  of  section  201(f)  of  the  Revenue  Act  of  1921 
a  dividend  paid  during  the  first  60  days  of  a  taxable  year  is  presumed  con- 
clusively to  have  been  paid  from  earnings  or  profits  accumulated  during  the 
preceding  taxable  years,  so  far  as  they  are  available,  and  that  this  presump- 
tion can  not  be  rebutted  by  showing  that  earnings  were  accumulated  during 
the  first  60  days  of  the  taxable  year  in  an  amount  sufficient  to  pay  the  divi- 
dends in  whole  or  in  part. 

That  the  surplus  and  undivided  profits  of  the  corporation  on  hand  at 
November  30,  1920,  which  represented  earnings  accumulated  during  the  period 
from  March  1,  1913,  to  November  30,  1920,  must  be  first  applied  against  the 
amount  of  the  dividend  paid  December  15,  1920. 

That  in  case  this  dividend  exceeded  the  amount  of  the  surplus  and  un- 
divided -profits  available  for  its  payment,  the  excess  will  be  deemed  to  have 
been  paid  out  of  the  earnings  of  the  taxable  year  available  at  the  date  when 
the  dividend  was  paid,  and  that  to  the  extent  that  such  earnings  are  insuffi- 
cient, the  dividend  will  be  deemed  to  have  been  paid  out  of  the  earned  surplus 
accumulated  prior  to  March  1,  1913,  or  to  be  a  liquidation  of  paid-in  surplus 
or  capital. 

The  above  methods  of  allocating  the  dividend  must  be  followed,  although 
profits  were  realized  by  the  corporation  through  the  sale  of  its  plant  December 
1920,  which  were  actually  applied  to  the  payment  of  the  dividend. 

10 

Supplementary  Bulletin  Rulings. 


2-2C-22. 

Sec.  326.    Art.  859.-1. 

Law  Section  326.— Invested  Capital  (1918  Act— ^555,  ante):  (1921  Act— 
111035,  post). 

Article  859.— Effect  of  Stock  Dividend  (Reg.  45— f[  814,  ante) :  (Reg.  62— 
<T1230,  post). 

1-19-7:  T.  B.  R.  3. 

Under  the  Revenue  Act  of  1917  stock  dividends  paid  during  any  taxable 
year,  and  under  the  Revenue  Act  of  1918  stock  dividends  paid  after  the 
first  60  days  of  any  taxable  year,  shall  be  deemed  to  have  been  paid  from 
earnings  or  profits,  but  the  payment  of  a  stock  dividend  has  no  effect  upon 
the  amount  of  invested  capital. 

in  determining  the  amount  by  which  invested  capital  should  be  reduced 
on  account  of  dividend  payments  made  during  the  taxable  year  in  excess 
of  current  earnings,  should  stock  dividends  be  treated  the  same  as  cash 
dividends? 

The  following  example  illustrates  the  point  in  question: 


Current  earnings  to  Apr.  1,  1917   $33,000 

Stock  dividends,  Apr.  1,  1917   30,000 

Balance  current  earnings  undistributed   3,000 

Earnings  for  April,  1917   12.000 

Current  earnings  on  hand  May  1,  1917   15,000 

Cash  dividend  May  1,  1917   27,000 

Dividend  payments  in  excess  of  current  earnings   12,0CO 

12,000  averaged  for  eight  months   8,000 


which  is  the  amount  by  which  invested  capital  as  of  the  beginning  of  the 
year  should  be  reduced. 

The  provisions  of  section  31  (a)  of  the  Revenue  Act  of  1917,  and  section 
201  of  the  Revenue  Act  of  1918,  place  stock  dividends  upon  the  same  basis 
as  cash  dividends  in  this  connection.  The  latter  section  provides,  "That 
the  term  'dividend*  *  *  *  means  any  distribution  made  by  a  corporation 
*  *  *  whether  in  cash  or  in  other  property  or  in  stock  of  the  corporation 
out  of  its  earnings  or  profits  accumulated  since  February  28,  1913, "  and 
the  definition  in  the  Act  of  1917  is  substantially  the  same.  Section  31  (b) 
of  the  Act  of  1917  provides  that  any  distribution  made  during  the  year 
shall  be  deemed  to  have  been  made  from  the  most  recently  accumulated 
undivided  profits  or  surplus.  Section  201  (e)  of  the  Act  of  1918  provides 
that  any  distribution  made  after  the  first  60  days  of  any  taxable  year  shall 
be  deemed  to  have  been  made  from  current  earnings  or  profits  so  far  as 
possible.  The  language  of  these  provisions  is  general  and  is  susceptible  of 
only  one  interpretation.  It  applies  to  all  distributions  of  earnings,  whether 
made  in  cash  or  in  other  property  or  in  stock  of  the  corporation.  And  any 
such  distributions  in  excess  of  earnings  or  profits  of  the  taxable  year  will 
reduce  the  surplus  at  the  beginning  of  the  taxable  year  by  the  amount  of 
such  excess. 

The  payment  of  a  stock  dividend,  however,  has  no  effect  upon  the  amount 
of  invested  capital,  article  859,  Regulations  45  (final  edition).  The  dis- 
tribution of  a  stock  dividend  is  in  effect  a  capitalization  of  current  earnings 
or  of  earned  surplus  on  hand  at  the  beginning  of  the  year.  The  capitaliza- 
tion of  current  earnings  does  not  increase  the  invested  capital  and  the  capital- 
ization of  surplus  on  hand  at  the  beginning  of  the  year  does  not  decrease  the 
invested  capital.  Nevertheless  a  stock  dividend  distributed  at  any  time 
during  the  year  under  the  Act  of  1917  or  after  the  first  60  days  of  the  taxable 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  859.-2. 

year  under  the  Act  of  1918  must  be  deemed  to  have  been  paid  from  current 
earnings  or  profits  so  far  as  possible,  so  that  the  accumulated  earnings  or 
profits  of  the  taxable  year  available  thereafter  for  cash  dividends  or  other 
payments  are  correspondingly  reduced.  In  the  specific  illustration  given, 
therefore,  the  result  is  correct,  but  in  a  case  in  which  the  stock  dividend 
was  in  whole  or  in  part  a  capitalization  of  the  surplus  on  hand  at  the  begin- 
ning of  the  taxable  year,  no  reduction  in  invested  capital  should  be  made 
because  of  the  capitalization  of  such  surplus. 

1 


jain  adi  isfiz  io  UQi  lo  )oA 

Supplementary  Bulletio  Ruling* 


2-20-22. 

Sec.  326.    Art.  862.— 1. 

Law  Section  326.— Invested  Capital  (1918  Act— «;555,  ante):  (1921  Act— 
c 1035,  post). 

Article  862.— Purchase  of  Stock  (Reg.  45— *;817,  ante):  (Reg.  62— 
^[1233,  post). 

18-20-891:    O.  D.  479. 

A  corporation  issued  additional  shares  of  stock  equal  to  approximately 
7  per  cent  of  the  amount  previously  outstanding,  using  the  proceeds  from 
the  sale  of  the  stock  to  purchase  an  additional  plant  which,  however,  was 
later  abandoned  as  a  manufacturing  plant  and  sold.  The  proceeds  of  this 
sale  were  used  to  purchase  equipment  for  carrying  out  Government  contracts 
during  the  war.  Upon  the  completion  of  the  contracts  the  corporation 
had  more  funds  than  were  needed  in  its  business  and  retired  approximately 
twice  the  amount  of  additional  stock  previously  issued,  paying  for  each  share 
an  amount  in  excess  of  its  par  value.  The  amount  representing  the  par 
value  of  the  stock  was  charged  to  capital  account,  and  the  amount  paid  in 
excess  of  its  par  value  was  charged  to  surplus  accumulated  prior  to  March  1, 
1913.  After  the  distribution,  the  corporation  had  no  greater  surplus  than 
was  reasonably  required  for  the  needs  of  its  business. 

Held,  that  the  distribution  was  not  a  dividend  within  the  meaning  of 
section  201  (a)  and  (b)  of  the  Revenue  Act  of  1918,  but  was  a  distribution 
in  part  liquidation  of  the  corporation  within  the  meaning  of  section  201  (c) 
of  the  Act. 

The  transaction  should  be  treated  as  a  voluntary  purchase  by  the  cor- 
poration of  its  capital  stock  for  the  purpose  of  its  retirement,  and  the  entire 
cost  of  such  stock  is  a  required  deduction  from  invested  capital  of  the  com- 
pany as  of  the  beginning  of  the  taxable  year  and  effective  from  the  date 
of  purchase  only  to  the  extent  that  such  stock  has  not  been  purchased  out 
of  the  undivided  profits  of  the  taxable  year. 

The  stockholders  who  sold  their  stock  to  the  company  should  return  as 
income,  subject  to  both  the  normal  and  additional  taxes,  any  excess  over 
and  above  the  cost  of  the  stock  to  them,  or  its  fair  market  value  as  of  March 
1,  1913,  if  acquired  prior  thereto. 
1 


51-21-1984:  A.  R.  R.  693. 
REVENUE  ACT  OF  1917. 
Recommended,  in  the  appeal  of  the  M  Company  that  the  action  of 
the  Income  Tax  Unit  in  disallowing  as  a  deduction  from  gross  income  the 
excess  of  the  book  value  on  January  1,  1917,  of  certain  assets  transferred  over 
the  book  value  as  of  that  date  of  y  shares  of  its  capital  stock  acquired  by 
such  transfer  and  carried  to  treasury  stock  account,  be  sustained,  and 
accordingly  that  the  taxpayer's  appeal  be  denied. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  disallowing  a  deduction 
for  losses  amounting  to  \2>x  dollars  and  claimed  in  the  appellant's  1917 
income  and  profits  tax  return. 

The  transaction  giving  rise  to  the  point  at  issue  may  be  briefly  summar- 
ized as  follows:  The  M  Company  was  the  operator  of  several  stores  which 
were  located  in  different  cities.  The  several  stores  were  merely  branches 
of  the  business,  and  were  not  separately  incorporated.  According  to  the 
records  in  the  case,  and  the  statements  made  by  the  appellant  therein,  the 
branch  store  located  in  Z  was  not  operated  with  satisfactory  results,  and 
i  it  had  been  the  desire  of  the  concern  for  some  time  prior  to  1917  to  divest 
itself  of  this  branch  business.    It  is  shown  that  in  October,  1917,  agre«ment 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.-2. 


was  made  and  contract  entered  into  whereby  the  appellant  transferred  to 
A  (one  of  its  stockholders)  the  entire  assets,  business,  good  will,  etc.,  of  the 
branch  store  located  in  Z  in  consideration  of  y  shares  of  its  own  capital 
stock,  which  at  that  time  were  owned  and  held  by  said  A. 

The  taxpayer  submits  that  book  values  as  of  January  1,  1917,  as  shown 
by  its  books  on  that  date,  were  67x  dollars  for  the  branch  store  at  Z  and 
53x  dollars  for  the  y  shares  of  stock  held  on  that  date  by  A.  It  is  the  tax- 
payer's contention  that  the  transaction  was  one  of  sale  wherein  it  sold  cap- 
ital assets  (the  Z  business  including  physical  assets,  fixtures,  inventory, 
good  will,  etc.),  having  a  value  of  67x  dollars,  which  was  in  excess  of  the 
consideration  received  therefor  (y  shares  of  capital  stock  valued  at  53x 
dollars),  and  consequently  sustained  a  loss  to  the  extent  of  such  difference 
between  values  as  might  properly  be  deducted  in  computing  taxable  net 
income  under  the  provisions  of  the  Revenue  Act  of  1916,  as  amended  by 
the  Revenue  Act  of  1917,  section  12(a)2.  This  provision  of  law  reads 
that  in  the  ascertainment  of  net  income  there  shall  be  deducted: 

All  losses  actually  sustained  and  charged  off  within  the  year  and  not  compensated 

by  insurance  or  otherwise.     *    *  * 

The  Income  Tax  Unit  in  its  consideration  of  this  question  has  held  that 
the  transaction  was  a  capital  one,  i.e.,  one  in  which  the  appellant  had  pur- 
chased its  own  capital  stock  for  a  consideration,  and  that  under  such  trans- 
action, whether  the  consideration  for  such  purchase  of  stock  be  in  money 
or  money's  worth,  there  results  no  taxable  gain  or  deductible  loss  for  tax 
purposes.  Accordingly,  the  amount  deducted  by  the  appellant  has  been 
restored  to  taxable  net  income  and  the  necessary  adjustment  of  invested 
capital  has  been  made,  resulting  in  an  additional  tax  which  the  Unit  pro- 
poses to  assess.  It  is  from  such  holding  and  proposed  action  on  the  part 
of  the  Unit  that  the  taxpayer  appeals. 

It  is  apparent,  therefore,  that  the  question  for  determination  by  the 
Committee  is  whether  the  transaction  is  a  capital  one  involving  no  gain 
or  loss  as  contended  by  the  Unit  or  one  of  sale  consummated  by  the  ap- 
pellant wherein  was  sustained  a  loss  which  may  properly  be  deducted  in 
the  computation  of  taxable  net  income  as  contended  by  the  taxpayer.  The 
taxpayer  in  contending  for  the  latter  view  makes  the  following  comments: 

The  Government  takes  the  position  that  this  was  not  a  sale  of  the  Z  store,  but  a  pur- 
chase of  the  shares  in  the  corporation  and  that  the  excess  of  the  value  of  the  assets  sold 
over  the  value  of  the  stock  received  in  payment  therefor  is  a  premium  paid  for  the  return 
of  the  shares  to  the  corporation.  This  is  entirely  unjustified  and  we  are  unable  to  see 
upon  what  theory  the  Government  ran  so  distort  the  facts  as  to  change  a  legitimate  trans- 
action from  a  sale  into  a  purchase.  The  store  in  Z  was  the  least  successful  of  the  stores 
owned  by  the  corporation  and  was  the  subject  of  the  most  care  and  trouble.  The  motive 
which  prompted  the  entire  transaction  was  to  be  rid  of  the  Z  business.  The  sale  was  a 
legitimate  one  and  the  stock  would  not  have  been  purchased  under  any  circumstances 
had  it  not  been  taken  in  payment  for  the  Z  store.  The  transaction  is  closed  and  there 
is  no  reason  why  the  loss  can  not  be  deducted. 

The  return  in  question  was  filed  under  the  Act  of  September  8,  1916,  as  amended  by 
the  Act  of  October  3,  1917,  and  the  loss  is  properly  deductible  under  section  12(a)  second, 
which  provides  for  the  deduction  of  "all  losses  actually  sustained  and  charged  off  within 
the  year  and  not  compensated  by  insurance  or  otherwise."  Attention  is  called  to  arti- 
cles 101  and  124  of  Regulations  33,  revised,  interpreting  the  Act  under  which  this  return 
was  filed.    The  taxpayer  is  supported  by  the  wording  of  the  regulations  in  question. 

If  the  M  Company  had  taken  in  exchange  for  the  Z  store  capital  stock  in  its  own 
company  having  a  book  value  of  80x  dollars,  would  the  Government  hold  that  the  M  Com- 
pany was  not  obliged  to  return  as  income  for  the  year  1917  the  difference  between  80* 
dollars  and  67*  dollars?  We  think  not;  and  if  a  profit  from  such  a  sale  is  taxable  and 
must  be  included  in  a  return,  then  it  follows  that  a  loss  is  deductible. 

If  the  M  Company  had  taken  from  A,  the  purchaser  of  the  Z  store,  a  check  for  53x 
dollars  and  had  immediately  purchased  from  A  his  y  shares  in  the  M  Company  for  53x 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.  -3. 

dollars,  giving  him  a  check  therefor,  the  Government  would  not  have  objected  to  the 
M  Company  claiming  as  a  loss  the  difference  between  the  value  of  the  capital  assets  sold 
and  the  53x  dollars,  but  because  the  M  Company  dealt  openly  and  above  board  and  did 
not  resort  to  an  exchange  of  checks  in  the  manner  indicated,  they  arc  penalized  for  their 
honesty. 

If  the  M  Company  had  taken  in  exchange  for  the  sale  of  the  assets  in  question  Liberty 
bonds  or  other  securities  of  the  value  of  the  stock  of  the  M  Company  taken  in  exchange, 
the  Government  ,  would  raise  no  objection  to  the  deduction  of  the  loss  in  question,  and 
it  is  seriously  contended  that  the  medium  of  payment  can  make  no  difference  in  the  prin- 
ciple involved  in  the  transaction  in  question.  We  call  the  Government's  attention  to 
the  regulations  on  dividend  disbursements  in  which  it  is  distinctly  held  that  the  medium 
of  payment  makes  no  difference. 

It  is  observed  that  the  appellant  attempts  to  justify  its  position  in  this 
matter  by  applying  article  101  of  Regulations  33,  revised,  which  provides: 

Income  from  sale  of  capital  assets. — If  a  corporation  sells  its  capital  assets  in  whole 
or  in  part,  it  will  include  in  its  gross  income  for  the  year  in  which  the  sale  was  made  an 
amount  equivalent  to  the  excess  of  the  sales  price  caver  the  fair  market  price  or  value  of 
such  assets,  as  of  March  1,  1913,  if  acquired  prior  to  that  date,  or  over  cost,  if  acquired 
subsequent  to  that  date.    *    *  * 

It  is  noted  also  that  the  taxpayer  submits  that  had  the  book  value  of 
its  own  stock  acquired  in  this  transaction  been  in  excess  of  the  book  value 
of  the  assets  transferred  therefor,  the  Government  would  have  sought  to 
tax  such  excess  as  a  taxable  gain  or  profit.  The  Committee  has  given  thor- 
ough consideration  to  all  of  the  arguments,  briefs,  and  data  submitted  re- 
garding the  character  of  the  transaction  and  the  respective  values  of  the 
assets  and  capital  stock  involved  therein,  and  finds  itself  unable  to  sustain 
•the  view  of  the  taxpayer. 

It  is  the  opinion  of  the  Committee  that  as  contended  by  the  Unit  the 
transaction  was  a  capital  one  within  the  meaning  of  the  law  as  defined  by 
the  regulations  and  not  a  sale  of  capital  assets  as  argued  by  the  taxpayer. 
That  this  transaction  was  one  in  which  the  appellant  purchased  its  own 
stock  rather  than  sold  capital  assets,  seems  to  be  borne  out  by  the  language 
of  the  contract  entered  into  by  it  and  A  in  1917.  The  pertinent  portion  of 
that  contract  is  here  quoted: 

This  contract  entered  into  this  —  day  of  October,  1917,  between  the  M  Compnny 
and  A,  witnesseth: 

A  sells  to  the  M  Company  y  shares  of  the  capital  stock  of  the  M  Company.  In  pay- 
ment of  said  shares  the  M  Company  agress  as  follows:    *    *  * 

(In  the  contract  there  follow  certain  stipulations  relating  to  the  payment 
and  other  things  to  be  done  by  the  M  Company  as  considerations  for  the 
acquisition  of  y  shares  of  its  capital  stock.) 

The  position  taken  by  the  Committee  in  this  connection  seems  to  be 
borne  out  further  by  articles  of  the  regulations,  legal  opinions,  and  account- 
ing authorities  hereinafter  quoted. 

Article  98  of  Regulations  33,  revised,  issued  under  the  Revenue  Act  of 
1916,  as  amended  by  the  Act  of  1917,  provides: 

Treasury  stock — When  taxable. — Treasury  stock  wherever  and  whenever  that  term  is 
used  in  connection  with  the  accounts  of  the  corporation  or  for  income  tax  purposes,  will 
be  held  to  mean  stock  which  had  been  previously  issued  by  the  corporation  and  which 
had  been  repossessed  by  it  through  purchase  or  otherwise,  and  then  carried  on  its  books 
as  an  asset. .  If  such  stock  is  resold  at  a  price  in  excess  of  its  cost  upon  repossession,  such 
excess  shall  be  returned  as  income  for  the  year  in  which  resold.    *    *  * 

Article  542  of  Regulations  45  issued  under  the  Revenue  Act  of  1918 
provides  in  part  as  follows: 

Sale  of  capital  stock. —  *  *  *  If  the  corporation  purchases  any  of  its  stock  and 
holds  it  as  treasury  stock,  the  sale  of  such  stock  will  be  considered  a  capital  transaction, 
and  the  proceeds  of  such  sale  will  be  treated  as  capital  and  will  not  constitute  income 
of  the  corporation.  A  corporation  realizes  no  gain  or  loss  from  the  purchase  of  its  own 
stock.    See  articles  563,  ,861,  and  862. 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.-4. 


It  should  be  here  noted  that  the  regulations  issued  under  the  two  Acts 
materially  differ  so  far  as  concerns  the  subsequent  sale  of  treasury  stock 
acquired  by  the  issuing  corporation  after  originally  issued.  This  question, 
however,  is  not  germaine  to  the  case  under  consideration  and  may  be  passed 
by  merely  stating  that  the  provisions  of  article  542,  Regulations  45,  super- 
sede article  98  of  Regulations  33,  revised,  and  should  control  in  all  cases 
involving  such  circumstances.  While  article  542  of  Regulations  45  is  issued 
under  the  Revenue  Act  of  1918  and  applies  primarily  to  returns  filed  under 
that  Act,  it  is  equally  applicable  to  returns  under  prior  Acts  and  is  controll- 
ing in  the  instant  case  in  that  portion  thereof  which  reads: 

A  corporation  realizes  no  gain  or  loss  from  the  purchase  of  its  own  stock. 

As  before  stated,  the  Committee  is  of  the  opinion  that  the  transaction 
involved  is  a  capital  one,  and  that  for  the  purpose  of  determination  it  is 
immaterial  that  the  consideration  given  in  exchange  for  the  capital  stock 
repossessed  was  not  money  but  money's  worth,  such  as  in  the  instant  case. 

The  Solicitor  of  Internal  Revenue  stated  in  his  Law  Opinion  296  (not 
published),  issued  under  the  Revenue  Act  of  October  3,  1913,  that: 

A  corporation  does  not  derive  income  from  the  acquisition  of  its  own  capital  stock 
for  cancellation. 

In  the  discussion  of  the  case  under  consideration  at  that  time  the  Solicitor 
stated  that: 

The  O  Company  was  doing  a  prosperous  business,  and  a  syndicate  was  formed  which 
secured  control  of  all  of  its  capital  stock.  The  P  Company  was  then  organized  which 
purchased  for  cash  from  the  syndicate  all  of  the  shares  of  the  company  except  directors' 
or  qualifying  shares.  The  P  Company  then  had  the  O  Company  deed  to  it  approximately 
90  per  cent  of  its  assets  in  payment  for  which  the  P  Company  surrendered  to  the  0  Com- 
pany 90  per  cent  of  the  capital  stock  of  the  O  Company.  The  transaction  was  carried 
through,  and  the  90  per  cent  of  the  stock  surrendered  was  canceled.    *    *  * 

In  the  argument  of  the  question  under  discussion  the  Solicitor  stated: 

The  stock  of  a  corporation  held  by  any  person  other  than  the  corporation  whuh  issued 
it  of  course  constitutes  an  asset  and  one  receiving  in  exchange  capital  stock  of  as Cereal ..ed 
market  value  greater  than  the  cost  to  him  of  the  asset  given  in  exchange  might  realize 
a  taxable  profit  from  the  transaction,  but  when  stock  is  acquired  by  the  corporation  which 
issued  it,  in  exchange  for  assets  of  the  corporation,  the  transaction  has  an  entirely  differ- 
ent character.  The  stock  is  then  necessarily  diminished  in  value  by  the  amount  of  the 
assets  which  the  corporation  has  exchanged  for  it. 

In  the  instant  case,  when  the  O  Company  acquired  substantially  all  of  its  stock  in 
exchange  for  90  per  cent  of  its  assets,  the  stock  immediately  ceased  to  represent  any- 
thing like  its  former  value.  The  whole  exchange  from  the  standpoint  of  the  O  Company 
was  a  capital  transaction;  capital  stock,  a  bookkeeping  capital  liability,  was  acquired 
and  extinguished  by  a  surrender  of  assets  including  capital  assets,  the  beneficial  interest 
in  which  was  previously  represented  by  the  stock  acquired.  No  income  could  or  did 
accrue  to  the  O  Company  from  this  transaction.    Its  capital  account  alone  was  affected.  *  *  * 

It  is  observed  that  the  Solicitor's  law  opinion  just  cited  has  to  do  with 
the  question  of  taxable  profit  rather  than  a  deductible  loss  as  involved  in 
the  instant  case,  but  it  logically  follows  from  the  language  of  that  opinion 
that  the  converse  of  the  proposition  would  be  true,  and  that  under  such 
circumstances  where  a  taxable  gain  could  not  be  realized,  no  deductible  loss 
could  be  sustained.  This  latter  view  is  supported  by  Solicitor's  Law  Opinion 
426  (not  published),  issued  under  Revenue  Act  of  1916,  in  which  the  Solicitor 
held  that: 

'*  *  *  Amounts  paid  by  a  corporation  for  the  purchase  of  its  capital  stock  for 
cancellation  constitute  capital  transactions,  and  no  part  of  the  amounts  paid  is  an  allow- 
able deduction  from  income  as  a  loss  sustained. 

In  the  argument  of  the  case  under  consideration  at  that  time,  the  Solicitor 
states  that: 

*    *    *    This  office  has  consistently  held  that  where  a  corporation  purchases  its 
capital  stock  at  a  premium,  it  is  not  entitled  to  deduct  the  premium  paid  as  a  loss.  Under 
Supplementary  Jsuuetin  Ruling?/ 


8-16-22. 

Sec.  326.    Art.  862.-5. 

date  of  April  11,  1917,  this  office  wrote  a  letter  to  an  inquirer  in  which  it  was  held:  "You 
ate  informed  that  this  office  will  hold  that  the  redeeming  of  stock  at  a  price  in  excess  of 
par  represents  a  capital  transaction  in  which  there  can  be  no  gain  or  loss  to  the  corpora- 
tion, and  therefore,  the  difference  between  the  selling  price  of  the  stock  and  the  price  at 
which  it  was  redeemed  will  not  be  taken  up  in  the  return  of  annual  net  income." 

Each  of  the  above  cases  had  to  do  with  the  acquisition  and  cancellation 
of  its  stock  by  the  company  issuing  such  stock,  while  in  the  instant  case, 
the  stock  acquired  was  carried  as  "Treasury  stock."  In  the  judgment  of 
the  Committee  this  difference  is  not  material  in  the  disposition  of  the  ques- 
tion involved,  and  the  rule  laid  down  by  the  Solicitor  is  applicable  to  the 
appellant  case. 

It  does  not  appear  necessary  to  enter  into  a  discussion  of  the  analyses 
of  book  values  of  the  corporate  assets  transferred  or  of  the  capital  stock 
reacquired  in  view  of  the  position  taken  by  the  Solicitor.  It  has  been  here- 
tofore shown  in  this  opinion  that  the  contract  entered  into  by  the  M  Com- 
pany and  A  refers  in  no  uncertain  terms  to  a  sale  by  A  to  the  appellant  of 
y  shares  of  its  capital  stock  for  certain  considerations  named  in  payment 
therefor.  It  is  also  shown  by  a  statement  taken  from  the  books  of  the  ap- 
pellant that  this  transaction  was  treated  primarily  as  a  capital  transaction 
and  that  there  has  been  set  up  a  treasury  stock  account  with  appropriate 
debits  and  credits  thereto. 

Esquerre  in  his  work  entitled,  "Applied  Theory  of  Accounts,"  in  speak- 
ing of  accounting  for  treasury  stock,  states  in  part  as  follows: 

*  *  *  No  matter  what  the  financing  scheme  may  have  been  which  suggested  the 
purchase  of  stock,  its  purpose  should  have  been  accomplished  without  affecting  the  income 
since  the  question  of  reducing  the  capital  stock  liability  was  never  at  issue.  It  would 
undoubtedly  be  better  accounting  to  accept  the  view  that  premiums  on  capital  stock 
constitute  liabilities  while  discounts  constitute  assets,  or,  at  all  events,  that  they  repre- 
sent facts  which  should  be  permitted  to  remain  on  the  books  until  offset  by  subsequent 
transactions.  Nor  can  it  be  said  that  such  a  treatment  would  be  good  financing  since  it 
would  compel  the  supposed  gains  on  discounts  to  remain  in  the  business,  while  it  would 
prevent  the  supposed  losses  on  premiums  from  being  charged  to  the  present  stockholders 
to  the  possible  advantage  of  future  stockholders. 

In  view  of  the  foregoing  matters,  the  Committee  concludes  that  the 
transaction  in  the  instant  case  was  a  capital  one  and  not  one  in  which  there 
resulted  a  loss  from  the  sale,  exchange  or  other  disposition  of  property  such 
as  may  properly  be  deducted  in  the  computation  of  taxable  net  income; 
therefore  it  is  recommended,  in  the  appeal  of  the  M  Company  that  the 
action  of  the  Income  Tax  Unit  in  disallowing  as  a  deduction  from  gross 
income  the  excess  of  the  book  value  on  January  1,  1917,  of  certain  assets 
transferred  over  the  book  value  as  of  that  date  of  y  snares  of  its  capital 
stock  acquired  in  such  transfer  and  carried  to  treasury  stock  account,  be 
sustained,  and  accordingly  that  the  taxpayer's  appeal  be  denied. 
Z 


I('22)-ll-146;  A.  R.  R.  799 
Revenue  Acts  of  1917  and  1918. 

Recommended,  in  the  appeal  of  the  M  Company,  (1)  That  the  value  of  patents 
acquired  by  said  company  at  date  of  organization  be  placed  at  1443^a:  dollars  and 
the  value  of  good  will,  trade-marks,  etc.,  be  placed  at  37x  dollars  (these  figures 
being  subject  to  verification  by  the  Unit  under  the  principles  of  valuation  herein 
stated);  (2)  that  the  corporation  be  allowed  to  amortize  its  patents  in  the  taxable 
year  1918  on  basis  of  1/17  of  the  values  recommended  herein;  (3)  that  the  pre- 
ferred stock  purchased  by  the  corporation  and  held  as  treasury  stock  be  excluded 
in  determining  the  statutory  limitation  on  intangibles  for  purposes  of  invested 
capital;  (4)  that  the  corporation  be  denied  its  inventory  adjustment  at  December 
31,  1918,  because  net  inventory  loss  has  not  been  established;  (5)  that  the  cor- 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.-6. 


poration  be  allowed  the  value  of  patents  of  A  in  the  computation  of  prewar  invested 
capital  in  accordance  with  the  provisions  of  section  330  of  the  Revenue  Act  of 
1918  and  article  934  of  Regulations  45;  (6)  that  the  corporation  be  allowed  in- 
come from  royalties  on  patents  owned  by  A  in  computing  prewar  income  in  accord- 
ance with  the  provisions  of  section  330  of  the  Act. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  adjusting  its  tax  returns  for 
the  taxable  years  1917  and  1918. 

The  exceptions  taken  by  the  taxpayer  are  summarized  as  follows: 

1.  That  the  Income  Tax  Unit  did  not  give  proper  value  to  patents  acquired 
at  date  of  incorporation  of  the  M  Company. 

2.  That  the  Income  Tax  Unit  was  in  error  in  refusing  to  allow  the  appellant 
to  depreciate  its  patents  for  the  year  1918. 

3.  That  the  Income  Tax  Unit  was  in  error  in  refusing  to  take  into  con- 
sideration (in  determining  the  value  of  intangible  assets  for  purposes  of 
invested  capital)  the  proper  value  of  the  preferred  stock  originally  issued  and 
aggregating  2Cbc  dollars. 

4.  That  the  Income  Tax  Unit  was  in  error  in  refusing  to  allow  the  appellant 
the  right  to  correctly  value  its  inventory  at  December  31,  1918. 

5.  That  the  Income  Tax  Unit  was  in  error  in  failing  to  compute  the  in- 
vested capital  for  the  prewar  period  in  the  same  way  as  that  employed  in 
computing  invested  capital  for  the  taxable  year,  as  required  by  section  330 
of  the  Revenue  Act  of  1918. 

6.  That  the  Income  Tax  Unit  was  in  error  in  excluding  from  the  war 
profits  credit,  in  violation  of  section  330,  the  net  profits  of  one  of  the  businesses 
acquired  by  the  appellant  at  time  of  its  organization,  January,  1913. 

The  M  Company  was  incorporated  about  January  — ,  1913.  It  im- 
mediately acquired  the  patents,  assets,  and  business  of  the  O  Company,  and 
of  the  P  Company,  and  of  one  A.  The  O  Company  was,  prior  to  that  time, 
engaged  in  manufacturing  an  automobile  fixture  and  owned  certain  patents 
relating  to  the  same.  A,  prior  to  1913,  was  also  the  owner  of  a  number  of 
patents  relating  to  the  manufacture  of  a  similar  fixture.  He  had  given  an 
exclusive  license  to  the  P  Company  under  these  patents  and  that  company 
likewise  owned  some  patents  relating  to  and  was  in  the  business  of  manu- 
facturing and  selling  the  same  kind  of  fixtures.  Just  prior  to  the  organization 
of  the  M  Company,  the  O  Company,  on  the  one  hand,  and  A  together  with 
the  P  Company  on  the  other,  were  in  serious  patent  litigation.  Countersuits 
had  been  brought  for  infringement  and  it  is  stated  that  under  such  conditions 
the  business  of  each  of  the  corporations  was  being  seriously  injured.  In  fact, 
patent  counsel  advised  at  the  time  that  the  pending  litigation  might  not  only 
but  probably  would  result  in  absolute  destruction  of  the  particular  business 
by  virtue  of  the  fact  that  each  of  the  litigants  could  not  only  prevent  the 
other  from  manufacturing  the  fixtures  which  they  then  manufactured,  but 
there  was  then  no  known  method  by  which  commercially  satisfactory  fixtures 
could  be  manufactured  without  uniting  in  one  owner  the  patents  in  con- 
troversy. It  was  thereupon  determined  that  the  M  Company  be  organized 
with  an  authorized  capital  stock  of  220*  dollars,  made  up  as  follows: 

Y  shares  of  preferred  stock  of  the  par  value  of  5z  dollars  each  and  lOy 
shares  of  common  stock  of  the  par  value  of  5z  dollars  each,  making  a  total 
capitalization  of  220x  dollars.  All  of  this  stock  was  immediately  issued  in 
consideration  of  the  acquisition  by  the  corporation  of  the  patents  and  other 
assets  of  the  0  Company  and  of  the  patents  and  other  assets  of  the  P  Com- 
pany and  all  of  the  patents  of  A  with  respect  to  which  he  had  previously  given 
exclusive  licenses  to  the  P  Company.   Inventories  made  at  the  time  show  that 

Supplementary  Bulletin  Rulings. 


3-16-22. 


Sec.  326.    Art.  £62.— 7. 


cash  and  other  tangible  property  acquired  by  the  M  Company  were  of  the 
value  of  37  1-5at  dollars.  The  tangible  assets  to  the  amount  thus  determined 
were  accordingly  entered  on  the  books  of  the  new  corporation,  and  all  of  the 
rest  of  the  capital  stock  in  excess  of  the  par  value  of  this  amount,  or  lS2x 
dollars,  was  entered  upon  the  books  of  the  corporation  under  the  asset 
"patents,  trade  names,  trade-marks  and  good  will."  The  corporation,  how- 
ever, subsequently  claimed  that  the  value  of  its  patents  was  really  in  excess 
of  this  amount  and  for  the  purpose  of  taxation  reported  this  asset  at  a  value  of 
182  1-5*  dollars. 

The  Income  Tax  Unit,  as  a  result  of  an  examination  of  the  taxpayer's 
books,  determined  that  the  value  of  patents,  trade  names,  trade-marks,  good 


will,  etc.,  should  have  been  stated  as  follows: 

Dollars 

On  basis  of  excess  of  par  value  of  stock  over  tangible  assets  acquired 

by  the  corporation   182* 

The  value  of  patents  on  the  books  of  the  P  Company  when  acquired 

by  the  corporation   l/50x 

The  value  of  patents  on  the  books  of  the  0  Company  when  acquired 

by  the  corporation   1/2* 


Total   182  13/25* 

Less  credits   1  1/5* 


Total   181  8/25* 


The  corporation  has  accepted  these  figures,  but  contends  they  exclusively 
represent  the  value  of  patents  acquired  at  date  of  organization,  namely, 
January  ■ — ,  1913.  The  Income  Tax  Unit  arbitrarily  reached  the  conclusion 
that  this  amount  should  be  allocated  on  a  basis  of  50  per  cent  for  the  value  of 
patents  and  50  per  cent  for  the  value  of  good  will,  trade  names,  etc.  This 
conclusion  resulted  in  an  exclusion  from  invested  capital  of  the  appellant  at 
the  beginning  of  the  taxable  year  1917  of  50a-  dollars. 

Argument  was  made  before  the  Committee  to  show,  on  the  facts  above 
stated,  that  the  organization  of  the  M  Company  was  determined  upon  solely 
because  of  the  value  and  protection  of  the  patents  owned  by  its  predecessor 
companies  and  by  A;  that  the  value  of  these  patents  at  that  time  was  deter- 
mined by  the  earnings  of  the  corporations  for  a  period  of  years  prior  to  Jan- 
uary 1,  1913,  and  that  since  January,  1913,  the  reorganized  company  has  con- 
tinued to  demonstrate  the  value  of  these  patents  by  its  earnings  resulting  in 
an  earned  surplus  of  something  over  80x  dollars  at  December  31,  1917,  after 
the  consistent  payment  of  dividends  on  the  entire  issue  of  preferred  and  com- 
mon stock. 

It  is  stated  that  prior  to  January  1,  1918,  the  company  was  engaged 
exclusively  in  the  manufacture  of  the  fixtures  under  these  patents  and  that 
at  the  present  time  at  least  70  per  cent  of  all  of  the  fixtures  in  use  in  this 
country  are  under  the  M  Company  patents. 

The  Income  Tax  Unit,  in  support  of  its  position  in  allocating  50  per  cent 
of  the  adjusted  capital  stock  issued  in  excess  of  net  tangible  assets  to  good 
will,  trade  names,  etc.,  refers  to  this  Committee's  Memorandum  34  (C.  B. 
2,  p.  31).  After  deducting  10  per  cent  of  the  net  tangible  assets  of  the  P 
Company  and  the  0  Company  to  cover  earnings  from  such  assets,  the  Unit 
attributed  the  remaining  earnings  to  patents,  good  will,  etc.,  which,  capital- 
ized on  basis  of  five  years'  purchase,  resulted  in  a  value  of  60x  dollars.  It 
must  be  borne  in  mind,  however,  that  the  Committee's  recommendation  above 
referred  to  dealt  exclusively  with  such  intangible  assets  as  good  will,  trade- 
marks, trade  brands,  etc.  Patents,  under  the  1917  law,  had  a  somewhat 
different  status. 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.-8. 


The  taxpayer  has  submitted  the  earnings  for  the  years  1909  to  1912, 
inclusive,  for  the  P  Company  and  the  average  earnings  for  these  years 
amounted  to  I3x  dollars,  while  the  average  invested  capital  for  the  same 
years  was  3%x  dollars.  This  would  indicate  that  the  corporation  earned 
more  than  $3.71  for  every  dollar  of  capital  employed  in  the  business.  There 
were  no  intangible  assets  on  the  books  of  this  company  and  the  only  asset  in 
the  nature  of  an  intangible  was  patents  at  l/50x  dollars.  Accordingly,  the 
taxpayer  submits  that  out  of  a  return  of  37 1 .4  per  cent  on  the  average  invested 
capital  of  P  Company,  9  per  cent  of  this  return  may  reasonably  be  considered 
a  manufacturing  profit,  although,  as  above  stated,  it  manufactured  no 
other  commodities  except  the  patented  fixtures.  It  further  claims  that  the 
balance  of  this  percentage  return  of  371.4  per  cent  on  this  average  invested 
capital  should  be  assigned  to  patent  earnings  and  the  earnings  so  determined 
should  be  capitalized  on  basis  of  6  per  cent  in  order  to  arrive  at  the  value  of 
the  patents  acquired  by  M  Company  from  P  Company, 

Similar  calculations  are  made  on  the  average  capital  and  yearly  earnings 
of  the  O  Company,  but  the  period  is  necessarily  limited  to  two  years  prior  to 
the  organization  of  the  M  Company.  There  were  no  intangibles  on  the  books 
of  O  Company  and  the  only  asset  in  nature  of  an  intangible  was  patents  at 
}/2pc  dollars.  In  this  case  the  return  on  average  invested  capital  is  17.25  per 
cent,  and  it  is  claimed  that  8.25  per  cent  of  the  same  should  be  applied  to  the 
average  invested  capital  of  the  O  Company  on  account  of  patent  earnings. 
This  amount  of  earnings  it  has  also  capitalized  on  a  6  per  cent  basis  to  deter- 
mine the  value  of  patents  acquired  from  the  O  Company.  In  the  instant  case 
the  Committe  recognizes  that  9  per  cent  is  a  fair  return  on  average  invested 
capital  for  manufacturing  profit  when  there  stand  behind  the  invested  capital 
substantially  only  tangible  assets  and  the  nature  of  the  business  is  exclusively 
the  production  of  patented  articles.  It  can  not,  however,  give  sanction,  in 
the  instant  case,  to  the  capitalization  of  patent  earnings  on  basis  of  6  per  cent 
when  apportioned  as  above  stated.  It  considers  that  a  capitalization  on 
basis  of  10  per  cent  gives  recognition  to  the  value  of  the  patents  as  indicated 
not  only  by  the  earnings  of  the  companies  prior  to  the  reorganization  of 
January,  1913,  but  also  subsequent  thereto.  The  Committee  also  has  in 
mind  the  emphasis  which  was  placed  on  the  value  of  the  patents  when  the 
two  predecessor  companies  were  in  litigation.  The  Committee  can  not, 
however,  ignore  the  fact  that  the  trade  names  used  on  the  patents  of  the 
predecessor  companies  had  a  good  will  or  trade-mark  value.  This  was 
recognized  by  the  corporation  in  the  trade  name.  Accordingly,  using  the 
average  invested  capital  and  the  average  earnings  as  submitted  by  the 
taxpayer  for  the  years  prior  to  organization  of  the  M  Company  (these  figures 
being  subject  to  verification  by  the  Unit),  the  Committee  finds  the  value  of 
the  patents  of  P  Company  to  be  133  S/25x  dollars  and  the  value  of  the 
patents  acquired  from  the  O  Company  to  be  llx  dollars  or  a  total  valuation 
for  the  patents  acquired  by  the  M  Company  of  144  8/25*  dollars  in  lieu  of 
the  value  of  181  8/25*  dollars,  as  claimed  by  the  taxpayer.  The  difference, 
37  \/5x  dollars,  fairly  covers  the  value  of  the  good  will,  trade-marks,  etc., 
acquired  by  the  M  Company  at  the  date  of  organization.  This  value  of 
37  l/5x  dollars  applicable  to  good  will,  trade-marks,  etc.,  is,  however,  within 
the  20  per  cent  limitation  prescribed  by  the  statute  for  the  inclusion  of  good 
will  in  invested  capital.  This,  therefore,  gives  the  M  Company  its  full  claim 
of  181  8/25x  dollars  for  invested  capital  but  not  without  due  recognition  on 
a  sound  basis  of  the  value  of  the  patents  acquired  from  its  predecessor 
companies. 


Supplementary  Bulletin  Ruling*. 


3-16-22. 

Sec.  326.   Art.  862.— 0. 

In  the  consideration  of  the  second  exception  taken  by  the  appellant,  to 
the  effect  that  the  Unit  was  in  error  in  refusing  to  allow  depreciation  on 
patents  for  the  year  1918,  it  is  noted  the  following  entries  were  made  on  the 
books  of  the  corporation  before  they  were  closed  for  the  taxable  year  ended 
December  31,  1918: 

December  31,  1918. 

Dollars  Dollars 

Good  will   10  7/10* 

To  surplus   10  7/10* 

To  set  up  on  books  as  of  Dec.  31,  1918,  a  value  for 
good  will  arising  from  advertising,  ownership  of 
patents,  etc.,  in  a  sum  equal  to  1/17  of  the  book 
value  of  patents  as  at  Dec.  31,  1917. 
This  entry  is  made  per  instructions  of  president. 

Amortization  of  patents   10  7/10* 

To  reserve  for  amortization  of  patents   10  7/10* 

To  set  up  on  books  as  at  Dec.  31,  1918,  a  reserve  for 
the  amortization  of  patents  equal  to  1/17  of  the 
book  value  of  these  assets  as  shown  by  books 
Dec.  31,  1917,  to  wit,  18234*  dollars  x  1/17  = 
10  7/10*  dollars. 
This  entry  is  made  per  instructions  of  president. 

Surplus   10  7/10* 

To  amortization  of  patents   10  7/10* 

To  close  the  latter  account  into  surplus. 

The  last  entry  above  noted  closes  a  nominal  account  (amortization  of 
patents)  into  surplus  without  carrying  the  entry  through  the  profit  and  loss 
account.  Because  the  entry  was  made  against  surplus  the  corporation  admits 
that  its  books  do  not  show  a  deduction  from  income  for  amortization  of 
patents.  The  Committee  considers  this  merely  a  technical  question  of  book- 
keeping and  that  the  explanatory  entries  in  journalizing  these  accounts  clearly 
show  the  true  intent  of  the  corporation  to  amortize  its  patents  on  basis  of 
1/17  of  the  value  as  shown  by  the  books  at  December  31,  1917,  to  wit,  X&l^x 
dollars.  It  has  been  pointed  out  and  confirmed  that  the  item  of  good  will  is 
nothing  more  than  an  item  of  appreciation,  and  the  taxpayer  accordingly 
deducted  under  Schedule  G  in  its  1919  tax  return  the  surplus  item  of  \0]^x 
dollars  as  an  unallowable  surplus  adjustment  of  the  prior  year  for  invested 
capital  purposes.  The  amount  of  allowable  amortization  must  be  adjusted 
to  conform  with  the  valuation  of  patents  as  determined  by  the  Committee 
in  this  recommendation.  With  respect  to  the  adjustment  for  prior  years 
affecting  invested  capital  at  the  beginning  of  the  taxable  year  1918,  attention 
is  directed  to  the  following  provision  in  article  843  of  Regulations  45: 

It  can  not  be  said  that  the  correct  computation  of  surplus  and  undivided  profits 
necessarily  requires  a  deduction  in  respect  of  the  expiration  of  patents.  It  follows,  therefore, 
that  where  a  corporation  in  the  exercise  of  its  option  has  not  written  down  the  cost  of 
patents,  it  is  not  ordinarily  necessary  to  reduce  the  surplus  and  undivided  profits  in  com- 
puting invested  capital,  whether  the  patents  have  been  acquired  for  stock  or  shares  or  for 
cash  or  other  tangible  property.  Due  consideration  will  be  given  to  the  facts  in  any  case 
in  which  this  rule  seems  obviously  unreasonable. 

Article  167  of  Regulations  45  reads,  in  part,  as  follows: 

The  fact  that  depreciation  has  not  been  taken  in  prior  years  does  not  entitle  the  tax- 
payer to  deduct  in  any  taxable  year  a  greater  amount  for  depreciation  than  would  otherwise 
be  allowable. 

It  is,  therefore,  clear  that  the  corporation  was  within  the  provisions  of  the 
regulations  in  claiming  amortization  for  the  taxable  year  1918  under  article 
167  without  reducing  its  surplus  at  the  beginning  of  the  taxable  year. 

In  consideration  of  the  third  exception  taken  by  the  appellant,  to  the 
effect  that  the  Unit  was  in  error  in  refusing  to  take  into  consideration  (in 
Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.— 10. 


determining  the  value  of  intangible  assets  for  purposes  of  invested  capital) 
the  proper  value  of  the  preferred  stock  originally  issued  and  aggregating  20* 
dollars,  it  is  noted  that  prior  to  January  1,  1917,  the  entire  issue  of  preferred 
stock  had  been  purchased  by  the  corporation  and  was  held  in  its  treasury. 
It  was  so  held  until  the  company  amended  its  charter  in  the  year  1919,  at 
which  time  the  stock  was  canceled.  In  the  computation  for  the  allowance  of 
intangibles,  as  prescribed  by  section  207  (a)  of  the  Revenue  Act  of  1917  and 
section  326(a)4  of  the  Revenue  Act  of  1918,  the  Unit  declined  to  take  into 
consideration  this  preferred  stock. 

Section  207(a)  of  the  Revenue  Act  of  1917  provides,  in  part,  as  follows: 
*  *  *  Good  will,  trade-marks,  trade  brands,  franchise  of  a  corporation  *  *  *  or 
other  intangible  property,  bona  fide  purchases,  *  *  *  for  and  with  shares  in  the  capital 
stock  of  a  corporation  *  *  *  in  an  amount  not  to  exceed  *  *  *  20  per  centum  *  *  * 
of  the  total  shares  of  the  capital  stock  of  the  corporation,  shall  be  included  in  invested 
capital  *    *  *. 

Article  57  of  Regulations  41  prescribes  the  limitation  to  be: 

Twenty  per  cent  of  the  par  value  of  the  total  stock  or  shares  outstanding  on  that  date 
(Mar.  3,  1917). 

Section  326 (a)4  of  the  Revenue  Act  of  1918  reads  as  follows: 
Intangible  property  bona  fide  paid  in  for  stock  or  shares  prior  to  March  3,  1917,  in  an 
amount  not  exceeding  (a)  the  actual  cash  value  of  such  property  at  the  time  paid  in,  \b)  the 
par  value  of  the  stock  or  shares  issued  therefor,  or  (c)  in  the  aggregate  of  25  per  centum  of 
the  par  value  of  the  total  stock  or  shares  of  the  corporation  outstanding  on  March  3,  1917, 
whichever  is  lowest. 

In  an  informal  opinion  the  Solicitor  of  Internal  Revenue  has  held: 

The  company's  contention  is  that  by  the  purchase  the  stock  in  question  became  treasury 
stock  and  as  such  it  was  an  asset,  in  that  the  company  might  have  at  any  time  sold  the  same 
for  a  consideration.  Treasury  stock  as  generally  defined  in  the  decided  cases  has  usually 
been  held  to  mean  such  portion  of  the  shares  of  capital  stock  originally  issued  in  consideration 
of  property  or  cash  contributed  to  the  corporation  as  have  been  returned  to  the  corporation 
by  way  of  a  gift  or  a  loan  in  order  to  enable  the  corporation  to  raise  working  capital  with 
which  to  operate.  Having  once  been  issued  as  paid-up  shares,  such  stock,  when  returned 
to  the  corporation  after  it  has  been  issued  in  the  manner  specified,  becomes  a  part  of  the 
general  assets  of  the  company  and  may  be  sold  or  disposed  of  in  the  same  manner  as  other 
personal  property.  The  essential  feature  is,  however,  that  it  is  paid-up  stock,  which  by  its 
transfer  back  to  the  corporation  has  not  been  changed  in  character.  With  reference  to  such 
stock  it  may  be  said  that  the  same  object  could  be  attained  in  the  usual  case  by  the  sale 
by  the  stockholder  of  such  shares  and  thereafter  turning  over  to  the  corporation  the  pro- 
ceeds of  such  sale.  The  original  number  of  shares  of  stock  issued  in  such  a  case  remains 
constant  and  the  capital  stock  liability  of  the  corporation  likewise  remains  the  same. 
(Crosby  v.  Stratton,  17  Colo.  Appeals,  212;  68  Pac,  130,  133;  Machey  v.  Burns  et  al,  16 
Colo.  Appeals,  6;  64  Pac,  485,  490;  Enright  v.  Heckscher,  240  Fed.,  863,  874;  Davies  v.  Ball, 
64  Wash.,  292;  116  Pac,  83;  Camden  Land  Company  v.  Lewis,  63  Atl.,  523;  Davis  v.  Mont- 
gomery Furnace  \3  Chemical  Company,  101  Ala.,  127;  8  So.,  496,  497;  Mosher  v.  Sinnott, 
20  Colo.  Appeals,  454;  79  Pac,  742.) 

It  will  be  seen  that  the  above  definition  can  not  include  a  corporation's  own  stock  which 
it  has  purchased  from  its  stockholders  in  the  open  market  for  the  simple  reason  that  whatever 
the  corporation  pays  to  the  stockholder  for  his  share  of  stock  is  a  withdrawal  by  such  stock- 
holder of  the  amount  of  capital  originally  contributed  to  the  capital  stock  of  the  company. 
By  such  withdrawal  the  share  which  his  interest  represented  is  extinguished  because  it  has 
been  so  withdrawn.  The  amount  of  capital  originally  contributed  still  in  the  hands  of 
the  corporation  constitutes  the  remaining  capital  stock,  of  which  it  can  not  be  said  that 
the  interest  formerly  represented  by  the  share  of  the  withdrawing  stockholder  is  a  part. 
In  considering  a  case  very  similar  to  the  present  one,  the  Supreme  Court  of  Louisiana,  in 
Belknap  v.  Adams  (49  La.  Annual,  1350;   22  So.,  382,  383),  said: 

But,  instead  of  a  division  of  property,  we  have  in  this  case  the  division  of  purchased 
stock,  which,  by  the  purchase,  was  canceled  and  remained  canceled  for  all  purposes  until 
reissued.  (1  Mor.  Priv.  Corp.,  sees.  112,  114;  Cook,  Corp.,  sec  282.)  This  is  the  well- 
defined  result  when  the  corporation  purchases  its  stock.  The  purchase  is  an  unauthorized  use 
of  the  corporate  funds,  but,  when  permitted  to  stand  or  is  unassailed,  the  purchase  simply 
extinguishes  the  stock,  increases  the  rights  of  the  remaining  stockholders.  This  division 
or  donation  of  the  purchased  stock  was  not,  in  any  sense,  a  distribution  of  corporate 
property. 

Supplementary  Bulletin  Rulings. 


3-16-22. 


Sec.  326.    Art.  862.— 11. 


in  Steel  v.  Farmers  &  Merchants  Mutual  Telephone  Association  (Supreme  Court,- Kansas, 
May  8,  1915;  148  Pac,  661)  the  court  said: 

The  use  of  the  means  or  assets  of  a  corporation  to  buy  up  its  own  capital  stock  permits 
the  withdrawal  of  a  stockholder  without  substituting  another  in  its  place,  repays  to  the 
withdrawing  member  his  share  of  the  capital,  reduces  the  amount  of  the  fund  contributed  to 
the  common  venture,  and  to  that  extent  injures  the  continuing  stockholders  and  creditors 
and  opens  the  door  to  mismanagement  and  unfairness. 

See  also  Bank  v.  Fox  (Federal  case  2683),  wherein  the  court  speaks  of  the  purchase  by 
a  corporation  of  its  own  stock  as  being  an  extinguishment  of  such  stock. 

In  any  view  of  the  case,  this  is  the  logical  legal  result  of  the  purchase  by  a  corporation 
of  outstanding  shares  of  its  own  capital  stock,  for  it  is  but  returning  to  the  stockholder  the 
original  contribution  advanced  by  him  and  for  which  advance  he  was  entitled  to  an  interest 
in  the  capital  stock  of  the  corporation  represented  by  his  share  of  stock.  This  also  appears 
to  be  the  correct  view  from  the  standpoint  of  accounting  principles.  Dickinson,  "Account- 
ing, Practice  and  Procedure,"  at  page  130,  says: 

An  important  question  arises  as  to  the  treatment  of  stock  of  a  corporation  held  in  its 
own  treasury.  Many  corporations  still  treat  this  as  an  investment  asset,  either  under  a 
'special  division  of  the  balance  sheet  or  among  the  current  assets. 

*  *  *  A  little  consideration  will  show  that  such  a  practice  is  entirely  erroneous  and 
misleading,  and,  moreover,  that  it  also  raises  difficult  questions  of  valuation.  The  capital 
stock  represents  the  manner  in  which  its  property  and  assets  are  distributed  among  those 
who  constitute  the  corporation.  If  one  of  these  owners  disposes  of  his  share  of  the  corpo- 
ration, he  withdraws  therefrom  taking  with  him  what  he  considers  his  fair  proportion  of  the 
asset  value,  and  leaving  the  rest  to  be  divided  among  the  remaining  owners.  Assuming  that  the 
seller  gets  full  value,  the  value  remaining  to  the  others  is  neither  more  nor  less  in  fact  than 
it  was  before,  although  if  the  stock  is  actually  worth  more  or  less  than  its  par  value,  there 
will  be  an  apparent  profit  or  loss  on  the  transaction;  the  effect  of  which  may  be  thus 
illustrated:  A  corporation  has  a  capital  stock  of  $1,000,000,  divided  into  10,000  shares  of 
$100  each,  and  represented  by  assets  of  equal  value.  The  holders  of  1,000  shares  with- 
draw, i.  e.,  sell  their  shares  to  the  company  at  the  book  value,  which  in  this  case  is  par. 
The  stock  is  thereby  reduced  to  9,000  shares,  i.  e.,  $900,000,  and  the  assets  are  similarly 
reduced  by  the  payment  of  $100,000  to  $900,000.  There  is  clearly  no  reason  whatever  for 
pretending  that  there  are  still  10,000  shareholders  and  assets  of  $1,000,000,  when  as  a  matter 
of  fact  there  are  only  9,000  with  assets  of  $900,000,  and  the  position  of  those  9,000  is  entirely 

Wfufangad^^ p«v,zrti  In  rtrtitfi-tncimm  r-)i\i  nr  [  «*;>ii  a 

On  page  132  of  Dickinson,  "Accounting,  Practice  and  Prodecure,"  the  author  continues 
as  follows: 

As  a  matter  of  convenience  small  amounts  of  such  stock  are  carried  as  marketable 
investments  when  the  same  are  held  temporarily;  but  even  this  practice  is  open  to  criticism 
as  lending  itself  to  a  use  of  the  funds  of  a  corporation  for  influencing  the  market  in  its 
own  stock,  which  is  not  one  of  the  purposes  for  which  it  is  permitted  to  exist. 

See  also  Montgomery,  "Income  Tax  Procedure,  1921,"  page  386. 

In  the  instant  case  it  appears  quite  clearly  that  this  corporation  did  not  purchase  this 
stock  for  temporary  purposes,  but  that  such  purchase  was  actually  a  part  of  a  scheme  to 
retire  such  stock  in  a  general  plan  to  rearrange  the  stockholdings  in  the  corporation.  The 
purchase  was  a  retirement  of  the  stock  for  all  purposes.  It  is  immaterial  for  our  purposes 
that  the  corporation  was  required  to  pay  taxes  to  the  State  upon  the  basis  of  the  original 
capitalization  (as  they  state  in  their  brief  they  were  required  to  do),  for  such  payment  may 
have  been  required  by  the  State  because  of  failure  on  the  part  of  the  corporation  to  give 
proper  notice  of  the  reduction  in  its  capital  stock  as  provided  for  by  the  State  statutes. 
At  any  rate,  it  is  not  a  point  of  importance  in  this  case. 

In  view  of  the  above,  it  is  the  opinion  of  this  office  that  the  action  of  the  Income  Tax 
Unit  in  refusing  to  recognize  the  preferred  stock  so  purchased  by  the  corporation  for  the 
purposes  of  its  computation  with  respect  to  the  allowance  of  intangibles  for  invested 
capital  purposes  was  correct. 

In  this  opinion  the  Committee  concurs. 

In  consideration  of  the  fourth  exception  taken  by  the  appellant,  to  the 
effect  that  the  Unit  was  in  error  in  refusing  to  allow  the  right  to  correct  the 
value  of  its  inventory  at  December  31,  1918,  it  is  noted  that  certain  products 
were  included  in  its  inventory  of  December  31,  1918,  priced  at  the  market  as 
of  January  22,  1919,  as  quoted  by  the  market  report,  the  first  market  quota- 
tions after  the  Government's  release  of  control  of  prices  for  these  products. 
This  adjustment  decreased  the  profits  for  1918  in  the  sum  of  x  dollars.  It  is 
admitted  by  the  taxpayer  that  the  prices  so  fixed  did  not  cover  the  entire 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  862.  -12. 


slock  on  hand  at  December  31,  1918.  In  view  of  this  appellant's  contention 
that  it  suffered  an  inventory  loss  under  section  234(a)  14  of  the  Revenue  Act 
of  1918  can  not  be  sustained.  The  Advisory  Tax  Board,  in  passing  opinion 
July  24  in  its  Memorandum  52  (C.  B.  1,  p.  155),  gave  reference  to  article  267 
of  Regulations  45,  which  provides,  inter  alia,  that: 

Not  later  than  30  days  after  the  close  of  the  taxable  year  1919  a  taxpayer  who  has 
filed  either  a  claim  in  abatement  or  a  claim  for  refund,  or  both,  shall  submit  to  the  Com- 
missioner a  descriptive  statement  showing  the  quantity  and  kind  of  all  goods  included  in 
the  1918  inventory  which  have  been  (a)  sold  at  a  loss  in  the  taxable  year  1919,  (b)  sold  at 
a  profit  during  the  taxable  year  1919,  or  (c)  not  sold  or  otherwise  disposed  of  during  the 
taxable  year  1919    *    *  *. 

Commenting  on  these  provisions,  the  Advisory  Tax  Board  said: 

The  regulations  thus  clearly  require  a  statement  showing  the  disposition  of  all  the 
inventory,  and  the  regulations  conform  to  the  statute  which  speaks  of  the  inventory.  An 
inventory  is  a  well-understood  concept  and  where  the  term  is  used  without  qualification 
it  means  the  inventory  as  a  whole,  and  not  merely  some  part  of  the  goods  included  in  the 
inventory.  The  Advisory  Tax  Board  is,  therefore,  of  the  opinion  that  an  inventory  loss 
can  not  be  proved  by  a  submission  of  evidence  showing  that  a  loss  has  been  sustained  in 
respect  of  a  part  of  the  inventory,  without  showing  at  least  that  the  amount  of  the  loss  for 
which  claim  lias  been  filed  has  not  been  offset  by  profits  made  on  the  remainder  of  the 
inventory. 

If,  therefore,  a  claim  can  only  be  sustained  on  basis  of^net  loss  in  the 
inventory  of  the  appellant,  the  adjustment  which  the  taxpayer  made  in  the 
inventory  as  of  December  31,  1918,  can  not  be  sustained,  because  it  does  not 
reflect  a  net  loss.  The  opinion  of  the  Advisory  Tax  Board  has  been  con- 
firmed by  this  Committee  in  its  Recommendation  487  (C.  B.  4,  p.  205),  dated 
March  1,  1921. 

The  fifth  and  sixth  exceptions  taken  by  the  appellant  are  to  the  effect 
that  for  the  purpose  of  computing  prewar  income  and  invested  capital  the 
earnings  of  A  from  royalties  on  patents  must  be  included  and  that  under 
section  330  the  value  of  patents  as  used  in  the  computation  of  invested  capital 
for  the  taxable  year  must  be  included  in  prewar  invested  capital  in  the  same 
amount.  It  is  noted  that  A,  in  1906,  gave  the  P  Company  the  exclusive 
right  to  use  his  patents  subject  to  the  payment  to  him  of  certain  royalties. 
These  royalties  were  regularly  paid  him  by  the  company,  such  payments 
constituting  a  deduction  from  the  income  of  the  P  Company.  The  cost  to 
A  of  procuring  and  developing  the  original  patents  is  not  in  evidence. 

The  M  Company  acquired,  on  the  date  of  its  organization — 

(a)  The  assets  of  the  O  Company; 

(b)  The  assets  of  the  P  Company;  and 

(c)  The  business  of  A  in  so  far  as  it  related  to  owning  and  licensing  patents 
to  the  P  Company. 

In  the  computation  of  prewar  income  and  invested  capital  the  Income 
Tax  Unit  did  not  take  into  consideration  the  income  or  the  invested  capital 
of  A  as  owner  of  a  portion  of  the  patents  acquired.  The  Unit,  however,  in 
submitting  the  case  for  consideration  by  this  Committee,  gives  approval 
under  section  330  of  the  Revenue  Act  of  1918  to  the  claim  of  the  appellant, 
but  makes  the  point  that  under  article  934  of  Regulations  45  the  excess  of 
the  valuation  of  any  asset  in  existence  during  both  the  taxable  year  and  any 
prewar  year,  but  included  in  invested  capital  for  the  prewar  year  at  a  lesser 
value  than  for  the  taxable  year,  shall  not  be  included  in  determining  the 
difference,  10  per  cent  of  which  is  added  to  or  deducted  from  the  war  profits 
credit. 

The  Committee  concurs  in  this  conclusion  and  considers  that  the  excess 
value  of  patents  for  the  taxable  year  over  the  value  at  which  they  were  carried 
on  the  books  of  the  predecessor  corporations  and  A  should  be  eliminated  for 

Supplementary  Bulletin  Rulings. 


3-16-22. 


Sec.  326.    Art.  862.— 13. 

computation  of  the  increase  in  invested  capital  for  the  war  profits  credit.  It 
is  not  considered  that  the  income  of  A  from  royalties  on  patents  can  be 
capitalized  to  determine  the  invested  capital  of  A  for  the  prewar  period. 
Summing  up,  the  Committee  recommends: 

1.  That,  in  the  appeal  of  the  M  Company,  the  value  of  patents  acquired 
by  said  company  at  date  of  organization  be  placed  at  144J/2*  dollars  and  the 
value  of  good  will,  trade-marks,  etc.,  be  placed  at  37  l/5x  dollars  (these 
figures  being  subject  to  verification  by  the  Unit  under  the  principles  of  valua- 
tion herein  stated). 

2.  That  the  corporation  be  allowed  to  amortize  its  patents  in  the  taxable 
year  1918  on  basis  of  one-seventeenth  of  the  value  recommended  herein. 

3.  That  the  preferred  stock  purchased  by  the  corporation  and  held  as 
treasury  stock  be  excluded  in  determining  the  statutory  limitation  on  in- 
tangibles for  purposes  of  invested  capital. 

4.  That  the  corporation  be  denied  its  inventory  adjustment  at  December 
31,  1918,  because  net  inventory  loss  has  not  been  established. 

5.  That  the  corporation  be  allowed  the  value  of  patents  of  A  in  the 
computation  of  prewar  invested  capital  in  accordance  with  provisions  of 
section  330  of  the  Revenue  Act  of  1918  and  article  934  of  Regulations  45. 

6.  That  the  corporation  be  allowed  income  from  royalties  on  patents  owned 
by  A  in  computing  prewar  income  in  accordance  with  the  provisions  of  section 
330  of  the  Act. 

3 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  869.— 1. 


Section  326. — Invested   Capital  (H555). 

Article  869. — Affiliated  Corporations:  Invested  Capital  for  Prewar  Period. 
(11828). 

(See  12-21-1526;  sec.  320,  art.  802.)  Basis  for  determining  average  pre- 
war income  and  invested  capital. 

1 


Supplementary  Bulletin  Rulings. 


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2-20-22. 

Sec.  326.    Art.  871.— 1. 

Section  326.— Invested  Capital  (1918  Act— e!555,  ante):  (1921  Act— «[  1035, 
post). 

Article  871. — Foreign  corporations  (Reg.  45 — 1[830,  ante):  (Reg.  62 — 
^1242,  post). 

9-21-1486:  A.  R.  R.  397. 

REVENUE  ACT  OF  1917. 
The  M  Company,  a  foreign  manufacturing  corporation,  is  said  to  be  in 
reality  no  more  than  a  branch  of  the  N  Company,  a  very  much  larger  foreign 
corporation.  The  facts  with  regard  to  the  corporate  organization  and  business 
of  the  taxpayer  and  the  parent  corporation  are  shown  in  the  record  to  be 
as  follows: 

The  parent  corporation  was  organized  about  1877  to  take  over  the  business 
established  many  years  ago  and  continuously  conducted  by  members  of  an 
English  family.  This  corporation  has,  on  a  very  large  scale,  continued  down 
to  the  present  time  the  manufacture  and  sale  of  the  goods  and  had  outstanding, 
in  1917,  ordinary  shares  of  the  par  value  of  66*  pounds,  which  had  then  a 
market  value  of  297*  pounds,  or  nearly  1,450*  dollars. 

The  parent  company  and  its  subsidiaries  then,  as  they  do  now,  manu- 
factured and  marketed  this  product  in  many  parts  of  the  world. 

Previous  to  1901,  the  parent  company  had  sold  its  products  in  the  United 
States  through  an  agent;  but,  in  or  about  that  year,  the  company  established 
its  own  agency  in  this  country  and  continued  to  sell  its  products  through 
that  agency  down  to  1908. 

In  the  year  1908,  the  company  purchased  a  factory  in  this  country,  and 
then  began  the  manufacture  of  its  goods  in  this  country.  Late  in  1907  it 
was  found  desirable  to  organize  a  new  English  corporation  which  should 
carry  on  the  American  business  of  the  company.  Accordingly,  the  M  Com- 
pany, this  taxpayer,  was  organized  under  the  English  Companies  Act  with 
an  issued  capital  of  x  pounds,  equivalent  in  dollars  at  $4.86  in  the  pound 
to  4.86*  dollars,  and  the  new  company  immediately  took  over  the  parent 
company's  plant  and  entire  assets  in  this  country.  The  amount  of  this 
capitalization  is  said  to  have  been  approximately  equivalent  to  the  net 
income  from  the  American  business  for  one  year  at  that  time,  and  it  is  asserted 
and  insisted  upon  that  such  capitalization  bore  absolutely  no  relation  what- 
ever to  the  value  of  the  assets  acquired  by  the  new  company,  "for  (so  asserts 
the  taxpayer's  brief)  in  these  assets  were  included,  at  a  nominal  valuation, 
the  trade-marks  and  good  will  of  the  parent  company,  which  had  a  real 
value  of  say  100*  dollars." 

It  is  further  asserted  that  the  entire  capital  stock  of  the  taxpayer  which, 
ever  since  1908,  has  nominally  carried  on  the  American  business,  is  and 
always  has  been  owned  by  the  parent  company. 

It  is  said  that  the  majority  of  the  board  of  directors  of  taxpayer  company 
are  all  members  of  the  said  English  family,  as  are  the  directors  of  the  parent 
corporation,  and  the  entire  net  income  from  the  operations  of  the  business 
goes  into  the  treasury  of  the  parent  company,  no  appreciable  portion  of  such 
income  being  retained  for  any  considerable  period  of  time  in  the  treasury 
of  the  taxpayer;  and  that  the  taxpayer  is  only  able  to  carry  on  its  business 
and  finance  itself,  without  accumulating  a  surplus,  because  it  can  depend 
upon  the  vast  resources  of  the  parent  company. 

In  filing  its  income  and  excess  profits  tax  return  for  the  taxable  year 
ended  November  .30,  1917,  the  taxpayer,  in  its  excess  profits  tax  return,  set 
forth  that  the  income  for  that  year  was  103/2*  dollars,  which  was  subsequently 
amended  and  fixed  by  the  Commissioner  of  Internal  Revenue  at  10*  dollars. 


Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  871.— 2. 


In  this  return  it  was  suggested  to  the  Department  by  the  taxpayer  that  a 
fair  constructed  capital  should  be  fixed  after  giving  due  weight  to  the  foreign 
invested  capital  and  taking  into  account  the  very  great  value  of  the  foreign 
trade  marks;  a  transfer  of  which,  so  far  as  they  were  used  in  America,  had 
been  made  to  the  taxpayer  in  1908  at  the  time  of  its  incorporation. 

In  May,  1918,  the  taxpayer  was  notified  by  the  Commissioner,  of  a  tax 
of  \}Ax  dollars;  which  was  promptly  paid  and  nothing  further  was  heard 
by  the  taxpayer  from  the  Government  until  March  8,  1920,  when  the  com- 
pany was  notified  of  the  proposed  assessment  of  an  additional  tax  in  the 
sum  of  2%x  dollars.  In  arriving  at  this  additional  tax,  the  Income  Tax  Unit 
recognized  that  the  assessment  should  be  made  under  section  210  of  the 
Revenue  Act  of  1917  and  gave  to  the  taxpayer  a  total  constructed  capital 
of  2Sx  dollars,  being  an  additional  allowance  of  approximately  lOx  dollars 
above  the  invested  capital  as  shown  by  the  books  of  the  taxpayer;  and  it  is 
from  this  action  on  the  part  of  the  Unit  that  the  taxpayer  now  appeals. 

It  is  the  understanding  of  this  Committee  that  there  is  no  controversy 
as  to  the  correctness  of  the  facts  substantially  as  advanced  by  the  taxpayer 
in  his  brief  submitted  upon  appeal  to  the  Committee,  and  which  are  set 
forth  above. 

It  is  the  contention  of  the  taxpayer  that  no  fair  comparison  can  be  made 
for  the  purpose  of  computing  the  tax  under  section  210  of  the  Revenue  Act 
of  1917,  except  with  the  parent  corporation,  and  the  taxpayer  prays  that 
under  such  circumstances  it  should  be  assessed  under  that  section  on  the 
same  basis  on  which  it  would  be  assessed  if  it  were  a  branch  of  the  parent 
company;  or,  if  not  on  that  basis,  then  directly  as  a  branch  of  the  parent 
company,  and  that  an  estimate  of  the  capital  of  the  parent  company  employed 
in  this  country  be  made  under  article  48  of  Regulations  41  relative  to  the  war 
excess  profits  tax  imposed  by  the  War  Revenue  Act  approved  October  3, 
1917. 

This  case  is  unique,  at  least  in  the  experience  of  the  Committee,  in  that 
the  taxpayer  is  a  foreign  corporation,  of  which  the  entire  business  is  trans- 
acted and  the  profits  therefrom  earned  in  the  United  States,  and  in  that  it  is 
also  a  subsidiary  of  another  foreign  corporation  which  owns  or  controls 
all  of  the  taxpayers'  capital  stock. 

A  situation  is  here  presented  which  does  not  seem  to  have  been  contem- 
plated or  exactly  provided  for  by  the  framers  of  the  Act.  Nevertheless,  the 
Committee  finds  no  warrant  in  the  law  or  regulations  which  would  permit 
or  justify  the  disposition  of  the  case  which  is  sought  by  the  taxpayer;  nor 
is  it  all  certain  that  such  consideration,  if  possible,  would  afford  to  the  tax- 
payer any  further  relief  than  that  which  has  heretofore  been  granted  to  it 
by  the  Commissioner,  acting  through  the  Unit. 

Treasury  Decision  2662  reads  in  part  as  follows: 

Pursuant  to  article  78  of  Regulations  41,  relative  to  war  excess  profits  tax,  affiliated 
corporations  as  limited  and  defined  in  paragraphs  C  and  D  below  are  hereby  directed 
to  make  consolidated  returns  for  the  purpose  of  excess  profits  tax.  Atftiiated  corporations 
other  than  those  falling  within  the  provisions  of  paragraphs  C  and  D  may  make  a  con- 
solidated return  only  after  having  secured  permission  in  writing  from  the  Commissioner 
of  Internal  Revenue. 

The  Treasury  decision  then  proceeds  to  quote  article  77  of  the  regulations 
in  definition  of  "affiliated  corporations,"  and  in  paragraphs  A  to  H  enlarges 
upon  the  definition  contained  in  that  article  of  the  regulations. 

It  seems  unnecessary  to  refer  more  in  detail,  either  to  this  Treasury 
decision  or  to  articles  77  and  78  of  Regulations  41,  for  the  reason  that,  as 
has  already  been  said,  the  instant  case  presents  a  feature  apparently  not 
contemplated  or  provided  for  in  either  the  law  or  the  regulation,  namely, 

Supplementary  Bulletin  Rulings. 


Sec.  326.    Art.  871.— 3. 


that  both  the  taxpayer  and  its  parent  company  are  foreign  corporations,  while 
the  taxpayer  alone  does  business  within  the  United  States. 

It  has  been  consistently  held  by  the  Department  that  the  privilege  of 
riling  a  consolidated  return  can  not  be  granted  to  a  taxpayer  in  cases  where 
the  Department  would  be  without  power  to  require  such  a  return.  Clearly 
this  is  such  a  case,  for  it  is  obvious  that  the  Department  has  no  such  authority 
in  the  case  of  the  two  foreign  corporations. 

It  would  seem,  therefore,  that  the  request  of  the  taxpayer  for  the  privilege 
of  filing  such  a  consolidated  return  must  be  denied,  if  upon  no  other  ground 
than  the  sufficient  one  that  the  Department  is  entirely  without  power  to 
grant  such  a  privilege.  But  it  is  doubtful,  even  though  the  Department 
had  the  power,  and  the  privilege  were  granted,  that  the  taxpayer  would 
experience  the  anticipated  relief,  for  it  seems  to  the  Committee  that  the 
application  by  the  Unit  to  this  case  of  section  210  of  the  Revenue  Act  of  1917 
produces  substantially  the  situation  that  the  taxpayer  seeks  to  attain,  through 
article  48  of  Regulations  41,  which  provides  that: 

When  used  in  reference  to  a  foreign  corporation  or  partnership,  or  a  nonresident  alien 
individual,  the  term  "invested  capital"  means  that  portion  of  the  entire  invested  capital 
as  defined  and  limited  by  these  regulations  which  the  net  income  from  sources  within 
the  United  States  is  of  the  entire  net  income. 

This  is  substantially  the  condition  produced  by  the  application  of  section 
210  to  the  taxpayer's  case  under  consideration,  and  it  does  not  appear  to 
the  Committee,  therefore,  that  any  further  relief  can  be  granted  to  the  tax- 
payer than  has  already  been  afforded  by  the  Unit;  nor,  as  a  matter  of  fact, 
that  any  hardship  or  injustice  has  been  done  to  the  taxpayer  by  such  appli- 
cation, since  the  taxpayer's  earnings,  based  on  its  actual  investment,  were 
215  per  cent,  and  its  excess  profits  tax,  computed  under  the  provisions  of 
section  210,  is  38.25  per  cent  of  its  net  income. 

1 


Supplementary  Bulletin  Ruling6 


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2-20-22. 


Sec.  327.    Art.  901.— 1. 

Section  327.— Special  Cases  (1918  Act— r 565,  ante):  (1921  Act— a  1044, 

i9bnu  'ndmpefi^.-xol  tk  lo  nobollqit  tffe.lo^tt?  snJ  ni  BOtr«bflMBtn<mJj| 

Article  901—  Treatment  of  Special  Cases  (Reg.  45— •  831,  ante):  (Reg. 
62— 1fl243,  post). 

1-19-119:  T.  B.  M.  7. 

The  same  principle  stated  in  the  Revenue  Act  of  1918  that  assessment 
will  not  be  made  as  a  special  case  under  section  328,  when  the  tax  is  high 
"merely  because  the  corporation  earned  within  the  taxable  year  a  high 
rate  of  profit  upon  a  normal  invested  capital"  is  applicable  to  the  Revenue 
Act  of  1917  in  cases  in  which  application  is  made  for  assessment  under 
section  210  of  that  act. 

i 


14-19-441:  T.  B.  M.  58 

This  is  an  application  by  the  X  Company  for  assessment  for  the  year 
1917  under  section  209  of  the  Revenue  Act  of  1917,  or,  if  this  application 
is  denied,  for  assessment  under  section  210. 

The  corporation  was  engaged  in  a  manufacturing  business. 

The  application  for  assessment  under  section  209  should  be  denied. 
Under  the  definition  of  nominal  capital  contained  in  article  74  of  Regulations 
41  this  is  not  a  "case  of  a  trade  or  business  having  no  invested  capital  or 
not  more  than  a  nominal  capital."  (See  section  209.)  It  "belongs  to  a 
class  which  necessarily  and  customarily  requires  capital  for  its  operation.'' 
(See  article  74.) 

The  application  for  assessment  under  section  210  should  also  be  denied. 
It  is  true  that  the  excess  profits  tax  rate  determined  without  the  benefit  of 
section  210  is  very  high,  approximately  59  per  cent,  but  the  profits  on  the 
business  were  clearly  war  profits,  and  thus  of  a  kind  which  were  intended 
to  be  taxed  at  a  high  rate.  The  case  does  not  come  within  any  of  the  classes 
of  exceptional  cases  enumerated  in  article  52  of  Regulations  41  as  within 
the  scope  of  section  210.  Obviously  it  is  not  within  any  of  these  classes 
unless  it  is  within  that: 

(4)  Where  the  invested  capital  is  seriously  disproportionate  to  the  taxable  income. 

While  the  Regulations  do  not  enumerate  all  the  ways  in  which  such  cases 
may  arise,  this  class  of  cases  is  limited  to  cases  enumerated  or  those  similar 
in  character.    The  cases  enumerated  are  those  which  arise  through: 

(a)  The  realization  in  one  year  of  the  earnings  of  capital  unproductively  invested 
through  a  period  of  years  or  of  the  fruits  of  activities  antedating  the  taxable  year;  or, 

(b)  Inability  to  recognize  or  properly  allow  for  amortization,  obsolescence,  or  excep- 
tional depreciation  due  to  the  present  war,  or  to  the  necessity  in  connection  with  the 
present  war  of  providing  plant  which  will  not  be  wanted  for  the  purposes  of  the  trade  or 
business  after  the  termination  of  the  war. 

f  he  present  case  does  not  arise  in  either  of  these  ways,  or  in  any  similar 
manner.  Properly  speaking,  this  is  a  case  where  taxable  income  is  "high" 
with  respect  to  invested  capital  rather  than  where  invested  capital  is  "seriously 
disproportionate"  to  such  income.  Section  210,  as  interpreted  in  the  Regula- 
tions, like  paragraph  (d)  of  section  327  of  the  Revenue  Act  of  1918,  was 
not  intended  to  afford  relief  where  the  only  reason  therefor  is  a  high  rate 
of  tax— that  is,  a  high  ratio  of  taxable  income  to  invested  capital.  There 
must  be  in  addition  some  abnormality  with  respect  to  invested  capital, 
taxable  income,  or  both.   There  is  no  such  abnormality  in  the  present  case. 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 2. 


15-19-453:  T.  B.  M.  53. 

Recommendation  in  the  case  of  the  application  of  A,  for  assessment  under 
tection  210  [1917  Act].    Request  denied. 

The  appeal  in  this  case  for  assessment  under  section  210  is  based  upon 
the  fact  that  A  began  to  liquidate  the  business  in  1917  and  therefore  had 
abnormal  profits  during  that  year.  This  is  supported  by  argument  to  show 
that  by  reason  of  such  liquidation  there  was  a  sacrifice  of  the  value  of  trade 
brands  and  other  intangibles  which  should  receive  consideration. 

The  record  makes  it  doubtful  whether  there  was  any  actual  liquidation 
in  1917;  but  assuming  that  there  was,  it  has  been  repeatedly  held  that  a 
taxpayer  who  had  liquidated  all  or  part  of  his  business  in  a  particular  year 
is  not  entitled  to  assessment  under  section  210,  unless  such  liquidation 
results  in  throwing  into  a  single  year  profits  so  abnormally  high  as  to  result 
in  a  tax  which,  compared  with  the  taxes  imposed  upon  representative 
business  concerns  in  the  same  line  of  business,  is  seriously  disproportionate 
and  productive  of  exceptional  hardship. 

A  comparison  of  the  return  of  A  with  representative  concerns  in  the  same 
line  of  business  discloses  the  fact  that  no  material  change  in  the  tax  wrould 
result  by  fixing  his  tax  on  the  basis  of  the  experience  of  such  representative 
concerns.  It  further  appears  that  the  amount  of  the  invested  capital  can 
be  satisfactorily  determined  without  special  difficulty,  and  that  under  the 
conditions  prevailing  in  1917  the  profits  were  not  seriously  disproportionate 
to  such  invested  capital.  With  respect  to  the  alleged  liquidation  or  shrinkage 
in  the  value  of  intangible  assets,  there  were  in  the  year  1917  no  facts  or 
events  affecting  these  intangibles  sufficiently  definite  and  conclusive  to 
warrant  special  deductions  either  as  extraordinary  depreciation  (including 
obsolescence)  or  loss.  The  case  plainly  does  not  come  within  the  time 
limits  controlling  allowances  for  the  obsolescence  of  intangible  assets  in 
the  liquor  business,  laid  down  in  Advisory  Tax  Board  Recommendation 
No.  44.  The  Advisory  Tax  Board,  therefore,  recommends  that  the  petition 
of  the  taxpayer  be  denied. 

2 


£S  shins  ni  batKisrnuns 


15_19_454:  T.  B.  M.  60. 
The  limitation  of  the  tax  under  the  Revenue  Act  of  1918  on  profits  derived 
from  the  sale  of  a  discovered  mine  can  not  be  applied  to  the  assessment  of 
1917  taxes,  nor  can  such  limitation  or  any  modification  thereof  be  used  as 
a  basis  for  an  assessment  under  section  210  of  the  Revenue  Act  of  1917. 
A  case  in  which  income  as  compared  with  invested  capital  has  been  abnor- 
mally increased  by  the  sale  of  all  capital  assets,  may  be  considered  under 
section  210,  Revenue  Act  of  1917. 


3 


— 


"rlaid"  ci  amoorii  aldcxEl  aiadv/  aaeo  e  z\  «iril  <gni2l£9q2  vhsQO-iH  i^nnBrn 

19-19-492:  T.  B.  R.  58 

Ruling  Under  Revenue  Act  of  191 7. 

The  M  Company  appealed  to  the  Advisory  Tax  Board  to  be  taxed  under 
section  209  of  the  act  of  October  3,  1917,  and  as  a  personal  service  corporation 
under  the  Revenue  Act  of  1918. 

The  facts  appear  to  be  as  follows: 

The  M  Company  is  a  corporation  engaged  in  the  business  of  retailing, 
Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 3. 


and  the  return  under  consideration  is  for  the  fiscal  year  ended  June  30, 
1918.  The  stock  of  this  corporation  is  owned  by  two  stockholders  who  are 
actively  engaged  in  the  business  and  are  the  principal  salesmen.  There  is 
but  one  other  salesman  employed  by  the  corporation,  and  he  works  on  a 
commission  basis.  The  claim  filed  by  this  corporation  sets  forth  the  fact 
that  the  employment  of  capital  is  unnecessary  in  the  business,  except  in 
paying  for  merchandise  consigned  to  claimant  by  the  factory  and  for  the 
payment  of  the  freight  charges  assessed  thereon.  The  claim  also  shows  how 
the  direct  use  of  the  capital  of  the  corporation  can  be  avoided  by  having  the 
purchaser  make  the  customary  deposit  when  placing  his  order  and  the 
funds  thus  secured  would  enable  the  corporation  to  transact  business  without 
the  use  of  its  own  capital,  no  stock  being  carried  other  than  that  passing 
through  the  shop  for  test  before  delivery.  The  statements  made  by  the 
corporation  show  that  capital  is  necessary  in  the  conduct  of  the  business. 
The  nature  of  the  business  is  also  well  known  and  the  statements  made  in 
the  claim  clearly  establish  the  fact  that  the  business  conducted  by  this 
corporation  is  purely  a  commercial  enterprise.  Section  209  was  not  intended 
to  apply  to  a  commercial  business,  even  though  the  capital  used  should  be 
small  in  amount,  and  the  definition  of  a  personal-service  corporation  in 
section  200  of  the  Revenue  Act  of  1918  excludes  any  corporation  50  per 
cent  or  more  of  whose  gross  income  consists  of  gains,  profits,  or  income 
derived  from  trading  as  a  principal. 

Article  71  of  Regulations  No.  41  provides: 

Section  209  *  *  *  applies  primarily  to  occupations,  professions,  trades,  and  businesses 
engaged  principally  in  rendering  personal  service  in  which  the  employment  of  capital  is 
not  necessary  and  the  earnings  of  which  are  to  be  ascribed  primarily  to  the  activities  of 
the  owners. 

While  the  business  of  the  M  Company  is  evidently  commercial  it  is  of  a 
nature,  however,  wherein  salesmanship  largely  governs  the  volume  of 
business,  and  in  this  case  the  two  stockholders  are  actively  engaged  as 
salesmen  for  the  corporation;  and,  while  the  income  of  the  corporation  is 
derived  from  purchase  and  sale,  the  volume  of  business  would  appear  to 
rest  practically  upon  the  individual  efforts  of  the  two  stockholders. 

The  examination  of  a  number  of  returns  of  similar  concerns  indicates 
that  many  of  them  belong  in  section  210  of  the  act  of  October  3,  1917,  and 
section  328  of  the  Revenue  Act  of  1918.  The  data  on  which  a  recommenda- 
tion with  respect  to  assessment  under  sections  210  and  328  might  be  based 
was  not  transmitted  to  the  Advisory  Tax  Board,  but  in  numerous  cases 
where  a  commercial  business  is  dependent  upon  the  personal  efforts  of  the 
stockholders  and  but  a  nominal  capital  is  used,  assessment  has  been  so  made. 

The  Advisory  Tax  Board,  therefore,  recommends  that  the  decision  of 
the  Income  Tax  Unit  declining  to  consider  the  claim  of  the  M  Company 
for  taxation  for  the  year  1917  under  section  209  of  the  act  of  October  3, 
1917.  and  for  the  year  1918  as  a  personal-service  corporation,  be  sustained, 
and  that  the  return  of  the  corporation  be  examined  with  the  view  of  deter- 
mining whether  assessment  should  be  made  under  sections  210  and  328  of 
the  1917  and  1918  Revenue  Acts,  respectively. 
4 


(See  2-20-679;  Section  326,  Article  |841.)    Application  of  section  327, 
Revenue  Act  of  1918,  in  cases  where  good  will  has  been  built  up  by  the 
expenditure  of  large  sums  in  advertising. 
5 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901. 


5-20-722:  A.  R.  R.  19. 

The  firm  of  A  is  engaged  in  the  produce  commission  business,  but  a  'pro- 
portion of  its  income  is  derived  from  buying  produce  outright  and  selling 
it  for  its  own  account.  This  proportion,  however,  is  entirely  problematical 
and  speculative. 

The  Committee  finds  difficulty  in  arriving  at  the  facts  in  this  case  for  the 
reason  that  it  is  apparent  from  the  papers  submitted  that  the  books  of  the 
partnership  are  not  kept  with  precision.  Nevertheless  from  the  balance 
sheets  submitted  by  the  firm  and  from  its  own  statements  it  appears  that  it 
was  in  the  enjoyment  of  a  "substantial  credit"  in  addition  to  the  capital 
invested  by  the  partners.  It  appears  certain  that  the  income  of  the  firm 
was  derived  about  evenly  from  commissions  on  sales  of  produce  belonging 
to  others  and  from  profits  on  sales  of  produce  purchased  for  its  own  account. 

Under  these  circumstances  the  firm  is  not  entitled  to  consideration  under 
Section  209  of  the  Revenue  Act  of  1917. 

Article  73  of  Regulations  41  provides  that — 

Commission  houses  regularly  employing  a  substantial  amount  of  capital,  whether  tc 
lend  to  principals  or  to  carry  goods  on  their  own  account,  are  not  deemed  to  be  agents 
or  brokers  and  are  taxable  under  the  provisions  of  article  16. 

Article  74  of  the  same  regulations  provides  that — 

The  following  will  not  be  construed  as  businesses  having  a  nominal  capital  for  purposes 
of  excess  profits  tax;  (b)  corporations  which,  although  their  capitalization  is  nominal,  employ 
a  substantial  amount  of  capital  in  their  business. 

fcThe  Committee  is  of  the  opinion  that  the  facts,  so  far  as  they  are  known 
or  asserted  by  the  taxpayer,  construed  in  the  light  of  the  regulations  above 
quoted,  clearly  exclude  the  taxpayer  from  whatever  benefit  might  be  derived 
from  the  application  of  section  209  of  the  Revenue  Act  of  1917,  and  therefore 
the  Committee  recommends  that  the  appeal  of  the  taxpayer  for  consideration 
under  such  section  be  denied  and  that  the  action  of  the  Income  Tax  Unit 
in  assessing  tax  under  Section  210  of  the  above  Act  be  approved  and  confirmed 
6 


(See  10-20-783;  Section  311,  Article  783.)  Consideration  of  section  327 
in  connection  with  cases  where  the  median  (section  311(c))  is  used  in  com- 
puting the  war  profits  credit. 


6     (See  17-20-882;  Section  326,  Article  837.)    Application  of  section  210, 
Revenue  Act  of  1917,  and  sections  327  and  328,  Revenue  Act  of  1918,  in 
cases  where  the  principal  asset  of  a  corporation  is  an  invention  of  unknown 
value. 
7 


19-20-927:  O.  1000— A. 

The  provisions  of  section  327(d)  of  the  Revenue  Act  of  19 IS  are  applicable  to 
cases  of  hardship  caused  by  abnormal  conditions  affecting  the  capital  or  income 
of  the  corporation  for  the  prewar  period  or  for  the  taxable  year. 

A  reconsideration  of  Law  Opinion  1000,  in  which  it  is  decided  that  the 
provisions  of  section  327  (d)  of  the  Revenue  Act  of  1918  do  not  apply  where 
hardship  is  caused  by  some  abnormal  condition  affecting  the  capital  or  income 


Supplementary  Bulletin  Rulings 


Sec.  327.    Art.  901.—  5. 


of  the  prewar  period  of  the  corporation,  has  been  requested.  Section  327(d) 
provides  as  follows: 

(d)  Where  upon  application  by  the  corporation  the  Commissioner  finds  and  so  declare! 
of  record  that  the  tax  if  determined  without  the  benefit  of  this  section  would,  owing  to 
abnormal  conditions  affecting  the  capital  or  income  of  the  corporation}  work  upon  the  corpo- 
ration an  exceptional  nardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  section  328.  This  subdivision  shall  not  apply  to  any  case  (1)  ire 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  because  the  cor- 
poration earned  within  the  taxable  year  a  high  rate  of  profits  upon  a  normal  invested  capital 
nor  (2)  in  which  50  per  cent  or  more  of  the  gross  income  of  the  corporation  for  the  taxable 
year  (computed  under  section  233  of  Title  II)  consist  of  gains,  profits,  commissions,  or 
other  income  derived  on  a  cost-plus  basis  from  a  Government  contract  or  contracts  made 
between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive.  & 

This  subdivision  is  not  in  terms  limited  in  its  application  to  cases  arising 
out  of  abnormal  conditions  affecting  the  capital  or  income  of  the  corporation 
for  the  taxable  year.  The  words  "capital  or  income  of  the  corporation"  are 
general  words  applicable  to  the  income  or  capital  of  any  year  and  can  not 
be  limited  by  construction  unless  there  is  a  clear,  necessary,  and  irresistible 
implication  from  other  parts  of  the  Act  that  such  a  limitation  should  be  made. 
Faw  v.  Marsletter,  3  Cranch,  10,  23;  United  States  v.  Coombs,  12  Peters, 
72,  80.  Furthermore,  in  the  same  subdivision  Congress  has  in  two  instances 
specified  that  the  income  or  profits  referred  to  is  that  of  the  taxable  year, 
although  the  context  made  that  meaning  clear  without  specification.  The 
use  of  such  a  limiting  clause  in  two  instances  and  the  absence  of  it  in  the 
third  instance  indicates  that  the  words  were  there  used  without  limitation* 
Therefore,  unless  there  is  some  clear  and  necessary  inference  from  the  other 
parts  of  the  statute,  it  seems  evident  that  subdivision  (d)  includes  cases 
of  hardship  caused  by  abnormal  conditions  affecting  the  capital  or  income 
for  the  prewar  period. 

The  prewar  data  is  used  in  computing  the  war  profits  credit.  Section 
311  defines  the  war  profits  credit.  It  may  consist  of  (a)  33,000  plus  the 
average  net  income  for  the  prewar  period  with  an  adjustment  for  changes 
in  capital;  or  (b)  $3,000  plus  a  percentage  of  the  invested  capital  for  the 
taxable  year  based  on  the  median  average  established  by  the  prewar  experi- 
ence of  a  general  class  of  trade  or  business.  This  credit  is  used  by  concerns 
having  no  prewar  history;  or  (c)  a  minimum  war  profits  credit  of  $3,000 
plus  10  per  cent  of  the  invested  capital  for  the  taxable  year. 

It  is  suggested  that  because  of  the  minimum  war  profits  credit  provided 
for  in  section  311(b)  in  case  a  corporation  had  no  income  in  the  prewar 
period  or  earned  less  than  10  per  cent  of  its  invested  capital,  it  should  be 
presumed  that  Congress  intended  to  include  in  section  311  all  relief  which 
should  be  granted  because  of  abnormal  conditions  existing  in  the  prewar 
period,  and  that  there  is  a  clear  and  necessary  inference  that  Congress  did 
not  intend  to  grant  further  relief  of  the  same  nature  under  section  327  on 
account  of  the  same  conditions. 

It  should  be  noted,  however,  that  the  relief  granted  in  section  311  and 
that  granted  in  section  327  are  not  of  the  same  nature.  Section  311  estab- 
lishes certain  rules  applicable  to  general  classes  and  which  apply  in  all  cases 
whether  hardship  actually  exists  or  not.  It  gives  relief  to  industries  which 
passed  through  a  period  of  depression  in  the  prewar  years.  It  also  applies 
to  concerns  which  earned  less  than  10  per  cent  in  the  prewar  period,  even 
though  their  tax  is  not  grossly  disproportionate  to  that  of  their  competitors. 
Neither  of  these  cases  would  be  helped  by  section  327. 

Section  327  on  the  other  hand  deals  not  with  general  classes  but  with 
specific  instances  and  grants  relief  in  special  cases  according  to  the  facts  of 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— <5. 


each  case  where,  without  such  relief,  there  would  be  a  hardship  as  compared 
with  representative  concerns  because  of  some  abnormal  condition  affecting 
the  capital  or  income  of  the  corporation.  The  two  sections  are  of  a  different 
nature.  Section  311  would  give  no  relief  to  a  corporation  belonging  to  a  class 
which  normally  earned  20  per  cent  if  that  corporation,  due  to  some  abnormal 
condition  affecting  the  income  of  the  prewar  period,  earned  only  12  per 
cent  during  the  prewar  period.  Such  concerns  do  not  receive  even  partial 
relief  under  section  311.  They  would  receive  relief  under  section  327  if 
that  applies.  Section  311  lays  down  a  number  of  general  rules  applicable 
to  general  classes  which  apply  in  all  cases  without  reference  to  their  effect. 
Section  327  deals  with  specific  cases  and  applies  only  where  the  failure  to 
give  relief  will  cause  hardship.  These  sections  have  different  purposes, 
apply  to  different  classes  of  cases,  and  measure  the  relief  in  a  different  way. 
In  my  opinion,  the  fact  that  they  may  both  affect  the  same  case  does  not 
make  section  311  exclusive  in  that  case. 

It  is  concluded  that  the  fact  that  the  general  rules  established  by  section 
311  will  in  some  cases  grant  partial  relief  against  an  abnormally  low  income 
in  the  prewar  period,  does  not  clearly  and  necessarily  limit  the  application 
of  section  327  to  cases  of  hardship  arising  out  of  abnormal  conditions  affecting 
the  capital  and  income  for  the  taxable  year  only.  No  other  reason  has  been 
suggested  for  limiting  the  literal  interpretation  of  the  general  words  used  in 
section  327(d).  They  should,  therefore,  be  given  their  ordinary  and  natural 
meaning  so  that  section  327(d)  will  apply  to  cases  of  hardship  due  to 
abnormal  conditions  affecting  the  capital  and  income  of  the  prewar  period 
or  of  the  taxable  year. 
* 


20-20-944:  A.  R.  R.  104 

REVENUE  ACT  OF  1917. 
During  its  fiscal  year,  which  ended  May  31,  1911,  (this  corporation 
commenced  the  erection  and  operation  of  a  refinery  wherein  the  crude 
product  manufactured  by  it  could  be  refined  and  made  into  high-grade 
finished  products,  thus  adding  a  new  department  to  its  business  which  had 
theretofore  been  confined  to  purchasing  and  manufacturing  the  raw  material 
into  the  finished  product  as  above  outlined  and  selling  the  residue  of  the 
raw  material. 

The  building  of  this  additional  plant  and  the  experimental  operation  and 
development  of  this  new  line  of  business  extended  over  several  years,  requir- 
ing the  withdrawal  from  its  other  lines  of  business  of  a  large  share  of  the 
corporation's  available  capital,  thus  greatly  curtailing  its  earning  power  and 
reducing  its  profits  for  these  years  in  which  this  experimentation  and  develop- 
ment was  in  progress,  and  requiring,  also,  the  investment  of  a  considerable 
portion  of  its  working  capital,  so  withdrawn  from  its  other  lines  of  industry, 
in  real  estate,  buildings,  machinery,  etc.,  and  necessitating  the  spending 
of  the  remainder  for  supplies  and  accessories  to  the  refinery  business;  and  in 
advertising,  and  in  other  ways  exploiting  the  particular  trade  brands  adopted 
by  this  company  for  its  finished  product. 

It  is  set  forth  in  the  corporation's  brief  that  all  of  the  capital  thus  required 
and  so  employed  was,  for  the  time  being,  unproductive;  but  that  it  was  of 
necessity  included  on  its  books  of  account  and  in  its  annual  statements  as  a 
part  of  its  invested  capital;  that  it  not  only  earned  nothing  and  thereby 
'.reduced  the  percentage  of  profit  for  the  business  as  a  whole;  but  for  practically 

Supplementary  bulletin  Rulings. 


Sec.  327.    Art.  901.— 7. 


allfof  the  time  designated  as  the  "prewar  period, "  this  development  and 
these  expenses  resulted  in  an  actual  loss  in  its  refinery  business. 

I  In  support  of  this  contention  the  corporation  submits 'a  statement  from 
which  it  appears  that  its  earnings  on  the  capital  actually  invested  in  its 
business,  exclusive  of  the  refinery,  during  the  prewar  period,  were  at  the 
rate  of  11.1  per  cent  of  the  capital  so  invested,  and  in  addition  it  submits  a 
statement  of  the  annual  earnings  of  its  business  as  a  whole  from  June  1, 
1898,  to  May  31,  1918,  which  statement  follows: 

Percentage  of  Earnings  to  Investment. 


Year  ended  May  31: 

1899  

1900  

1901  

1902  

1903  


Per  cent. 

Year  en( 

27.5 

1909 

24.8 

1910 

1911 

61.9 

1912 

48.7 

1913 

21.7 

1914 

22.2 

1915 

,  23.2 

1916 

21.9 

1917 

,  19.6 

Per  cent. 
.  40.6 
.  16.4 
...3.5 
.  16.8 
.  1.2 
.  13.0 
.  11.6 
.  1.4 
.  44.5 


1904  

1905  

1906  

1907  

1908  

From  this  statement  it  appears  that  during  the  period  to  and  inclusive 
of  the  year  1910  the  earnings  never  fell  below  16.4  per  cent  on  its  invested 
capital  (except  in  the  year  1901,  when  there  was  a  loss)  and  ran  as  high  as 
61.9  per  cent  in  1902,  the  average  for  the  12  years  being  26.1  per  cent. 

In  computing  the  tax  of  this  taxpayer  for  the  year  1917,  the  Income  Tax 
Unit  applied  the  provisions  of  sections  203  and  205  of  the  Revenue  Act  of 
1917  and  established  comparisons  with  corporations  with  capital  between 
31,000,000  and  31,500,000  which  were  engaged  in  a  similar  line  of  business. 
In  this  classification  were  found  only  three  corporations  beside  the  taxpayer, 
and  the  earnings  of  these  were  about  7  per  cent  of  their  invested  capital. 
From  this  comparison  by  the  Unit  the  taxpayer  appeals  on  the  ground  that 
the  corporations  selected  are  not  representative  so  far  as  its  business  is 
concerned,  for  the  reason  that  none  of  them  engages  in  all  the  different 
lines  of  activities  which  comprise  the  business  of  the  taxpayer,  and  also  on 
the  ground  that  is  own  average  earnings  of  26.1  per  cent  over  a  period  of 
12  years  prior  to  the  prewar  period  and  44.5  per  cent  for  its  taxable  year 
1917  are  more  truly  an  indication  of  its  earning  power  than  can  justly  and 
equitably  be  arrived  at  by  the  use  of  the  comparatives  selected  by  the  Unit. 

Section  203  of  the  Revenue  Act  of  1917  provides: 

That  for  the  purpose  of  this  title  the  deduction  shall  be  as  follows,  except  as  otherwise 
in  this  title  provided: 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1)  an  amount  equal  to  the  same 
percentage  of  the  invested  capital  for  the  taxable  year  which  the  average  amount  of  the 
annual  net  income  of  the  trade  or  business  during  the  prewar  period  was  of  the  invested 
capital  for  the  prewar  period  (but  not  less  than  seven  or  more  than  nine  per  centum  of 
the  invested  capital  for  the  taxable  year).    *    *  *. 

Section  JJ205!  provides: 

(a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint,  finds  *  *  *  (2)  that 
during  the  prewar  period  the  percentage,  which  the  net  income  was  of  the  invested  capital, 
was  low  as  compared  with  the  percentage,  which  the  net  income  during  such  period  of 
representative  corporations,  *  *  *  engaged  in  a  like  or  similar  trade  or  business,  was  of 
their  invested  capital,  then  the  deduction  shall  be  the  sum  of  (1)  an  amount  equal  to  the 
•ame  percentage  of  its  invested  capital  for  the  taxable  year  which  the  average  deduction 
(determined  in  the  same  manner  as  provided  in  section  two  hundred  and  three,  without 
including  the  $3,000  or  £6,000  therein  referred  to)  for  such  year  of  representative  cor- 
porations *  *  *  engaged  in  a  like  or  similar  trade  or  business  is  of  their  average  invested 
capital  for  such  year  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000    *    *  *. 

In  the  enactment  of  these  two  sections  of  the  law  Congress  assumed  that 
the  business  of  the  three  years  immediately  preceding  the  outbreak  of  the 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 8. 


war  on  August  1,  1914,  would,  in  general,  afford  a  reliable  measure  of  the 
average  normal  business  of  the  corporation;  but  in  the  instant  case,  the  appli- 
cation of  section  203  appears  to  work  an  injustice  because  this  period  (referred 
to  in  the  law  as  the  "prewar  period")  was,  for  this  taxpayer,  rendered  ab- 
normal and  not  a  true  measure  of  its  normal  average  business,  by  reason  of 
the  fact  that  it  was  in  this  very  period  that  it  undertook  the  development 
of  its  business  of  refining  in  addition  to  the  business  theretofore  conducted 
by  it. 

For  the  alternative  consideration  of  this  case  under  section  205,  the 
Committee  requested  the  Unit  to  furnish  statistics  covering  a  broader  field 
than  that  represented  by  the  three  comparatives  previously  used,  in  view  of 
the  taxpayer's  protest  that  these  are  not  truly  representative  for  the  reason 
that,  so  far  as  it  knows,  it  is  the  only  corporation  of  this  character  which 
engages  in  the  purchase  of  raw  material  direct  and  disposes  of  such  material 
after  the  portion  used  for  the  finished  product  has  been  separated  therefrom. 

From  the  statistics  presented  by  the  Unit  in  compliance  with  this  re- 
quest, and  which  include  249  corporations  capitalized  at  from  310,000  to 
?10,000,000  it  appears  that  103  of  them  had  prewar  earnings  of  7  per  cent, 
and  124  had  prewar  earnings  between  8.80  per  cent  and  8.99  per  cent — 
the  average  for  the  entire  249  corporations  being  8.1  per  cent. 

The  Committee  is  of  the  opinion  that,  under  the  circumstances,  this 
broader  field  presents  a  truer  basis  of  comparison  than  do  the  three  com- 
panies whose  capital  is  in  the  class  with  that  of  the  taxpayer  but  whose 
business,  according  to  the  taxpayer,  is  much  more  limited  in  its  scope. 

In  consideration  of  these  facts  and  of  the  fact  of  this  company's  high 
rate  of  earnings  prior  to  the  year  1911  when  it  began  the  installation  and 
development  of  the  new  branch  of  its  business  and  that  in  the  prewar  period 
its  earnings,  exclusive  of  the  loss  on  its  capital  invested  in  its  refinery  business 
then  being  developed,  were  11.1  per  cent,  and  of  the  fact  that  in  the  taxable 
year  1917  itself  this  company's  earnings  were  44.5  per  cent  of  its  invested 
capital,  the  Committee  is  of  the  opinion  that  this  taxpayer,  for  the  year  1917, 
is  entitled  to  further  relief  than  that  heretofore  granted  to  it  by  the  Income 
Tax  Unit,  and  that  its  deduction  under  sections  203  and  205  of  the  Revenue 
Act  of  1917  should  be  computed  at  8.1  per  cent  of  its  invested  capital. 
9 


20-20-945:  A.  R.  R.  110. 
REVENUE  ACT  OF  1917. 
Recommended  in  re  appeal  of  N  Company,  that  its  application  for  assessment 
under  the  provisions  of  section  210  of  the  Revenue  Act  of  1917  be  granted. 

The  Committee  on  Appeals  and  Review  has  had  under  consideration  the 
appeal  of  the  N  Company  from  a  decision  of  the  Income  Tax  Unit  denying 
its  application  for  assessment  under  the  provisions  of  section  210  of  the 
Revenue  Act  of  1917  and  assessing  the  tax  for  that  year  under  the  provisions 

It  appears  that  this  corporation  was  organized  in  1909,  with  an  authorized 
capital  stock  of  10*  dollars  fully  paid  in,  of  which  4*  dollars  is  represented 
by  cash  and  6x  dollars  is  represented  by  working  models  turned  in  by  A, 
president  of  the  corporation,  for  which  he  received  stock  in  that  amount. 
The  corporation  since  the  date  of  its  organization  has  been  engaged  in  the 
manufacture  of  machinery,  and  on  January  1,  1917,  it  had  an  accumulated 
surplus  of  85*  dollars  and  capital  stock  of  10*  dollars  or  a  total  capital  as 
shown  on  the  return  for  1917  of  95*  dollars. 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-  /. 


The  corporation  has  concurred  in  all  the  adjustments  made  by  the 
Income  Tax  Unit  with  the  exception  of  two.  It  protests  against  the  failure 
on  the  part  of  the  Unit  to  allow  the  addition  to  invested  capital  of  an  item 
of  30*  dollars  originally  claimed  on  account  of  the  patents,  good  will,  and 
other  assets,  partly  tangible  and  partly  intangible,  which  were  put  into  the 
corporation  by  one  of  its  officers  and  stockholders  at  the  time  of  organiza- 
tion and  also  against  the  disallowance  of  15*  dollars  as  a  deduction  in  com- 
puting net  income  for  1917  set  up  as  a  reserve  for  cost  of  construction,  etc. 
This  reserve  was  set  up  on  the  books  of  the  corporation  to  take  care  of  the 
expense  of  installing  machinery  sold  during  the  year  1917,  but  which  had 
not  been  installed  at  the  close  of  the  year.  It  subsequently  developed  that 
the  amount  actually  paid  out  for  installation  in  1918  and  charged  to  this 
reserve  was  lOx  dollars.  This  amount  has  been  allowed  to  the  corporation 
in  office  letter  dated  March  1,  1920.  In  this  letter  the  corporation's  applica- 
tion for  assessment  under  the  provisions  of  section  209  was  denied  and  it 
was  notified  that  its  correct  tax  liability  for  1917  was  2ix  dollars. 

It  is  urged  that  it  would  have  been  impossible  for  the  present  company 
to  have  succeeded  on  the  small  capitalization  had  it  not  been  for  the  other 
property,  both  tangible  and  intangible,  put  into  the  business  by  A  for 
which  he  received  no  stock.  It  is  further  urged  that  at  the  time  the  corpora- 
tion was  organized  no  consideration  was  given  to  the  fact  that  the  property 
turned  in  by  A,  including  the  patterns  valued  at  6x  dollars  had  a  value 
largely  in  excess  of  the  par  value  of  the  stock  issued  to  A  for  the  patterns 
alone.  In  this  way  it  is  urged  that  the  corporation  is  penalized  ^through  not 
having  issued  capital  stock  for  the  full  valuation  of  both  the  tangibles  and 
intangibles  paid  into  the  corporation  by  A. 

The  record  further  discloses  that  at  the  time  of  dissolution  of  the  M 
Company,  the  patterns  which  were  given  to  A  by  that  company  and  later 
turned  over  by  him  to  the  N  Company  were  carried  on  the  books  of  the  M 
Company  at  a  valuation  of  16x  dollars,  and  that  the  patents  were  also  carried 
on  its  books  at  a  valuation  of  45*  dollars.  No  part  of  the  good  will  or  the 
patents  is  represented  in  the  capitalization  of  the  present  company.  This, 
it  is  urged,  entitles  the  corporation  to  consideration  under  the  provisions 
of  section  210  of  the  Revenue  Act  of  1917. 

The  excess  profits  tax  of  this  corporation  has  been  determined  under 
the  provisions  of  sections  201  and  207  at  48.58  per  cent  of  the  net  income, 
The  corporation,  through  its  accountants,  contends  that  this  is  due  to  the 
conservative  accounting  and  low  capitalization  at  the  time  of  organization, 
and  also  to  the  fact  that  the  corporation  is  denied  in  the  computation  of 
its  invested  capital  amounts,  such  as  patents,  good  will,  etc.,  actually  paid 
into  the  business  and  actually  earning  income  for  the  corporation  on  which 
it  is  paying  a  tax. 

The  Committee  has  carefully  considered  the  points  at  issue  and  the  argu- 
ments made  by  the  representatives  of  the  corporation,  and  has  reached  the 
conclusion  that  this  corporation  has  capital  which  is  earning  income  but 
which  can  not  be  used  in  the  computation  of  its  invested  capital  for  1917 
under  the  statutory  provisions  of  section  207. 

Article  52  of  Regulations  41  provides  among  other  things,  that  a  claim 
for  assessment  under  the  provisions  of  section  210  may  arise  in  cases  where — 
long-established  business  concerns,  which  by  reason  of  ultra-conservative  accounting  or 
the  form  and  manner  of  their  organization  taouldy  through  the  operation  of  section  207, 
be  placed  at  a  serious  disadvantage  in  competing'with  representative  concerns  in  a  like  or 
similar  trade  or  business. 

In  view  of  the  foregoing   the  Committee  feels  that  this  corporation 

Supplementary  Bulletin  Killings. 


Sec.  327.    Art.  901.-10. 


should  be  taxed  under  the  provisions  of  section  210  and  recommends  that 
the  decision  of  the  Income  Tax  Unit  be  reversed  for  the  reasons  stated  above. 
10 


31-20-1111:  A.  R.  R.  209. 
REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  an  appeal  by  the  M  Company 
against  the  constructive  capital  determined  by  the  Income  Tax  Unit  under 
the  provisions  of  section  210,  Revenue  Act  of  1917,  claiming  that  the  con- 
structive capital  determined  by  reference  to  representative  concerns  is  not 
only  less  by  a  considerable  amount  than  the  invested  capital  claimed,  but 
is  also  less  than  the  invested  capital  which  can  be  definitely  established  to 
the  satisfaction  of  the  Bureau. 

The  questions  at  issue  as  stated  by  the  Unit  in  the  letter  of  tranmission 
are: 

1.  Has  the  department  a  right  to  fix  the  tax  under  section  210  without 
application  by  and  against  the  wishes  of  the  taxpayer? 

2.  Is  the  constructive  capital  determined  by  the  Income  Tax  Unit 
unconscionable  to  the  taxpayer? 

Section  210  reads  in  part  as  follows: 

That  if  the  Secretary  of  the  Treasury  is  unable  in  any  case  satisfactorily  to'determine 
the  invested  capital,  the  amount  of  the  deduction  shall  be  *    *  *. 

Upon  a  strict  and  literal  interpretation  of  this  language  the  Secretary 

of  the  Treasury  is  unquestionably  authorized  to  determine  that  the  invested 
capital  can  not  be  satisfactorily  determined,  and  therefore  that  the  assess- 
ment should  be  determined  as  further  provided  in  the  section. 

However,  it  is  manifestly  the  purpose  and  intent  of  the  excess-profits 
tax  law  that  the  taxpayer  shall  have  a  deduction  upon  all  the  statutory 
invested  capital  which  he  can  establish,  and  if  in  any  case  the  taxpayer  is 
able  to  show  to  the  satisfaction  of  the  Unit  that  he  has  statutory  invested 
capital  which  can  be  recognized  in  excess  of  constructive  capital  found  upon 
application  of  section  210  the  taxpayer  should  not  be  deprived  of  his  right 
to  have  assessment  based  upon  such  statutory  capital  as  he  can  show, 
because  there  are  other  items  of  invested  capital  which  can  not  be  determined 
and  which   he  taxpayer  concedes  the  right  of  the  Unit  to  ignore. 

11 


45-20-1288:  A.  R.  M.  89. 

The  provision  of  section  327  of  the  Revenue  Act  of  1918,  denying  the 
benefits  of  that  section  to  corporations  50  per  cent  or  more  of  the  gross 
income  of  which  consists  of  income  derived  from  Government  contracts  on  a 
cost-plus  basis  was,  in  the  opinion  of  the  Committee,  designed  to  cover  cases 
in  which  the  contractor  was  assured  of  a  profit  irrespective  of  cost,  and  in 
which  the  Government  rather  than  the  contractor  assumed  the  risk  of  loss. 

Where  the  unfinished  work  of  a  contractor  was  commandeered  by  the 
Government  and  it  was  agreed  that  he  should  receive  the  same  compensation 
as  he  would  have  received  under  the  private  contract,  the  fact  that  he  was 
subsequently  compensated  on  a  cost-plus  basis  after  the  work  was  completed 


Supplementary  Bulletin  Rulings 


Sec.  327.    Art.  901.— 11. 


does  not,  in  the  opinion  of  the  Committee,  operate  to  change  the  legal; 

situation  in  this  respect. 

12 


47-20-1318:  A.  R.  R.  326, 
If  a  corporation  has  paid  no  salaries  to  its  ofhcers^  during  1917,  or  has 
paid  them  salaries  which  were  unusually  low  in  comparison  with  the  salaries 
paid  to  the  officers  of  competing  concerns,  and  thereby  created  an  abnormal 
condition  which  seriously  affected  its  net  income  and  tax  liability,  it  may 
properly  receive  consideration  with  the  view  to  determining  its  excess  profits 
tax  liability  for  1917  in  accordance  with  section  210  of  the  Revenue  Act  of 
1917. 
13 


48-20-1330:  A.  R.  R.  327.. 
Where  a  corporation  operated  its  business  with  a  large  amount  of  borrowed 
capital  during  the  year  1918,  and  thereby  created  an  abnormal  condition 
which  rendered  its  invested  capital  disproportionate  to  its  net  income  as, 
evidenced  by  comparison  with  representative  corporations  engaged  in  au 
similar  or  like  trade  or  business,  and  where  it  received  insurance  on  the  life 
of  one  of  its  officers  which  created  an  abnormal  condition  with  respect  to- 
its  net  income,  it  may  properly  receive  consideration  with  the  view  of  deter- 
mining its  excess  profits  tax  liability  for  1918,  in  accordance  with  sections 
327  and  328  of  the  Revenue  Act  of  1918. 
14 


50-20-1348:  A.  R.  R.  332. 

REVENUE  ACT  OF  1917. 
Held,  that  taxpayer  having  clearly  shown  substantial  intangible  value  in  a 
business  with  small  capitalization,  the  success  of  which  business  is  not  dependent 
on  personal  services  except  as  may  be  normally  required  for  the  management  of  any 
property  of  any  company,  is  entitled  to  relief  under  section  210  of  the  Revenue  Act 
of  1917,  and  may  not  establish  his  invested  capital  for  excess  profits  tax  in  any  other 
manner. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Conr- 
pany  and  the  N  Company  from  the  findings  of  the  Income  Tax  Unit  in  making 
assessment  of  taxes  for  the  year  1917,  under  section  210  of  the  Revenue 
Act  of  1917. 

In  the  year  19 1-,  A,  B3  and  C  acquired  the  business  of  the  M  Company 
and  the  N  Company  for  cash.  In  each  instance  the  business  of  the  company 
was  acquired  and  not  capital  stock.  Each  company  so  acquired  was  immedi- 
ately incorporated  with  a  capital  stock  of  x  dollars  and  A,  B,  and  C,  the- 
stockholders,  turned  over  to  D  and  E,  without  other  consideration  from  these 
two  gentlemen  than  their  promise  and  agreement  to  conduct  the  business 
and  do  the  advertising,  one-half  in  the  aggregate  of  the  said  stock.  In  the 
year  191-  D  and  E  sold  half  of  their  interest  to  outside  parties  and  received 
therefor  in  cash  64*  dollars  per  share. 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 12. 


Both  companies  were  engaged  in  the  manufacture  and  sale  of  a  certain 
commodity  and  in  the  year  1917,  because  of  nominal  capital  outstanding, 
filed  income  tax  returns  as  personal  service  corporations.  The  audit  in  the 
Income  Tax  Unit  brought  the  two  corporations  under  consolidation  and  the 
tax  was  finally  assessed  under  the  provisions  of  section  210,  resulting  in  a 
percentage  of  3y  per  cent  of  excess  profits  tax  to  net  income  as  compared  with 
a  percentage  of  5y  per  cent,  had  assessment  been  made  under  section  201. 
The  taxpayer  submits  that  the  assessment  under  section  210  imposes  too 
high  a  tax  and  that  in  lieu  thereof  the  tax  should  be  based  on  certain  other 
methods  of  determining  invested  capital,  which  it  does  not  seem  necessary 
to  now  refer  to  in  detail. 

The  business  of  each  company  is  that  of  an  ordinary  commercial  enter- 
prise. The  value  of  the  capital  stock  of  each  is  conclusively  shown  by  the 
original  purchases  by  A,  B,  and  C,  and  by  cash  sales  between  individuals 
in  the  year  19 1-,  one  year  after  incorporation.  This  value  is  not  supported 
by  personal  services  but  by  the  earning  power  (potential  or  otherwise)  of 
certain  property  not  i  effected  in  the  capitalization.  This  certain  property 
is  an  intangible  asset  which  was  actually  paid  into  the  company  at  incorpo- 
ration but  at  a  nominal  value.  Had  the  certain  property  been  a  tangible 
asset,  article  63,  of  Regulations  41,  could  be  invoked  for  claiming  a  paid-in 
surplus. 

Article  74?  of  Regulations  41,  defines  "nominal  capital"  and  prescribes 
^certain  tests,  one  of  which  is  that  corporations  having  a  nominal  capitaliza- 
tion but  employing  a  substantial  amount  of  capital  in  their  business  will  not 
be  construed  as  businesses  having  a  nominal  capital  for  purposes  of  excess 
profits  tax.  There  is  no  provision  in  the  law  or  regulations  which  gives  effect 
to  the  inclusion  of  a  substantial  amount  of  capital  of  intangible  nature 
when  specifically  paid  in  at  nominal  value.  Manifestly,  however,  under  such 
conditions  the  taxpayer  is  entitled  to  relief  under  the  equitable  provisions 
of  the  statute. 

Accordingly  the  Committee  recommends  that  action  of  the  Income  Tax 
Unit  in  assessing  the  tax  under  section  210  of  the  Act  be  sustained.  In 
further  support  of  this  recommendation  attention  is  directed  to  Advisory 
Tax  Board  Memorandum  9  [which  reads  as  follows:  A  claim  for  assessment  as 
a;personal  service  corporation  should  be  denied  where  the  income  of  the  cor- 
poration is  derived  entirely  as  the  result  of  the  ownership  of  certain  property 
(such  as  patents)  and  is  in  no  sense  derived  from  the  personal  activities  of 
any  of  the  stockholders.]. 
16 


51-20-1359:  A.  R.  R.  338. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M.  Com- 
pany against  the  action  of  the  Income  Tax  Unit  in  denying  assessment  under 
the  provisions  of  sections  327  and  328  for  1918. 

Two  grounds  are  urged  as  a  basis  for  relief  under  the  provisions  of  sections 
327  and  328:  (1)  That  the  taxpayer's  invested  capital  can  not  be  satisfac- 
torily determined,  and  (2)  that  owing  to  abnormal  conditions  affecting  the 
capital  and  income  of  the  corporation,  denial  would  work  upon  the  corpora- 
tion an  exceptional  hardship  evidenced  by  gross  disproportion  of  the  tax 
computed  without  the  benefit  of  section  327  and  the  tax  computed  with 
reference  to  the  representative  corporation-  specified  in  section  328. 

The  grounds  for  the  claim  that  the  invested  capital  can  not  be  determined 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 13. 


are  (a)  that  the  company  has  a  water  power  site  in  connection  with  its  fac- 
tory which  is  included  in  the  value  of  land  and  buildings  but  the  value  of 
which  is  not  susceptible  of  accurate  ascertainment,  and  (b)  that  consider- 
able sums  of  money  were  expended  prior  to  1918,  in  building  up  its  trade-mark 
and  good  will. 

With  respect  to  the  value  of  the  water  power  site  it  was  brought  out  at 
the  hearing  that  the  original  cost  of  such  water-power  site  and  development 
is  included  in  the  cost  of  the  land  and  buildings  and  consequently  is  reflected 
in.invested  capital  to  the  extent  permitted  under  the  law. 

With  respect  to  the  building  up  of  good  will,  no  evidence  whatever  is 
presented  as  to  expenditures  in  this  connection.  The  Committee  therefore 
finds  no  ground  on  which  to  hold  that  the  capital  can  not  be  satisfactorily 
determined. 

The  abnormal  conditions  affecting  capital  and  income  are  apparently 
that  in  the  prewar  period  and  prior  to  1915,  the  business  was  not  efficiently 
operated  but  that  since  1915,  under  new  management  a  reorganization  has 
been  effected  with  results  in  much  greater  profit  to  the  company.  The 
Committee  is  unable  to  agree  that  inefficient  management,  constitutes  such 
an  abnormal  condition  as  to  be  recognizable  under  the  statute. 

It  is  therefore  recommended  that  the  action  of  the  Unit  in  denying  assess- 
ment in  accordance  with  sections  327  and  328  be  affirmed. 
16 


3-21-1394:  A.R.R.  363. 

REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, a  corporation,  from  the  action  of  the  Income  Tax  Unit  in  denying 
assessment  of  taxes  for  the  calendar  year  1917,  upon  the  basis  of  section  209 
of  the  Revenue  Act  of  1917.  The  company  was  incorporated  in  June,  1911, 
taking  over  the  assets  and  liabilities  of  the  business  of  A  who,  with  B,  was 
engaged  in  developing  certain  patents.  The  assets  so  taken  over  consisted 
of  x  dollars.  Against  these  assets  there  were  accounts  payable  aggregating 
%x  dollars,  which  were  assumed.  For  these  net  assets  capital  stock,  in  the 
amount  of  2x  dollars  was  issued,  of  which  49  per  cent  was  issued  to  B,  50 
per  cent  to  A,  and  1  per  cent  to  D.  No  additional  funds  were  paid  in  to  the 
corporation  since  it  appears  that  A  possessed  no  funds  which  he  could  invest, 
and  B,  having  no  faith  in  the  practical  ability  of  the  patents,  refused  further 
financial  assistance.  The  patents  did  not  prove  a  success  but,  as  a  result  of 
several  years  of  experimental  and  development  work,  the  corporation  secured 
various  patents  for  automobile  bumpers,  the  use  of  which  it  sold  to  the  N 
Company,  which  operated  the  same  on  a  license,  paying  the  M  Company 
royalties  on  the  number  of  bumpers  manufactured.  The  only  income  received 
by  the  corporation  in  the  year  1917,  was  from  these  royalties  and  it  amounted 
to  4#  dollars.  The  only  disbursements  made  were  salaries,  attorney's  fees, 
commissions,  and  certain  miscellaneous  expenses,  the  aggregate  amount 
being  2}/2X  dollars,  leaving  net  income  for  the  year  1917  of  V/ix  dollars. 

I  It  is  contended  by  the  taxpayer  that  the  income  of  the  corporation  con- 
sisted of  royalties  received  from  these  bumper  patents  developed  by  the 
ingenuity  and  personal  services  of  the  stockholders,  and  the  continuance 
of  these  personal  services  on  the  part  of  such  stockholders  is  absolutely 
essential  if  the  income  of  the  corporation  is  to  continue.  The  license  agree- 
ment with  the  N  Company  provides  that  A  shall  devote  his  time  to  demon- 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 14. 


strating,  improving,  and  developing  the  bumper  patents,  and  it  is  claimed 
that  the  result  of  these  efforts  is  being  reflected  in  the  royalties  received  by 
the  corporation. 

The  books  of  the  company  are  kept  on  a  cash  receipts  and  disbursements 
basis,  and  at  January  1,  1917,  the  cash  book  and  stock  record  book  show 
an  asset  of  cash,  \x  dollars,  liabilities,  attorney's  fees,  and  capital  stock, 
2\x  dollars. 

Article  71  of  Regulations  41  provides: 

Section  209  *  *^  *  applies  primarily  to  occupations,  professions,  trades,  and 
businesses  engaged  principally  in  rendering  personal  service,  in  which  the  employment 
of  capital  is  not  necessary,  and  the  earnings  of  which  are  to  be  ascribed  primarily  to  the 
activities  of  the  owners. 

Advisory  Tax  Board  Memorandum  9,  published  in  Bulletin  1-19,  covers 
a  case  quite  analogous  to  this.   The  memorandum  reads,  in  part,  as  follows: 

The  facts  are  briefly  that  the  net  income  of  9%x  dollars  was  derived  entirely  from 
license  fees  paid  by  users  of  machines  embodying  the  company's  patents.  This  is  the 
only  source  of  revenue  that  the  company  now  has  or  ever  has  had.  Certain  patents  on  a 
new  form  of  mold  for  vulcanizing  tires  were  assigned  to  the  company.  It  originally  in- 
tended to  manufacture  the  tires,  but  later  determined  to  grant  licenses  under  the  patents, 
and  has  never  engaged  in  manufacturing.    The  paid-in  capital  is  x  dollars. 

Inasmuch  as  the  income  of  the  corporation  is  derived  entirely  as  a  result  of  the  owner- 
ship of  certain  property,  namely,  patents;  and  is  in  no  sense  derived  from  the  personal 
activities  of  any  of  the  stockholders,  other  than  such  activities  as  are  normally  required 
for  the  management  of  any  property  of  any  company,  it  is  recommended  that  the  claim 
under  section  209  should  be  denied. 

In  the  instant  case  capital  (patents)  is  employed  in  the  business.  Royalties 
are  the  result  of  the  employment  of  this  capital,  and  it  can  not  be  denied 
that  the  volume  of  the  business  rests  practically  upon  the  individual  efforts 
of  the  stockholders  of  this  corporation.   This  is  true,  more  or  less,  in  every 

corporation,  and  the  distinction  must  be  noted  between  personal  service 
and  commercial  service. 

The  company  has  paid-in  capital,  but  its  true  invested  capita]  for  the 
taxable  year  can  not  be  actually  determined.  At  any  rate,  the  income 
for  the  taxable  year  justifies  the  consideration  given  the  case  under  section 
210  of  the  Revenue  Act  by  the  Income  Tax  Unit. 

The  Committee  accordingly  recommends  that  the  action  of  the  Income 
Tax  Unit  in  denying  assessment  of  taxes  against  this  corporation  under 
section  209  of  the  Revenue  Act  be  sustained,  and  that  its  action  in  assessing 
the  tax  under  section  210  be  approved. 
17 


3-21-1395:  A.R.R.  364. 

REVENUE  ACT  OF  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  M  Company, 
a  partnership,  from  a  decision  of  the  Income  Tax  Unit  rejecting  the  excess 
profits  tax  return  filed  for  the  calendar  year  ended  December  31,  1917,  under 
the  provisions  of  section  209,  and  making  an  assessment  of  excess  profits 
tax  under  the  provisions  of  section  210. 

It  appears  from  the  records  in  the  case  that  the  partnership  was  formed 
in  190-  for  the  purpose  of  conducting  a  wholesale  merchandise  brokerage 
business,  the  firm  acting  as  local  brokers  of  foreign  principals  in  negotiating 
sales  on  a  commission  basis.  In  addition  to  its  regular  business  of  negotiating 
sales  of  merchandise  as  brokers  the  firm  purchased  merchandise  from  time 
to  time  in  "pooled  cars"  which  it  sold  at  a  profit.   The  sales  negotiated  on  a 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-15. 


commission  basis  during  the  year  1917  aggregated  100*  dollars  and  yielded 
gross  brokerage  charges  of  x  dollars,  while  the  amount  of  merchandise 
purchased  aggregated  22x  dollars,  which  merchandise  was  sold  at  a  gross 
profit  of  \x  dollars.  A,  in  an  affidavit,  states  that  it  is  his  opinion  that 
the  expense  of  conducting  the  business  could  be  fairly  apportioned  so 
as  to  charge  brokerage  sales  with  40  per  cent  and  merchandise  sales  with 
60  per  cent  of  the  total  expense.  An  allocation  of  expense  on  the  basis 
stated  by  A  to  each  line  of  business  conducted  shows  that  approximately 
30  per  cent  of  the  firm's  net  income  was  derived  from  sales  of  merchandise. 
In  reply  to  inquiries  made  by  the  Income  Tax  Unit  the  firm  stated  that  it 
had  no  branches  during  the  year  1917,  employed  only  one  salesman,  and 
that  it  was  not  responsible  in  any  event  for  losses  in  shipments,  bad  debts, 
etc.;  that  such  responsibility  rested  upon  its  foreign  principals  or  was  a 
matter  of  adjustment  between  foreign  sellers  and  local  buyers,  and  that  it 
did  not  either  directly  or  indirectly  make  loans  or  advances  to  customers, 
but  did  extend  short-time  credits  on  merchandise. 

The  partnership  in  rendering  its  returns  for  the  year  1917  computed 
excess  profits  tax  under  the  provisions  of  section  209  based  on  the  contention 
that  its  principal  net  income  was  due  primarily  to  the  personal  activities 
of  the  two  partners.  The  balance  sheets  accompanying  the  returns  show, 
as  of  January  1  and  December  31,  1917,  moneys  borrowed  in  considerable 
amounts  and  accounts  receivable  and  payable,  indicating  the  use  of  capital 
more  than  nominal  in  amount  of  the  business. 

Because  of  the  volume  of  business  transacted  by  the  partnership  during 
the  year  1917  through  direct  buying  and  selling  of  merchandise,  and  the 
numerous  accounts  receivable  and  payable  shown  on  the  firm's  balance  sheets, 
both  at  the  beginning  and  close  of  the  taxable  year,  the  Unit  denied  assessment 
under  section  209,  but,  holding  that  a  statutory  invested  capital  of  %x 
dollars  was  negligible  in  comparison  with  the  volume  of  business  transacted 
and  seriously  disproportionate  to  the  invested  capital  of  other  taxpayers 
doing  a  like  or  similar  business,  assessed  tax  under  the  provisions  of  section 
210,  basing  such  assessment  upon  comparative  data  compiled  in  the  Unit. 
The  comparatives  used  appear  to  be  representative  and  give  a  tax  which  is 
both  fair  to  the  Government  and  to  the  taxpayer. 

In  view  of  the  foregoing,  the  Committee  is  of  the  opinion  that  classi- 
fication under  the  provisions  of  section  209  was  properly  denied,  and  that  the 
assessment  of  the  tax  as  made  by  the  Unit  under  the  provisions  of  section 
210  should  be  sustained. 
18 


(See  9-21-1486;  Section  326,  Article  871.)    Foreign  affiliated  corporations, 

19 


15-21-1568:  A.  R.  R.  459. 
REVENUE  ACT  OF  1917. 
Recommended,  where  respective  values  of  mixed  aggregates  of  tangible  and 
intangible  properties  paid  in  for  stocks  and  bonds  can  not  be  satisfactorily  de- 
termined, that  the  tax  should  be"  assessed  under  the  provisions  of  section  210  of 
the  Revenue  Act  of  1917  and  articles  18,  24,  and  52,  Regulations  41. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, a  corporation,  from  the  action  of  the  Income  Tax  Unit  in  assessing 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 16. 


taxes  for  the  year  1917  under  section  210  instead  of  under  section  207  of  the 
Revenue  Act  of  1917. 

In  June,  189-,  the  M  Company  acquired  the  business  of  a  partner- 
ship owning  and  publishing  a  certain  publication.  The  assets  of  the  partner- 
ship consisted  of  cash,  typesetting  plant,  library,  stock  of  bound  volumes, 
office  furniture  and  fixtures,  and  copyrights.  It  is  also  alleged  the  partner- 
ship had  a  valuable  good  will  asset.  The  consideration  received  by  the 
partnership  from  the  corporation  consisted  of  shares  of  capital  stock  (par 
value  20a;  dollars)  and  bonds  amounting  to  7x  dollars. 

The  corporation,  in  filing  its  1917  tax  return,  failed  to  furnish  balance 
sheets  at  the  beginning  and  end  of  the  taxable  year,  explaining  that  the 
business  was  entirely  on  a  cash  basis.  At  the  request  of  the  Income  Tax 
Unit  it  subsequently  constructed  balance  sheets  as  of  December  31,  1916, 
and  as  of  December  31,  1917.  The  constructed  balance  sheet  as  of  De- 
cember 31,  1916,  reads  as  follows: 

Assets. 

Paid  for  copyright  and  good  will  at  organization  of  company  in  189-,  half  assigned 


to  each — 

Copyright   13*  dollars 

Good  will   13*  dollars 

Typesetting  plant   If*  dollars 

Library  and  stock   \x  dollars 

Furniture  and  fixtures   \x  dollars 

Cash   2\x  dollars 


30f*  dollars 

Liabilities. 

Capital  stock   20*  dollars 

Bonds  issued  in  189-  and  subsequently  paid  off   7x  dollars 

Increase  in  cash  and  other  tangible  assets  since  189-   3fx  dollars 


30£*  dollars 

The  bonds  aggregating  7x  dollars,  which  were  issued,  were  retired  within 
a  period  of  12  years  subsequent  to  date  of  issue  out  of  the  earnings  of  the 
corporation.  It  is,  therefore,  contended  that  retirement  of  this  liability 
gives  the  corporation  a  surplus  in  amount  equivalent  to  the  bond  issue  of 
7x  dollars.  It  is  also  claimed,  as  stated  in  the  above  balance  sheet,  that  the 
increase  in  cash  and  other  tangible  assets  since  189-  gives  the  corporation 
additional  surplus  of  3f*  dollars.  It  is  further  contended  that  in  addition 
to  this  surplus  aggregating  lO^x  dollars  the  corporation  is  entitled  to  good 
will  of  Ax  dollars,  based  on  20  per  cent  of  the  capital  stock  of  the  corporation 
outstanding  as  at  March  3,  1917. 

A  dividend  adjustment  of  $x  dollars  has  been  made  by  taxpayer,  leaving 
13-f*  dollars,  which  the  taxpayer  claims  as  statutory  invested  capital,  as 
against  the  invested  capital  of  \\x  dollars  constructed  by  the  Income  Tax 
Unit  under  the  provisions  of  section  210.  This  is  a  case  where  stocks  and 
bonds  were  issued  by  the  corporation  prior  to  March  3,  1917,  for  a  mixed 
aggregate  of — 

(a)  Tangible  property, 

(b)  Copyrights,  and 

(c)  Good  will  subject  to  the  determination  of  values  as  prescribed  in 

article  (59)  (1)  (2)  of  Regulations  41. 
The  claim  is  made  that  tangible  assets  at  acquisition  (189-)  could  not 
have  been  less  than  x  dollars.  There  is  no  evidence  to  support  this  assertion. 
The  corresponding  tangible  assets  (eliminating  cash)  at  January  1,  1917, 
are  shown  at  values  aggregating  2\x  dollars  and  the  difference  of  \\x 
dollars  is  unexplained.    This  increase  may  or  may  not  represent  appreciation. 


Supplementary  Bulletin  Rulings. 


.81™. 


Sec.  327.    Art.  901.— 17. 


Assuming  the  surplus  has  been  increased  7x  dollars  by  the  retirement  of 
a  liability  through  income,  no  evidence  has  been  submitted  to  show  that  the 
value  of  the  copyrights  and  good  will  alleged  to  have  been  acquired  in  189- 
was  in  excess  of  this  amount  of  borrowed  capital.  On  this  basis  of  valuation 
no  cash  value  could  be  placed  on  the  capital  stock  issue  of  20x  dollars.  Only 
an  assertion  is  made  that — 

The  tangible  assets  consisting  of  cash,  typesetting  plant,  library,  stock  of  bound  volumes, 
and  office  furniture  and  fixtures  had  a  value  of  x  dollars,  thus  making  the  value  of  the 
copyrights  and  good  will  26x  dollars  (20*  dollars  attributable  to  stock  and  6x  dollars 
attributable  to  bonds). 

and  that — 

While  it  is  true  that  the  copyrights  of  the  publication  have  always  been  and  will  always 
continue  to  be  the  most  valuable  asset  possessed  by  the  M  Company,  and  in  view  of  the 
fact  that  at  this  late  date  we  can  not  satisfactorily  state  its  actual  worth  at  the  time  of 
its  acquisition,  we  have  therefore  waived  our  privilege  of  having  any  portion  of  this  26* 
dollars  treated  as  copyright  and  consent  to  have  the  entire  sum  treated  as  good  will. 

Article  59  (1)  provides  that: 

In  the  absence  of  satisfactory  evidence  to  the  contrary,  it  will  be  presumed  in  the  case 
of  a  corporation,  that  its  stock  was  issued  for  the  following  purposes  in  the  order  named: 
(a)  Good  will  or  other  intangible  property, 

b)  Patents  and  copyrights,  and 

c)  Tangible  property. 

This  article  (2)  further  provides  that: 

Upon  the  production  by  the  taxpayer  of  evidence  satisfactory  to  the  Commissioner  of 
Internal  Revenue  as  to  the  actual  values  at  the  date  of  acquisition  of  (a)  the  tangible 
property,  and  (b)  the  patents  and  copyrights,  the  sum  of  these  two  items  may  be  applied 
against  the  total  par  value  of  the  securities  issued  and  the  remainder  will  then  be  deemed  to 
represent  the  par  value  of  the  securities  issued  for  the  good  will  or  other  intangible  property. 
(3)  Cases  where  mixed  aggregates  of  tangible  and  intangible  property  have  been  paid  in 
for  stock  and  bonds  shall,  if  the  Secretary  of  the  Treasury  is  unable  to  determine  satis- 
factorily the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment, 
be  treated  as  coming  under  articles  18  and  24  and  the  tax  shall  be  assessed  accordingly. 

Articles  18  and  24  are  regulations  applicable  to  section  210  of  the  Revenue 
Act  and  from  what  has  been  stated  it  is  clearly  apparent  that  the  respective 
values  of  the  tangible  and  intangible  properties  acquired  by  the  corporation 
in  189-  can  not  be  satisfactorily  determined.  The  Committee  accordingly 
recommends  that  the  action  of  the  Income  Tax  Unit,  in  disposing  of  this 
case  under  section  210  of  the  Revenue  Act  of  1917,  be  sustained. 
20 


17-21-1588:  A.  R.  R.  464 

REVENUE  ACT  OF  1917. 
Recommended,  in  the  appeal  of  the  M  Company  that  the  action  of  the  Income 
Tax  Unit  in  denying  assessment  under  section  209  of  the  Revenue  Act  of  1917 
be  sustained,  and  that  the  said  corporation's  excess  profits  tax  liability  be  de- 
termined under  the  provisions  of  section  210  of  that  statute. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Income  Tax  Unit  in  denying  assessment  under 
section  209  of  the  Revenue  Act  of  1917  and  assessing  excess  profits  tax  under 
the  provisions  of  section  201  for  the  fiscal  year  ended  March  31,  1917. 

It  appears  from  the  records  in  the  case  that  during  the  taxable  year  in 
question  the  four  officers  of  the  company  owned  all  of  the  stock  and  gave 
their  entire  time  and  attention  to  the  business,  that  of  obtaining  exclusive 
selling  contracts  covering  lots,  tracts,  and  other  parcels  of  land  and  the 
disposal  of  such  lands  on  a  commission  basis.  It  does  not  appear  that  the 
company  made  any  purchases  and  sales  of  lands  on  its  own  account  nor  that 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 18. 


it  assisted  in  the  financing  of  real  estate  operations,  except  that  in  a  very  few- 
cases  where  the  purchasers  of  lands  were  unable  to  continue  their  payments 
under  the  terms  of  their  contracts  and  the  company  would  lose  its  commission 
should  such  contracts  lapse,  and  in  one  or  two  instances  where  such  losses 
and  lapse  of  contracts  would  result  in  a  serious  hardship  to  the  purchaser  of 
the  lands  the  company  assumed  such  contracts  and  resold  them. 

It  further  appears  that  the  company  was  organized  with  an  authorized 
capital  of  $3,000,  of  which  amount  $2,000  was  subscribed  for  and  paid  in 
prior  to  January  1,  1917,  and  that  no  addition  to  capital  has  been  made  since 
the  organization  from  any  source  other  than  from  earned  income,  funds, 
however,  being  borrowed  occasionally  to  meet  payrolls  and  expenses  at  times 
when  the  collection  of  commissions  earned  has  been  deferred.  The  taxpayer 
contends  that  it  requires  and  employs  no  more  than  a  nominal  capital  in  the 
conduct  of  its  business,  that  the  character  of  its  business  is  such  that  capital 
is  not  required,  and  that  its  success  is  due  to  and  its  net  income  is  derived 
solely  from  the  activities  of  its  officers,  all  of  whom  are  stockholders.  To 
this  contention  the  Committee  does  not  agree  for  the  reason  that  it  is  shown 
that  in  the  conduct  of  its  business  the  corporation  does  require  capital  and 
that  its  income  is  derived  in  a  large  part  from  services  rendered  by  others. 

Under  its  usual  form  of  contract  the  company,  in  taking  over  a  sub- 
division for  sale,  obligates  itself  to  bear  all  selling  expenses  such  as  newspaper 
advertisements,  printed  matter,  signs,  and  the  cost  of  erecting  branch  offices 
on  the  property  offered  for  sale.  During  the  year  in  question  advertising, 
auto  expenses,  miscellaneous  expenses,  and  supplies,  as  shown  by  taxpayer's 
original  return,  amounted  to  Ax  dollars.  It  also  obligates  itself  to  render 
various  forms  of  service,  such  as  planning  and  supervising  the  placing  of 
properties  on  the  market,  the  making  of  sales  and  collections,  and  the  accounting 
for  and  remitting  of  collections  made,  to  furnish  surety  bonds  for  the  faithful 
performance  of  its  contracts,  to  supervise  the  entire  work  of  preparing  the  prop- 
erty for  market,  including  the  negotiation  and  letting  of  contracts,  subject  to 
the  approval  of  the  owners  of  the  land,  with  all  engineers  and  contractors,  and 
the  laying  out  and  construction  of  improvements  by  such  engineers  and 
contractors,  to  negotiate  with  all  public  and  private  corporations  and  public 
authorities  for  permission  to  construct  and  connect  improvements  in  con- 
formity with  private  rights  and  public  law,  and  to  prepare  and  publish 
such  advertising  matter  as  is  deemed  necessary.  These  duties  are  dis- 
charged in  part  by  the  four  officers  of  the  corporation  and  in  a  large  part  by 
its  superintendents  and  salesmen  working  on  a  commission  basis  and  its 
salaried  office  force.  The  compensation  of  the  corporation  for  the  rendition 
of  such  services  is  received  in  the  form  of  commissions  based  on  the  amount  of 
sales  made  by  its  salesmen,  an  average  of  twenty-five  being  employed,  each 
of  whom  receives  a  stated  percentage  of  the  commissions  received  on  the 
sales  made  by  him.  The  superintendents  who  direct  and  supervise  the 
activities  of  the  salesmen  and  perform  other  duties  receive  a  commission  of 
2  per  cent  on  all  sales  made.  The  balance  of  the  commissions  received 
accrues  to  the  corporation. 

In  view  of  these  facts  it  is  the  opinion  of  the  Committee  that  the  business 
of  the  corporation  is  such  as  that  ordinarily  requiring  the  use  of  capital,  and 
inasmuch  as  a  substantial  part  of  the  income  received  is  derived  from  services 
rendered  by  the  company's  superintendents  and  salesmen,  the  Committee 
holds  that  the  Unit  was  correct  in  denying  assessment  under  section  209 
and  recommends  that  such  action  be  sustained. 

The  corporation  in  preparing  its  return  for  the. fiscal  year  1917,  reported 
on  the  accrual  basis,  showed  a  net  income  of  35*  dollars,  and  computed  the 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-  19. 


excess  profits  tax  thereon  under  the  provisions  of  section  209.  It  is  shown 
that  the  corporation  is  entitled,  under  its  usual  form  of  contract,  to  a  com- 
mission of  from  10  per  cent  to  30  per  cent  on  the  gross  sales  price  of  each 
property  sold,  that  it  usually  deducts  5  per  cent  of  such  sales  price  from  the 
initial  or  "down"  payment,  in  part  payment  of  its  commission,  and  a  portion 
of  each  subsequent  installment  payment  until  its  entire  commission  is  satisfied. 
Under  this  plan  of  realizing  its  commissions  the  company  must  wait  from  two 
and  one-half  to  five  years,  and  in  some  instances  a  much  longer  period,  before  it 
finally  receives  payment  in  full  for  its  services.  It  is  stated  that  the  company 
attempted  to  make  a  return  on  the  actual  receipt  and  disbursement  basis 
but  was  forced  by  the  Collector  of  its  district  to  report  on  the  accrual  basis. 

It  is  the  opinion  of  the  Committee  that  the  alleged  action  of  the  collector 
in  refusing  to  permit  the  corporation  to  report  on  an  actual  receipt  and  dis- 
bursement basis  was  not  justified.  It  is  shown  that  the  responsibilities  and 
duties  of  the  company  under  its  usual  form  of  contract  with  the  owners  of 
the  properties  to  be  sold,  in  consideration  for  the  assumption  of  which 
responsibilities  and  the  discharge  of  such  duties,  commissions  are  to  be 
received,  are  not  fully  discharged  and  the  commissions  fully  earned  until  the 
last  installment  payment  is  received  from  the  purchaser,  and  therefore  to 
report  the  full  amount  of  commissions  called  for  under  sales  contracts  as 
income  for  the  year  during  which  such  contracts  are  entered  into  is  to  report 
as  income  for  that  year  commissions  which  have  not  been  fully  earned  and 
which,  in  case  of  default,  will  never  be  received. 

The  revenue  agent  reported  a  net  income  of  14*  dollars,  computed  on  the 
actual  receipt  and  disbursement  basis,  and  an  invested  capital  of  10*  dollars 
for  the  fiscal  year  1917,  and  stated  that  the  company  and  its  accountant 
agreed  with  this  report  except  in  respect  to  his  decision  that  the  company 
was  not  entitled  to  classification  as  a  personal  service  corporation. 

After  a  careful  consideration  of  all  the  facts  presented  the  Committee  is 
of  the  opinion  that  the  M  Company  is  not  entitled,  for  the  fiscal  year  1917, 
to  assessment  under  the  provisions  of  section  209  as  a  personal  service  corpo- 
ration or  one  employing  only  a  nominal  capital.  In  connection  with  this  case, 
however,  the  Unit  has  prepared  a  comparative  data  sheet,  using  a  number  of 
comparatives. 

From  these  comparatives  it  is  apparent  that  the  amount  of  statutory 
invested  capital  allowable  to  the  M  Company  for  the  taxable  year  1917,  is 
smail  when  compared  with  that  of  other  taxpayers  engaged  in  a  like  or  similar 
business,  which  fact  would,  through  the  operation  of  section  207,  place  that 
corporation  at  a  serious  disadvantage  in  comparison  with  such  other  tax- 
payers, and  that  the  percentage  of  excess  profits  tax  to  net  income  assessed 
against  it  for  the  said  taxable  year  is  grossly  disproportionate  to  such  per- 
centage in  the  case  of  other  corporations  engaged  in  a  like  or  similar  business. 
In  comparison  with  the  amount  of  business  done  the  appellant  does  not  appear 
to  have  a  normal  amount  of  capital  invested  in  its  business,  owing  to  which 
fact  it  found  itself  obliged  from  time  to  time  to  borrow  funds  with  which  to 
meet  its  pay  rolls  and  current  expenses.  It  does  not  appear  to  have  enjoyed 
any  particular  advantage  over  other  corporations  doing  a  similar  business. 

Article  52  of  Regulations  41  provides,  in  part,  as  follows: 

Section  210  provides  for  exceptional  cases  in  which  the  invested  capital  can  not  be 
satisfactorily  determined.  In  such  cases  the  taxpayer  may  submit  to  the  Commissioner  of 
Internal  Revenue  evidence  in  support  of  a  claim  for  assessment  under  the  provisions  of 
section  210.  (See  articles  18  and  24.)  Such  exceptional  cases  may  consist,  among  others, 
of  the  following: 

***** 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 20. 


(3)  Long-established  business  concerns  which  by  reason  of  ultraconservative  accounting 
or  the  form  and  manner  of  their  organization  would,  through  the  operation  of  section  207, 
be  placed  at  a  serious  disadvantage  in  competing  with  representative  concerns  in  a  like  or 
similar  trade  or  business. 

Section  327(d)  of  the  Revenue  Act  of  1918  provides,  in  part,  that — 

Where  upon  application  by  the  corporation  the  Commissioner  finds  and  so  declares 
of  record  that  the  tax  if  determined  without  benefit  of  this  section  would,  owing  to  abnormal 
conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the  corporation 
an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed  without 
benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative  corpora- 
tions specified  in  section  328. 

While  the  above-quoted  provision  of  the  Revenue  Act  of  1918  will  not  be 
applied  in  any  case  in  which  the  tax  computed  without  its  benefit  is  high 
merely  because  the  corporation  earned  in  the  taxable  year  a  high  rate  of 
profits  upon  a  normal  invested  capital,  in  the  opinion  of  the  Committee  it 
confirms  the  interpretation  which  has  been  placed  upon  section  210  of  the 
Revenue  Act  of  1917  and  articles  18,  24,  and  52  of  Regulations  41. 

It  having  been  shown  that  the  M  Company  employed  more  than  a  nominal 
amount  of  capital  in  its  business  during  the  taxable  year  ended  March  31, 
1917,  and  derived  a  considerable  part  of  its  net  income  from  services  rendered 
by  others  than  its  four  stockholders,  the  Committee  recommends  that  the 
action  of  the  Unit  in  denying  assessment  under  the  provisions  of  section  209 
be  sustained.  And  further,  in  view  of  the  fact  that  the  said  corporation  was 
ultraconservative  in  its  capitalization  and  the  further  fact  that  the  amount  of 
capital  it  had  invested  in  the  business  was  insufficient  at  times  to  meet  the 
needs  of  that  business  and  was  less  than  normal  as  compared  with  the  amount 
of  business  transacted  and  as  compared  with  the  amount  of  capital  employed 
by  other  concerns  doing  a  similar  business,  the  Committee  recommends  that 
the  case  be  returned  to  the  Unit  for  adjustment  and  assessment  of  excess 
profits  tax  under  the  provisions  of  section  210  on  the  basis  of  the  average 
percentages  shown  on  the  data  sheet  submitted  to  the  Committee. 

21 


21-21-1645:  A.  R.  R.  500. 

REVENUE  ACT  OF  1917. 
Recommended,  in  the  appeal  of  the  M  Company  that  the  action  of  the  Income 
Tax  Unit  be  reversed  and  that  assessment  of  the  excess  profits  tax  of  this  corpora- 
tion be  made  in  accordance  with  the  provisions  of  section  209  of  the  Revenue  Act. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  assessment  of  taxes  for  the 
year  1917  under  section  209  of  the  Revenue  Act  of  1917. 

The  M  Company  was  organized  in  March,  1917,  for  the  purpose  of  doing 
a  brokerage  business  in  metals.  The  company  has  paid-in  capital  stock  of 
%x  dollars  issued  in  three  shares.  Its  gross  sales  for  the  year  1917  amounted 
to  \S3x  dollars  and  its  cost  of  goods  sold  amounted  to  165a:  dollars.  The 
only  expense  of  the  corporation  consisted  of  a  salary  of  lg.v  dollars  paid  to 
its  president,  who  owns  one  share  of  stock,  and  }/§x  dollars  paid  for 
incorporation  and  legal  services.  Its  net  income  was,  accordingly,  16* 
dollars  and  its  balance  sheet  at  the  close  of  December  31,  1917,  shows  capital 
stock,  \^x  dollars,  surplus,  16*  dollars,  this  latter  amount  representing  the 
net  income  of  the  year  as  stated.  The  treasurer  and  the  secretary  of  the 
corporation  are  its  other  stockholders. 

The  Income  Tax  Unit  denied  the  right  of  assessment  under  section  209, 
and  because  of  the  relation  of  the  corporation's  income  to  its  invested  capital 
the  tax  was  assessed  under  the  provisions  of  section  210  of  the  Revenue  Act. 
Supplementarv  Bulletin  Rulings. 


Sec.  327.    Art.  901.-21. 


This  assessment  resulted  in  an  excess  profits  tax  of  y  per  cent  of  net  income, 
resulting  in  an  additional  tax  of  4x  dollars. 

The  taxpayer  under  his  contention  for  assessment  under  section  209 
claims  that  99  per  cent  of  the  business  of  the  company  consisted  of  brokerage 
collected  on  sales  made  to  the  N  Company,  that  the  arrangement  with  this 
company  was  that  it  should  be  furnished  with  a  certain  product  in  quantities 
such  as  they  might  order,  and  that  the  broker  should  be  paid  a  certain  broker- 
age over  and  above  the  mill  price,  the  mill  price  being  known  to  the  purchasers. 
The  taxpayer  made  the  collections  from  the  N  Company  and  paid  to  the  mills 
the  price  of  the  product  purchased.  It  is  stated  that  it  was  so  arranged  that 
capital  was  not  necessary  in  these  transactions,  since  the  N  Company  was 
required  to  pay  for  the  product  furnished  it  prior  to  the  date  on  which  the 
M  Company  was  required  to  pay  the  mills.  The  corporation  accordingly 
rests  its  case  on  its  claim  that  it  transacts  grokerage  business  only,  that  it  has 
a  mere  nominal  capital  of  dollars,  and  that  during  the  year  of  1917  it  was 
the  personal  equation  of  its  president  that  made  it  possible  for  this  corporation 
to  conduct  any  business  whatever. 

The  Income  Tax  Unit  contends  that  the  corporation  was  trading  as  a 
principal,  making  contracts  direct  with  the  purchaser  and  assuming  respon- 
sibility thereunder,  and  that  accordingly  its  tax  can  not  be  adjusted  under 
section  209  of  the  Revenue  Act. 

Article  73  of  Regulations  41,  revised,  provides  that; 

Agents  and  brokers  requiring  and  using  no  capital  or  merely  a  nominal  capital  in  theii 
business  are  taxable  under  article  15,  but  commission  houses  regularly  employing  a  sub- 
stantial amount  of  capital,  whether  to  lend  to  principals  or  to  carry  goods  on  their  own 
account,  are  not  deemed  to  be  agents  or  brokers  and  are  taxable  under  the  provisions  oi 
article  16. 

In  the  instant  case  it  is  clearly  apparent  that  only  nominal  capital  was 
employed  in  the  business.  No  advances  were  made  to  the  manufacturer, 
and  collections  from  the  purchaser  only  passed  through  the  hands  of  the 
brokers.  The  goods  were  shipped  direct  to  the  purchaser,  and  therefore  the 
officers  of  the  corporation  required  no  offices  and  no  clerical  assistance.  It 
was  merely  a  matter  of  securing  orders  for  the  product  and  placing  these 
orders  with  the  manufacturer,  It  was  admitted  in  conference  that  under  the 
contracts  with  the  purchaser  the  M  Company  might  be  sued,  but  in  view  of 
the  recognition  by  the  purchaser  that  the  M  Company  was  merely  acting  in  a 
brokerage  capacity,  without  capital  to  insure  recovery  under  any  breach  of 
contract,  the  real  responsibility  rested  in  the  manufacturer,  and  that  in  event 
there  should  be  any  right  of  action  it  would  rest  against  the  purchaser.  In 
view  of  this,  the  representatives  of  the  taxpayer  contend  that  for  the  purpose 
of  arriving  at  a  proper  tax  the  Department  should  look  beyond  corporate 
form  if  it  is  considered  the  corporation  was  trading  as  a  principal. 

The  Committee  recognizes  that  is  is  only  on  the  theory  that  the  M 
Company  might  be  held  responsible  under  its  contracts  that  assessment  under 
section  209  can  be  denied.  It  considers,  however,  that  the  nominal  capital 
of  the  corporation  clearly  establishes  the  fact  that  it  was  not  contemplated 
it  should  be  held  responsible  except  by  way  of  personal  service  to  both  the 
buyer  and  seller,  and  accordingly  the  corporation  clearly  comes  within  the 
contemplation  of  the  section  of  the  Act  itself  which  provides  that  a  corporation 
doing  business  on  a  nominal  capital,  or  without  any  capital,  should  be 
assessed  for  excess  profits  tax  at  the  rate  of  8  per  cent  on  its  net  income. 

The  Committee  accordingly  recommends,  in  the  instant  case,  that  the 
action  of  the  Income  Tax  Unit  be  reversed  and  that  assessment  of  the  excess 
profits  tax  of  this  corporation  be  made  in  accordance  with  the  provisions  of 
section  209  of  the  Revenue  Act. 
• 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art,  901.— 22. 


22-21-1668:  A.  R.  R.  518. 

REVENUE  ACTS  OF  1917  AND  1918. 
Recommended,  that  the  action  of  the  Income  Tax  Unit  in  denying  the  M 
Company  special  consideration  under  section  210  of  the  Revenue  Act  of  1917,  and 
under  sections  327  and  328  of  the  Revenue  Act  of  1918,  be  sustained. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  asse  sment  under  section 
210  of  the  Revenue  Act  of  1917,  and  sections  327  and  328  of  the  Revenue  Act 
of  1918. 

The  M  Company  was  organized  and  incorporated  in  1906  with  capital 
stock  issued  and  outstanding  amounting  to  8x  dollars.  Of  this  amount  x 
dollars  was  i  sued  to  A  and  charged  to  good  will  on  the  books  of  the  corpora- 
tion. This  contribution  was  in  recognition  of  the  experience  of  A  and  his 
success  as  a  salesman  in  the  territory  in  which  the  corporation  was  located. 

The  corporation  filed  its  returns  for  the  fiscal  year  ended  May  31  1918, 
computing  income  and  profits  taxes  under  the  provisions  of  section  201.  and 
under  the  provisions  of  section  328  at  the  rate  of  50  per  cent  of  its  net  income. 
The  corporation  subsequently  filed  a  claim  for  consideration  under  the  pro- 
visions of  section  210  of  the  Revenue  Act  of  1917,  and  sections  327  and  328 
of  the  Revenue  Act  of  1918,  based  on  the  following  reasons: 

1.  That  the  case  of  the  taxpayer  is  an  exceptional  one,  and  its  invested 
capital  can  not  be  used  as  the  basis  for  assessing  the  excess  profits  tax  without 
resulting  in  an  unduly  burdensome  tax,  because  the  invested  capital  is 
seriously  disproportionate  to  the  taxable  income. 

2.  That  the  income  of  the  taxable  year  represents  the  fruit  of  activities 
antedating  the  taxable  year. 

3.  That  the  operation  of  section  207  would  place  it  at  a  disadvantage  in 
competing  with  representative  concerns. 

The  books  of  the  corporation  have  been  examined  by  a  revenue  agent  and 
its  invested  capital  has  been  clearly  established.  This  is  recognized  by  the 
taxpayer  who  relies,  under  the  above  contentions,  principally  on  the  value 
of  the  services  of  A  who  is  president  of  the  corporation  and  who,  in  1917, 
acquired  practically  all  of  the  stock  of  the  corporation,  and  upon  the  fact 
that  in  1916  a  very  satisfactory  contract  was  made  from  which  it  is  claimed 
about  one-fourth  of  the  income  of  the  company  is  derived.  This  contract, 
in  effect,  provided  for  the  purchase  of  a  finished  product  to  be  made  from  steel 
at  a  price  which  would  yield  a  reasonable  profit  over  all  costs,  whatever  they 
might  prove  to  be.  It  is  stated,  however,  that  the  purchase  amounted  to  more 
than  a  normal  year's  supply  and  that  delivery  has  not  yet  been  completed. 
The  taxpayer  was  accordingly  able  to  supply  its  customers  at  the  high  pre- 
vailing prices  in  the  year  1918  and  to  realize  the  correspondingly  large 
profits.  Its  net  income  for  the  fiscal  year  ended  May  31,  1917,  was  Sx 
dollars  and  its  net  income  for  the  fiscal  year  ended  May  31,  1918,  was  22* 
dollars.  The  invested  capital  at  the  beginning  of  the  fiscal  year  ended 
May  31,  1917,  was  30*  dollars  and  at  the  beginning  of  the  fiscal  year  ended 
May  31,  1918,  was  38*  dollars,  while  at  the  close  of  the  fiscal  year  ended 
May  31,  1918,  it  was  61*  dollars,  which  reflected  the  undistributed  income  of 
22*  dollars  for  that  year.  The  income  and  profits  taxes  assessed  by  the  Unit 
for  the  fiscal  year  ended  May  31,  1918,  amounted  to  12*  dollars,  which 
amount,  deducted  from  the  income  for  the  year,  leaves  a  balance  of  10* 
dollars  for  dividends,  or  approximately  27  per  cent  of  the  invested  capital 
at  the  beginning  of  the  taxable  year. 

It  is  contended  that  A's  personality  is  a  most  important  factor  in  the 
business  and  that  possibly  consideration  should  be  given  for  assessment  of 


Supplementary  Bulletin  Rulings 


Sec.  327.    Art.  901.— 23. 


the  company's  taxes  under  section  209  of  the  Revenue  Act  of  1917,  but  this 
section  of  the  law  manifestly  is  not  applicable  because  of  the  amount  of  capital 
employed  in  the  business  nor  can  A's  services  be  considered  as  creating  an 
abnormal  condition  because  he  had  been  constantly  employed  in  the  develop- 
ment of  the  business  since  its  incorporation  and  the  value  of  his  services  was 
recognized  in  the  first  instance  by  the  corporation's  contribution  of  x  dollars 
of  its  stock  which  it  charged  to  good  will. 

Section  210  of  the  Revenue  Act  of  1917  provides  for  an  equitable  adjust- 
ment of  the  tax  when  the  invested  capital  of  a  corporation  can  not  be  satis- 
factorily determined,  and  in  giving  recognition  to  the  intent  of  this  section, 
article  52  of  Regulations  41  provides  that  when  invested  capital  is  seriously 
disproportionate  to  taxable  income  because  of  the  realization  in  one  year  of 
the  earnings  of  capital  unproductively  invested  through  a  period  of  years  or 
of  the  fruits  of  activities  antedating  the  taxable  year,  adjustment  of  the  tax 
may  be  made  under  the  provisions  of  section  210. 

The  Committee,  after  careful  consideration  of  all  the  facts  in  the  instant 
case,  finds  that  the  business  of  the  M  Company  gradually  and  satisfactorily 
developed  from  the  date  of  its  incorporation  with  consistent  earnings  in  the 
years  1916,  1917,  and  1918  available  for  dividends.  The  capital  stock  of  the 
company  was  only  8*  dollars  and  yet  at  the  beginning  of  the  year  1916  the 
company  has  a  surplus  of  22*  dollars. 

In  the  final  analysis  of  the  case  it  would  seem  that  taxpayer's  contention 
substantially  rests  only  on  an  abnormal  condition  brought  about  by  a  business 
contract  which  resulted  in  material  advantage  to  the  taxpayer  by  virtue  of 
circumstances  which,  in  the  year  1918,  were  reflected  in  very  high  prices  for 
the  product  of  this  corporation.  It  is  not  thought  this  is  such  an  abnormal 
condition  as  might  be  contemplated  under  article  52  of  Regulations  41  or 
under  section  327  of  the  Revenue  Act  of  1918.  The  contract  was  a  simple 
business  proposition  which,  like  many  other  contracts,  resulted  in  large  profits 
during  the  year  1918  and  it  might  be  said  in  corresponding  losses  in  subse- 
quent years.  The  right  to  claim  such  losses  is  recognized  in  certain  sections 
of  the  Revenue  Act  of  1918  and  in  the  regulations  promulgated  thereunder. 
Surely,  under  such  conditions,  there  is  no  good  reason  why  a  corporation 
receiving  large  profits  in  the  year  1918  in  the  ordinary  conduct  of  its  business 
should  not  pay  taxes  under  the  prescribed  provisions  of  the  law  without  special 
consideration  under  the  equitable  provisions  of  the  law.  The  ratio  of  excess 
profits  tax,  in  the  instant  case,  is  something  in  excess  of  50  per  cent,  but  there 
are  other  corporations  having  similar  favorable  contracts  made  in  the  ordinary 
course  of  business  which  paid  tax  at  equally  as  high  a  rate. 

The  Committee  accordingly  recommends  that  the  action  of  the  Income 
Tax  Unit  in  denying  the  M  Company  special  consideration  under  section  210 
of  the  Revenue  Act  of  1917  and  under  sections  327  and  328  of  the  Revenue 
Act  of  1918,  be  sustained. 
23 


(Sep  27-21-1720;  Section  326,  Article  853.)  Assets  in  custody  of  trustees 
in  liquidation. 

14 


SupplementarylBulletin  Rulings. 


Sec.  327*.    Art.  901.— 24. 


28-21-1730:  A.  R.  R.  538 

Recommended,  that  the  M  Company,  formerly  the  N  Company,  be  granted 
the  benefit  of  assessment  of  excess  profits  and  war  profits  taxes  for  the  year  1918 
under  the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of  1918;  that  in 
the  preparation  of  a  comparative  data  sheet  particular  care  be  used  to  select  only 
such  comparatives  as  are  fair  both  to  the  Government  and  to  the  taxpayer;  and 
that  the  Unit  be  sustained  in  restoring  to  the  closing  inventory  for  that  year  the 
fruit  on  hand  in  warehouses  and  in  transit  to  market  but  not  marketed  and  sold 
as  of  December  31,  1918. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, formerly  the  N  Company,  from  the  action  of  the  Income  Tax  Unit 
in  computing  the  amount  of  war  profits  credit  to  be  allowed  the  corporation 
for  the  year  1918  under  the  provisions  of  section  311(a)  of  the  Revenue  Act 
of  1918  and  including  in  the  closing  inventory  for  that  year  the  amount  of 
fruit  on  hand  in  warehouses  ready  for  sale. 

It  appears  from  the  records  in  the  case  that  in  190-  the  N  Company  was 
organized  for  the  purpose  of  taking  over  certain  real  estate  and  securities 
owned  by  a  partnership  and  the  business  of  growing,  shipping,  and  selling 
fruits  conducted  by  it,  and  incorporated  with  an  authorized  capital  stock 
issue  of  10a*  dollars  which  was  in  1917  reduced  to  lY^x  dollars.  The  name  of 
the  corporation  was  changed  in  1920  to  the  M  Company  and  the  revenue 
agent  who  investigated  the  corporation's  income  tax  returns  for  the,,  years 
1909-1919  reported: 

The  corporation  was  formed  to  take  over  certain  real  estate  and  securities  which  were 
owned  by  A  and  B  and  operated  by  them  as  a  partnership.  In  setting  up  these  accounts 
on  the  books  at  the  time  of  incorporation  the  officers  placed  very  conservative  figures 
upon  the  buildings  and  equipment  and  upon  the  real  estate.  *  *  *  An  examination  of 
the  books  of  the  partnership  for  1905  and  the  first  half  of  1906  would  indicate  that  the 
value  of  the  good  will  based  upon  the  earnings  for  this  period  would  be  at  least  three  times 
the  total  value  claimed. 

which  statement  indicates  that  the  corporation  was  very  conservatively 
capitalized. 

During  the  prewar  period  1911-1913  the  corporation's  orchard  was"divided 
into  two  units,  one  containing  about  r  acres  in  full  bearing,  the  other  about 
r  acres  of  young  trees  which  had  not  yet  reached  the  productive  state  and  in 
which  a  considerable  portion  of  the  corporation's  invested  capital  was  tied 
up,  due  to  which  fact  the  corporation  claims  its  net  income  for  the  prewar- 
period  was  abnormally  low  as  compared  with  its  invested  capital  for  the  same 
period. 

In  an  affidavit  executed  by  A  under  date  of  October  13,  1920,  it  is  stated 
that  the  average  yearly  yield  of  the  old  orchard  for  the  prewar  period  was 
38y  boxes  of  fruit,  that  the  profit  per  year  for  that  period  was  %  dollars  plus 
per  box.  For  the  year  1918  the  yield  of  both  old  and  new  orchards  was 
72y  boxes  and  the  average  net  profit  per  box  %  dollars  plus. 

The  corporation  contends  that  inasmuch  as  the  figures  submitted  show 
conclusively  that  it  did  not  benefit  by  war  profits  it  should  not  be  called  upon 
to  pay  a  war  profits  tax,  and  submits  the  following: 

In  order  to  arrive  at  a  fair  basis  for  assessing  the  war  profits  tax  we  suggest  that  the 
war  profits  credit  be  computed  as  follows: 

To  the  average  net  income  for  the  prewar  period  add  a  figure  representing  the  increased 
production  in  1918  in  boxes  over  the  prewar  period  times  the  average  profit  per  box  in  the 
prewar  period.  In  other  words,  if  during  the  prewar  period  our  orchards  had  been  in  the 
lame  bearing  condition  they  were  in  1918  it  is  reasonable  to  assume  that  they  would  have 
produced  as  much  fruit  as  they  did  in  1918,  or  72y  boxes  a  year  instead  of  an  average  of 
38y  boxes.  Therefore  an  amount  representing  the  increase  in  1918,  namely  34y  boxes, 
times  the  average  prewar  profit  per  box  should  be  added  to  our  average  prewar  profit  in 
determining  the  war  profits  credit. 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 25. 


This  contention  and  suggestion  may  be  dismissed  upon  the  mere  statement 
that  the  net  income  of  a  corporation  need  not  be  derived  solely  from  so-called 
"war  profits,"  that  is,  the  increase  in  normal  profits  by  reason  of  a  greater 
demand  and  higher  prices  due  to  war  conditions,  to  be  subject  to  the  tax 
complained  of,  and  that  there  is  no  provision  in  the  Revenue  Act  of  1918 
which  would  permit  the  allowance  of  a  war  profits  credit  computed  on  the 
basis  suggested  by  the  appellant  corporation.  The  Committee  is,  however, 
of  the  opinion  that  due  to  conservative  capitalization,  the  realization  of  net 
income  in  1918  resulting  from  the  investment  of  capital  which  was  nonincome 
producing  during  the  prewar  period  and  for  a  number  of  years  subsequent 
thereto,  and  the  payment  of  salaries  to  officers  which  were  extremely  low  as 
compared  to  salaries  paid  by  other  concerns  engaged  in  the  same  line  of 
business  of  similar  volume  (one  salary  only  being  paid  to  an  officer  of  the  com- 
pany for  1918),  abnormal  conditions  existed  during  1918  and  that  the  assess- 
ment of  excess  profits  and  war  profits  taxes  for  that  year  under  section  301 
of  the  Revenue  Act  of  1918  will  work  upon  the  corporation  an  exceptional 
hardship  evidenced  by  gross  disproportion  between  the  tax  so  computed  and 
the  tax  assessed  against  representative  corporations.  The  Committee 
therefore  recommends  that,  bearing  these  abnormal  conditions  in  mind,  the 
Unit  carefully  prepare  a  comparative  data  sheet  and  grant  the  corporation 
assessment  under  the  provisions  of  sections  327  and  328  of  the  Revenue 
Act  of  1918. 

With  reference  to  the  question  of  inventory  the  taxpayer  states: 

From  the  time  that  this  corporation  was  first  organized  an  inventory  of  the  fruit  in 
storage  in  the  packing  house  had  been  made  weekly,  principally  for  insurance  purposes, 
and  erroneously  at  the  end  of  every  year  the  estimated  value  of  the  fruit  in  the  packing 
house  and  shipped,  but  not  marketed  and  sold,  was  carried  on  to  the  books,  and  this  policy 
of  carrying  the  fruit  inventory  on  to  the  books  was  continued  until  the  year  1918,  at  which 
time  the  inventory  was  omitted  owing  to  the  fact  that  it  is  our  understanding  that  farmers 
and  farming  corporations  are  required  to  make  their  returns  on  the  basis  of  produce  actually 
marketed  and  sold  during  the  year,  and  it  was  the  intention  of  the  corporation,  as  explained 
to  the  revenue  agent  who  investigated  the  returns,  prior  to  the  commencement  of  his 
examination,  to  file  amended  returns  for  previous  years  eliminating  the  fruit  inventory  and 
adjusting  the  income  so  that  it  would  show  only  the  profits  on  fruit  actually  marketed  and 
sold. 

P  ^The  taxpayer  further  states  various  reasons  which  in  its  opinion  precludes 
an s  exact  determination  of  a  fruit-growing  corporation's  true  net  income 
if  the  fruit  gathered  and  in  warehouse,  together  with  fruit  en  route  to  market 
but  not  sold,  is  included  in  the  inventory. 

!  The  revenue  agent  who  investigated  the  corporation's  books  reported 
that— 

For  1918  the  company  purposely  left  out  of  the  books  ]/$x  dollars  of  fruit  in  packing 
house  on  the  theory  that  it  had  the  right  to  make  a  return  on  the  basis  of  farmer  who  keeps 
no  books  and  report  only  the  income  derived  from  products  actually  marketed  and  sold. 

The  agent  restored  to  the  closing  inventory  for  1918  this  item  of  }4X 
dollars,  which  action  was  approved  by  the  Unit  and  appealed  from  by  the 
taxpayer. 

As  shown  by  the  records  in  the  case  the  corporation,  from  the  time  it  was 
organized  down  to  the  close  of  1918,  kept  books  of  account  and  regularly 
took  inventories  which  were  carried  to  those  books  and  in  which  was  included 
the  fruit  on  hand  in  warehouses  and  in  transit  to  market,  but  not  marketed 
and  sold.  Its  net  income  for  each  year  was  determined  and  its  tax  returns 
rendered  on  this  basis,  and  there  is  nothing  to  show  and  the  taxpayer  does  not 
claim  that  it  ever  applied  for  permission  to  change  from  the  method  regularly 
employed  to  an  actual  receipt  and  disbursement  basis.    The  Committee  is 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.—  26. 


therefore  of  the  opinion  that  the  Unit  should  be  sustained  in  its  refusal  to 
accept  the  1918  tax  return  of  the  M  Company  as  originally  rendered. 

It  was  optional  with  the  taxpayer  whether  it  should  return  for  tax  pur- 
poses on  an  inventory  basis  or  on  the  basis  of  actual  receipts  and  disburse- 
ments. It  adopted  the  first-mentioned  method  and  followed  the  same  for  a 
number  of  years.  An  approved  method  of  reporting  income  for  tax  pur- 
poses once  adopted  should  be  consistently  followed  from  year  to  year,  and 
permission  to  change  from  one  approved  method  to  another  should  not  be 
lightly  granted  and  only  granted  after  a  formal  request  for  permission  to 
change  has  been  received  from  the  taxpayer  and  approved  by  the  Com- 
missioner. While  in  the  instant  case  the  taxpaye  now  claims  that  returns 
rendered  on  a  basis  which  requires  the  inclusion  in  inventories  of  fruit  on 
hand  in  warehouses  and  in  transit  at  the  close  of  a  taxable  year,  bu.  not  mar- 
keted and  sold,  does  not  truly  reflect  its  net  income  for  that  year  it  followed 
such  a  method  of  accounting  and  rendering  of  returns  for  nearly  ten  years 
without  protest.  At  the  close  of  1918  it  realized  that  market  conditions 
Were  such  that  a  return  rendered  on  the  basis  of  actual  receipts  and  disburse- 
ments would,  if  accepted,  show  as  taxable  net  income  an  amount  much  less 
than  would  be  shown  by  a  return  rendered  on  the  basis  formerly  followed, 
and  this  appears  to  be  the  controlling  reason  for  a  desire  to  change;  and,  in  the 
opinion  of  the  Committee,  it  is  such  a  one  as  can  not,  under  the  circumstances, 
be  properly  recognized. 

In  view  of  the  foregoing  the  Committee  recommends  that  the  M  Company, 
formerly  the  N  Company,  be  granted  the  benefit  of  assessment  of  excess 
profits  and  war  profits  taxes  for  the  year  1918  under  the  provisions  of  sections 
327  and  328  of  the  Revenue  Act  of  1918;  that  in  the  preparation  of  a  compara- 
tive data  sheet  particular  care  be  used  to  select  only  such  comparatives  as 
are  fair  both  to  the  Government  and  to  the  taxpayer;  and  that  the  Unit  be 
sustained  in  restoring  to  the  closing  inventory  for  that  year  the  fruit  on  hand 
in  warehouses  and  in  transit  to  market,  but  not  marketed  and  sold  as  of 
December  31,  1918. 
26 


37-21-1823:  A.  R.  R.  599. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  income 
Tax  Unit  in  denying  to  the  said  company  assessment  of  profits  tax  for  the  year 

1917  under  the  provisions  of  section  210  of  the  Revenue  Act  of  1917  and  for  the  year 

1918  under  the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of  1918  be 

sustained. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  In  denying  to  the  taxpayer  assess- 
ment of  profits  taxes  for  the  year  1917  under  the  provisions  of  section  210 
of  the  Revenue  Act  of  1917  and  for  the  year  1918  under  the  provisions  of 
sections  327  and  328  of  the  Revenue  Act  of  that  year. 

The  grounds  upon  which  the  taxpayer  contends  that  profits  taxes  for  the 
years  1917  and  1918  should  be  assessed  under  the  provisions  of  the  said  sections 
as  stated  in  its  appeal  of  February  26,  1921,  addressed  to  this  Committee, 
are  as  follows: 

In  view  of  the  fact  that  our  corporation  is  denied  the  inclusion  in  invested  capital 
of  a  part  of  the  good  will  asset  which  was  acquired  for  capital  stock,  and  in  view  oi  the 
further  fact  that  this  good  will  value  is  in  reality  much  greater  than  the  amount  of  capital 
Stock  issued  therefor,  it  appears  that  the  Income  Tax  Unit  is  in  error  in  stating  that  there 
is  nothing  abnormal  in  regard  to  the  invested  capital  of  this  corporation. 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-27. 


It  also  appears  that  asset  account  representing  machinery  actually  in  use  in  the  business 
was  charged  oh  in  1907  ^hd  subsequent  years  thereby  making  the  capital  amount  appear 
smaller  in  the  books  than  is  really  the  case  if  the  true  investment  of  the  corporation  could 
actually  be  shown. 

In  regard  to  the  income  of  the  corporation,  the  figures  now  at  your  disposal  as  con- 
tained on  the  income  tax  returns  for  the  years  1917  and  1918  indicate  very  plainly  that  the 
profits  of  these  years  are  abnormal  as  compared  with  earnings  of  our  corporation  for  pre- 
vious years.  This  fact  in  itself  indicates  that  the  large  profits  made  in  the  years  for  which 
relief  is  claimed  through  your  Committee  are  based  to  a  great  extent  upon  the  building 
efforts  of  the  previous  years  when  incomes  were  very  much  smaller. 

The  records  in  the  case  indicate  that  prior  to  1907  the  taxpayer  wai 
operating  under  a  charter  granted  under  the  laws  of  the  State  of  Y  and  that 
in  1907  it  was  reorganized  under  the  laws  of  Z  in  order  that  it  might  hold 
legal  title  to  real  property  in  that  State.  Upon  reorganization  its  authorized 
capital  stock  was  increased  from  10*  dollars  to  50*  dollars  and  the  stock  of 
the  reorganized  company  was  issued  to  the  holders  of  the  old  stock  in  pro- 
portion to  their  original  holdings. 

The  revenue  agent  who  investigated  the  returns  of  the  taxpayer  reported 
that  its  opening  balance  sheet  at  time  of  reorganization  was  as  follows: 


Cash  

Merchandise.  ..... 

T'iH s  receivable.  .  .  . 

Machinery  

Accounts  receivable 
Good  will   


lOx  dollars, 
9.x  dollars. 
Ix  dollars. 

16x  dollars. 
6x  dollars. 

I3x  dollars. 


Accounts  payable 
Capital  stock  


5x  dollars, 
50x  dollar*. 


55a;  dollars.  55x  dollars. 


The  revenue  agent  reported  that  the  officers  of  the  appellant  company 
state  that  the  reorganization  was  made  solely  for  the  purpose  of  securing  a 
charter  in  Z  in  order  the  the  taxpayer  could  hold  legal  title  to  real  property 
in  that  State.    No  new  stockholders  were  admitted.    The  ownership  of  the 
stock  in  the  reorganized  company  being  the  same  as  the  ownership  of  stock 
in  the  original,  the  item  of  13*  dollars  set  up  on  the  books  as  good  will  server 
as  a  balancing  entry,  or  offset,  to  the  increase  in  capital  stock  over  net  assets. 
It  does  not  appear  that  the  company  as  reorganized  possessed  one  dollar'f 
worth  more  of  any  tangible  or  intangible  asset  than  it  possessed  immediately 
prior  to  that  reorganization.    It  took  over  the  assets  and  assumed  the  lia- 
bilities of  the  old  organization  together  with  any  and  all  good  will  attached 
to  the  business.  It  has  not  been  shown,  nor  claimed,  that  any  amount  was 
ever  actually  expended  by  either  the  old  or  the  new  organization  in  the  acquire- 
ment of  good  will  and  yet,  because  of  the  fact  that  a  reorganization  was 
effected  and  an  item  of  good  will  was  entered  upon  the  books  in  an  amount 
equal  to  the  excess  of  par  value  of  new  stock  over  the  net  value  of  the  assets 
taken  over,  the  taxpayer  is  now  in  a  position  to  claim  and  be  allowed  under  the 
provisions  of  section  207(a)  of  the  Revenue  Act  of  1917  as  statutory  invested 
capital  10*  dollars  for  the  year  1917  on  account  of  good  will  and  12j/£* 
dollars  for  the  year  1918  under  the  provisions  of  section  326(4)  of  the  Rev- 
enue Act  of  1918.    The  mere  fact  that  the  taxpayer  can  not  be  allowed  to 
include  in  its  statutory  invested  capital  the  full  amount  of  good  will  it  wrote 
on  its  books  at  time  of  reorganization,  even  though  that  amount  is  less  than 
the  actual  value  of  the  good  will  at  that  time,  as  is  claimed  in  this  case, 
does  not,  as  it  contends,  create  such  an  abnormal  condition  with  regard  to 
statutory  invested  capital  as  would  entitle  it  to  assessment  of  profits  taxes 
under  the  provisions  of  the  said  sections  210,  327,  and  328. 


Supplementary  Rulletin  Rulings. 


Sec.  327.    Art.  901.— 28. 


j  In  support  of  its  claim  that  ;  "asset  account  representing  machinery 
Actually  in  use  in  the  business  was  charged  off  in  1907  and  subsequent  years" 
the  tax  payer  has  submitted  no  specific  and  detailed  statement,  although 
it  apparently  has  been  afforded  full  opportunity  to  do  so. 

From  the  records  in  the  case  it  appears  that  the  books  of  account  have 
been  carefully  kept  and  that  no  great  difficulty  would  be  experienced  in 
determining  just  what  amounts,  if  any,  charged  off  to  any  asset  account 
may  now  be  properly  restored  under  the  provisions  of  the  law  and  regulation! 
as  an  increase  in  invested  capital.  If  this  be  true,  the  mere  fact  that  an  asset 
Account  has  been,  in  the  past,  improperly  reduced  through  excessive  depreci- 
Ation  charges  or  otherwise,  does  not  in  itself  preclude  adjustment  now  nor  a 
satisfactory  determination  of  the  company's  statutory  invested  capital,  and 
it  does  not  in  itself  entitle  the  company  to  assessment  under  section  210, 
nor  sections  327  and  328.  The  records  in  the  case  do  not  disclose  any  ab- 
normal condition  here. 

The  third  reason  advanced  by  the  taxpayer  in  support  of  its  contention 
that  it  is  entitled  to  assessment  of  profits  taxes  under  the  provisions  of  the 
said  sections  210,  327,  and  328,  is  that  its  profits  for  the  years  1917  and  1918 
"are  abnormal  as  compared  with  earnings  of  our  corporation  for  the  previous 
years"  and  that  "this  fact  in  itself  indicates  that  the  large  profits  made  in  the 
years  for  which  relief  is  claimed  *  *  *  are  based  to  a  great  extent  upon 
the  building  efforts  of  the  previous  years  when  incomes  were  very  much 
smaller." 

After  a  careful  consideration  of  all  the  facts  disclosed  by  the  records  in 
the  case  the  Committee  is  of  the  opinion  that  there  was  not  in  1917  nor 
1918  a  realization  of  the  earnings  of  capital  unproductively  invested  or  em- 
ployed through  a  period  of  years,  nor  of  the  fruits  of  activities  antedating  the 
years  1917  and  1918.  The  realization  of  large  profits  during  the  years 
1917  and  1918  was  undoubtedly  due  in  a  large  measure  to  war  conditions. 
The  taxpayer  is  engaged  in  the  manufacture  and  sale  of  certain  articles,  and, 
as  has  been  repeatedly  demonstrated  to  this  Committee  in  similar  cases 
relating  to  concerns  engaged  in  a  like  or  similar  business,  the  demand  for  and 
production  of  such  articles  of  manufacture  were  greatly  increased  by  the  en- 
trance of  the  United  States  into  the  World  War,  with  a  corresponding  in- 
crease in  the  profits  derived  from  their  larger  manufacture  and  sale. 

The  taxpayer's  return  for  1916,  the  year  just  preceding  that  during  which 
the  United  States  entered  the  war,  shows  gross  sales  amounting  to  104* 
dollars,  its  1917  return  shows  this  item  increased  to  142*  dollars,  and  its  1918 
return  to  191*  dollars.  The  taxpayer  was  engaged  in  the  same  trade  or 
business  during  the  years  1917  and  1918,  as  it  was  for  many  years  previous. 
It  has  not  been  shown  that  any  great  amount  of  its  capital,  if  any,  remained 
unproductively  employed  through  a  period  of  years,  nor  that  any  asset  in 
which  any  of  its  capital  was  invested  remained  inactive  through  such  a  period. 
Under  the  circumstances  the  realization  of  greater  profits  in  1917  and  1918 
than  in  prior  years  does  not  indicate  to  this  Committee  the  existence  of  any 
Abnormal  condition.  As  a  matter  of  fact  the  failure  of  the  taxpayer  to  realize 
greater  profits  in  1917  and  1918,  in  view  of  the  greater  volume  of  business 
transacted  would  more  clearly  indicate  the  existence  of  such  a  condition. 

In  view  of  the  foregoing,  the  Committee  recommends  that  the  action  of 
the  Income  Tax  Unit  in  denying  to  the  M  Company  assessment  of  profits 
tax  for  the  year  1917  under  the  provisions  of  section  210  of  the  Revenue  Act 
of  1917  and  for  the  year  1918  under  the  provisions  of  sections  327  and  328 
of  the  Revenue  Act  of  1918  be  sustained. 
£6 

Supplementary  Bulletin  Rulings. 


Sec.  327.   Art.  901.— 29. 

37-21-1817:  A.  R.  R.  556. 

THE  REVENUE  ACT  OF  1917. 
Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  disallowing  a  deduction  of  15a-  dollars  claimed  for  the  year  1917  on 
account  of  depreciation  in  the  value  of  liquor  license  be  sustained,  and  that  the 
corporation  be  granted  assessment  of  excess  profits  tax  for  the  year  1917  under  the 
provisions  of  section  210  of  the  Revenue  Act  of  1917. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
for  the  allowance  of  a  deduction  of  15*  dollars  for  the  year  1917  to  cover 
depreciation  in  the  value  of  a  liquor  license  and  for  the  assessment  of  excess 
profits  tax  for  that  year  under  section  210  of  the  Revenue  Act  of  1917. 

The  records  in  the  case  show  that  A.  from  1905  until  his  death  in  1913, 
conducted  a  wholesale  and  retail  liquor  business.  After  his  death,  B,  his  sole 
legatee,  continued  the  business  until  November,  1913,  and  then  incorporated 
the  same  under  the  name  of  the  M  Company  with  an  authorized  capital  stock 
issue  of  50*  dollars,  which  stock  she  accepted  in  exchange  for  all  the  fixtures, 
leases,  stock  in  trade,  etc.,  of  the  business,  said  to  have  been  appraised  at 
about  the  time  of  the  incorporation  as  having  a  value  of  200*  dollars.  In 
an  affidavit  dated  January,  1921,  one  E  states  that  he  was  associated  with 
A  from  1905  until  1910  as  manager  of  the  latter' s  store,  that  he  had  access 
to  A's  books  of  account  from  1905  to  1913  and  knew  fully  the  extent  of  the 
said  business  and  the  profits  derived  therefrom  during  such  time.  E  further 
states  that  in  1910,  when  he  left  A's  employ,  the  latter  had  approximately 
150*  dollars  invested  in  the  business,  that  subsequent  to  1910  and  until  the 
death  of  A  in  1913,  the  latter's  capital  investment  had  increased  approxi- 
mately 25  per  cent  and  that  the  yearly  profits  from  the  business  from  1905 
to  1913  were  equal  to  50  per  cent  or  better  on  the  invested  capital;  and  he 
expressed  the  belief  that  at  the  time  B  incorporated  the  business  its  assets 
were  worth  in  excess  of  150*  dollars. 

In  February,  1915,  B  disposed  of  all  her  stock  in  the  M  Company  to  one 
C,  at  a  price  which  is  not  stated,  and  he  managed  and  controlled  the  business 
until  June,  1915,  when  he  disposed  of  all  its  capital  stock  to  D  and  E  for 
175*  dollars.  In  determining  the  amount  to  be  paid  for  the  capital  stock 
D  and  E  appraised  the  assets  of  the  business  back  of  the  capital  stock  to  be 
worth  the  following  amounts: 

Bills  and  accounts  receivable   42 dollars. 

Fixtures  and  furnishings   34-%x  dollars. 

Merchandise   83}4>  dollars. 

Liquor  license   \5x  dollars. 

175*  dollars. 

In  the  merchandise  account  was  included  the  actual  cash  surrender 
value  of  the  liquor  license  under  which  the  business  was  operated,  or  3j^* 
dollars,  which  license  had  been  taken  out  September,  1914,  at  a  cost  of 
10*  dollars  to  run  for  one  year.  The  additional  value  of  15*  dollars  placed 
upon  this  license  was  its  estimated  selling  value  over  its  cash  surrender  value 
at  the  time  the  capital  stock  of  the  corporation  was  purchased  from  C. 
At  that  time  local  laws  restricted  the  number  of  licenses  that  could  be  out- 
standing and  operative  in  the  city.  Each  license  was  for  the  operation  of  a 
liquor  business  at  a  certain  specified  street  address  and  was  renewable  from 
year  to  year.  It  could  not  be  transferred  to  another  address  but  was  trans- 
ferable from  one  holder  to  another.  This  created  a  ready  market  for  each 
such  license  outstanding  and  license  sales  were  being  made  at  from  15* 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-30. 


i 

dollars  to  30*  dollars  over  and  above  the  cash  surrender  value  of  the  licens 
Immediately  after  their  purchase  of  the  capital  stock  of  the  M  Company 
D  and  E  installed  a  new  set  of  corporate  books  and  in  opening  same  they 
had  set  up  a  license  account  showing  a  value  of  I5x  dollars.  In  1917.  due  to 
the  enactment  of  prohibition  laws,  it  was  considered  that  this  license  right 
had  become  worthless  and  the  item  of  15#  dollars  was  charged  off  as  a  loss 
and  claimed  as  a  deduction  against  gross  income  for  that  year,  which  deduction 
was  disallowed  by  the  Income  Tax  Unit. 

In  the  opinion  of  the  Committee  the  action  of  the  Income  Tax  Unit 
in  disallowing  the  said  deduction  of  I5x  dollars  should  be  sustained  for  the 
following  reasons:  The  transaction  in  which  B  sold  her  holding  of  capital 
stock  in  the  M  Company  to  C  was  a  transaction  solely  between  two  indi- 
viduals and  not  one  between  an  individual  and  a  corporation.  It  resulted 
in  the  sale  of  the  said  capital  stock  and  not  in  a  sale  of  the  corporation's 
assets.  It  was  a  transaction  to  which  the  corporation  itself  was  not  a  party. 
The  same  is  true  of  the  transaction  in  which  C  sold  the  same  stock  to  D  and 
E.  The  latter  paid  175*  dollars  for  the  capital  stock  of  the  M  Company. 
They  did  not  purchase  that  corporation's  assets  as  such  and  neither  trans- 
action effected  any  change  in  the  corporation's  invested  capital.  The  only 
amount  the  corporation  ever  had  invested  in  the  license  was  the  amount  paid 
therefor,  or  lOx  dollars,  and  inasmuch  as  that  license  was  taken  out  Septem- 
ber, 1914,  and  ran  for  only  one  year,  the  corporation  was  entitled  to  claim 
the  proportionate  part  of  that  amount  properly  chargeable  to  the  period 
September  to  December  31,  1914,  as  an  expense  deduction  for  the  year  1914 
and  the  balance  as  a  deduction  for  the  succeeding  year.  In  a  similar  manner 
the  amount  paid  for  a  renewal  of  the  license  in  1915,  1916,  and  1917  could 
have  been  and  probably  was  claimed  as  a  deduction.  Even  though  the 
license  had  been  regarded  as  a  capital  asset  and  not  as  an  expense  deduction, 
appreciation  in  its  value  over  cost  was  not  properly  returnable  as  income 
for  tax  purposes  nor  allowable  as  a  deduction  when  wiped  out  by  subsequent 
events. 

The  Revenue  Act  of  1917  provides  that  if  the  Secretary  of  the  Treasury 
is  unable  in  any  case  to  satisfactorily  determine  the  invested  capital  the  pro- 
visions of  section  210  of  that  Act  shall  apply.  The  taxpayer  in  the  instant 
case  claims  assessment  under  that  section,  and,  in  the  opinion  of  the  Com- 
mittee, that  claim  should  be  granted.  It  appears  clear  from  the  records  in 
the  case  that  at  the  time  the  business  of  A  was  incorporated  the  assets  trans- 
ferred in  exchange  for  capital  stock  of  the  par  value  of  50*  dollars  were  worth 
approximately  150*  dollars  or  more.  B  when  selling  her  stock  retained  the 
books  of  the  corporation  and  has  since  refused  to  surrender  them.  C,  as  sole 
owner  of  the  corporation's  capital  stock,  apparently  conducted  the  business 
more  or  less  as  his  own  individual  business  and  kept  very  incomplete  corporate 
records.  When  disposing  of  his  stock  in  the  corporation  to  D  and  E,  he 
turned. over  to  them  the  corporation's  stock  book,  stock  ledger,  and  corporate 
seal,  and  a  statement  showing  the  names  of  the  corporation's  debtors  and 
creditors  and  the  amounts  due  and  payable.  None  of  the  account  books, 
with  the  exception  of  a  cash  book,  were  turned  over  to  the  purchasers  of 
the  stock,  and  the  corporation  is  not  now  in  possession  of  sufficient  records 
to  clearly  establish  its  statutory  invested  capital. 

The  Unit  in  its  final  audit  of  the  appellant  company's  return  for  1917, 
established  a  statutory  invested  capital  as  of  the  beginning  of  that  year 
on  the  following  basis: 


Supplementary  Bulletin  Rulings. 


8-16-22. 

Sec.  327.    Art.  901.— 31 

Capital  stock      50x  dollars. 

Surplus  (undivided  profits)   85  dollars. 

I35x  dollars. 

Less  1916  income  tax  prorated   x  dollars. 

Adjusted  invested  capital   134*  dollars. 

No  consideration  was  given  to  the  fact  that  at  the  time  the  business  was 
incorporated  the  value  of  the  assets  taken  over  by  the  corporation  in  exchange 
for  its  stock  was  greater  than  the  par  value  of  the  stock  issued  therefor. 

Article  63  of  Regulations  41  provides  that — 

Where  it  can  be  shown  by  evidence  satisfactory  to  the  Commissioner  of  Internal  Revenue 
that  tangible  property  has  been  conve3'ed  to  a  corporation  or  partnership  by  gift  or  at  a 
value,  accurately  ascertainable  or  definitely  known  as  at  the  date  of  the  conveyance, 
clearly  and  substantially  in  excess  of  the  casn  or  the  par  value  of  the  stock  or  shares  paid 
therefor,  then  the  amount  of  the  excess  shall  be  deemed  to  be  paid  in  surplus.    *    *  * 

It  is  clearly  evident  from  the  records  in  the  case  that  tangible  property 
of  a  value  substantially  in  excess  of  the  par  value  of  the  stock  paid  therefor 
was  conveyed  by  B  to  the  M  Company  and  that  the  corporation  would  be 
entitled  to  an  allowance  of  paid-in  surplus  if  it  were  now  in  possession  of 
records  showing  the  actual  cash  value  of  the  tangible  property  at  the  time 
of  conveyance.  However,  such  records  are  not  now  available  nor  are  there 
any  records  available  from  which  a  complete  history  of  the  corporation's 
invested  capital  from  time  of  incorporation  to  the  beginning  of  1917  may  be 
obtained  and  the  amount  of  statutory  invested  capital  allowable  to  the 
corporation  for  that  year  clearly  established. 

In  view  of  the  foregoing  the  Committee  recommends  that  the  action 
of  the  Income  Tax  Unit  in  disallowing  a  deduction  of  15a?  dollars  claimed 
by  the  M  Company  for  the  year  1917  to  cover  depreciation  in  the  value  of 
liquor  license  be  sustained,  and  that  the  corporation  be  granted  assessment 
of  excess  profits  tax  for  the  year  1917  under  the  provisions  of  section  210 
cf  the  Revenue  Act  of  1917. 
27 


I  ('22)-l  1-147;  L.  O.  1090 

Revenue  Act  of  1918. 

1.  The  phrase  "abnormal  conditions  affecting  the  capital  or  income  of  the 
corporation"  is  defined  to  include  the  following:  (a)  Where  a  corporation  is 
placed  in  a  position  of  substantial  inequality  because  of  the  time  or  manner  of 
organisation;  (/;)  where  the  capital  employed,  although  a  material  income- 
producing  factor,  is  very  small,  or  in  large  part  borrowed;  (c)  where  there  is 
excluded  from  invested  capital  under  section  326  intangible  assets  of  recognized 
value  and  substantial  in  amount  which  have  been  developed  by  the  taxpayer  (in 
view  of  the  specific  limitations  upon  the  admission  of  intangibles  into  invested 
capital  contained  in  sec.  326  of  t!:e  Act  applications  for  assessments  under  sec.  328 
upon  tins  ground  should  be  carefully  scrutinized  and  the  application  denied  where 
its  allowance  would  result  in  defeating  the  avowed  purpose  of  the  limitations 
contained  in  sec.  326);  (d)  where  the  net  income  for  the  year  is  abnormally  high, 
due  to  realisation  in  one  year  of  income  earned  during  a  period  of  years;  (e)  where 
extraordinary  gains  are  derived  from  the  sale  of  property  where  its  principal 
value  has  been  demonstrated  by  prospecting  or  exploration:  and  (/)  where  proper 
recognition  can  not  be  made  for  amortization,  obsolescence,  or  exceptional  de- 
pletion due  to  the  World  War. 

2.  Where  application  is  made  under  section  327(d)  for  assessment  under  section 
328  of  the  Act  of  1918,  the  abnormal  conditions  affecting  the  capital  or  income  of 
the  taxpayer  must  be  established  by  proof.  Abnormal  conditions  affecting 
capital  or  income  in  the  present  case  have  been  established. 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 32 


3.  The  term  "exceptional  hardships,"  as  used  in  section  327(d)  of  the  Revenue 
Act  of  1918,  means  the  hardship  of  inequality  evidenced  by  gross  disproportion 
between  the  tax  computed  without  the  benefit  of  sections  327  and  328  and  the 
tax  computed  by  reference  to  the  representative  corporations  specified  in  section 
328,  but  inequality  alone  is  not  sufficient  to  grant  relief  under  section  328;  the 
inequality  must  be  due  to  abnormal  conditions  affecting  capital  or  income. 

4.  In  selecting  corporations  with  which  to  compare  the  taxpayer  in  a  given 
case,  great  care  should  be  exercised,  and  only  corporations  which  are  truly  rep- 
resentative should  be  used.  The  word  "representative,"  as  used  in  the  Act, 
means  "typical"  or  "symbolical,"  and  the  Act  requires  the  comparatives  used  to  be 
typical  as  near  as  may  be  in  respect  to  capital  employed,  gross  income,  net  income, 
profits  per  unit  of  business  transacted,  amount  and  rate  of  war  and  excess  profits 
tax,  and  all  other  relevant  facts  and  circumstances.  The  corporations  used  as  com- 
paratives must  not  only  be  in  the  same  general  line  of  business,  but  as  nearly  as 
possible  representative  in  all  the  particulars  mentioned  in  the  Act.  In  the 
present  case,  comparatives  Nos.  1  and  2  are  not  representative  within  the  meaning 
of  section  328  of  the  Revenue  Act  of  1918.  Their  use  in  this  case  creates  and 
does  not  correct  an  inequality. 

Reference  is  made  to  the  claim  filed  by  the  M  Company  for  the  abatement  of 
71  dollars  excess  profits  taxes  for  the  year  1918.  The  claim  is  based  upon 
the  application  for  assessment  under  sections  327  and  328  of  the  Act  of  1918. 
The  Unit  allowed  relief  under  the  above  sections,  and  after  selecting  com- 
paratives provided  for  in  the  last  paragraph  of  section  328,  computed  the 
tax  thereunder  and  found  the  corporation  entitled  to  an  abatement  in  the 
sum  of  71j^*  dollars  and,  in  addition  thereto,  has  suggested  a  refund  of  40* 
dollars  of  the  taxes  already  paid. 

The  question  is  whether  the  corporation  is  entitled  to  relief  under  these 
sections,  and,  if  so,  whether  the  proper  comparatives  have  been  used  in  com- 
puting the  tax. 

The  M  Company  appears  to  have  begun  business  about  1901  and  to  have 
organized  under  its  present  name  in  1905  with  a  cash  capital  of  60*  dollars. 
In  1909  it  took  over  the  assets  of  the  O  Company  and  the  P  Company  and 
increased  its  capital  stock  to  600*  dollars.  Under  the  plan  of  reorganization 
the  par  value  of  the  stock  was  $100,  and  15%y  shares  appear  to  have  been 
issued  for  tangible  assets  and  14)4/y  shares  for  intangible  assets,  making  the 
total  outstanding  shares  30y. 

In  its  early  years  and  up  until  1916  this  corporation's  earnings  were  small, 
and  it  was  its  policy  to  reinvest  its  earnings  and  surplus  in  plant  property. 
From  1917  on  its  earnings  have  been  very  large,  due  no  doubt  in  large  part 
to  war  conditions.  In  1918  its  invested  capital  was  over  1,200*  dollars  and 
its  net  income  approximately  700*  dollars. 

Over  200*  dollars  written  up  on  the  books  as  good  will  has  been  disallowed 
as  invested  capital,  and  the  company  bases  its  claim  for  relief  under  sections 
327  and  328  on  the  fact  that  it  has  spent  large  sums  in  experimental  work, 
and  that  as  a  result  thereof  it  has  developed  secret  formulas  for  the  man- 
ufacture of  .  .  .  .,  which  gives  it  a  practical  monopoly  in  certain  kinds  of  

That  none  of  the  amounts  spent  in  experimental  and  discovery  work  has  been 
capitalized,  and  it  now  has  valuable  intangible  property  which  is  not  shown 
in  its  invested  capital,  which  by  the  proper  method  of  bookkeeping  should 
be  so  included,  and  that  by  reason  thereof  it  is  subject  to  an  exceptional 
hardship  when  compared  with  other  corporations  in  its  class  which  have 
capitalized  such  expenditures. 

In  order  to  determine  whether  or  not  the  corporation  in  question  is 
entitled  to  relief  under  section  327  and  328  of  the  Act  of  1918,  and  if  so  whether 
the  proper  comparatives  have  been  used,  it  is  necessary  to  refer  to  the  Act 
and  its  history  and  examine  the  case  and  the  comparatives  used  in  the  light 


Supplementary  Bulletin  Rulings. 


S-16-22. 


Sec.  327.   Art.  901.-33 

of  the  language  of  the  Act.  The  sections  of  the  Act  in  so  far  as  material  are 
as  follows: 

Sec.  327.  That  in  the  following  cases  the  tax  shall  be  determined  as  provided  in  section 
328: 

(a)  Where  the  Commissioner  is  unable  to  determine  the  invested  capital  as  provided 
in  section  326; 

(b)  In  the  case  of  a  foreign  corporation; 

(c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible  property  has  been 
paid  in  for  stock  or  for  stock  and  bonds  and  the  Commissioner  is  unable  satisfactorily  to 
determine  the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment, 
or  to  distinguish  the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

(d)  Where  upon  application  by  the  corporation  the  Commissioner  finds  and  so  declares 
of  record  that  the  tax  is  determined  without  benefit  of  this  section  would,  owing  to  abnormal 
conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the  corporation 
an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  section  328.  This  subdivision  shall  not  apply  to  any  case  (1)  in 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  because  the  corpo- 
ration earned  within  the  taxable  year  a  high  rate  of  profits  upon  a  normal  invested  capital, 
nor  (2)  in  which  50  per  centum  or  more  of  the  gross  income  of  the  corporation  for  the  tax- 
able year  (computed  under  section  233  of  Title  II)  consists  of  gains,  profits,  commissions, 
or  other  income,  derived  on  a  cost-plus  basis  from  a  Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive. 

Sec.  328.  (a)  In  the  cases  specified  in  section  327  the  tax  shall  be  the  amount  which 
bears  the  same  ratio  to  the  net  income  of  the  taxpayer  (in  excess  of  the  specific  exemption 
of  $3,000)  for  the  taxable  year,  as  the  average  tax  of  representative  corporations  engaged 
in  a  like  or  similar  trade  or  business,  bears  to  their  average  net  income  (in  excess  of  the 
specific  exemption  of  $3,000)  for  such  year.  In  the  case  of  a  foreign  corporation  the  tax 
shall  be  computed  without  deducting  the  specific  exemption  of  $3,000  either  for  the  tax- 
payer or  the  representative  corporations. 

In  computing  the  tax  under  this  section  the  Commissioner  shall  compare  the  taxpayer 
only  with  representative  corporations  whose  invested  capital  can  be  satisfactorily  de- 
termined under  section  326  and  which  are,  as  nearly  as  may  be,  similarly  circumstanced 
with  respect  to  gross  income,  net  income,  profits  per  unit  of  business  transacted  and  capital 
employed,  the  amount  and  rate  of  war  profits  or  excess  profits,  and  all  other  relevant  facts 
and  circumstances. 

The  provisions  of  the  bill  as  first  introduced  in  the  House  of  Repre- 
sentatives were  very  different  from  the  Act  as  it  finally  passed.  Section 
327  as  originally  introduced  was  as  follows: 

(a)  That  in  the  following  cases  the  invested  capital  shall  be  determined  as  provided 
in  subdivision  (b)  of  this  section;  (1)  where  the  Commissioner  is  unable  satisfactorily  to 
determine  the  invested  capital  as  provided  in  section  326;  or  (2)  where  a  mixed  aggregate 
of  tangible  property  and  intangible  property  has  been  paid  in  for  stock  or  for  stock  and 
bonds  and  the  Commissioner  is  unable  satisfactorily  to  determine  the  respective  values  of 
the  several  classes  of  property  at  the  time  of  payment,  or  to  distinguish  the  classes  of 
property  paid  in  for  stock  and  for  bonds,  respectively;  or  (3)  where  capital  is  a  material 
income-producing  factor,  but  where,  because  of  the  fact  that  the  capital  employed  is  in 
large  part  borrowed,  there  is  no  invested  capital  or  the  invested  capital  is  materially  dis- 
proportionate to  the  net  income  as  compared  with  representative  corporations  engaged  in 
a  like  or  similar  trade  or  business.  This  section  shall  not  apply  in  the  case  of  a  corporation 
50  per  centum  or  more  of  whose  gross  income  (as  defined  in  section  213  for  income  tax 
purposes)  consists  of  gain,  profits  or  commissions  derived  from  Government  contracts, 
unless  the  Commissioner  is  satisfied  that  such  corporation  is  overcapitalized. 

[b)  In  the  cases  specified  in  subdivision  (a)  the  invested  capital  shall  be  the  amount 
which  bears  the  same  ratio  to  the  net  income  of  the  corporation  for  the  taxable  year  as 
the  average  invested  capital  for  the  taxable  year  of  representative  corporations  engaged 
in  a  like  or  similar  trade  or  business  bears  to  their  average  net  income  for  such  year. 

After  much  discussion,  the  bill  was  amended,  passed  the  House,  and  was 
transferred  to  the  Senate.  When  section  327  passed  the  Senate  it  read  as 
follows : 

That  in  the  following^  cases  the  tax  shall  be  determined  as  provided  in  section  328: 
(a)  Where  the  Commissioner  is  unable  (satisfactorily)  to  determine  the  invested  capital 
as  provided  in  section  326; 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 34 


(b)  In  the  case  of  a  foreign  corporation; 
_  (c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible  proeprty  has  been 
paid  in  for  stock  or  for  stock  and  bonds  and  the  Commissioner  is  unable  satisfactorily  to 
determine  the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment, 
or  to  distinguish  the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

(d)  Where,  as  compared  with  representative  corporations,  engaged  in  a  like  or  similar 
trade  or  business,  the  taxpayer  would  (under  section  326)  be  placed  in  a  position  of  sub- 
stantial inequality,  because  of  the  time  or  manner  of  organization,  or  because  the  actual 
value  of  the  assets  on  March  1,  1913,  was  substantially  in  excess  of  the  amount  at  which 
such  assets  would  be  valued  for  the  purpose  of  computing  invested  capital  under  the 
provisions  of  section  326; 

(e)  Where  the  invested  capital  is  materially  disproportionate  to  the  net  income  as 
compared  with  representative  corporations  engaged  in  a  like  or  similar  trade  or  business 
because: 

1.  The  capital  employed,  although  a  material  income-producing  factor,  is  very  small 
or  is  in  large  part  borrowed; 

2.  There  are  excluded  from  the  invested  capital  as  computed  under  the  provisions  of 
section  326,  intangible  assets  of  recognized  and  substantial  value  built  up  or  developed  by 
the  taxpayer; 

3.  The  net  income  for  the  taxable  year  is  abnormally  high  due  to  the  realization  in 
one  year  of  (a)  gains,  profits,  or  income  earned  or  accrued  during  a  period  of  years,  or  (b) 
extraordinary  gains  or  profits  derived  from  the  sale  of  property  the  principal  value  of  which 
has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work  done  by  the 
taxpayer.  When  the  tax  is  determined  under  this  paragraph  proper  allowance  shall  be 
made  for  the  taxes  which  would  have  been  payable  in  prior  years  if  the  gains,  profits,  or 
income  earned  or  accrued  in  such  years  has  been  taxed  at  the  rates  then  applicable; 

4.  Proper  recognition  or  allowance  can  not  be  made  for  amortization,  obsolescence,  or 
exceptional  depletion  due  to  the  present  war,  or  to  the  necessity  in  connection  with  the 
present  war  of  providing  plant  which  will  not  be  wanted  for  the  purpose  of  the  trade  or 
business  after  the  termination  of  the  war. 

In  the  conference  committee,  composed  of  House  and  Senate  members, 
the  section  was  again  very  materially  altered,  and  was  finally  passed  in  the 
form  in  which  it  is  now  contained  in  the  Act. 

Mr.  Kfachin,  who  was  in  charge  of  the  bill  in  the  House  and  who  was  a 
member  of  the  committee  composed  of  House  and  Senate  members,  in  his 
report  from  the  committee  to  the  House  referred  to  the  changes  made  in  the 
Senate  and  in  the  conference  committee  as  follows: 

The  House  bill  in  the  so-called  relief  provisions  provided  that  in  certain  specified  cases 
the  invested  capital  of  a  corporation  shall  be  the  amount  which  bears  the  same  ratio  to  the 
net  income  of  the  corporation  for  the  taxable  year  as  the  average  invested  capital  for  the 
taxable  year  of  representative  corporations  engaged  in  a  like  or  similar  trade  or  business 
bears  to  their  average  net  income  for  such  year. 

The  Senate  amendment  increases  the  classes  of  cases  in  which  the  tax  is  to  be  fixed  by 
reference  to  the  experience  of  representative  corporations;  included  therein  all  foreign 
corporations,  and  provides  that  in  such  cases  the  tax  shall  be  the  amount  which  bears  the 
same  ratio  to  the  net  income  of  the  taxpayer  for  the  taxable  year  as  the  average'tax  of  rep- 
resentative corporations  engaged  in  a  like  or  similar  trade  or  business  bears  to  their  average 
net  income  for  such  years. 

The  House  recedes  with  amendments: 

(1)  Making  clerical  changes; 

(2)  Consolidating  a  number  of  separate  classes  of  cases  differentiated  in  the  Senate  amend- 
ment into  a  single  class  of  cases  in  which  upon  application  by  the  corporation    *  , 

and -continues  in  the  same  language  of  the  Act. 

Mr.  Kitchin  later,  in  a  speech  before  the  House,  stated  what  the  committee 
intended  by  the  use  of  the  language  used  in  section  327.  After  reading 
paragraph  (d)  of  section  327,  he  proceeded  as  follows: 

The  bill  provides  that  in  the  cases  specified  in  section  327  the  tax  shall  be  an  amount 
which  bears  the  same  proportion  to  the  net  income  of  the  taxpayer,  in  excess  of  the  spcahc 
exemption  of  $3,000,  for  the  taxable  year  as  the  average  tax  of  representative  corporations 
engaged  in  a  like  or  similar  trade  or  business  bears  to  their  average  net  income,  in  excess  of 
the  specific  exemption  of  $3,000  for  such  year.  Under  the  specific  provisions  no  official 
had  any  particular  responsibility,  and  one  could  take  any  case  he  desired,  whether  it  was  an 


Supplementary^Bulletin^Rulings. 


8-16-22. 


Sec.  327.    Art.  901.— 35 


exceptional  hardship  or  not,  and  pake  application  that  the  tax  should  be  computed  on  the 
basis  of  representative  corporations. 

The  conferees,  as  I  said  a  while  ago,  as  a  matter  of  safety  to  the  Government,  without 
doing  any  injustice  to  the  taxpayer,  in  case  he  is  actually  entitled  to  relief,  provide  that  the 
taxpayer,  in  order  to  get  relief  under  this  representative  corporation  section,  must  apply- 
to  the  Commissioner  and  must  show  to  the  Commissioner  that  it  is  an  exceptional  hardship; 
not  that  he  is  making  an  exceedingly  large  profit  on  invested  capital  and  therefore  his  tax  is 
exceedingly  large,  but  it  must  be  an  exceptional  hardship  owing  to  the  peculiar  and  excep- 
tional conditions  surrounding  the  taxpayer's  business,  income,  invested  capital,  and  so  forth; 
and  the  Commissioner  must  find,  and  so  declare  of  record,  that  the  case  is  one  of  exceptional 
hardship  before  it  can  be  considered  under  section  328. 

This  provision  gives  a  taxpayer  only  that  to  which  he  is  entitled,  because  he  ought  not 
to  have  relief  unless,  owing  to  the  peculiar  situation  of  his  business  or  capital  or  income  or 
something,  the  payment  of  the  tax  would  be  an  exceptional  hardship  upon  him  without  the 
benefit  of  the  relief  provision. 

This  language  leaves  a  very  vague  ?nd  indefinite  idea  in  the  mind  as  to 
what  was  intended  by  "abnormal  condition"  but  it  is  a  very  definite  statement 
that  no  relief  is  to  be  given  under  the  section  unless  there  is  "exceptional 
hardship."  The  language  indicates  also  that  it  is  not  an  "exceedingly  large 
tax"  to  be  paid  upon  "exceedingly  large  profits"  which  gives  the  taxpayer 
right  to  relief  under  the  section,  but  "exceptional  hardship"  due  "to  the 
peculiar  situation"  of  the  "business  or  capital  or  income  or  something"  so 
that  "the  payment  of  'the  tax  would  be  an  exceptional  hardship  *  *  * 
without  the  benefit  of  this  section." 

Senator  Simmons,  of  North  Carolina,  who  was  in  charge  of  the  bill  in  the 
Senate,  in  his  speech  on  Tuesday,  December  10,  1918,  Congressional  Record, 
page  529,  had  the  following  to  say  in  connection  with  relief  measures: 

We  have  also  recommended  a  series  of  relief  amendments  relating  to  amortization, 
depletion,  and  shrinkage  in  inventories,  which,  if  ratified  by  the  Senate  and  not  eliminated 
in  conference,  I  think  will  answer  to  a  very  large  extent  the  criticisms  of  the  present  law 
and  correct  many  discriminations  and  inequalities  which  have  confronted  the  department 
in  the  administration  of  the  existing  law.  In  addition,  the  committee  has  prepared  a 
general  amendment  which  we  have  been  in  the  habit  in  the  committee  of  speaking  of  as 
the  relief  amendment,  authorizing  the  Commissioner  to  classify  in  groups  certain  exceptional 
cases  which  seemed  to  require  special  treatment  to  safeguard  the  taxpayer  against  injustice. 
Every  corporation  which  brings  itself  within  the  provisions  of  these  classifications  is  given 
the  benefit,  in  computing  its  deductions,  of  the  like  or  "similar  business"  section  of  the 
bill;  that  is  to  say,  it  will  be  entitled  to  the  same  percentage  of  deductions  that  representative 
concerns  in  the  same  line  of  business  are  found  to  be  entitled  to. 

Senator  Penrose,  in  a  speech  delivered  Wednesday,  February  12,  1919, 
after  the  meeting  of  the  conferees  of  the  Senate  and  House,  made  the  fol- 
lowing statement  in  connection  with  the  relief  provisions: 

A  similar  change  was  made  in  the  conference  in  connection  with  the  war  profits  credit 
or  deduction  for  new  corporations;  that  is,  corporations  organized  after  January  1,  1913. 
The  House  gave  new  corporations  a  deduction  of  10  per  cent  of  their  invested  capital  for 
the  taxable  year.  The  Senate  liberalized  this  and  made  the  deduction  of  new  corporations 
the  same  percentage  of  their  invested  capital  for  the  taxable  year  as  was  earned  by  corpo- 
rations in  the  same  general  class  of  trade  or  business  during  the  prewar  period.  The 
conferees  adopted  the  Senate  method,  but  excepted  newly  organized  subsidiaries  and  cor- 
porations whose  principal  income  is  derived  from  war  contracts.  Similar  action  was 
taken  with  respect  to  the  so-called  relief  provisions,  which  permit  the  profits  tax  in  any 
case  of  exceptional  hardship  to  be  fixed  by  reference  to  the  experience  of  representative 
concerns.  This  amendment,  to  my  mind,  is  a  most  admirable  one.  The  Senate  greatly 
increased  the  classes  of  cases  entitled  to  this  relief.  The  conferees  amalgamated  all  these  classes 
into  a  single  general  class,  but  denied  the  relief  to  corporations  whose  principal  income  con- 
sists of  profits  derived  on  a  cost-plus  basis  from  war  contracts.  Relief  also  was  granted  to 
certain  partnerships  doing  business  with  invested  capital  which  reorganize  as  corporations 
prior  to  July  1,  1919.  Such  partnerships  are  authorized  to  pay  income  taxes,  profits 
taxes,  and  capital-stock  taxes  for  1918  as  corporations  in  lieu  of  the  income  taxes  to  which, 
under  existing  law,  the  members  of  the  partnership  would  be  liable.  This  extends  im- 
mediate relief  to  a  class  of  partnerships  in  which  the  exigencies  of  business  require  most 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-36 


of  the  profits  to  be  reinvested  and  which,  under  existing  law,  have  been  taxed  much  more 
severely  than  their  competitors  organized  in  the  corporate  form. 

This  amendment,  Mr.  President,  put  into  the  bill  at  the  last  hour,  furnishes,  in  my 
opinion,  a  striking  illustration  of  the  relief  provisions  abounding  in  the  measure.  There  was 
a  particular  case,  typical  of  many  others,  in  which  it  was  discovered  that  some  seven  or 
eight  hundred  thousand  dollars  of  taxes  would  have  had  to  have  been  paid  by  a  certain 
partnership  in  excess  of  that  required  under  the  corporate  form,  thereby  involving  a  most 
rank  and  indefensible  discrimination  between  one  concern  as  a  partnership  and,  perchance, 
a  competitor  as  a  corporation.  This  amendment  was  put  in  giving  such  a  partnership  the 
option  of  becoming  incorporated  and  paying  the  profits  taxes  as  a  corporation.  I  only 
refer  to  this  as  a  fine  illustration,  to  my  mind,  of  very  many  similar  provisions  put  in  the 
bill  to  correct  inequalities;  not  put  in  to  favor  any  individual,  but  to  relieve  the  hardship  of 
inequality  which  the  legislator  can  not  defend  or  explain  to  the  injured  taxpayer. 

The  above-quoted  statements  indicate  that  Congress  intended  to  retain 
the  relief  provisions  of  the  Senate  in  the  bill  as  finally  passed,  but  that  it 
intended  to  consolidate  all  the  provisions  into  one  general  class.  The  Senate 
greatly  increased  the  classes  of  cases  entitled  to  this  relief,  and  the  conferees 
amalgamated  all  these  classes  into  a  single  general  class.  A  better  idea  may 
be  gained  of  the  relief  intended,  therefore,  when  a  comparison  is  made  of  the 
bill  as  it  passed  the  House,  as  it  passed  the  Senate,  and  as  it  finally  passed 
after  conference.  If  all  the  classes  of  cases  which  were  embodied  in  the  bill 
as  it  passed  the  Senate  were  "amalgamated"  or  "consolidated"  into  one 
general  class,  we  receive  some  idea  of  what  was  intended  by  the  use  of  the 
phrase  "abnormal  conditions  affecting  the  capital  or  income  of  the  corpo- 
ration" by  referring  to  the  bill  as  it  passed  the  Senate.  By  this  reference  the 
phrase  may  be  defined  to  include  the  following:  (a)  "Where  a  corporation  is 
placed  in  a  position  of  substantial  inequality  because  of  the  time  or  manner 
of  organization;  (b)  where  the  capital  employed,  although  a  material  in- 
come-producing factor,  is  very  small  or  in  large  part  borrowed;  (c)  where 
there  is  excluded  from  invested  capital  under  section  326  intangible  assets  of 
recognized  and  substantial  value  developed  by  the  taxpayer  (in  view  of  the 
specific  limitations  placed  upon  the  admission  of  intangibles  into  invested 
capital  contained  in  section  326  of  the  Act,  applications  for  assessment  under 
328  for  this  reason  should  be  closely  scrutinized  and  the  application  denied 
where  allowance  of  the  application  would  result  in  defeating  the  avowed 
purpose  of  the  limitations  contained  in  sec.  326);  (d)  where  the  net  income 
for  the  year  is  abnormally  high,  due  to  realization  in  one  year  of  income  earned 
during  a  period  of  years;  (e)  where  extraordinary  gains  are  derived  from  the 
sale  of  property  where  its  principal  value  has  been  demonstrated  by  pros- 
pecting or  exploration;  and  (/)  where  proper  recognition  can  not  be  made  for 
amortization,  obsolescence,  or  exceptional  depletion  due  to  the  World  War. 
One  other,  "where  the  invested  capital  is  materially  disproportionate  to  the 
net  income,"  was  included  in  the  Senate  bill  but  was  excluded  by  the  conferees 
by  the  use  of  the  following:  "This  subdivision  shall  not  apply  to  any  case 
(1)  in  which  the  tax  (computed  without  benefit  of  this  section)  is  'high  merely 
because  the  corporation  earned  within  the  taxable  year  a  high  rate  of  profit 
upon  a  normal  invested  capital."  This  provision  was  inserted  in  the  Act  by 
the  conferees  and  was  evidently  for  the  purpose  of  restricting  the  section  to 
a  smaller  class  of  cases,  because  without  this  provision  the  Act  as  amended  in 
the  Senate  would  clearly  have  applied  to  such  a  case. 

The  phrase  "exceptional  hardship"  is  defined  in  the  above  quotations 
more  clearly  than  the  provision  as  to  "abnormal  conditions."  Senator 
Simmons,  in  speaking  of  "certain  exceptional  cases,"  used  the  words  "to 
safeguard  the  taxpayer  against  injustice"  and  Senator  Penrose  in  speaking  of 
the  relief  provisions  in  the  bill  used  more  emphatic  language,  such  as  "to 


Supplementary  Bulletin  Ruling*. 


8-16-22. 

Sec.  327.    Art.  901.-37 

correst  inequalities"  and  "most  rank  and  indefensible  discrimination, "  and 
directly  defines  what  he  means  by  "exceptional  hardship"  as  the  "hardship 
of  inequality  which  the  legislator  can  not  defend  or  explain  to  the  injured  tax- 
payer" The  plan  evidently  was  to  give  the  Commissioner  the  power  to 
administer  the  excess  profits  tax  law  with  as  few  inequalities  as  possible  to 
taxpayers  falling  in  the  same  class.  If,  due  to  abnormal  conditions,  an 
exceptional  hardship  of  inequality  appears  to  have  been  imposed  upon  any 
taxpayer  by  computing  its  invested  capital  under  section  326,  such  taxpayer 
has  the  right  to  appeal  to  the  Commissioner  and  show  that  it  is  having  to 
pay  a  higher  rate  of  tax  than  other  corporations  which  are  similarly  cir- 
cumstanced and  ask  that  it  be  allowed  to  pay  a  tax  equal  to  the  average  rate 
of  tax  paid  by  other  corporations  which  are  in  its  class  and  similarly  cir- 
cumstanced. Such  a  taxpayer,  to  be  entitled  to  the  provisions  of  section 
328,  must  be  able  to  show  that  when  compared  to  other  corporations  which 
are  similarly  circumstanced  with  respect  to  gross  income,  net  income,  profits 
per  unit  of  business  transacted  and  capital  employed,  the  rate  of  war  profits 
or  excess  profits  tax  imposed  upon  it  is  higher  than  the  rate  imposed  upon  such 
other  corporations.  However,  when  it  has  shown  the  inequality,  before  it 
is  entitled  to  the  relief  sought  it  must  go  further  and  show  that  the  inequality 
is  due  not  merely  to  large  profits  earned  upon  a  normal  capital,  but  to  ab- 
normal conditions  affecting  its  income  or  invested  capital. 

The  thought  in  the  minds  of  those  in  charge  of  the  bill  was  centered  upon 
preventing  inequalities  and  unjust  discriminations.  If  the  corporation's  tax 
is  high  merely  because  it  made  large  profits  upon  a  normal  invested  capital, 
no  relief  is  to  be  granted.  If,  however,  owing  to  some  abnormal  condition 
affecting  its  business  it  is  compelled  to  pay  a  higher  rate  of  tax  than  other 
corporations  in  its  class,  then  it  may  show  that  it  is  under  the  "hardship  of 
inequality"  and  gain  relief  under  sections  327  and  328.  The  power  placed  in 
the  hands  of  the  Commissioner  is  first  to  determine  whether  the  "hardship  of 
inequality"  exists,  and  if  it  does  and  it  is  due  to  abnormal  conditions,  he  is 
to  average  the  taxpayer's  tax  with  comparatives  selected  according  to  the 
Act. 

Manifestly,  if  the  discriminations  referred  to  in  the  debates  are  to  be 
avoided,  the  greatest  care  should  be  exercised  in  selecting  the  comparatives. 
It  is  easy,  without  effort  or  intent,  to  select  comparatives  so  differently  cir- 
cumstanced as  to  cause  rather  than  correct  glaring  inequalities  between  tax- 
payers of  the  same  class.  Granting  one  taxpayer  relief  under  section  328  and 
comparing  it  with  corporations  which  are  not  similarly  circumstanced  in  all 
of  the  particulars  mentioned  in  the  Act,  and  giving  it  a  lower  rate  of  tax  than 
corporations  so  circumstanced,  is  creating,  not  correcting,  the  "hardship  of 
inequality."  Congress  has  provided  that  the  comparatives  shall  be  rep- 
resentative corporations  similarly  circumstanced  as  to  gross  income,  net 
income,  and  profits  per  unit  of  business  transacted,  "the  amount  and  rate  of 
excess  profits  and  capital  employed  and  all  other  relevant  facts  and  cir- 
cumstances," and  that  the  taxpayer  seeking  such  relief  shall  be  compared 
only  with  such  representative  corporations.  The  term  "capital  employed"  as 
used  in  section  328,  as  applied  to  the  taxpayer,  means  total  capital  employed 
as  distinguished  from  statutory  invested  capital.  The  word  "representative," 
as  used  in  this  section,  means  "typical"  or  "symbolical,"  and  the  Act  requires 
that  the  comparatives  used  be  as  nearly  as  possible  representative  in  all  the 
particulars  mentioned  therein,  and  where  it  is  not  possible  to  find  com- 
paratives which  are  representative  in  all  the  particulars  named  in  the  Act  it 
should  be  kept  in  mind  that  the  intention  of  Congress  was  to  equalize  taxes 
rather  than  reduce  any  particular  taxpayer's  taxes. 

Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 38 


It  does  not  appear  to  this  office  that  the  comparatives  used  in  the  present 
case  meet  with  the  requirements  of  the  Act.    Comparatives  3,  4,  5,  and  6 

appear  to  have  been  well  taken.    These  comparatives  are  all  located  in  , 

their  capital  employed  is  very  nearly  the  capital  of  the  claimant,  and  while 
their  gross  sales  are  less,  their  net  income  compares  favorably  with  that  of 
the  taxpayer.  Their  ordinary  expense  accounts,  repairs,  interest  and  taxes, 
and  rate  of  excess  profits  compare  favorably  with  the  taxpayer's.  The  tax- 
payer's rate  of  tax  computed  under  section  326  is  a  little  higher  than  any  one 

of  them,  but  the  tax  rate  of  three  of  these  comparatives  ranges  from  

per  cent  to  per  cent.    The  other  one  is  below  per  cent.  The 

taxpayer's  rate  is  per  cent. 

Comparatives  1  and  2,  however,  do  not  compare  with  the  taxpayer  in 
hardly  any  particular,  and  are  so  unlike  the  taxpayer  that  the  impression 
might  be  gained  that  they  have  been  used  for  no  other  purpose  than  to 
reduce  the  taxpayer's  rate  of  tax.  Their  invested  capital  is  approximately 
four  times  as  large  as  the  invested  capital  of  the  taxpayer;  their  gross  income 
is  nearly  twice  as  much;  and  their  expense  accounts  compare  in  no  particular 
favorably  with  the  taxpayer.  The  item  of  repairs  alone  should  cause  these 
comparatives  to  be  closely  scrutinized.  The  taxpayer's  repairs  are  consid- 
erably less  than  200x  dollars.  Each  of  the  repair  accounts  of  comparatives 
1  and  2  is  nearly  700x  dollars,  or  over  three  times  as  much  as  the  taxpayer's. 
Their  taxes  and  interest  accounts  are  much  larger,  and  in  comparative  2 
nearly  thirty  times  as  large  as  the  taxpayer's.  Their  excess  profits  tax  rate 
is  only  one-third  to  one-half  as  high  as  the  other  comparatives.  They  are 
not  similarly  circumstanced  with  respect  to  gross  income,  net  income,  profits 
per  unit  of  business  transacted,  as  to  capital  employed,  as  to  the  amount  and 
rate  of  war  profits  or  excess  profits,  nor  in  any  other  particular.  They  produce, 
and  do  not  correct,  an  inequality.    When  used  in  this  case,  they  reduce  the 

taxpayer's  rate  of  tax  to  per  cent,  while  the  comparatives  which  are 

similarly  circumstanced  to  the  taxpayer  must  pay  their  taxes  at  rates  ranging 
from  per  cent  to  per  cent. 

Senator  Smoot,  when  he  was  speaking  on  the  subject  on  the  floor  of  the 
Senate,  December  14,  1918  (Congressional  R.ecord,  p.  666),  foresaw  what 
might  happen  if  these  sections  were  not  administered  with  great  care,  and 
said: 

Mr.  President,  those  are  the  relief  provisions  as  provided  in  the  bill.  Some  of  them  are 
very  sweeping  in  their  scope,  and  if  not  administered  by  the  department  in  absolute  fairness 
will  work  an  unjust  discrimination  against  the  business  of  the  country.  I  want  Senators  to 
know  tha*.  in  these  provisions  there  is  placed  in  the  hands  of  the  Commissioner  of  Internal 
Revenue  or  the  Secretary  of  the  Treasury,  as  the  case  may  be,  a  power  that  has  never  been 
granted  to  department  officials  before.  If  exercised  wisely  it  will  be  a  relief  to  the  insti- 
tutions of  the  country,  and  many  of  them  will  need  it,  but  if  exercised  unjustly  or  unwisely 
there  will  be  a  frightful  discrimination  between  business  concerns  and  industries  of  the  country. 

From  the  foregoing  it  follows  that  the  taxpayer  in  this  case  has  established 
an  abnormal  condition  within  the  meaning  of  section  327  of  the  Revenue  Act 
of  1918  by  showing  that  it  has  developed  in  connection  with  its  business 
intangible  assets  of  recognized  value  and  substantial  in  amount  which  are 
excluded  from  its  invested  capital  under  section  326  of  the  .Vet,  and  is  there- 
fore entitled  to  relief  under  the  provisions  of  sections  327  and  328  of  the  Rev- 
enue Act  of  1918,  if  comparatives  selected  in  accordance  with  the  provisions 
of  section  328  show  the  existence  of  an  exceptional  hardship  as  defined  herein; 
that  comparatives  Nos.  1  and  2  should  be  eliminated  from  the  comparative 
data  and  other  comparatives  selected  which  meet  the  requirements  of  the 
Act. 

Carl  A.  Mapes, 

28  Solicitor  of  Internal  Revenue. 

Supplementary  Bulletin  Rulings. 


A  k   | 


Sec.  327.    Art  901  .—30. 


I('22)-14-205:  A.  R.  R.  845 
Revenue  Act  of  1918— Sections  327  and  328. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  denying  assessment  under  the  provisions  of  sections  327  and  328  of 
the  Revenue  Act  of  1918  be  affirmed,  and,  accordingly,  that  the  appeal  of  the 
taxpayer  be  denied. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  application  for  assessment 
of  the  1919  tax  under  the  provisions  of  sections  327  and  328  of  the  Revenue 
Act  of  1918. 

The  attorneys  for  the  taxpayer  contend  that  the  contracts  entered  into 
between  the  M  Company  and  the  United  States  Government  are  not  "cost 
plus"  contracts  within  the  meaning  of  that  term  as  used  in  section  327  of  the 
Revenue  Act  of  1918. 

Inasmuch  as  the  question  presented  is  one  of  law  rather  than  of  fact,  the 
entire  file  was  referred  to  the  Solicitor  with  request  for  an  opinion.  Under 
date  of  February  2,  1922,  the  Committee  is  in  receipt  of  an  opinion  from  the 
Solicitor,  which  reads  as  follows: 

The  pertinent  provisions  of  the  contract  may  be  summarized  as  follows: 

1.  The  contractor  agreed  to  construct  for  the  United  States  a  manufacturing  plant 
to  consist  of  nine  sections  of  the  aggregate  capacity  of  y  pounds  per  day  of  24  hours,  capable 
of  being  operated  for  27  days  per  month.  The  total  cost  was  estimated  at  75x  dollars. 
The  United  States  agreed  to  reimburse  the  contractor  for  all  costs  and  expenses  of  every  char- 
acter and  description  incurred  or  made  in  connection  with  the  construction  and  equipment 
of  the  plant. 

2.  The  contractor  agreed  upon  the  completion  of  each  section  of  the  plant  to  operate 
it  and  to  do  all  things  necessary  or  convenient  in  this  connection,  including  the  purchase 
and  procurement  of  all  necessary  materials  and  labor  therefor.  The  United  States  agreed 
to  bear  all  the  cost  and  expenditures  of  every  character  and  description  incurred  or  made  in 
connection  with  the  operation  of  the  plant  or  any  part  thereof.  In  addition  to  reimburse- 
ment by  the  United  States  for  all  costs  and  expenditures  incurred  in  operating  the  plant, 
or  any  part  thereof,  it  was  agreed  that  the  United  States  should  pay  the  contractor  z  cents 
per  pound  for  each  and  every  pound  of  the  product  delivered  and  accepted  under  the 
contract;  and  in  addition  thereto,  one-half  of  the  difference,  if  any,  between  the  estimated 
eost  of  producing  each  pound,  determined  in  accordance  with  the  provisions  of  the  con- 
tract, and  the  actual  cost  of  production,  as  ascertained  in  paragraph  (a)  of  such  article, 
where  such  actual  cost  was  less  than  the  estimated  cost  so  determined. 

It  will  be  noted  that  there  was  to  be  paid  to  the  contractor  as  a  guaranteed  fixed  profit 
%  cents  per  pound  for  the  product  delivered  and  accepted  and  that  reimbursement  was 
to  be  made  by  the  United  States  to  the  contractor  for  "all  costs  and  expenditures  of  every 
character  and  description." 

For  the  purpose  of  determining  the  amount  of  additional  compensation,  if  any,  to  be 
paid  over  and  above  the  guaranteed  profit  of  z  cents  per  pound  of  the  product  delivered 
and  accepted,  one  article  sets  forth  an  estimated  price  list  per  pound  of  five  component 
materials.  Upon  the  basis  of  this  price  list  estimated  base  prices  per  pound  were  fixed 
for  five  grades  of  the  product  to  be  manufactured  under  the  contract  (that  is,  an  estimated 
cost  of  manufacturing  a  pound  of  product  of  the  respective  grades).  Of  the  several  grades 
specified  only  one  grade  has  been  manufactured  at  the  time  of  the  suspension  of  work 
under  the  contract  after  the  signing  of  the  armistice,  of  which  approximately  2>9l/iy  pounds 
were  manufactured.  The  estimated  price  of  this  grade  was  originally  fixed  at  12.7s  cents 
per  pound.  It  was  provided,  however,  that  if  the  cost  of  any  of  the  component  mate- 
rials should  so  change  as  to  increase  or  decrease  the  actual  cost  of  the  product,  then  the 
estimated  price  per  pound  should  be  increased  or  decreased  accordingly.  As  stated,  this 
estimated  price  was  fixed  only  for  the  purpose  of  measuring  the  additional  profit  to  be  paid 
to  the  contractor,  if  it  should  be  able  to  produce  the  product  at  an  actual  cost  less  than  the 
estimated  price  so  fixed. 

Paragraph  (a)  of  article  — — ■  provided  that  the  actual  cost  per  pound  of  the  product 
should  be  all  the  costs  and  expenditures  incurred  or  made  in  operation,  excluding,  how- 
ever, (1)  the  cost  of  placing  finished  product  in  storehouses,  (2)  the  cost  of  boxes,  and 
(3)  the  expense  of  maintaining  guards  at  the  plant.  These  latter  costs,  although  not 
included  in  the  computation  for  ascertaining  the  actual  cost  of  the  product  for  the  pur- 
pose stated,  were  nevertheless  a  part  of  the  actual  cost  of  operation  to  be  borne  by  the 
Government. 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.— 40. 


In  the  actual  working  out  of  the  contract  it  was  necessary  to  make  an  adjustment 
of  the  estimated  price  of  12. 7z  cents  per  pound  for  the  product  delivered  and  accepted, 
because  the  contractor  was  compelled  to  pay  higher  prices  for  certain  component  materials 
than  the  estimated  prices  specified  therefor.  The  estimated  price  was,  therefore,  increased 
to  approximately  13. lz  cents  per  pound.  The  actual  cost  per  pound  of  the  product  manu- 
factured was  11. 6z  cents  per  pound,  resulting  in  a  so-called  saving  of  1.5z  cents  per  pound 
under  the  readjusted  base  price  of  13.1  cents  per  pound.  The  actual  cost  of  producing 
such  product  upon  this  basis  was  approximately  l%x  dollars  less  than  the  estimated  cost 
upon  the  basis  of  the  readjusted  estimated  base  price  per  pound.  Pursuant  to  the  terms 
of  the  contract,  the  contractor  became  entitled  thereby  to  one-half  of  the  so-called  saving, 
or  %x  dollars,  which,  as  stated,  was  in  addition  to  the  guaranteed  profit  of  z  cents  per 
pound  for  each  pound  of  the  product  delivered  and  accepted. 

The  taxpayer  has  applied  for  the  assessment  of  its  1919  taxes  under  section  328  of  the 
Revenue  Act  of  1918.    Section  327  of  the  Revenue  Act  of  1918  provides  in  part  as  follows: 

"Sec.  327.  That  in  the  following  cases  the  tax  shall  be  determined  as  provided  in 
section  328: 

(d)  Where  upon  application  by  the  corporation  the  Commissioner  finds  and  so  de- 
clares of  record  that  the  tax  if  determined  without  the  benefit  of  this  section  would,  owing 
to  abnormal  conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the 
corporation  an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax 
computed  without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  repre- 
sentative corporations  specified  in  section  328.  This  subdivision  shall  not  apply  to  any 
case  *  *  *  (2)  in  which  50  per  centum  of  the  gross  income  of  the  corporation  for  the 
taxable  year  (computed  under  section  233  of  Title  II)  consists  of  gains,  profits,  commis- 
sions or  other  income  derived  on  a  cost-plus  basis  from  a  Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive." 

The  contract  in  question  was  made  on  March  - — ,  1918,  and  is  within  the  time  prescribed 
by  clause  (2)  of  subdivision  (d)  of  the  section  quoted. 

The  question  for  determination  is  whether  the  income  from  the  product  manufactured 
under  the  contract  here  in  question  is  derived  on  a  cost-plus  basis.  Words  in  a  statute 
are  to  be  construed  in  their  ordinary  and  generally  accepted  sense,  unless  the  context  in 
which  they  are  used  implies  that  a  different  meaning  was  intended.  On  behalf  of  the 
taxpayer  it  has  been  contended  that  the  phrase  is  equivalent  in  meaning  to  the  phrase 
"income  derived  on  a  cost  basis,"  that  is  to  say  that  income  derived  on  a  cost  basis  must 
bear  some  relation  to  total  cost,  the  amount  thereof  being  arrived  at  by  a  computation 
based  upon  the  amount  of  such  total  cost.  In  other  words,  that  cost  is  the  measure  of 
income  derived,  computed  at  some  rate  upon  the  basis  of  the  total  cost.  It  has,  there- 
fore, been  contended  that  the  application  of  the  phrase  "income  derived  on  a  cost-plus  basis" 
must  be  limited  to  income  derived  upon  a  cost  plus  a  percentage  basis  from  a  Government 
contract  within  the  time  prescribed  by  the  statute. 

In  my  opinion  "income  derived  on  a  cost-plus  basis  from  a  Government  contract" 
means  simply  income  derived  from  such  a  contract  wherein  the  method  of  compensating 
the  contractor  is  by  way  of  reimbursing  him  the  total  actual  cost  of  the  work  done  or  the 
article  furnished  and  the  payment  to  such  contractor  in  addition  thereto  of  a  guaranteed 
profit,  consisting  either  of  (1)  a  fixed  percentage  of  total  cost,  (2)  a  fixed  profit  of  a  definite 
sum  agreed  upon  at  the  time  of  the  closing  of  the  contract,  or  (3)  such  fixed  profit  of  a 
definite  sum  plus  a  percentage  of  any  so-called  saving  effected  by  the  contractor  by  the 
doing  of  such  work  or  the  production  of  such  article  at  a  cost  below  an  agreed  estimated 
cost  of  production  fixed  at  the  time  of  the  closing  of  the  contract.  In  common  usage  the 
term  "cost-plus  basis"  has  been  used  merely  as  a  means  of  distinction  from  the  term  "lump- 
sum basis,"  which  is  a  method  of  compensation  whereby  the  parties  agree  that  the  con- 
tractor will  do  certain  work  at.  an  agreed  total  cost  to  the  owner  of  a  lump  or  fixed  sum 
fixed  at  the  time  of  the  closing  of  the  contract.  See  Kester,  "Accounting,  Theory  and 
Practice,"  volume  3,  pages  318  and  319.  See  also  Crowell,  "Government  War  Contracts," 
volume  25,  "Preliminary  Economic  Studies  of  the  War,"  published  by  the  Carnegie  En- 
dowment for  International  Peace.  In  prewar  days  the  "cost-plus  basis"  of  contracting 
was  used  in  order  to  assure  good  workmanship  and  good  materials  in  connection  with 
building  contracts  and  to  prevent  the  restricting  of  costs  by  the  contractor.  It  consisted 
•  imply  of  the  assumption  of  costs  by  the  owner  and  the  payment  of  a  fee  as  the  contrac- 
tor's compensation,  determined  in  either  of  the  three  ways  mentioned  above.  During 
the  recent  war  it  was  used  in  Government  war  contracting  where  speed  and  a  quantity 
production  were  required  and  where  there  were  no  ready  estimates  at  hand  to  enable 
the  parties  to  fix  a  lump-sum  contract-price.  It  was  also  used  in  letting  contracts  to  some 
contractors  of  proven  ability,  but  who  could  not  finance  operations  upon  as  large  a  scale 
as  the  Government  required.  The  "cost-plus  basis"  of  contracting  has,  therefore,  been 
used  as  indicating  a  method  of  making  compensation  rather  than  as  a  basis  for  the  deter- 
mination of  the  amount  of  compensation  to  be  paid.    Such  compensation  may  or  may 


Supplementary  Bulletin  Rulings. 


11-22-22. 

Sec/327.1  Art  901.-41. 

not  be  computed  upon  the  basis  of  or  in  direct  relation  to  cost,  but  in  either  case  it  satisfies 
the  term  "plus."  This  interpretation  appears  to  be  in  accord  with  the  common  under- 
standing of  the  term  "cost-plus  basis"  by  the  governmental  departments  charged  with 
war  contracting,  as  appears  from  the  recommendations  of  the  Interdepartmental  Cost 
Conference  held  on  July  31,  1917.  (See  full  reprint  of  such  recommendations  in  Nicholson 
&  Rohrbach  on  Cost  Accounting,  p.  488,  et  seq.^  Accordingly,  this  office  holds  that  the 
"cost-plus  basis"  of  contracting  within  the  meaning  of  the  statute  applies  to  those  cases 
wherein  the  contractor  is  to  be  reimbursed  the  actual  cost  of  operations  and  is  to  be  paid 
in  addition  (or  "plus")  an  assured  profit,  determined  by  any  of  the  methods  above  men- 
tioned, whereby  the  burden  of  the  cost  of,  production  is  put  upon  the  Government. 

As  appears  above,  the  method  of  compensation  agreed  upon  by  the  parties  to  the 
contract  here  considered  consisted  of  a  reimbursement  to  the  contractor  of  its  total  actual 
cost  of  operations  and  the  payment  in  addition  thereto  of  a  fixed  profit  of  a  definite  sum 
for  each  and  every  pound  of  product  delivered  and  accepted,  with  a  provision  for  the 
payment  of  an  additional  profit  of  50  per  cent  of  a  so-called  saving  in  case  the  contractor 
produced  the  product  at  an  actual  cost  of  production  in  an  amount  less  than  the  estimated 
cost  of  production  as  determined  under  the  contract.  Income  derived  upon  this  basis 
or  method  of  compensation  is  "income  derived  on  a  cost-plus  basis." 

In  view  of  the  foregoing  opinion  of  the  Solicitor,  in  which  the  Committee 
concurs,  it  is  recommended  that  the  action  of  the  Income  Tax  Unit  in  rejecting 
the  corporation's  application  for  assessment  of  the  profits  tax  for  1919  under 
the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of  1918  be  affirmed, 
and  accordingly  that  the  appeal  of  the  taxpayer  be  denied,  inasmuch  as  50 
per  cent  or  more  of  the  gross  income  of  the  corporation  for  the  taxable  year 
consists  of  gains,  profits,  commissions,  or  other  income  derived  on  a  cost-plus 
basis  from  a  Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive. 

29 


I  ('22)-47-606:    L.O.  1109. 
Excess-Profits  Tax— Sections  327  and  328,  Revenue  Act  of  1918. 

U  The  phrase  "abnormal  conditions  affecting  the  capital  or  income  of  the  corporation" 
includes  the  following  cases,  among  others:  (a)  Where  a  corporation  is  placed  in  a  position 
of  substantial  inequality  because  of  the  time  or  manner  of  organization;  (b)  where  the 
capital  employed,  although  a  material  income-producing  factor,  is  very  small  or  is  in  a 
large  part  borrowed;  (r)  where  there  are  excluded  from  invested  capital  computed  under 
section  326  intangible  assets  of  recognized  value  and  substantial  in  amount,  built  up  or 
developed  by  the  taxpayer;  (d)  where  the  net  income  for  the  year  is  abnormally  high,  due 
to  the  realization  in  one  year  of  (1)  income  earned  during  a  period  of  years,  or  (2)  extra- 
ordinary profit  derived  from  the  sale  of  property  the  principal  value  of  which  has  been 
demonstrated  by  prospecting  or  exploration  and  discovery  work  done  by  the  taxpayer,  or 
(3)  gain  derived  in  one  year  from  the  sale  of  property  the  increase  in  value  of  which  had 
accrued  over  a  period  of  years;  (e)  where  proper  recognition  or  allowance  can  not  be  made 
for  amortization,  obsolescence,  or  exceptional  depletion  due  to  the  World  War. 

2.  WThere  application  is  made  under  section  327(d)  for  assessment  under  section  328 
of  the  Act  of  1918,  the  abnormal  conditions  affecting  the  capital  or  income  of  the  taxpayer 
must  be  established  by  evidence.  Abnormal  conditions  affecting  capital  or  income  in  the 
present  case  have  been  established. 

3.  The  term  "exceptional^hardship,"  as  used  in  section  327(d)  of  the  Revenue  Act  of 
1918,  means  the  hardship  of  inequality  evidenced  by  gross  disproportion  between  the  tax 
computed  without  the  benefits  of  sections  327  and  328  and  the  tax  computed  by  reference 
to  the  representative  corporations  specified  in  section  328,  but  inequality  alone  is  not 
sufficient  to  entitle  a  taxpayer  to  assessment  under  section  328;  the  inequality  must  be 
due  to  abnormal  conditions  affecting  the  capital  or  income. 

4.  In  selecting  corporations  with  which  to  compare  the  taxpayer  in  a  given  case,  great 
care  should  be  exercised  and  only  corporations  which  are  truly  representative  should  be 
used.  The  word  "representative,"  as  used  in  the  Act,  means  "typical"  or  "average," 
and  the  Act  requires  the  comparatives  used  to  be  representative  and  to  be  similarly  cir- 
cumstanced as  nearly  as  may  be  in  respect  to  gross  income,  net  income,  profits  per  unit 
of  business  transacted  and  capital  empjoyed,  amount  and  rate  of  war  profits  or  excess 
profits,  and  all  other  relevant  facts  and  circumstances.  The  corporations  used  as  compara- 
tives must  not  only  be  engaged  in  a  like  or  similar  trade  or  business,  but  as  nearly  as  possible 


Supplementary  Bulletin  Rulings. 


Sec.  327.    Art.  901.-  42. 


similarly  circumstanced  in  all  the  particulars  mentioned  in  the  Act.  In  the  present  case 
the  comparatives  selected  comply  with  the  provisions  of  the  statute. 

5.  Law  Opinion  1090  (C.  B.  1-1,  p.  383)  [Sec.  327.  Art.  901-31,  herein]  is  hereby  revoked. 

Due  to  the  difficulty  which  has  been  experienced  in  interpreting  and  apply- 
ing Law  Opinion  1090,  it  appears  advisable  to  reconsider  that  opinion. 
Furthermore,  it  is  necessary  to  give  further  consideration  to  the  question  of 
what  constitutes  proper  comparatives  for  the  M  Company,  the  case  which 
was  under  consideration  in  Law  Opinion  1090. 

The  facts  in  the  case  of  the  M  Company  are  as  follows: 

The  M  Company  appears  to  have  begun  business  about  1901  and  to  have 
organized  under  its  present  name  in  1905,  with  a  cash  capital  of  60x  dollars. 
In  1909  it  took  over  the  assets  of  the  O  Company  and  the  P  Company  and 
increased  its  capital  stock  to  60Qx  dollars.  Under  the  reorganization,  15%/y 
shares  of  stock  of  the  par  value  of  $100  were  issued  for  tangible  assets,  and 
14}4y  shares  of  the  same  par  value  for  intangible  assets.  Until  1916  the  cor- 
poration's earnings  were  small,  and  it  was  its  policy  to  reinvest  its  earnings 
and  surplus  in  plant  property.  Since  1917  the  company's  earnings  have  been 
very  large,  due,  no  doubt,  in  a  large  part  to  war  conditions.  In  1918,  its 
statutory  invested  capital  was  over  $1200*  dollars  and  its  net  income  approxi- 
mately 700x  dollars. 

The  company  has  made  claim  for  the  abatement  of  71.3a:  dollars  excess- 
profits  taxes  for  the  year  1918,  the  claim  being  based  upon  an  application 
for  assessment  under  sections  327  and  328  of  the  Revenue  Act  of  1918.  The 
Income  Tax  Unit  allowed  relief  under  the  above  sections  and  computed  the 
tax  by  means  of  comparatives  under  section  328,  and  found  the  corporation 
entitled  to  an  abatement  in  the  sum  of  7l.3x  dollars  and  a  refund  in  the 
amount  of  40*  dollars. 

The  claim  of  the  taxpayer  for  assessment  under  sections  327  and  328  is 
based  on  the  fact  that  it  has  spent  large  sums  in  experimental  work  and  that 
as  a  result  thereof  it  has  developed  secret  formulas  which  give  it  a  practical 

monopoly  in  the  manufacture  of  certain  types  of  high-grade   ;  that 

none  of  the  amounts  spent  in  experimental  and  discovery  work  has  been 
capitalized;  that  it  now  has  valuable  intangible  property  which  is  not 
reflected  in  its  invested  capital,  and  that  by  reason  thereof  it  is  subject  to  an 
exceptional  hardship  when  compared  with  other  corporations  in  its  class  which 
have  capitalized  such  expenditures. 

The  question  presented  is  whether  the  M  Company  is  entitled  to  relief 
under  the  provisions  of  sections  327  and  328,  and  if  so,  whether  the  compara- 
tives used  in  computing  the  tax  under  section  328  are  proper. 

The  pertinent^ provisions1' of  the  Revenue'Act  of  1918  follow: 

Sec.  327.  That  in  the  following  cases  the  tax  shall  be  determined  as  provided  in  section 
328: 

(a)  Where  the  Commissioner  is  unable  to  determine  the  invested  capital  as  provided 
in  section  326; 

(b)  -In  the  case  of  a  foreign  corporation; 

(c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible  property  has  been 
paid  in  for  stock  or  for  stock  and  bonds  and  the  Commissioner  is  unable  to  satisfactorily 
to  determine  the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment, 
or  to  distinguish  the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

(d)  Where  upon  application  by  the  corporation  the  Commissioner  finds  and  so  declares 
of  record  that  the  tax  if  determined  without  benefit  of  this  section  would,  owing  to  abnormal 
conditions  affecting  the  capital  or  income  of  the  corporation,  work  upon  the  corporation 
an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed  without 
benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative  corporations 
specified  in  section  328.  This  subdivision  shall  not  apply  to  any  case  (1)  in  which  the  tax 
(computed  without  benefit  of  this  section)  is  high  merely  because  the  corporation  earned 
within  the  taxable  year  a  high  rate  of  profit  upon  a  normal  invested  capital,  nor  (2)  in  which 


Supplementary  Bulletin  Rulings. 


11-22-22. 

Se  .  327.   Ait.  Q01.-43. 

50  per  centum  or  more  of  the  gross  income  of  the  corporation  for  the  taxable  year  (com- 
puted under  section  233  of  Title  II)  consists  of  gains,  profits,  commissions,  or  other  income, 
derived  on  a  cost-plus  basis  from  a  Government  contract  or  contracts  made  between 
April  6,  1917,  and  November  11,  1918,  both  dates  inclusive. 

Sec.  328.  (a)  In  the  cases  specified  in  section  327  the  tax  shall  be  the  amount  which 
bears  the  same  ratio  to  the  net  income  of  the  taxpayer  (in  excess  of  the  specific  exemption 
of  $3,000)  for  the  taxable  year,  as  the  average  tax  of  representative  corporations  engaged 
in  a  like  or  similar  trade  or  business,  bears  to  their  average  net  income  (in  excess  of  the 
specific  exemption  of  $3,000)  for  such  year.  In  the  case  of  a  foreign  corporation  the  tax 
shall  be  computed  without  deducting  the  specific  exemption  of  $3,000  either  for  the  tax- 
payer or  the  representative  corporations. 

In  computing  the  tax  under  this  section  the  Commissioner  shall  compare  the  taxpayer 
only  with  representative  corporations  whose  invested  capital  can  be  satisfactorily  deter- 
mined under  section  326  and  which  are,  as  nearly  as  may  be,  similarly  circumstanced  with 
respect  to  gross  income,  net  income,  profits  per  unit  of  business  transacted  and  capital 
employed,  the  amount  and  rate  of  war  profits  or  excess  profits,  and  all  other  relevant  facts 
and  circumstances. 

While  it  is  manifestly  impossible  to  enumerate  all  the  classes  of  cases 
in  which  there  exists  an  abnormality  affecting  the  capital  or  income  of  a 
corporation  which  may  entitle  the  corporation  to  assessment  under  section 
328,  it  is  thought  advisable  to  set  out  some  of  the  more  usual  conditions  or 
circumstances  which  result  in  such  an  abnormality  as  may  form  the  basis 
for  assessment  under  that  section.  The  following  enumeration  is  by  no  means 
an  exclusive  one;  no  attempt  .is  made  to  enumerate  all  the  conditions  or 
circumstances  which  result  in  an  abnormality  under  the  statute.  However, 
a  statement  of  the  typical  and  usual  cases  in  which  an  abnormality  exists 
affecting  income  or  capital  is  of  value  in  that  it  shows  the  type  of  cases  con- 
templated by  the  statute  and  answers  some  of  the  questions  which  most 
often  arise  regarding  the  construction  and  application  of  the  section  of  the 
statute.  It  should  be  borne  in  mind,  however,  in  determining  a  specific 
case  whether  there  exists  such  an  abnormality  as  to  entitle  the  corporation 
to  assessment  under  section  328,  that  sections  327  and  328  are  obviously 
relief  sections  and  should  be  construed  and  applied  so  as  to  carry  into  effect 
the  clear  intention  of  Congress. 

It  is  my  opinion  that  the  following  represent  the  typical  and  common 
cases  in  which  there  is  present  an  abnormal  condition  affecting  capital  or 
income  of  a  corporation:  (1)  Where  a  corporation  is  placed  in  a  position  of 
substantial  inequality  because  of  the  time  or  manner  of  organization;  (2) 
where  the  capital  employed,  although  a  material  income-producing  factor, 
is  very  small  or  is  in  a  large  part  borrowed;  (3)  where  there  are  excluded  from 
invested  capital  computed  under  section  326  intangible  assets,  of  recognized 
value  and  substantial  in  amount,  built  up  or  developed  by  the  taxpayer; 
(4)  where  the  net  income  for  the  year  is  abnormally  high,  due  to  the  realiza- 
tion in  one  year  of  (a)  income  earned  during  a  period  of  years,  or  (b)  extra- 
ordinary profit  derived  from  the  sale  of  property  the  principal  value  of  which 
has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work 
done  by  the  taxpayer,  or  (c)  gain  derived  in  one  year  from  the  sale  of  property 
the  increase  in  value  of  which  had  accrued  over  a  period  of  years;  and  (5) 
where  proper  recognition  or  allowance  can  not  be  made  for  amortization, 
obsolescence,  or  exceptional  depletion  due  to  the  World  War. 

The  above  alone,  however,  is  not  sufficient  to  entitle  the  taxpayer  to  the 
benefit  of  assessment  under  section  328.  The  circumstances  outlined  above 
must  work  upon  the  corporation  an  exceptional  hardship,  evidenced  by 
gross  disproportion  between  the  tax  computed  without  the  benefit  of  sections 
327  and  328  and  the  tax  computed  under  section  328,  in  order  that  the  tax- 
payer may  be  entitled  to  special  relief.  "Exceptional  hardship,"  which  is  a 
prerequisite  to  assessment  under  section  328,  must  be  evidenced  by  gross 

Supplementary  Bulletin  Rulings. 


Sec  327.   Art.  901.— 44. 


disproportion  between  the  tax  computed  without  the  benefit  of  the  relief 
sections  and  the  tax  computed  under  section  328  by  a  comparison  with  repre- 
sentative corporations  engaged  in  a  like  or  similar  trade  or  business  and 
similarly  circumstanced  with  the  taxpayer  as  nearly  as  may  be  with  respect 
to  gross  income,  net  income,  profits  per  unit  of  business  transacted  and  capital 
employed,  the  amount  and  rate  of  war  profits  br  excess  profits,  and  all  other 
relevant  facts  and  circumstances. 

In  determining  whether  a  taxpayer  is  entitled  to  assessment  under  section 
328  because  of  any  of  the  reasons  given  above,  the  limitation  contained  in 
section  327  (d)  should  be  constantly  borne  in  mind.  A  taxpayer  is  not 
entitled  to  relief  if  its  tax  is  high  merely  because  it  earned  within  the  taxable 
year  a  high  rate  of  profit  upon  a  normal  invested  capital.  The  distinction 
between  those  cases  in  which  the  tax,  computed  without  benefit  of  the  relief 
provision,  is  exceptionally  high  because  of  abnormal  conditions  affecting 
invested  capital  or  net  income  and  those  cases  in  which  the  tax  is  high  merely 
because  the  corporation  earned  exceptionally  high  profits  upon  a  normal 
invested  capital,  is  an  important  one;  in  the  first  case,  the  corporation  may 
be  entitled  to  relief;  in  the  second  case,  it  is  not  entitled  to  relief. 

Applying  the  above  to  the  instant  case,  it  is  my  opinion  that  the  M 
Company  is  entitled  to  assessment  under  the  provisions  of  section  328, 
since  the  tax,  if  determined  without  the  benefit  of  the  relief  section,  would, 
owing  to  the  existence  of  an  abnormal  condition  affecting  the  capital  of  the 
company,  work  upon  the  company  an  exceptional  hardship  evidenced  by 
gross  disproportion  between  the  tax  computed  without  benefit  of  the  relief 
sections  and  the  tax  computed  by  reference  to  the  representative  corporations 
specified  in  section  328. 

Under  sections  327  and  328,  where  an  abnormality  exists  affecting  the 
net  income  or  invested  capital  of  the  corporation,  so  that  the  corporation  is 
entitled  to  special  relief,  the  rate  of  tax  of  the  corporation  shall  be  based  upon 
the  average  rate  of  tax  of  representative  corporations  engaged  in  a  like  or 
similar  trade  or  business  and  similarly  circumstanced  as  nearly  as  may  be 
with  the  taxpayer.  Representative  corporations,  within  the  meaning  of 
this  section,  are  the  typical: or  average  ones  in  that  trade  or  business,  as 
distinguished  from  the  ones  having  peculiar  characteristics.  The  intent  of 
the  section,  therefore,  is  that  the  rate  of  tax  of  a  corporation  entitled  to 
special  relief  shall  be  based  upon  the  average  rate  of  tax  of  the  typical  or 
average  corporations  in  that  trade  or  business  which  are  similarly  circum- 
stanced, as  nearly  as  may  be,  with  the  taxpayer.  Great  care  should  be 
exercised  in  the  selection  of  these  comparatives,  because  the  granting  of 
relief  under  Section  328  and  the  comparison  with  other  corporations  which 
are  either  not  representative  of  the  trade  or  business  or  not  similarly  cir- 
cumstanced in  all  particulars  specified  in  the  Act,  may  create  inequalities 
rather  than  correct  them. 

However,  it  must  be  recognized  as  a  practical  matter  that  it  is  not  always, 
and  in  fact  is  seldom,  possible  to  find  comparatives  representative  of  the  trade 
or  business  which  are  similarly  circumstanced  with  the  taxpayer  in  all 
particulars  specified  in  the  Act.  In  fact,  the  statute  expressly  recognizes 
this  fact  by  providing  that  the  corporations  with  which  the  taxpayer  entitled 
to  special  relief  is  compared  must  be  similarly  circumstanced  "as  nearly  as 
may  be"  with  respect  to  the  various  facts  and  circumstances  specified. 

These  six  comparatives  given  on  the  data  sheet,  I  am  advised,  comprise 
the  corporations  representative  of  the  same  trade  or  business  as  the  M 
Company,  which  are  most  similarly  circumstanced  with  respect  to  the  items 
specified  in  section  328,  with  the  taxpayer.    It  may  be  noted,  however,  that 

Supplementary  Bulletin  Rulings. 


1 1-22-22. 

Sec.  327.    Art.  901.-  45. 

none  of  these  six  corporations  is  in  exactly  the  same  position  as  the  taxpayer. 
The  invested  capital  of  comparatives  1  and  2  is  approximately  four  times  as 
large  as  the  invested  capital  of  the  taxpayer;  their  gross  income  is  nearly 
twice  as  large;  their  expense  accounts  do  not  compare  favorably  with  that 
of  the  taxpayer.  The  amount  of  gross  sales  of  comparative  6  is  less  than  one- 
half  that  of  the  taxpayer.  Its  cost  of  goods  sold  is  less  than  one-third  that  of 
the  taxpayer,  as  is  its  expense  account;  its  net  income  is  considerably  less 
than  that  of  the  taxpayer,  while  the  proportion  of  its  net  income  to  gross 
sales  is  approximately  twice  that  of  the  taxpayer.  Furthermore,  comparatives 
3,  4,  and  5,  as  may  be  seen,  are  circumstanced  in  many  respects  quite  differ- 
ently from  the  taxpayer.  Thus,  none  of  the  six  comparatives  which  are 
most  nearly  similarly  circumstanced  with  the  taxpayer  is  ideal.  Neverthe- 
less, the  taxpayer  is  entitled  to  relief  under  section  328,  and  corporations 
must  be  used  as  comparatives  which  are  similarly  circumstanced  as  nearly 
as  may  be  with  the  taxpayer.  The  six  corporations  used  as  comparatives  in 
this  case  are  those,  I  am  advised,  most  similarly  circumstanced  with  the 
taxpayer  with  respect  to  the  items  specified  in  section  328.  Furthermore,  the 
items  of  sifcae  which  are  dissimilar  to  the  taxpayer  are  balanced  by  the  corres- 
ponding items  of  the  other  comparatives,  and  the  correctness  of  the  result 
reached  by  the  use  of  these  comparatives  is  shown  by  the  fact  that  the 
average  obtained  by  grouping  the  six  comparatives  compares  very  closely 
with  the  taxpayer. 

In  the  instant  case  the  comparatives  used  are  the  ones  most  comparable 
to  the  taxpayer  with  respect  to  the  items  specified  in  section  328  and  the 
average  of  these  comparatives  compares  in  every  respect  favorably  with  the 
taxpayer.  It  is  my  opinion,  therefore,  that  the  comparatives  used  in  the 
data  sheet  prepared  in  this  case  comply  with  the  provisions  of  section  328. 
Law  Opinion  1090  [Sec.  327.    Art.  901.-31,  herein.]  is  hereby  revoked. 

Carl  A.  Mapes, 
Solicitor  of  Internal  Revenue. 

30 


Supplementary  Bulletin  Rulings. 


( 


2-20-22. 

Sec.  328.    Art.  911. — 1. 

Section  328.— Computation  of  Tax  in  Special  Cases  (1918  Act— ^[570,  ante) : 
(1921  Act— H1049,  post). 
Article  911. — Computation  of  Tax  in  Special  Cases  (Reg.  45 — 1f832r 
ante):  (Reg.  62— 1f 1244,  post). 

(See  5-20-723;  Section  337,  Article  971.)    Application  of  the  provisions 
of  this  section  in  case  of  a  corporation  which  is  also  entitled  to  the  benefit 
of  the  provisions  of  section  337. 
1 


(See  11-20-788;  Section  326,  Article  845.)  Adjustment  of  invested  capital 
for  taxable  year  when  claim  for  assessment  of  tax  for  previous  year  under 
section  328  remains  unsettled. 
1 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  328.    Art.  912.— 1. 

Section  328.— Computation  of  Tax  in  Special  Cases  (1918  Act— If 570,  ante): 
(1921  Act— H1049,  post). 
Article  912. — Determination  of  First  Installment  of  Tax  in  Special 
Cases  (Reg.  45— 1f833,  ante):  (Reg.  62— 1f  1245,  post). 

1-19-136:  O.  D.  94. 

Computation  of  tax  on  the  basis  of  50  per  cent  of  the  net  income  under 
section  328,  Revenue  Act  of  1918,  relates  only  to  war  excess  profits  tax. 
It  is  not  permissible  to  file  bond  in  lieu  of  cash  payments  of  tax  determined 
on  50  per  cent  basis  pending  final  determination  of  tax  due. 
1 


6-19-285:  T.  B.  M.  30. 

The  application  of  section  210  of  the  Revenue  Act  of  1917  and  sections  327 
and  328  of  the  Revenue  Act  of  1918  to  fiscal  year  returns. 

A  corporation  having  a  fiscal  year  ending  June  30,  1918,  filed  income 
and  excess  profits  tax  returns  for  that  period  under  the  Revenue  Act  of  1917. 
Its  tax  was  finally  assessed  under  section  210  of  the  Revenue  Act  of  1917. 
The  taxpayer  in  making  its  supplemental  return  for  the  same  fiscal  year 
under  the  Revenue  Act  of  1918  wishes  to  use  the  same  constructive  capital 
as  a  basis  for  computing  its  excess  profits  tax  under  the  Revenue  Act  of  1918, 
and  appeals  from  a  decision  of  the  Unit  advising  it  that  this  can  not  be  done. 

Section  335  of  the  Revenue  Act  of  1918,  which  levies  the  war  profits 
and  excess  profits  taxes  for  a  fiscal  year  ending  in  1918,  reads  in  part  as 
ollows. 

Sec.  335  («).  That  if  a  corporation  (other  than  a  personal  service  corporation)  makes 
return  for  a  fiscal  year  beginning  in  1917  and  ending  in  1918,  the  tax  for  the  first  taxable 
year  under  this  title  shall  be  the  sum  of:  (1)  The  same  proportion  of  a  tax  for  the  entire 
period  computed  under  Title  II  of  the  Revenue  Act  of  1917  which  the  portion  of  such 
pariod  falling  within  the  calendar  year  1917  is  of  the  entire  period,  and  (2)  the  same  pro- 
portion of  a  tax  for  the  entire  period  computed  under  this  title  at  the  rates  specified  in 
subdivision  («)  of  section  301  which  the  portion  of  such  period  falling  within  the  calendar 
year  1918  is  of  the  entire  period. 

In  the  opinion  of  the  Advisory  Tax  Board  the  effect  of  this  section  of 
the  statute  is  that  the  excess  profits  tax  for  a  fiscal  year  ending  in  1918  is 
computed  in  two  ways.  First,  it  is  computed  as  if  the  entire  income 
had  been  earned  during  the  calendar  year  1917.  This  involves  in  some 
cases  an  assessment  under  section  210.  Second,  it  is  computed  as  if  the 
entire  net  income  had  been  earned  during  the  calendar  year  1918.  This 
involves  in  some  cases  an  assessment  under  section  328.  The  proper  pro- 
portions of  the  resulting  taxes  are  used  to  determine  the  tax  for  the  fiscal 
year. 

Where  possible,  it  would  be  desirable  to  consider  the  application  for 
assessment  under  section  210  and  the  application  for  assessment  under  section 
327  together.  Where,  as  in  this  case,  the  assessment  under  section  210  has 
already  been  made,  the  taxpayer  should  be  notified  to  file  with  its  supple- 
mental return  an  application  for  assessment  under  section  327.  Pending 
decision  upon  its  application  it  will  be  necessary  for  the  taxpayer  to  compute 
the  additional  tax  due  upon  the  assumption  that  the  excess  profits  tax 
computed  under  the  Revenue  Act  of  1918  will  be  not  more  than  50  per  cent 
of  its  net  income,  as  is  provided  in  section  328  and  article  912-914,  Regula- 
tions 45.  In  no  case  would  the  constructive  capital  determined  under  section 
210  be  used  in  making  the  assessment  under  section  328, 
2 


Supplementary  Bulletin  Rulings. 


.1 — .SIQ  .irk    .8S€  .398 

Sec.  328.    Art.  912.— 2. 

:  (sina  t0Y£?— fc>A  8X011  2d8RD  Ifiioeqg  m  xbT  lo  aottBtuqmoO —  8S£  nortos^ 

I  ('22)-7-97  I.  T.  1210 

Revenue  Act  of  1918. 

The  installments  of  the  tax  in  the  case  of  a  corporation  coming  within  the 
provisions  of  article  912,  Regulations  45,  and  which  made  its^return  on  the 
basis  of  a  fiscal  year  ended  in  1919,  should  be  determined  as  follows: 

(1)  Compute  the  tax  at  1918  rates  upon  the  entire  net  income  forfthe 
taxable  year;  that  is,  50  per  cent  of  the  net  income. 

(2)  Compute  the  tax  at  the  1919  rates  upon  the  entireTnet  income  for  the 
taxable  year;  that  is,  20  per  cent  of  the  net  income  in  excess^of  $3,000'but  not 
in  excess  of  $20,000  plus  40  per  cent  of  the  net  income  in  excess  of  $20,000. 

(3)  Ascertain  that  proportion  of  item  1  which  thefnumber  of  months 
within  the  calendar  year  1918  is  of  the  number  of  months  infthe*entire*period. 

(4)  Ascertain  that  proportion  of  item  2  which  the  number  of  months  in 
the  calendar  year  1919  is  of  the  number  of  months  in  the  entire  period. 

(5)  /The  total  tax  equals  the  sum  of  item  3  and  item  4. 

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.1E9Y 

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noijo92  lsbnu  )n3m2a922c  3d?  aniiE^m  ni  b9au  3d  Oil 


Supplementary  Bulletin  Rulings. 


2-20-22. 


Sec.  328.    Art.  913.— i 

Law  Section  328.— Computation  of  Tax  in  Special  Cases  (1918  Act — 1[570, 
ante):  (1921  Act— 1f 1049,  post). 
Article  913. — Determination  of  First  Installment  of  Tax  in  the  Case  of 
Foreign  Corporation,  or  a  Corporation  Entitled  to  the  Benefits 
of  Section  262  (Reg.  45— H834,  ante) :  (Reg.  62— 1f  1246,  post). 

6-20-735:  O.  D.  402. 
The  instalments  of  the  tax  for  1919  of  a  foreign  corporation  shall  be 
determined  upon  the  basis  of  an  excess  profits  tax  computed  by  using  its 
invested  capital  for  the  taxable  year  1917  properly  adjusted  by  reason  of 
subsequent  changes.  Because  of  the  provisions  of  section  302  this  tax  can 
in  no  case  be  more  than  20  per  cent  of  the  amount  of  the  net  income  in  excess 
of  $3,000  and  not  in  excess  of  $20,000,  plus  40  per  cent  of  the  amount  of 
net  income  in  excess  of  $20,000.  Final  determination  of  the  tax  will  be  made 
according  to  the  provisions  of  sections  327  and  328. 
1 


Supplementary  Bulletin  Rulings. 


.8S£  aoi 


2-20-22. 

Sec.  328.    Art.  914.— IV 

Law  Section  328.— Computation  of  Tax  in  Special  Cases  (1918  Act — 1(570, 
ante):  (1921  Act— 1[1049,  post). 
Article  914.— Payment  of  Tax  in  Special  Cases  (Reg.  45 — 1f835,  ante) : 
(Reg.  62— 1T1247,  post). 

26-19-599:  0.  D.  321. 
The  provisions  of  section  327  (d)  of  the  Revenue  Act  of  1918  will  not 
debar  a  corporation  deriving  income  from  Government  contracts  on  the 
"per  unit"  basis  from  filing  a  claim  for  assessment  under  the  provisions  of 
section  328.  If  the  claim  is  filed  prior  to  the  due  date  of  the  fourth  install- 
ment of  tax  and  the  three  installments  already  paid  are  equal  to  the  sum  of 
the  normal  tax  plus  a  war  profits  and  excess  profits  tax  equal  to  50  per  cent 
of  the  net  income  of  the  corporation,  it  will  not  be  necessary  to  pay  the 
fourth  installment,  but  the  additional  payments  of  tax,  if  any,  with  interest, 
may  be  made  when  the  claim  for  readjustment  of  the  tax  is  finally  disposed 
of.  The  corporation  should  file  a  claim  for  abatement  of  any  taxes  assessed; 
in  excess  of  the  tax  computed. 
1 


31-19-655:  O.  D.  356. 

In  cases  where  application  has  been  made  at  the  time  of  filing  the  return 
for  assessment  of  war  profits  and  excess  profits  tax  in  accordance  with 
section  328,  Revenue  Act  of  1918,  and  the  installments  of  tax  determined 
and  assessment  made  on  the  basis  of  50  per  cent  of  the  net  income  for  the 
taxable  year,  no  abatement  claim  is  required  to  cover  the  difference  between 
the  tax  so  computed  and  the  tax  computed  without  the  benefit  of  section 
328.  If  the  tax  has  been  computed  and  assessment  made  without  reference 
to  section  328,  and  application  is  made  subsequently  for  assessment  of  the 
tax  in  accordance  with  section  328,  payment  of  the  entire  tax  as  originally 
computed  will  be  required  unless  a  claim  is  filed  for  the  abatement  of  the 
amount  assessed  in  excess  of  50  per  cent  of  the  net  income. 
2 

consolidating  cprporations,  or  a,  new  eorpoasafcioij  W. 


Supplementary  Bulletin  Rulings. 


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Sec.  330.    Art.  931.— 1. 


Law  Section  330. — Reorganizations  (11575). 

Article  931. — Scope  of  Reorganizations  (H837). 

22-20-981:  Sol.  Op.  4 

WAR  PROFITS  AND  EXCESS  PROFITS  TAX— REVENUE  ACT  OF  1918, 

INVESTED  CAPITAL 
A  merger  of  two  or  more  corporations  takes  place  when  one  of  such  corpora- 
tions retains  its  corporate  existence  and  absorbs  the  other  or  others,  which  thereby 
lose  their  corporate  existence. 

A  consolidation  of  two  or  more  corporations  is  effected  when  a  new  corporation 
is  created  to  take  the  place  of  the  constituent  corporations,  which  are  themselves 
dissolved  in  the  process. 

This  case  involves  the  formation  in  1904  of  the  M  Company  through  a 
so-called  merger  or  consolidation  of  three  New  Jersey  corporations:  the  N 
Company,  the  O  Company,  and  the  P  Company,  the  latter  of  which  owned 
a  controlling  proportion  of  the  stock  of  the  two  other  constituent  corpora- 
tions. The  question  upon  which  advice  is  desired  in  computing  the  invested 
capital  of  the  M  Company  is  whether  it  was  formed  as  a  new  corporation 
in  1904  in  connection  with  the  dissolution  of  the  three  constituent  corpora- 
tions, or  whether,  as  claimed  by  the  company,  it  was  the  same  corporate 
entity  (only  under  a  different  name)  as  the  P  Company  which  by  merger 
had  absorbed  the  N  and  O  Companies. 

Strictly  speaking,  a  merger  of  two  or  more  corporations  takes  place  when 
one  of  such  corporations  retains  its  corporate  existence  and  absorbs  the  other 
or  others,  which  thereby  lose  their  corporate  existence.  A  consolidation 
in  a  strict  legal  sense  is  effected  when  a  new  corporation  is  created  to  take 
the  place  of  the  constituent  corporations,  which  are  themselves  dissolved 
in  the  process.    Lee  v.  Atlantic  Coast  Line  Railway  Co.,  150  Fed.  775,  787, 

The  determination  of  whether  a  union  of  corporations  results  in  a  merger 
or  in  the  formation  of  a  new  corporation  depends  upon  the  statute  under 
which  it  takes  place,  and  the  intention  therein  manifested.  Central  Railroad 
Co.  v.  Georgia,  92  U.  S.  665,  670. 

The  merger  or  consolidation,  as  the  case  may  be,  which  is  here  under 
consideration  was  effected  under  a  New  Jersey  statute  entitled:  "An  Act 
concerning  corporations  (revision  of  1896)"  and  the  several  supplements 
thereto  and  Acts  amendatory  thereof.  The  statute  provides  that  two  or 
more  corporations  organized  under  the  laws  of  the  State  for  the  purpose  of 
carrying  on  business  of  the  same  or  a  similar  nature  may  "merge  or  consoli- 
date into  a  single  corporation,  which  may  be  either  one  of  said  merging  or 
consolidating  corporations,  or  a  new  corporation  to  be  formed  by  means  of 
such  merger  and  consolidation." 

The  New  Jersey  law  clearly  authorizes  either  a  process  by  which  one 
corporation  retains  its  corporate  existence  and  absorbs  one  or  more  other 
corporations,  or  a  process  by  which  two  or  more  corporations  unite  in  the 
formation  of  a  new  corporation;  but  the  interpretation  of  the  various  pro- 
visions of  the  statute  is  somewhat  confused  for  the  reason  that  the  terms 
"merge"  and  "consolidate"  in  their  different  grammatical  forms  are  employed 
therein  more  or  less  indiscriminately  and  without  regard  to  the  true  legal 
niceties  of  their  respective  meanings. 

The  Act  in  reality  gives  an  option  to  the  constituent  corporations  to  unite 
either  by  the  merger  of  one  or  more  into  another  or  by  the  formation  of  a  new 
corporation  to  take  the  place  of  the  old  ones.  Difficulty  arises  in  determining 
which  of  the  two  options  is  exercised  in  a  particular  instance  since  the  statute 
prescribes  substantially  the  same  procedure  in  one  case  as  in  the  other. 
The  terms  of  the  agreement  entered  into  as  a  first  step  in  the  union  of  the 


Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  931.— 2. 


corporations  furnish  the  best  evidence  of  what  the  parties  intended  in  this 
respect. 

In  examining  the  language  of  the  agreement  entered  into  in  1904  between 
the  respective  directors  of  the  N  Company,  the  O  Company,  and  the  P 
Company,  but  little  aid  is  obtained  from  a  consideration  of  the  use  of  the 
terms  "merge"  and  "consolidate"  for  the  reason  that  they  are  employed, 
as  in  the  case  of  the  New  Jersey  statute,  in  a  confused  and  inexact  sense. 
The  true  intention,  therefore,  must  be  ascertained  by  other  tests. 

It  is  claimed  in  behalf  of  the  corporation  that  the  N  Company  and  the 
0  Company  were  merged  in  the  P  Company,  which  retained  its  corporate 
existence  under  the  name  of  the  M  Company.  There  is  no  evidence  in  the 
record  other  than  the  bare  assertion  to  support  that  contention.  If  that  had 
been  the  intention  it  is  believed  at  least  that  in  the  resulting  corporation 
some  distinctive  feature  of  the  P  Company  would  have  been  preserved  by 
which  its  survivorship  could  be  recognized.  As  the  matter  stands  there  is 
no  basis  other  than  conjecture  or  surmise  to  justify  an  inference  that  the  P 
Company  survived  to  any  greater  extent  than  the  other  two  constituent 
companies,  and  it  is  conceded  that  the  latter  were  dissolved. 

It  is  true  that  the  P  Company  by  virtue  of  its  stock  holdings  in  the  other 
companies  was  the  parent  corporation  of  the  group  and  that  its  powers  more 
nearly  corresponded  to  the  powers  of  the  resulting  M  Company  than  to  those 
of  the  other  constituent  corporations,  but  such  facts  merely  create  a  likeli- 
hood that  the  P  Company  would  have  been  the  one  elected  to  survive  if 
any  had  been  chosen;  they  do  not  show  the  fact  of  such  election. 

On  the  other  hand,  there  are  various  provisions  in  the  agreement  which 
indicate  that  the  resulting  M  Company  was  regarded  as  a  separate  corporate 
entity  distinct  from  that  of  any  of  the  three  constituent  companies,  as 
evidenced  by  the  following  quotations: 

Article  V.  The  said  corporations  are  merged  and  consolidated  upon  the  understanding 
and  agreement  that  the  present  indebtedness  of  each  of  said  corporations  shall  be  assumed 
in  full  by  the  said  merged  corporation. 

Article  VI.  All^  property,  real,  personal,  and  mixed,  of  the  said  corporations,  parties 
hereto,  shall  vest  in  the  said  merged  corporation  immediately  upon  the  adoption  of  this 
agreement  by  the  stockholders  of  the  said  corporation,  as  provided  by  the  provisions  of 
the  said  Act  entitled  "An  Act  Concerning  Corporations  (Revision  in  1896)"  and  the  several 
supplements  thereto  and  Acts  amendatory  thereof;  but  if  the  said  merged  corporation 
shall  deem  or  be  advised  that  any  further  assignments,  assurances  in  the  law,  or  things 
are  necessary  or  desirable  to  vest  the  title  to  such  property  in  the  said  merged  corporation, 
the  said  corporations,  parties  hereto,  shall  execute  and  do  all  such  assignments,  assurances 
in  the  law,  and  things  necessary  to  vest  title  to  such  property  in  said  merged  corporation, 
and  otherwise  to  carry  out  the  purposes  of  this  agreement. 

Article  VII  (in  part).  The  capital  stock  of  each  of  the  said  corporations,  parties 
hereto,  shall  be  converted  into  the  common  stock,  the  preferred  stock,  or  the  obligations 
of  said  merged  corporation,  and  the  common  stock,  preferred  stock,  and  obligations  of  said 
merged  corporation  shall  be  apportioned  among  the  stockholders  of  the  said  corporations, 
parties  hereto,  according  to  the  shares  held  by  the  respective  stockholders  of  said  corpora- 
tions, a  d  shall  be  delivered  to  them  upon  the  sur;ender  of  their  certificates  of  stock. 
*  *  *  By  the  act  of  merger  the  stocks  of  all  the  companies,  parties  hereto,  held  by  any 
of  the  companies,  parties  hereto,  shall  stand  and  be  canceled. 

The  most  important  evidence  as  to  the  status  of  the  M  Company  is 
found  in  article  II  of  the  agreement  of  1904.  As  a  first  step  in  the  union 
of  corporations  the  New  Jersey  statute  provides  for  an  agreement  between 
the  directors,  which  must  then  be  submitted  to  and  ratified  by  a  two-thirds 
vote  of  the  stockholders  of  the  respective  corporations  Thereafter  the 
perfected  agreement  is  to  be  filed  with  the  Secretary  of  State  when  the 
merger  or  consolidation  becomes  complete,  and  the  resulting  corporation 
becomes  vested  with  all  the  powers,  rights,  privileges,  and  franchises  of  the 
constituent  corporations  The  statute  also  prescribes  what  must  be  embodied 
in  the  agreement,  including  the  terms  and  conditions  of  the  merger  or  con- 
Supplementary  Bulletin  Hillings. 


Sec.  330.    Art.  931.— 3. 


solidation,  the  mode  of  carrying  the  same  into  effect,  and  various  other 
provisions,  but  does  not  require  any  statement  therein  of  the  powers  of  the 
resulting  corporation.  In  article  II  of  the  directors'  agreement  in  the  case 
at  hand  it  is  expressly  provided  that  the  said  merged  corporation  in  addition 
to  the  powers  conferred  by  section  1  of  the  "Act  Concerning  Coj  potations" 
(which  section  covers  the  usual  powers  of  corporations)  "shall  have  the 
powers  herein  set  out."    Then  follows  an  elaborate  enumeration. 

It  appears,  therefore,  that  it  was  the  intention  of  the  agreement  to  vest 
the  so-called  "merged  corporation"  with  a  distinct  and  complete  set  of 
powers  such  as  would  be  conferred  upon  a  new  corporation  iather  than  to 
permit  the  statute  itself  to  operate  by  conferring  on  it  merely  the  resultant 
powers  of  the  old  corporations. 

Thus  the  final  result  of  the  union  of  the  N  Company,  the  O  Company, 
and  the  P  Company  was  that  each  of  said  corporations  alike  was  left  without 
property  and  stock — the  latter  of  which  particulaily,  or  its  equivalent,  is 
in  some  foim  essential  to  corporate  existence,  Keokuk  &  Western  Railroad 
v.  Missouri,  152  U.  S.,  301;  309 — and  there  emerged  in  their  place  a  corpora- 
tion having  new  stock,  new  officers  and  directors,  and  a  new,  distinct,  and 
complete  grant  of  corporate  powers. 

In  view  of  the  foregoing  considerations,  particularly  of  the  distinct 
corporate  character  designed  for  the  resulting  corporation  as  evidenced  by 
the  directors'  agreement,  and  also  the  lack  of  evidence  to  manifest  the  inten- 
tion of  the  parties  that  the  P  Company,  or  any  of  the  other  constituent 
corporations,  should  survive  and  absorb  the  others,  it  is  my  opinion  that  the 
M  Company  was  created  as  a  new  corporation  in  1904  through  the  union  of 
the  N  Company,  the  O  Company,  and  the  P  Company. 

Wayne  Johnson, 
Solicitor  of  Internal  Revenue. 

I 


(See  25-20-1022;  Section  331,  Article  941.)    Valuation  of  assets  trans- 
ferred upon  change  of  corporate  entity. 
2 


<  16-21-1586:  A.  R.  R.  467 
REVENUE  ACT  OF  1917. 
Held,  that  a  corporation,  organized  in  October,  1917,  which  acquires  the 
business  and  properties  of  a  partnership  as  of  January  1,  1917,  the  ownership 
continuing  identical  as  does  the  business,  can  not  make  a  return  for  the  entire 
year,  as  if  it  were  a  corporation,  using  the  invested  capital  of  the  partnership  as  of 
January  1,  1917,  as  its  invested  capital. 

The  Committee  has  had  under  consideration  the" appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  denying  this  corporation,  which 
was  organized  in  October,  1917,  the  right  of  filing  a  corporate  return  for  the  full 
taxable  year  1917,  by  treating  the  partnership  prior  to  October,  1917,  as  if  it 
were  a  corporation. 

^  The  M  Company  was  incorporated  October,  1917,  taking  over  the  partner- 
ship business  of  two  brothers.  By  a  written  agreement,  between  the  corpo- 
ration and  the  partnership,  the  corporation  acquired  all  of  the  assets  of  the 
partnership,  including  the  business,  as  of  January  1,  1917,  and  assumed  its 
obligations  from  that  date.  Except  for  one  or  two  statutory  shares  the  two 
partners  received  the  entire  capital  stock  of  the  corporation.    All  necessary 


Supplementary  Bulletin  Rulings 


Sec.  330.    Art.  931.— 4. 


adjustments  were  made  to  state  the  balance  sheet  as  of  January  1,  1917,  and 
certain  transactions  of  the  partners  were  revoked  in  order  that  the  identical 
book  values  and  liabilities  as  of  January  1,  1917,  might  be  assumed  by  the 
corporation  under  the  agreement  with  the  partners. 

It  is  stated  that  the  corporation,  between  October,  1917,  and  January  1, 
1918,  paid  dividends  to  its  stockholders,  offered  to  pay  its  capital  stock  tax 
for  said  year  of  1917,  and  at  the  proper  time  in  1918  filed  its  corporate  return 
with  the  Federal  Government  covering  the  entire  year  1917,  using  as  its 
invested  capital  the  invested  capital  of  its  predecessor  as  of  January  1,  1917. 

The  corporation,  in  making  an  appeal  to  this  Committee  to  sustain  its 
action  in  filing  a  corporation  return  for  the  full  taxable  year  1917,  relies  upon 
section  204  and  section  208  of  the  Revenue  Act  of  1917,  and  upon  section  330 
of:  the  Revenue  Act  of  1918.  Section  204  of  the  Revenue  Act  of  1917  estab- 
lished a  basis  for  prewar  data,  while  section  208  has  to  do  with  invested  capital 
at  date  of  reorganization,  consolidation  or  change  in  ownership.  It  does  not 
apply  retroactively  to  the  beginning  of  the  taxable  year  but  is  applicable 
only  to  the  value  of  assets  immediately  transferred. 

Section  330  (articles  931,  932,  933  of  Regulations  45)  approves  the  practice 
followed  by  the  taxpayer  for  the  year  1917,  except  for  the  important  provision 
that  the  net  income  of  a  trade  or  business  from  January  1,  1918,  to  date  of 
reorganization,  if  reorganized  on  or  before  July  1,  1919,  may  be  taxed  as  that 
of  a  corporation. 

There  was  no  provision  in  the  1917  law  for  treating  a  partnership  in  the 
taxable  year  as  if  it  were  a  corporation,  and  Congress  did  not  see  fit  to  make 
section  330  of  the  1918  Act  retroactive  to  include  the  taxable  year  1917  at 
the  rates  of  taxation  then  in  effect. 

The  Committee  does  not  consider  that  it  can  read  into  the  1917  law,  under 
any  of  the  sections  therein,  an  authority  to  disregard,  for  taxation  or  otherwise, 
the  important  distinctions  between  a  partnership  and  a  corporation. 

It  is  accordingly  recommended  that  the  action  of  the  Income  Tax  Unit  in 
denying  this  corporation  the  privilege  of  using  the  invested  capital  of  the 
partnert,n:p  as  of  January  1,  1917,  and  of  considering  the  income  of  the 
partnership  during  the  taxable  year  1917  as  if  it  were  the  income  of  the 
corporation,  be  sustained  under  section  208  of  the  Revenue  Act  of  1917. 

3 


21-21-1657:  O.  D.930. 

Where  under  the  laws  of  a  State  a  charter  granted  to  a  corporation 
is  limited  to  a  period  of  years,  the  renewal  of  such  charter  merely  prolongs 
the  existence  of  the  original  corporation  and  does  not  of  itself  constitute  a 
reorganization  within  the  meaning  of  the  excess  profits  tax  laws. 


Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  932—1. 


Law  Section  330. — Reorganizations  (1f575). 

Article  932. — Net  Income  and  Invested  Capital  of  Predecessor  Part- 
nership or  Individual  (11838). 

1-19-137:  T.  B.  R.  No.  2. 

The  provisions  of  section  208  of  the  Revenue  Act  of  1917  should  be  applied  on 
the  basis  of  the  adjusted  balance  sheet  of  the  predecessor  as  of  the  date  of  reor- 
ganization. 

This  section  reads: 

That  in  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business  after  March  3,  1917,  if  an  interest  or  control  in  such  trade  or  business  of  50  per 
centum  or  more  remains  in  control  of  the  same  persons,  corporations,  associations,  partner- 
ships, or  any  of  them,  then  in  ascertaining  the  invested  capital  of  the  trade  or  business  no 
asset  transferred  or  received  from  the  prior  trade  or  business  shall  be  allowed  a  greater  value 
than  would  have  been  allowed  under  this  tide  in  computing  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  received. 

The  question  at  issue  is  whether  the  provision  quoted  above  required 
the  new  corporation  to  base  its  invested  capital  on  (1)  the  invested  capital 
of  the  predecessor  as  of  the  beginning  of  the  then  taxable  year  of  the  pred- 
ecessor, or  (2)  on  the  basis  of  the  balance  sheet  of  the  predecessor  as  of  the 
date  of  reorganization. 

This  provision  should  be  held  to  require  the  new  corporation  to  base  its 
invested  capital  on  the  adjusted  balance  sheet  of  its  predecessor  as  of  the 
date  of  reorganization.  The  limitation  in  this  section  relates  in  terms  to 
the  value  which  shall  be  placed  upon  assets  transferred  or  received  from  the 
prior  trade  or  business.  Appreciation  in  the  value  of  assets  so  transferred 
or  received  can  not  be  included  in  the  invested  capital  of  the  new  corporation. 
The  statute,  however,  does  not  prohibit  the  treatment  of  the  date  of  reor- 
ganization as  the  beginning  of  a  new  taxable  year.  Consequently  it  does  not 
require  the  exclusion  from  the  invested  capital  of  the  new  corporation  of 
surplus  and  undivided  profits  earned  between  the  beginning  of  the  then 
taxable  year  of  the  predecessor  corporation  and  the  beginning  of  the  taxable 
year  of  the  new  corporation. 
1 


Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  933.— 1. 


Law  Section  330.— Reorganizations  (11575). 

Article  933.— Election  to  be  Taxed  as  Corporation  (1[839). 

1-19-138:    O.  D.  95. 

Partnership  net  income  as  contemplated  in  section  330,  paragraph  3, 
Revenue  Act  of  1918,  means  the  net  income  after  deducting  salaries  of 
partners. 
1 


6-19-286:  T.  B.  R.  27. 

Recommendation  in  the  case  of  the  application  of  the  X  Comapny  for  per- 
mission to  incorporate  and  then  make  an  affiliated  return  with  three  corporations 
owned  by  the  same.individuals. 

The  X  Company  is  a  partnership  owned  by  two  individuals  with  equal 
interests.  In  1918  the  partnership  owned  all  or  more  than  99  per  cent  of 
the  capital  stock  of  three  corporations,  Y  Company,  Z  Company,  and  the 
W  Company.  The  request  now  before  the  Bureau  is  that  the  partnership 
should  be  allowed  to  incorporate  before  July  1,  1919,  in  accordance  with 
section  330,  Revenue  Act  of  1918,  and  thereafter  be  allowed  to  file  a  con- 
solidated return  with  the  other  three  corporations  which  the  partnership 
now  owns. 

Section  330  of  the  1918  Revenue  Act  provides  that: 

In  the  case  of  the  organization  as  a  corporation  before  July  1,  1919,  of  any  trade  or 
business  in  which  capital  is  a  material  income-producing  factor  and  which  was  previously 
owned  by  a  partnership  or  individual,  the  net  income  of  such  trade  or  business  from 
January  1,  1918,  to  the  date  of  such  reorganization  may  at  the  option  of  the  individual 
or  partnership  be  taxed  as  the  net  income  of  a  corporation  is  taxed  under  Titles  II  and 
III;  in  which  event  the  net  income  and  invested  capital  of  such  trade  or  business  shall 
be  computed  as  if  such  corporation  had  been  in  existence  on  and  after  January  1,  1918, 
*  *  *:  Provided,  That  this  paragraph  shall  not  apply  to  any  trade  or  business  the  net 
income  of  which  for  the  taxable  year  1918  was  less  than  20  per  centum  of  its  invested 
capital  for  such  year:    *    *  * 

In  the  case  of  the  X  Company  it  has  been  stated  that  the  income  of  this 
partnership  was  more  than  20  per  cent  of  its  invested  capital  for  the  year 
1918.  Such  being  the  fact,  it  appears  that  the  law  specifically  gives  to  this 
partnership  the  right  to  make  return  as  a  corporation  for  the  year  1918  if 
it  shall,  before  July  1,  1919,  organize  as  a  corporation. 

While  the  partnership  has  a  net  income  of  more  than  20  per  cent  of  its 
invested  capital,  the  affiliated  group  of  corporations  will  have  a  net  income 
of  less  than  20  per  cent  of  their  invested  capital,  but  this  fact  does  not 
deprive  the  partnership  of  the  privilege  of  incorporating  and  paying  the 
tax  as  a  corporation  for  the  year  1918. 

The  partnership  upon  becoming  a  corporation  in  accordance  with  the 
provisions  of  the  law,  and  owning  99  per  cent  of  the  capital  stock  of  the 
other  three  corporations  referred  to  above,  should,  in  the  opinion  of  the 
Advisory  Tax  Board,  file  a  consolidated  return. 
2 


11-19-373:  O.  ,D.  211. 

j^If  a  partnership  was  an  "original  subscriber"  to  Liberty  bonds  of  the 
fourth  series  and  was  reorganized  as  a  corporation  prior  to  July  1,  1919, 
and  elects  to  be  taxed  as  a  corporation  from  January  1,  1918,  in  accordance 
with  section  330,  Revenue  Act  of  1918,  the  corporation  will  be  considered 

Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  933.-2. 


an  "original  subscriber"  to  Liberty  bonds  of  the  fourth  series  within  the 

meaning  of  article  79  of  Regulations  No.  45. 

3 


11-19-393:    O.  D.  223. 

A  partnership  whose  net  income  for  the  taxable  year  1918  was  more 
than  20  per  cent  of  its  invested  capital  may  elect  to  be  taxed  as  a  corpora- 
tion from  January  i,  191 8,  only  in  case  of  its  reorganization  as  a  corpo- 
ration before  July  1,  1919.  There  is  no  authority  vested  in  the  Treasury 
Department  to  extend  the  time  within  which  to  effect  the  reorganization. 
4 


15-20-854:  O.  D.  457. 

Returns  for  1918  were  filed  for  a  partnership  and  its.  members  in  accord- 
ance with  the  Revenue  Act  of  1917,  prior  to  the  passage  of  the  Revenue  Act 
of  1918,  and  tax  paid  accordingly.  The  partnership  was  incorporated  prior 
to  July  1,  1919,  and  elected  to  be  taxed  as  a  corporation  under  the  provisions 
of  paragraph  3,  section  330,  Revenue  Act  of  1918.  Amended  returns  for 
1918  showing  overpayment  of  tax  were  filed  by  the  partners. 

There  is  no  provision  in  the  law  whereby  either  the  tax  paid  by  the  part- 
nership or  any  excess  tax  paid  by  the  partners  may  be  credited  against  any 
tax  liability  of  the  successor  corporation  for  any  year.  Remedy  may  be 
sought  only  by  the  partnership  and  the  individual  members  thereof  filing 
claims  for  the  refunding  of  any  excess  tax  paid. 
6 


16-20-872:  O.  1023. 

Corporations  De  Facto. 

No  taxpayer  can  be  entitled  to  the  benefits  of  the  third  paragraph  of  section 
330  unless  a  corporation  de  jure  or  de  facto  came  into  existence  prior  to  July  1,  1919. 

The  intention  to  incorporate,  the  execution  and  mailing  of  the  articles  of 
incorporation  to  the  Secretary  of  State  on  June  30,  1919,  the  opening  of  corporate 
books  as  of  June  30,  1919,  and  the  manufacturing  for  one  day  under  the  same 
name  as  used  by  the  partnership,  in  the  absence  of  other  proof  of  user  prior  to 
Julv  1,  1919,  held  not  to  justify  the  inference  that  a  corporation  de  facto  existed 
before  July  1,  1919. 

The  M  Company  was  a  partnership  engaged  in  manufacturing  during  the 
calendar  year,  1918.  Early  in  1919  the  advisability  of  incorporating  and 
obtaining  the  benefits  of  section  330  of  the  Revenue  Act  of  1918  was  con- 
sidered and  a  determination  to  incorporate  prior  to  July  1  was  reached.  So 
far  as  appears  only  the  following  events  took  place  prior  to  July  1:  The  de- 
termination to  incorporate  was  reached.  The  plant  closed  down  on  June  27, 
and  an  inventory  was  taken  as  of  June  27.  No  business  was  transacted  as  a 
partnership  after  June  27.  The  plant  reopened  on  June  30;  and  the  accounts 
of  the  corporation  began  as  of  June  30.  So  far  as  appears  the  only  work  done 
on  June  30  was  manufacturing.  Articles  of  incorporation  were  drafted, 
signed,  and  acknowledged,  and  mailed  to  the  Secretary  of  State  on  June  30. 
Minutes  of  the  first  meeting  and  by-laws  were  drafted  by  counsel,  and  it  was 
decided  who  the  temporary  dummy  directors  should  be. 

No  other  evidence  tending  to  show  user  of  corporate  powers  prior  to  July 
1  was  in  evidence,  although  the  parties  made  every  effort  to  produce  all  facts 
in  their  favor. 

Because  of  defects  in  the  articles,  they  were  returned  by  the  Secretary  of 
State,  amended,  and  actually  filed  on  July  2,  1919.  It  was  stated  orally 
that  the  first  meeting  was  held,  directors  were  elected,  and  the  property  was 
formally  transferred  from  the  partnership  to  the  corporation  after  July  2. 

Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  933.-3. 


It  is  the  contention  of  the  company  that  it  became  a  de  facto  corporation  on 
June  30,  1919.  Section  330,  of  the  Revenue  Act  of  1918,  reads  in  part  as 
follows: 

In  the  case  of  the  organization  as  a  corporation  before  July  1,  1919,  of  any  trade  or 
business  in  which  capital  is  a  material  income-producing  factor  and  which  was  previously 
owned  by  a  partnership  or  individual,  the  net  income  of  such  trade  or  business  from  January 
1,  1918,  to  the  date  of  such  reorganization  may  at  the  option  of  the  indi.idual  or  partner- 
ship be  taxed  as  the  net  income  of  a  corporation  is  taxed  under  Titles  II  and  III;  in  which 
event  the  net  income  and  invested  capital  of  such  trade  or  business  shall  be  computed 
as  if  such  corporation  has  been  in  existence  on  and  after  January  1,  1918,  and  the  undis- 
tributed profits  or  earnings  of  such  trade  or  business  shall  not  be  subject  to  the  surtax 
imposed  in  section  211,  but  amounts  distributed  on  or  after  January  1,  1918,  from  the 
earnings  of  such  trade  or  business  shall  be  taxed  to  the  recipients  as  dividends,  and  all  the 
provisions  of  Titles  II  and  III  relating  to  corporations  shall  so  far  as  practicable  apply 
to  such  trade  or  business:  Provided,  That  this  paragraph  shall  not  apply  to  any  trade  or 
business  the  net  income  of  which  for  the  taxable  year  1918  was  less  than  20  per  centum 
of  its  invested  capital  for  such  year:  Provided  further,  That  any  taxpayer  who  takes  advantage 
of  this  paragraph  shall  pay  the  tax  imposed  by  section  1000  of  this  Act  and  by  the  first 
subdivision  of  section  407  of  the  Revenue  Act  of  1916,  as  if  such  taxpayer  had  been  a 
corporation  on  and  after  January  1,  1918,  with  a  capital  stock  having  no  par  value. 

This  is  a  remedial  provision  and  should  be  liberally  construed.  It  will 
be  assumed  that  in  this  controversy  the  Government  stands  in  the  same 
position  as  an  ordinary  creditor,  and  that  it  is  sufficient  if  the  existence  of  a 
de  facto  corporation  is  shown. 

The  requisites  of  a  de  facto  corporation  are,  first,  the  existence  of  a  charter 
or  law  under  which  a  corporation  with  the  powers  assumed  might  lawfully 
exist;  second,  an  effort  in  good  faith  to  incorporate  thereunder;  and,  third,  an 
actual  user  or  exercise  of  corporate  powers.  Tulare  Irrigating  [District  v. 
Sheppard,  185  U.  S.  1. 

In  applying  these  tests,  however,  there  is  considerable  conflict  in  ithe  deci- 
sions even  from  the  same  jurisdiction.  It  may  be  admitted  that  the  first 
two  requisites  were  complied  with  in  this  case  on  June  30;  but  there  is  great 
doubt  whether  there  was  a  sufficient  user  or  exercise  of  corporate  powers 
prior  to  July  1,  1919,  to  justify  a  decision  that  a  de  facto  corporation  existed. 
Only  one  day's  user  of  corporate  powers  is  claimed,  and  so  far  as  appears  no 
business  of  a  peculiarly  corporate  nature  was  transacted  on  that  day. 

It  is  essential  to  the  existence  of  such  a  corporation  (zrde  facto  corporation)  that  there 
be*' user  of  such  corporate  rights  as  could  be  authorized  by  law  and  not  merely  such  as 
might  be  exercised  by  individuals  or  unincorporated  societies.  If  such  a  user,  therefore, 
consists  only  of  acts  or  proceedings  that  might  be  exercised  without  incorporation,  a  cor- 
poration de  facto  will  not  usually  be  inferred  therefrom.  (Citing  cases.)  Under  the 
allegations  of  the  bill  the  name  "Elgin  Jewelry  Company"  was  so  used  by  defendants  under 
which  to  conduct  their  business  before  any  attempt  at  incorporation,  and  the  use  of  such 
name  is  entirely  consistent  with  individual  or  copartnership  capacity.  —  Elgin  National 
Watch  Company  p.  Loveland,  132  Fed.  41,  45,  1904. 

Merely  manufacturing  under  the  name  of  M  Company  is,  therefore,  not 
a  sufficient  user  of  corporate  powers,  since  they  were  merely  doing  what  had 
been  done  for  a  long  period  under  the  same  name  by  the  copartnership.  In 
fact  it  affirmatively  appears  that  the  acts,  which  are  usually  the  first  acts, 
such  as  first  meeting,  adoption  of  by-laws,  and  election  of  officers,  took  place 
after  July  1 . 

A  recent  authority,  discussing  the  question  of  user  in  this  connection,  says: 

Generally,  it  is  sufficient  to  show  that  the  corporation  was  acting  as  a  corporation  and 
transacted  business  as  such.  But  there  is  no  fixed  rule  for  determining  just  how  much 
business  must  be  done.  Taking  subscriptions  to  and  issuing  stock,  electing  managers  and 
directors,  adopting  by-laws,  buying  a  lot  and  constructing  and  leasing  a  building  upon  it; 
electing  officers  and  trustees,  who  manage  the  corporate  property  for  years,  and  lease  and 
mortgage  it,  and  expend  large  sums  of  money,  executing  powers  of  attorney,  and  loaning 
money  and  taking  a  loan  and  mortgage  therefor,  have  been  held  to  be  sufficient.  (Fletcher, 
Cyclopedia  of  Corporations,  Vol.  I,  p.  655.) 

Supplementary  Bulletin  Rulings. 


Sec.  330.    Art.  933. 


It  is  significant  that  the  illustrations  given  all  include  action  of  a  peculiarly 
corporate  nature  and  all  include  acts  which  are  not  present  in  the  case  under 
consideration. 

It  is  clear  that  mere  execution  of  the  articles  of  incorporation  is  not  a 
sufficient  basis  for  inferring  the  existence  of  a  corporation  de  facto.  Stevens  v. 
Episcopal  Church  History  Co.,  125  N.  Y.  Supp.  573.  The  mailing  of  such 
articles  to  the  Secretary  of  State  may  indicate  an  attempt  in  good  faith  to 
comply  with  the  statutory  requirements  but  can  not  be  said  to  be  a  user  of 
corporate  powers.    (Fletcher,  Cyclopedia  of  Corporations,  Vol.  I,  p.  625.) 

In  the  case  of  Childs  v.  Smith,  45  N.  Y.  34,  principally  relied  upon  by  the 
taxpayer,  meetings  were  held,  officers  were  elected,  by-laws  adopted,  minutes 
kept,  and  business  done.  These  were  peculiarly  corporate  acts  and  indicated 
a  state  of  facts  very  different  from  the  one  now  in  question.  (So  in  re  Cor- 
dova Shop.  216  Fed.  818.) 

No  case  has  been  found  which  would  justify  a  decision  that  there  was  a 
sufficient  user  of  corporate  powers  prior  to  July  I,  1919,  in  this  case  from 
which  to  infer  the  existence  of  a  corporation  de  facto.  Under  these  circum- 
stances administrative  officers  are  not  justified  in  extending  the  definition  of 
de  Jacto  corporation  beyond  the  limits  established  by  the  courts.  Nor  can 
the  administrative  officers  extend  the  time  limit  established  by  Congress  in 
section  330. 

Some  reliance  is  placed  by  the  taxpayer  upon  the  language  of  section  330 
which  requires  the  "organization  as  a  corporation  before  July  1,  1919,  of  any 
trade  or  business."  Under  any  interpretation  of  these  words,  however,  it 
seems  clear  that  a  corporation  de  jure  or  de  facto  must  exist  prior  to  July  f. 
No  such  corporation  existed  at  that  time  in  this  case,  and  the  taxpayer  must 
therefore  be  denied  the  benefits  of  section  330. 
6 


13-21-1529:  O.  D.  855 

The  M  Company  operated  as  a  partnership  until  June  30,  1919,  on  which 
date  it  was  incorporated. 

The  accounting  period  of  the  partnership,  as  well  as  that  of  the  corpora- 
tion, was  a  calendar  year.  During  the  calendar  year  1918  the  partnership 
earned  a  net  income,  and  during  the  period  from  January  1  to  June  29,  1919, 
it  suffered  a  net  operating  loss.  The  corporation  also  suffered  a  net  operat- 
ing loss  during  the  period  from  June  30  to  December  31,  1919.  Held,  that 
since  neither  the  net  operating  loss  sustained  by  the  partnership  nor  the  net 
operating  loss  suffered  by  the  corporation  was  a  loss  for  a  full  taxable  year, 
neither  organization  is  entitled  to  deduct  the  amount  of  its  net  loss  frorn  the 
net  income  for  either  the  preceding  or  succeeding  taxable  year  as  provided 
by  section  204  (b)  of  the  Revenue  Act  of  1918. 

If,  however,  the  organization  is  qualified  and  elects  to  take  advantage  of 
the  provisions  of  section  330  of  the  Revenue  Act  of  1918  and  article  933  of 
Regulations  45,  it  is  then  entitled  to  seek  relief  under  section  204  by  apply- 
ing the  total  net  operating  loss  sustained  during  the  entire  year  1919  against 
the  net  income  of  the  year  1918  and  applying  the  excess,  if  any,  of  the  1919 
loss  over  1918  net  income  against  the  net  income  of  the  year  1920. 
7 


Supplementary  Bulletin  Rulings. 


2-20-22. 

Sec.  331.    Art.  941.— 1. 

Law  Section  331. — Valuation  of  Assets  Upon  Reorganization  (1918  Act — 
1J579,  ante):  (1921  Act— 1 1053,  post). 
Article  941. — Valuation  of  Asset  upon  Change  of  Ownership  (Reg.  45 — 
1[841,  ante):  (Reg.  62— 1[1248,  post). 

(See  10-19-365;  Section  326,  Article  831.)  Valuation  of  assets  where 
merger  takes  place  prior  to  March  3,  1917,  but  formal  transfer  of  tangible 
assets  is  subsequent  to  that  date. 

1 


(See  11-19-389;  Section  326,  Article  831.)    Determination  of  invested 
capital  when  property  purchased  at  receiver's  sale  is  purchased  by  creditors 
and  transferred  to  new  corporation. 
2 


3-20-697:  A.  R.  R.  16. 
Mere  change  of  domicile  without  change  as  to  capital  and  surplus  held  not  to 
affect  the  invested  capital,  which  remains  the  same  for  the  new  company  as  for 
the  old. 

The  facts  in  the  case  appear  to  be  that  the  M  Company,  a  corporation 
organized  in  a  certain  State,  decided  that  its  development  would  be  hampered 
by  its  organization  in  that  State  and  it  was  therefore  decided  to  reincorporate 
the  company  in  another  State.  Accordingly,  a  new  corporation  was  formed 
n  another  State  which  exchanged  its  stock  directly  with  the  stockholders  of 
the  old  corporation  for  their  stock,  share  for  share.  No  change  was  made  in 
the  capitalization  or  the  surplus,  but  after  it  had  acquired  all  of  the  stock  of 
the  old  corporation  the  assets  of  the  old  corporation  were  transferred  to  the 
new  corporation  and  the  charter  of  the  old  corporation  surrendered.  This 
was  in  essence  merely  a  reincorporation  in  a  different  State  without  essential 
change  as  to  business,  capitalization,  or  surplus. 

The  change  of  domicile  took  place  in  1916,  and  the  Committee  has  con- 
sidered a  number  of  precedents  established  under  the  Acts  of  1913  and  1916 
with  regard  to  the  treatment  of  essentially  similar  transactions.  It  finds 
that  under  such^conditions  it  was  the  practice  of  the  Bureau  to  require  only 
onejreturn  as  covering  the  income  of  both  the  old  and  the  new  corporation. 
It  also  finds  that  in  numerous  cases  it  was  held  that  no  income  accrued  to  the 
stockholders  by  reason  of  exchange  of  their  stock  in  the  old  for  stock  in  the 
new  corporation. 

The;  Committee  is  of  the  opinion  that  it  is  not  necessary  to  make  any 
radical  departure  fromfthe  "distinct  entity"  theory  which  has  been  the  guide 
of  the  Bureau  injthe  past,  but  feels  that  where  there  is  merely  a  transfer  of 
domicile  through  the  surrender  of  the  charter  issued  in  one  State  and  the 
taking  out  of  a  new  charter  in  another  State,  without  any  change  in  the  busi- 
ness or  amount  of  the  capital  and  surplus  of  the  corporation,  that  the  new 
company  is  entitled  to  the  same  invested  capital  as  the  old. 

It  is  therefore  recommended  that  the  M  Company  (new)  be  permitted 
to  use  the  invested  capital  which  would  have  been  permitted  the  M  Company 
(old)  if  there  had  been  no  surrender  of  charter,  and  change  of  domicile. 
8 


Supplementary  Bulletin  Rulings. 


Sec.  331.    Art.  941.— 2. 


15-20-855:  O.  D.  458. 

The  provisions  of  section  331  of  the  Revenue  Act  of  1918  relate  only  to 
the  computation  of  invested  capital.  In  the  reorganization  of  a  corporation 
owning  timber  lands  and  engaging  in  the  manufacture  of  lumber,  the  basis 
for  deductions  for  depletion  of  the  timber  and  depreciation  of  the  plant, 
machinery  and  patents  claimed  by  the  reorganized  company  is  the  cost  of 
these  assets  at  the  time  they  were  acquired  in  reorganization,  or  their  fair 
market  value  as  of  March  1,  1913,  if  acquired  prior  thereto. 
4 


25-20-1022:  A.  R.  M.  60. 
REVENUE  ACT  OF  1917 

The  question  is  submitted  whether  or  not  where  there  was  a  change  of 
corporate  entity  prior  to  March  3,  1°47,  without  a  change  of  officers  or 
directors,  or  proportions  of  stockholdings,  the  new  corporation  is  limited 
in  its  invested  capital  to  that  which  might  be  claimed  by  the  old  corpora- 
tion, or  whether,  in  such  case,  the  new  corporation  is  entitled  to  recognize 
the  cash  value  of  assets  for  which  its  stock  was  issued  not  in  excess  of  the  par 
value  thereof. 

The  point  is  illustrated  by  the  cases  of  two  corporations,  each  of  which 
was  reorganized  in  1916  and  the  larger  amount  of  stock  issued  against  appre- 
ciated value,  patents,  good  will,  etc. 

Section  207  of  the  Revenue  Act  of  1917  provides  for  the  recognition  as 
invested  capital  of — 

(1)  Actual  cash  paid  in;  (2)  the  actual  cash  value  of  tangible  property  paid  in  other 
than  cash,  for  stock  or  shares  in  such  corporation  or  partnership,  at  the  time  of  such 
payment  *    *    *,  etc. 

It  is  clear  that  this  means  subject  only  to  the  limitation  in  the  section 
itself  and  in  section  208,  the  actual  cash  paid  in  or  the  actual  value  of  tangible 
assets  paid  in  to  the  specific  corporation,  which  is  the  present  taxpayer. 
The  limitation  in  section  20S  referred  to  is: 

That  in  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade 
or  business  after  March  third,  nineteen  hundred  and  seventeen,  if  an  interest  or  control 
in  such  trade  or  business  of  fifty  per  centum  or  more  remains  in  control  of  the  same  persons, 
corporations,  associations,  partnerships,  or  any  of  them,  then  in  ascertaining  the  invested 
capital  of  the  trade  or  business  no  asset  transferred  or  received  from  the  prior  trade  or 
business  shall  be  allowed  a  greater  value  than  would  have  been  allowed  under  this  title 
in  computing  the  invested  capital  of  such  prior  trade  or  business  if  such  asset  had  not 
been  so  transferred  or  received,  unless  such  asset  was  paid  for  specifically  as  such,  in  cash 
or  tangible  property,  and  then  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the 
tangible  property  paid  therefor  at  the  time  of  such  payment. 

The  necessary  corollary  of  the  provision  quoted  above  is  that  if  the 
reorganization,  consolidation,  or  change  of  ownership  took  place  prior  to 
March  3,  1917,  the  actual  value  of  the  assets  paid  in,  limited  by  the  pro- 
visions of  section  207,  is  the  invested  capital. 

The  only  question,  therefore,  left  in  the  case  is:  Was  there  such  a  change 
of  entity  in  the  corporations  named  as  to  create  in  effect  a  new  corporation? 
The  uniform  practice  for  some  years  in  dealing  with  the  question  of  sales  of 
stock  has  been  to  treat  every  change  of  corporate  entity  as  the  creation  of 
a  new  organization.  The  only  exception  to  this  has  been  in  the  case  of  a 
mere  change  of  domicile;  that  is  to  say,  surrender  of  charter  in  one  State 
and  the  taking  out  of  a  new  charter  in  a  different  State,  without  change, 
however,  in  the  amount  of  the  stock,  the  identity  of  the  stockholders  or 
capital  and  surplus  as  it  appears  on  the  books  of  the  corporation. 


Supplementary  Bulletin  Rulings. 


Sec.  331.   Art.  941.— 3. 


It  is  clear  that  under  the  rulings  of  the  office  stockholders  who,  in  either 
of  the  cases  above  mentioned,  surrendered  their  stock,  receiving  therefor 
stock  in  the  new  corporation,  would  have  been  held  liable  to  income  tax 
if  the  value  of  the  stock  received  was  in  excess  of  the  cost  of  the  stock  sur- 
rendered therefor,  or  the  value  of  such  surrendered  stock  on  March  1,  1913, 
on  the  ground  that  there  had  been  an  exchange  of  property  of  one  kind 
for  property  of  a  different  kind. 

The  Committee  is  therefore  clearly  of  the  opinion  that  both  of  the  cor- 
porations in  question  are  entitled  to  the  actual  cash  value  of  the  tangible 
and  intangible  properties  paid  in  for  their  stock  in  1916,  subject  only  to 
the  limitations  provided  in  section  207  as  to  the  value  of  the  intangibles 
which  may  be  recognized. 

6 


34-20-1159:  Sol.  Op.  41. 
EXCESS  PROFITS  TAX:  REVENUE  ACT  OF  OCTOBER  3,  1917. 

CORPORATION  INCOME  TAX:    REVENUE  „ ACT  OF  1918. 
Where  a  corporation  transfers  its  property  to  an  association  composed  of 
its  stockholders,  and  the  association  after  January  1,  1914,  but  prior  to  March  3, 
1917,  transfers  substantially  the  same  assets  to  a  new  corporation,  the  fair  market 
value  of  such  assets  when  transferred  to  the  new  corporation_shouid  be  included  in  \ 
determining  the  invested  capital  of  the  latter.  ^  ^  J 

Proceeds  of  a  judgment  recovered  in  1918 'are  income  for  the  year  injwhich 
received,  not  for  the  year  or  years  in  which  the  right  of  action  accrued. 

The  appeal  of  the  M  Company  of  Texas  raises  the  following  questions: 

1.  Should  the  property  received  by  the  company  in  or  about  June, 
1914,  in  return  for  its  entire  issue  of  capital  stock,  be  valued  for  the  purpose 
of  determining  invested  capital  as  of  the  date  of  transfer,  or  as  of  an  earlier 
time,  since  it  appears  that  the  property  transferred  has  been  acquired 
several  years  previously  by  a  preceding  corporation,  and  by  it  assigned  to 
an  association  composed  of  its  stockholders? 

2.  For  what  year  or  years  should  income  derived  from  the  sale  of  oil  be 
returned  where  delivery  of  the  oil  was  made  in  1914  and  1915,  but  only 
one-half  of  the  purchase  price  was  paid  at  that  time,  and  the  balance  was 
received  in  1918,  as  the  result  of  the  entry  of  a  final  judgment  in  a  court 
proceeding? 

The  war  excess  profits  tax  law  of  October  3,  1917,  provides: 
Sec.  207.  *   •  *. 

As  used  in  this  title  "invested  capital"  *    *    *  means  subject  to  the  above  limitations: 
(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash  paid  in,  (2)  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash,  for  stock  or  shares  in  such  corpora- 
tion or  partnership,  at  the  time  of  such  payment  *    *  *. 
Sec.  204.  *    *  *. 

A  trade  or  business  carried  on  by  a  corporation,  partnership,  or  individual,  although 
formally  organized  or  reorganized  on  or  after  January  second,  nineteen  hundred  and 
thirteen,  which  is  substantially  a  continuation  of  a  trade  or  business  carried  on  prior  to  that 
date,  shall,  for  the^  purposes  of  this  title,  be  deemed  to  have  been  in  existence  prior  to  that 
date,  and  the  net  income  and  invested  capital  of  its  predecessor  prior  to  that  date  shall  be 
deemed  to  have  been  its  net  income  and  invested  capital.  3*^  ^ 

Prior  to  March,  1914,  the  M  Company  was  a  corporation  organized  and 
existing  under  the  laws  of  the  State  of  Louisiana  and  owned  property  located 
there. 

In  March,  1914,  this  corporation,  pursuant  to  a  resolution  of  its  stock- 
holders, duly  transferred,  sold,  and  conveyed  all  of  its  property  to  certain 
stockholders  as  trustees  for  themselves  and  the  other  stockholders  of  the 
company.    It  was  provided  in  the  resolution  authorizing  such  transfer  that 


Supplementary  Bulletin  Ruliaga. 


Sec.  331.    Art.  941.— 4. 


the  trustees  named  should  have  authority  to  conduct  the  business  thereto- 
fore carried  on  by  the  corporation  in  the  form  of  a  limited  partnership  under 
the  name  of  the  M  Company,  (Ltd.),  and  that  the  trustees  should  also 
liquidate  the  corporation  affairs  of  the  M  Company  of  Louisiana. 

In  June,  1914,  the  M  Company  of  Texas  was  duly  incorporated  under 
the  laws  of  the  State  of  Texas,  having  been  organized  by  the  above  named 
trustees.  The  entire  issue  of  capital  stock  of  the  new  corporation  was  there- 
upon issued  to  the  trustees  and  beneficiaries  of  the  M  Company  (Ltd.), 
the  above  named  limited  partnership,  in  return  for  all  of  the  assets  of  that 
partnership  owned  jointly  by  the  principals  thereof,  who  were  the  sole  and 
only  stockholders  of  the  original  M  Company  of  Louisiana. 

It  is  represented  that  the  assets  of  the  limited  partnership  were  in  value 
greatly  in  excess  of  the  par  value  of  the  stock  issued  by  the  M  Company  of 
Texas,  as  purchase  price  thereof,  and  that  company  contends  that  the 
excess  in  value  of  said  property  when  transferred  to  it  in  return  for  its  capital 
stock  over  the  par  value  of  that  stock  shall  be  regarded  as  paid  in  surplus 
under  the  Revenue  Act  of  1918. 

As  to  the  year  for  which  proceeds  of  the  judgment  obtained  by  the  M 
Company  against  the  X  Company  should  be  returned  as  income,  the  facts 
were  as  follows:  A  contract  was  made  in  1912,  between  the  X  Company 
and  the  M  Company,  by  which  the  latter  agreed  to  sell  to  the  former — and 
the  former  to  buy — oil  produced  from  certain  wells  of  the  M  Company. 
The  contract  was  to  become  effective  December  25,  1912,  and  to  continue 
in  force  for  two  years.  The  X  Company  agreed  to  pay  for  the  oil  delivered 
at  the  rate  of  90  cents  per  barrel,  and  was  given  an  option  of  purhasing  any 
oil  delivered  in  excess  of  the  agreed  maximum  at  the  market  price  prevailing 
at  the  time  of  delivery.  The  X  Company  was  also  given  an  option  to  extend 
the  contract  for  a  period  of  two  years  after  its  expiration,  December  24, 
1914,  to  pay  for  the  oil  thereafter  delivered  at  a  price  equal  to  the  highest 
contract  price  then  being  paid  by  any  one  of  four  of  the  largest  purchasing 
companies.  Before  the  expiration  of  the  contarct  in  1914,  the  X  Company 
exercised  its  option  to  extend  the  same  for  a  period  of  five  years,  and  notified 
the  M  Company  that  the  price  for  oil  sold  thereunder  would  be  60  cents  per 
barrel,  as  that  was  the  price  for  which  the  companies  were  at  that  time  making 
contracts. 

In  acknowledging  receipt  of  the  letter  exercising  the  option  the  M 
Company  advised  that  the  price  of  oil  would  be  $1.00  per  barrel,  as  that  was 
the  highest  Iprice  then  being  paid  by  purhasing  companies  under  contracts 
already  existing.  The  parties  being  unable  to  come  to  an  agreement  as  to 
price  made  an  arrangement  by  which  the  M  Company  delivered  the  oil  as 
provided  in  the  contract,  but  the  X  Company  paid  only  50  cents  per  barrel, 
leaving  the  balance  of  the  purchase  price  to  be  paid  as  determined  by  the 
courts.  Suit  was  brought  by  the  M  Company,  as  a  result  of  which  judgment 
was  finally  obtained  in  1918,  ordering  the  X  Company  to  pay  the  balance 
of  50  cents  per  barrel. 

First,  as  to  the  time  the  capital  assets  in  question  should  be  valued  for 
the  purpose  of  determining  invested  capital.  The  excess  profits  tax  law  of 
1917,  explicitly  provides  that  the  term  "invested  capital"  includes  the  actual 
cash  value  of  tangible  property  paid  in  other  than  cash  for  stock  or  shares 
in  the  corporation.  (Section  207.)  This  is  the  general  provision  and  applies 
to  the  term  "invested  capital"  whenever  used  in  the  title.  One  qualification 
is  found  in  cases  in  which  it  is  sought  to  determine  invested  capital  for  the 
prewar  years,  viz:  1911,  1912,  and  1913.  This  qualification  is  found  in  sec- 
tion 204,  which  provides,  in  substance,  that  if  the  trade  or  business  carried 
On  by  the  corporation  existed  prior  to  January  2,  1913,  although  the  reorgani- 


Supplemcntury  Bulletin  Rulings. 


Sec.  331.    Art.  941.— 5. 


zation  took  place  later,  the  invested  capital  of  the  new  organization  shall  be 
deemed  to  be  no  greater  than  that  of  its  predecessor.  This  provision,  how- 
ever, applies  only  to  determination  of  invested  capital  for  prewar  years,  and 
has  been  so  regarded  by  the  Bureau.    (See  Regulations  41,  article  22.) 

A  further  qualification  of  the  general  rule  is  found  in  section  208  which 
provides,  in  substance,  that  in  the  case  of  the  reorganization,  consolidation 
or  change  of  ownership  of  a  trade  or  business  after  March  3,  1917,  if  an 
interest  or  control  in  such  trade  or  business  of  fifty  per  centum  remains  in 
control  of  the  same  persons,  or  any  of  them,  the  invested  capital  of  the  trade 
or  business  shall  be  ascertained  by  allowing  no  greater  value  to  any  of  the 
assets  transferred  to  the  new  corporation  than  would  have  been  allowed  in 
computing  invested  capital  of  such  prior  trade  or  business  if  such  asset  had 
not  been  transferred,  unless  such  asset  was  paid  for  specifically  in  cash  or 
tangible  property. 

The  fair  inference  to  be  drawn  from  section  208  is  that  in  the  case  of  such 
reorganization  before  March  3,  1917,  the  general  rule  shall  apply,  viz: 
Assets  should  be  valued  as  of  the  date  of  transfer  to  the  new  corporation 
for  the  purpose  of  determining  the  invested  capital  of  such  corporation. 

As  to  the  second  question,  viz:  Whether  income  derived  from  the  sale  of 
oil  to  the  X  Company  should  be  reported  for  the  years  1914  and  1916,  when 
the  oil  was  delivered  and  part  of  the  purchase  price  paid,  or  for  the  year  1918, 
when  final  judgment  was  secured  and  balance  of  the  purchase  price  paid. 

In  Jackson  v.  Smietanka,  T.  D.  2960,  which  was  decided  very  recently 
in  the  District  Court  for  the  Northern  District  of  Illinois,  Eastern  Division, 
it  was  held  that  a  fee  of  $100,000,  determined  and  received  in  1918,  for  ser- 
vices rendered  and  received  during  five  years,  was  income  for  the  year  of 
payment,  although  the  receiver  had  a  court  order  allocating  to  each  of  the 
years  a  portion  of  the  entire  amount. 

In  the  instant  case  the  M  Company  delivered  oil  during  the  years  1914 
and  1915,  under  a  contract  so  worded  as  to  give  rise  to  a  dispute  as  to  the 
amount  of  purchase  price.  The  X  Company  was  willing  to  pay  60  cents  per 
barrel.  The  M  Company  demanded  $1.00  per  barrel.  The  parties  agreed 
to  pay  and  receive  50  cents  per  barrel,  and  to  leave  the  balance  of  the  price 
to  be  determined  by  the  court.  The  50  cents  per  barrel  paid  by  the  X  Com- 
pany in  1914  and  1915  was,  so  far  as  the  record  shows,  included  in  the  gross 
income  of  the  M  Company  for  those  years.  The  record  does  not  show  that 
the  M  Company  accrued  on  its  books  the  balance  of  50  cents  per  barrel. 
Sound  business  policy  would  not  have  permitted  such  accrual,  for  at  that 
time  there  was  no  assurance  that  the  amount  of  50  cents  per  barrel  would  be 
recovered.  Since  the  X  Company  had  agreed  to  pay  60  cents  per  barrel,  it 
would  seem  that  10  cents  per  barrel  could  have  been  set  up  on  the  books  of 
the  M  Company  in  1914  and  1915  as  accrued.  As  to  any  further  amount, 
however,  there  was  a  grave  element  of  doubt.  In  fact,  in  the  lower  court  it 
was  held  that  the  contract  price  was  50  cents  per  barrel,  and  it  was  not  until 
the  final  determination  in  1918,  that  the  price  was  fixed  at  $1.00  per  barrel. 
For  this  reason  it  is  believed  that  the  facts  in  this  case  bring  it  squarely 
within  the  principle  laid  down  by  the  court  in  Jackson  v.  Smietanka  above. 
There,  as  here,  the  services  had  been  performed  in  prior  years,  but  it  was  not 
possible  for  the  parties,  as  in  this  case,  during  such  prior  years,  to  fix  and 
determine  an  amount  as  representing  the  final  amount  to  be  received.  The 
opinion  is  accordingly  expressed  that  the  entire  proceeds  of  the  judgment 
recovered  by  the  M  Company  in  1918,  should  be  reported  as  gross  income  for 
the  year  of  actual  receipt. 

It  is  accordingly  held  that  where  a  corporation  transfers  its  property  to  an 
association  composed  of  its  stockholders,  and  the  association  after  January 


Supplementary  Bulletin  Ruling*. 


Sec.  331.   Art.  941— 6. 


1,  1914,  but  prior  to  March  3,  1917,  transfers  substantially  the  same  assets 
to  a  new  corporation,  the  fair  market  value  of  such  assets  when  transferred 
to  the  new  corporation  should  be  included  in  determining  the  invested  capital 
of  the  latter;  that  the  proceeds  of  a  judgment  recovered  in  1918,  are  income 
for  the  year  in  which  received,  not  for  the  year  or  years  in  which  the  right 
of  action  accrued. 

Wayne  Johnson, 
Solicitor  of  Internal  Revenue. 

e 


42-20-1252:  A.  R.  R.  285, 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany, from  the  action  of  the  Income  Tax  Unit  eliminating  an  item  of  40* 
dollars  from  the  invested  capital  claimed  for  the  years  1917  and  1918. 

It  appears  that  the  N  Company,  a  Massachusetts  corporation,  was  or- 
ganized in  1907;  that  in  1917  the  M  Company  was  organized  under  the  laws 
of  the  State  of  Connecticut,  with  an  authorized  capital  stock  of  150*  dollars, 
of  which  80*  dollars  was  issued  for  the  purpose  of  taking  over  all  the  assets 
and  liabilities  of  the  N  Compnay,  a  Massachusetts  corporation.  The  charter 
of  the  reorganized  corporation  was  drafted  so  that  the  corporation  could 
engage  in  the  collateral  business  of  owning  and  renting  real  estate  in  addition 
to  its  regular  business. 

In  1917,  subsequent  to  March  3,  the  newly  organized  corporation  took 
over  the  entire  assets  and  assumed  the  liabilities  of  the  Massachusetts  cor- 
poration. Some  time  after  that  date  the  Massachusetts  corporation  sur- 
rendered its  charter  and  was  dissolved 

A  complete  field  audit  of  the  returns  filed  by  the  M  Company  for  the 
years  1917  and  1918,  has  been  made  and  the  report  has  been  received,  audited, 
and  accepted  by  the  Income  Tax  Unit.  Minor  adjustments  were  made  in 
the  net  income  for  these  years,  all  of  which  have  apparently  been  accepted  by 
the  corporation.  The  additional  tax  found  is  due  largely  to  the  adjustment 
of  the  invested  capital  for  these  years. 

The  revenue  agent  in  his  report  deals  quite  fully  with  the  reorganization 
of  the  corporation  and  the  transfer  to  it  of  certain  parcels  of  improved  real 
estate  by  A,  the  principal  stockholder  of  both  corporations.  It  appears  that 
soon  after  the  transfer  of  the  assets  of  the  Massachusetts  corporation  to  the 
M  Company,  the  newly  organized  corporation,  A,  its  principal  stockholder, 
transferred  certain  real  estate  to  the  new  corporation  for  stock.  Such  transfer 
was  made  after  March  3,  1917,  and  the  revenue  agent  has  included  in  in- 
vested capital  for  both  years  the  adjusted  cost  of  such  real  estate  to  A. 

The  adjustment  made  was  proper  for  1918,  and  was  in  accordance  with 
the  provisions  of  section  331  of  the  Revenue  Act  of  1918,  and  article  941  of 
Regulations  45.  The  same  adjustment  for  1917  was  not  proper,  if  the  cor- 
poration can  show  that  at  the  time  of  acquisition  of  the  real  estate  in  question 
such  real  estate  had  a  cash  value  in  excess  of  the  adjusted  cost  allowed  by 
the  revenue  agent. 

It  will  be  noted  that  in  section  208  of  the  Revenue  Act  of  1917  the  phrase 
"or  change  of  ownership  of  property  after  March  3,  1917,"  does  not  appear, 
but  section  208  deals  with  reorganizations,  consolidations,  or  change  of 
ownership  of  a  trade  or  business  after  March  3,  1917,  where  50  per  cent  of 
the  control  remains  with  the  same  person  or  persons.  Section  331  of 
the  Revenue  Act  of  1918  goes  a  little  further  and  take?  in  any  change  of 


Supplementary  Bulletin  Ruling*. 


Sec.  331.   Art.  941.— 7. 


ownership  of  property  after  March  3,  1917,  where  an  interest  or  control  in 
such  trade  or  business  or  property  of  50  per  cent  or  more  remains  in  the  same 
person  or  persons,  in  accordance  with  the  above  and  under  the  provisions 
of  section  208  of  the  Revenue  Act  of  1917,  if  the  corporation  can  show  that 
the  real  estate  acquired  from  A  after  March  3,  1917,  even  though  50  per  cent 
or  more  of  the  ownership  remains  in  A,  had  a  value  in  excess  of  the  cost  as 
adjusted  by  the  revenue  agent,  the  corporation  is  entitled  to  include  the 
actual  cash  value  of  the  property  at  the  date  of  acquisition.  This  is  not  true, 
however,  with  respect  to  the  1918  return.  The  limitation  is  extended  by  the 
provisions  of  section  331  to  any  change  of  ownership  of  property  after  March 
3,  1917,  where  an  interest  or  control  of  50  per  cent  or  more  remains  in  the 
same  person  or  persons.  The  amount  which  can  be  included  in  the  compu- 
tation of  invested  capital  is  limited  to  the  actual  cost,  plus  improvements, 
less  depreciation,  of  the  physical  property  so  transferred.  Therefore  the 
adjustment  made  by  the  revenue  agent  for  1918  appears  to  be  proper,  and 
his  action  in  reducing  the  invested  capital  to  the  adjusted  cost  of  the  real 
estate  in  question  is  sustained.  An  examination  of  the  record  does  not  show 
that  satisfactory  evidence  has  been  submitted  by  the  corporation  establishing 
the  value  of  the  real  estate  transferred  to  the  new  corporation  in  1917  in  ex- 
cess of  the  adjusted  cost.  Therefore  it  is  recommended  that  the  adjust- 
ment made  by  the  revenue  agent  and  accepted  by  the  Unit  be  affirmed. 

In  the  examination  of  this  case  the  revenue  agent  has  apparently  erred 
by  treating  the  return  filed  by  the  corporation  under  the  first  two  sentences 
of  article  206  of  Regulations  33,  revised,  which  reads  as  follows: 

A  mere  change  in  name  doe*  not  constitute  a  new  corporation.  If  the  business  wai 
continuous  throughout  the  year,  no  change  in  management  or  operation  other  than  the 
change  in  name  having  occurred,  the  return  should  be  made  covering  the  business  trans- 
acted throughoutvthe  year,  such  return  to  be  made  by  the  corporation  in  the  name  which 
it  bears  at  the  end  of  the  year,  with  a  notation  on  the  return  to  the  effect  that  the  name 
had  been  changed,  giving  both  the  old  and  the  new  names.  If,; however,  a  distinctly ^new 
corporaton  was  organized  to  take  over  the^  property  of  the  old,  both  corporations  will 
be  required  to  make  separate  returns  covering  the  periods  of  the  year  during  which  they 
were  respectively  in  charge  of  the  business. 

It  appears  that  a  new  corporation  was  created  to  take  over  the  assets  of 
the  old  corporation,  that  the  authorized  capital  stock  was  increased,  and  that 
by  the  new  charter  the  new  corporation  was  authorized  to  hold  title  to  real 
estate.  A  distinctly  new  corporation  came  into  existence,  which  took  over 
the  property  of  the  old  corporation;  therefore,  both  the  old  and  the  new  cor- 
porations will  be  required  to  file  separate  returns  covering  the  periods  of  the 
year  during  which  they  were  in  active  control  of  the  business.  The  last  sen- 
tence of  the  above-quoted  article  of  the  regulations  in  the  judgment  of  the 
Committee  covers  the  situation  in  the  instant  case.  Therefore  it  is  recom- 
mended that  the  action  of  the  Income  Tax  Unit  accepting  the  revenue  agent's 
recommendation  on  this  point  be  reversed  and  that  both  the  old  and  the  new 
corporations  be  required  to  render  separate  returns  for  the  respective  periods 
of  the  year.  It  is  also  suggested  that  the  net  earnings,  if  any,  of  the  Massa- 
chusetts corporation  from  January  1  to  the  date  of  dissolution  be  included 
as  part  of  the  invested  capital  of  the  newly  organized  corporation  for  the 
period  for  which  a  return  is  rendered. 
7 


Supplementary  Bulletin  Rulings. 


Sec.  331.   Art.  941.— 8. 

5-21-1424:  O.  D.  789. 

The  M  Company  was  incorporated  for  the  purpose  of  acquiring  that  part 
of  the  business  of  the  N  Company,  a  foreign  corporation,  which  it  carried 
on  in  the  United  States  and  Canada. 

The  M  Company  issued  common  and  preferred  stock  to  the  N  Company, 
n  the  amount  of  x  dollars,  in  exchange  for  its  business  in  the  United  States 
and  Canada.  The  domestic  corporation  requested  permission  to  set  up  on 
its  books  as  invested  capital  several  increases  over  the  amounts  carried  on 
its  books  for  the  same  items  by  the  foreign  corporation. 

Held,  that  where  a  foreign  corporation  has  been  taxed  on  its  activities 
in  this  country,  and  its  activities  in  Canada  and  this  country  are  subse- 
quently taken  over  by  a  domestic  corporation  organized  for  that  purpose, 
and  fifty  per  centum  or  more  of  the  stock  of  the  domestic  corporation  is 
held  by  the  foreign  corporation,  the  assets  of  the  domestic  corporation  are 
to  be  valued  under  section  331,  Revenue  Act  of  1918.  In  the  case  presented 
the  domestic  corporation  may  set  up  on  its  books  as  invested  capital  the 
assets  taken  over  from  the  foreign  corporation  at  such  values  as  could  have 
been  established  had  the  previous  owner  been  required  to  set  up  invested 
capital  as  a  domestic  corporation. 


(See  8-21-1470;  Section  326,  Article  831.)    Valuation  of  assets  upon  a 
reorganization  and  the  changing  of  a  partnership  into  a  corporation. 
9 


11-21-1512:  A.  R.  R.  409. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Corpo- 
ration from  the  action  of  the  Income  Tax  Unit  in  denying  the  corporation 
an  item  of  x  dollars,  or  the  statutory  percentage  thereof,  carried  on  the  books 
of  the  corporation  as  "good  will,  trade-marks,  and  foreign  agencies." 

The  M  Corporation  was  incorporated  April,  1917,  with  a  capital  stock  of 
lOOy  shares,  taking  over  the  net  assets  of  the  N  partnership  as  a  going  concern 
as  of  January  1,  1917,  and  in  addition  thereto  the  sum  of  x  dollars  in  cash. 
The  consideration  for  the  net  assets  of  the  partnership  and  the  additional  cash 
was  the  sum  of  4x  dollars  to  be  paid  by  the  corporation  issuing  to  the  partners, 
or  to  their  nominees,  the  entire  issue  of  capital  common  stock  of  the  corpora- 
tion consisting  of  lOOy  shares.  Certain  adjustments  were  made  of  salaries 
of  the  partners  to  offset  the  credit  for  earnings  from  January  1,  1917,  to  April, 
1917.  The  journal  entry  made  to  open  the  books  of  the  corporation  was  in  the 
following  expression: 

Net  value  of  the  tangible  assets  of  the  partnership   2x  dollars 

Cash  to  be  paid  in   x  dollars 

Good  will,  trade-marks,  and  foreign  agencies   x  dollars 

To  capital  stock   Ax  dollars 

The  partnership  books  were  not  closed,  and,  on  advice  of  accountants, 
they  became  the  books  of  the  corporation,  subject,  however,  to  the  above 
corporate  entry. 

At  a  meeting  of  the  board  of  directors  of  the  corporation  held  April, 
1917,  the  following  resolution  was  adopted: 

Resolved,  That  upon  the  execution  and  delivery  to  this  company  of  the  instruments 
enumerated  and  upon  the  payment  by  A,  B  and  C  to  this  corporation  of  said  sum  of  x 


Supplementary  Bulletin  Rulings. 


Sec.  331.    Art  941.— 9. 


dollars  in  cash,  in  accordance  with  the  terms  of  said  written  proposal  of  April,  this  corpora- 
tion, issued  to  said  A,  B,  tnd  C  the  entire  issue  of  the  capital  stock  of  this  corporation, 
to-wit,  lOOy  shares,  as  provided  for  in  said  written  proposal  of  said  M  Corporation 
dated  April,  1917,  and  as  accepted  by  the  board  of  directors  of  this  company  at  the  board 
meeting  held  in  April,  1917. 

The  following  abstract  and  resolution  are  quoted  from  the  minutes  of  a 
meeting  of  the  corporation  held  April,  1917: 

That  said  A,  B,  and  C  had  presented  a  list  of  the  nominees  in  whose  names  they  desired 
that  said  capital  stock  should  be  issued,  showing  the  name,  address,  and  number  of  shares 
of  stock  to  be  issued  to  each  person,  firm,  or  corporation. 

On  motion,  duly  seconded,  the  following  resolution  was  duly  adopted: 

Resolved,  That  the  said  list  be  set  forth  in  full  in  these  minutes  and  that  as  said  A,  B, 
and  C  had  complied  with  their  said  offer  of  April,  1917,  and  had  duly  transferred  all  of  the 
property  and  assets  of  said  N  partnership  to  this  corporation,  and  had  paid  in  to  this 
corporation  said  additional  sum  of  x  dollars  in  cash,  the  certificates  of  stock  prepared  for 
that  purpose  be  issued  to  said  persons  accordingly  as  the  original  issue  of  the  shares  of  the 
capital  stock  of  this  corporation. 

Of  the  lOOy  shares  of  stock  issued  by  the  corporation,  the  following  shares 
were  authorized  by  the  officers  of  the  corporation  to  be  recorded  by  the 
transfer  agent  in  the  names  of  the  former  partners: 

B   18y  shares 

C   lOy  shares 

A   21y  shares 

Total   49y  shares 

or  a  few  shares  less  than  50  per  cent  of  the  total  issue  of  stock  to  them. 
According  to  the  records  of  the  transfer  agent,  the  remaining  shares  were  issued 
to  the  stockholders  in  number  from  1  to  25y  shares.  The  stock  issued  to  the 
public  was  very  well  distributed.  In  the  corporate  organization  B  became 
president  and  general  manager,  C  vice-president  and  secretary,  and^A  chair- 
man of  the  board  of  directors  and  treasurer  of  the  corporation. 
Section  208  of  the  Revenue  Act  of  1917  provides: 

That  in  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business  after  March  third,  nineteen  hundred  and  seventeen,  if  an  interest  or  control  in 
such  trade  or  business  of  fifty  per  centum  or  more  remains  in  control  of  the  same  persons, 
corporations,  associations,  partnerships,  or  any  of  them,  then  in  ascertaining  the  invested 
capital  of  the  trade  or  business  no  asset  transferred  or  received  from  the  prior  trade  or  busi- 
ness shall  be  allowed  a  greater  value  than  would  have  been  allowed  under  this  title  in  com- 
puting the  invested  capital  of  such  prior  trade  or  business  if  such  asset  had  not  been  so 
transferred  or  received,  unless  such  asset  was  paid  for  specifically  as  such,  in  cash  or  tangible 
property,  and  then  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible  property 
paid  therefor  at  the  time  of  such  payment. 

Article  50  of  Regulations  41  substantially  follows  the  language  of  the 
Act.  It  would  appear,  therefore,  that  the  sole  question  at  issue  rests  upon  the 
intent  of  the  words  "remains  in  control''  as  used  in  the  Act.  It  is  clear  from 
the  above  facts  that  the  partners  who  became  the  principal  officers  of  the 
corporation  continued  in  position  to  exercise  direct  and  effective  control  over 
the  affairs  of  the  business.  The  corporate  books  were  in  the  hands  of  one  of 
the  former  partners  and  from  this  record  he  had  intimate  knowledge  of  the 
ownership  of  stock  held  by  outside  interests. 

Apart  from  this  effective  control  it  is  clear  that  by  agreement  and  bill  of 
sale  the  partners  received  the  entire  capital  stock  of  the  corporation  for  the 
net  partnership  assets  and  for  other  valuable  considerations.  This  gave  the 
partners  immediate  authority  to  dispose  of  such  stock  in  any  manner  they 
might  desire.  Technically,  the  proceeds  from  the  sale  of  any  or  all  of  the 
stock  passed  to  the  partnership.  Out  of  these  proceeds  the  partners  paid  to 
the  corporation  such  amount  or  amounts  as  the  partners  had  agreed  to  pay  in 
part  consideration  for  the  stock  received  by  them.  In  other  words,  the  trans- 
action was  between  the  corporation  and  the  partners  and  the  latter  named 


Supplementary  Bulletin  Rulings. 


Sec.  331.    Art.  941.— 10. 


the  proportion  in  which  they  desired  the  stock  distributed  to  them  and  to  their 
nominees.  Hence,  the  partners  did  remain  in  control.  They  exercised  this 
control  in  naming  their  nominees.  It  is  immaterial  that  this  stock  control 
was  not  continuing — that  it  immediately  passed  by  a  small  fraction  into 
other  hands. 

In  oral  argument  representatives  of  taxpayer  laid  stress  on  the  amounts 
which  had  been  expended  by  the  partnership  from  time  to  time  in  developing 
foreign  agencies.  The  Committee  finds  no  provision  in  the  law  or  regulations 
for  the  capitalization  of  such  items^which  were  invariably  charged,  and 
properly  so,  to  cost  of  conducting  the  business. 

Article  64  of  Regulations  41  provides: 

Amounts  expended  in  the  past  for  good  will,  trade-marks,  trade  brands,  franchises, 
and  other  intangible  assets  of  a  like  character,  are  controlled  by  the  language  of  the  statute 
which  provides  that  such  assets  "shall  be  included  in  invested  capital  if  the  corporation  or 
partnership  made  payment  bona  fide  therefor  specifically  as  such  in  cash,  or  tangible  prop- 
erty." The  Commissioner  of  Internal  Revenue  will  recognize  additions  to  invested  capital  on 
account  of  intangible  assets  only  if  such  assets  have  been  explicitly  paid  for  in  the  manner 
prescribed  by  the  statute.  Where  expenditures  have  been  made  for  the  general  develop- 
ment of  intangible  assets,  and  charged  as  current  expense,  no  readjustment  thereof  will  be 
allowed. 

It  is,  accordingly,  the  recommendation  of  the  Committee  that  the  action 
of  the  Income  Tax  Unit  in  disallowing  this  corporation  x  dollars,  or  any  part 
thereof,  as  "good  will,  trade-marks  and  foreign  agencies"  be  sustained  under 
section  208  of  the  Revenue  Act  of  1917. 

10 


39-21-1849:  A.  R.  R.  618. 

Recommended,  in  the  case  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  disallowing  an  item  of  good  will  under  section  331  of  the  Revenue 
Act  of  1918  be  sustained,  and  that  the  action  of  the  Income  Tax  Unit  be  also 
sustained  under  section  310  in  declining  the  request  of  this  appellant  to  use  other 
years  than  the  years  1911,  1912  and  1913  in  establishing  average  prewar  income 
for  war  profits  tax  purposes. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  disallowing  in  the  statutory 
invested  capital  of  this  corporation  a  good  will  item  of  10*  dollars  and  in 
declining  to  consider  certain  years  other  than  the  years  1911,  1912  and  1913 
in  arriving  at  the  average  prewar  income  for  war  profits  tax  purposes. 

The  M  Company  was  incorporated  in  1918,  taking  over  the  net  tangible 
assets  of  the  partnership  of  O  &  Company.  For  the  net  tangible  assets  of 
the  partnership  there  was  issued  25*  dollars  of  preferred  stock  of  the  corpora- 
tion and  10*  dollars  of  common  stock.  The  stock  of  both  issues  was  delivered 
to  the  partners  of  O  &  Company  in  consideration  for  their  partnership  interests 
and  the  par  value  of  the  common  stock,  namely,  10*  dollars,  which  was  in 
excess  of  the  value  of  the  net  tangible  assets  of  the  partnership,  was  charged 
to  good  will  on  the  books  of  the  corporation.  That  item  was  eliminated 
from  invested  capital  by  the  Income  Tax  Unit  under  authority  of  section 
331  of  the  Revenue  Act  of  1918  and  article  941  of  Regulations  45  because 
more  than  50  per  cent  of  the  interest  or  control  in  the  partnership  continued 
in  the  same  persons  as  stockholders  of  the  corporation. 

The  appellant  states  that  the  partnership  of  O  &  Company  had  been 
operating  successfully  for  approximately  sixty  years  and  that  during  this 
period  it  earned  the  good  will  of  both  the  public  and  the  trade  on  account 
of  the  sterling  integrity  of  the  members  of  the  firm  in  their  business  relations, 
together  with  the  maintenance  of  an  unsurpassed  standard  of  quality  of 


Supplementary  Bulletin  Rulings. 


Sec.  331.   Art.  941.— 11. 


merchandise  offered  for  sale,  It  is  contended  that  such  good  will  thus 
established  should  be  considered  as  entirely  separate  and  distinct  from  the 
good  will  created  through  the  medium  of  advertising  and  development  of 
the  trade-name  brands  of  goods  and  that  accordingly  in  addition  to  the 
"cost  of  acquisition,"  as  stated  in  section  331  of  the  Revenue  Act,  there  should 
be  taken  into  account  not  merely  "betterments"  represented  by  actual  cash 
outlay  for  advertising,  etc.,  but  a  positive  additional  value  represented  by 
the  gradual  development  of  the  good  will  value  during  the  years,  which  must 
be  measured  in  terms  of  profits  earned. 

It  does  not  seem  necessary  to  give  consideration  to  the  going  concern 
value  of  this  business  as  may  be  determined  by  its  income  over  a  period 
of  years.  Section  331  of  the  Act  and  article  941  of  the  Regulations  are 
explicit  enough  in  limiting  the  value  of  the  assets  of  a  trade  or  business 
reorganized  after  March  3,  1917,  to  the  value  of  the  assets  of  the  predecessor 
company  when  there  is  an  interest  of  50  per  cent  or  more  remaining  in  the 
same  persons.  In  the  instant  case  the  continuing  interest  was  100  per  cent. 
Accordingly,  under  the  mandate  of  the  law  itself,  no  recognition  can  be 
given  in  the  instant  case  to  the  alleged  value  of  good  will  measured  by  the 
capital  stock  of  the  corporation  issued  in  excess  of  the  value  of  the  net  assets, 
both  tangible  and  intangible,  of  the  predecessor  partnership. 

It  appears,  however,  that  in  190-  there  was  a  partnership  reorganization 
and  at  this  time,  by  agreement,  there  was  set  up  on  the  books  of  the  new 
partnership  an  item  of  Yi%  dollars  for  good  will  of  the  business  of  O  &  Com- 
pany. This  item,  however,  was  written  off  the  books  of  the  partnership 
prior  to  the  incorporation  of  the  business  in  July,  1918.  It  would  seem, 
under  section  331  of  the  Act,  that  if  the  value  of  this  asset  can  be  established 
by  cost  of  acquisition  at  the  time  of  reorganization  of  the  partnership  in 
190-,  the  partnership  should  have  the  right  to  restate  its  proprietary  interest 
so  that  the  item  of  %x  dollars  would  be  reflected  as  an  asset  at  the  date  of 
incorporation  of  the  partnership  and  accordingly  allowed  as  an  intangible 
asset  on  the  books  of  the  corporation. 

With  respect  to  the  contention  of  the  appellant  that  other  years  than  the 
years  1911,  1912  and  1913  be  used  for  the  purpose  of  establishing  prewar 
income,  it  is  noted  that  the  contention  rests  on  the  fact  that  in  the  year 
1913  great  quantities  of  the  product  handled  were  sold  by  a  foreign  govern- 
ment in  the  American  market  at  a  stated  price  with  the  immediate  effect 
that  its  value  declined  considerably.  This  contention,  however,  was  not 
peculiar  to  this  appellant.  It  is  admitted  that  the  act  of  the  foreign  govern- 
ment affected  approximately  all  American  concerns  engaged  in  the  same 
business.  It  is  admitted,  therefore,  that  while  this  was  an  unusual  year  of 
depression,  all  like  trades  were  affected  to  the  same  extent  as  that  of  the 
appellant.  Relief,  which  is  sought  by  the  appellant  under  section  205  of 
the  Revenue  Act  of  1917,  does  not  obtain  and  the  point  at  issue  must  be  dis- 
posed of  under  the  mandatory  provisions  of  section  310  of  the  Revenue 
Act  of  1918,  which  prescribes  the  years  1911,  1912  and  1913  as  the  prewar 
period. 

The  Committee,  therefore,  recommends,  in  the  case  of  the  M  Company, 
that  the  action  of  the  Income  Tax  Unit  in  disallowing  an  item  of  good  will 
under  section  331  of  the  Revenue  Act  of  1918  be  sustained,  and  that  the  action 
of  the  Income  Tax  Unit  be  also  sustained  under  section  310  in  declining 
the  request  of  this  appellant  to  use  other  years  than  the  years  1911,  1912  and 
1913  in  establishing  average  prewar  income  for  war  profits  tax  purposes. 
1 1 


Supplementary  Bulletin  Rulings. 


Sec.  331.   Art.  941.— 12. 


43-21-1890:  A.  R.  R.  645 

Recommended  in  the  appeal  of  the  M.  Company,  that  the  action  of  the  Income 
Tax  Unit  be  sustained  in  holding  that  A  did  not  retain  an  interest  or  control  of 
50  per  cent  or  more  in  the  trade  or  business  previously  owned  and  engaged  in 
by  him  under  the  name  of  X,  and  that  the  case  does  not  come  within  the  pro- 
visions of  section  208  of  the  Revenue  Act  of  1917,  and  article  50  of  Regulations 
41  and  section  331  of  the  Revenue  Act  of  1918  and  article  941  of  Regulations  45. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Company 
from  the  action  of  the  Income  Tax  Unit  in  holding  that  A  did  not  retain  an 
interest  or  control  of  50  per  cent  or  more  in  his  individual  trade  or  business 
transferred  to  the  foregoing  corporation  on  or  about  December — ,  1917,  and 
that  the  provisions  of  section  208  of  the  Revenue  Act  of  1917  and  section  331 
of  the  Revenue  Act  of  1918  do  not  apply. 

The  tax  returns  of  this  corporation  are  under  audit  for  the  years  1917, 
1918,  and  1919,  and  the  question  under  consideration  by  the  Committee 
arose  in  connection  with  the  audit. 

The  Committee,  after  examining  the  facts  in  the  case  and  the  arguments 
presented  by  attorneys  for  the  corporation,  reached  the  conclusion  that  the 
appeal  raised  a  question  of  law.  An  opinion  was  requested  from  the  Solicitor, 
and  the  Committee  is  now  in  receipt  of  an  opinion,  which  reads  as  follows: 

In  December,  1917,  A  was  the  owner  of  a  certain  business,  which  he  engaged  in  under 
the  name  of  X.  In  that  month  his  son,  B,  together  with  two  other  persons,  formed  a  cor- 
poration known  as  the  M  Company  for  the  purpose  of  acquiring  the  assets  of  the  business 
conducted  by  A  so  that  the  business  might  be  continued  by  the  corporation.  On  December 
— ,  1917,  A  offered  to  sell  to  the  corporation  all  his  right,  title,  and  interest  in  and  to  the 
assets  of  the  business  that  had  been  conducted  by  him,  in  consideration  of  the  issuance  of 
48%y  shares  of  stock  of  the  corporation  to  seven  persons,  who  were  named  in  the  offer. 
A  was  to  receive  shares,  his  children  and  close  connections  were  to  receive  the  remainder. 
The  corporation  was  authorized  to  issue  not  more  than  50y  shares  of  stock  under  its  charter. 
The  offer  was  accepted  by  the  corporation.  The  assets  were  then  transferred  to  the  cor- 
poration and  the  stock  was  issued  to  the  designated  persons  in  accordance  with  the  agree- 
ment, with  the  exception  of  two  qualifying  shares  issued  to  other  persons.  After  the  con- 
summation of  this  transaction  A  held  l^y  shares  of  the  corporate  stock,  y  shares  being 
purchased  by  him  for  cash. 

Two  questions  are  raised  (1)  whether  the  transaction  in  question  constituted  a  reorgan- 
ization of  the  business  or  a  sale  of  the  business  to  the  corporation,  and  (2)  whether  an  interest 
or  control  of  50  per  cent  or  more  of  the  business  remained  in  A,  the  owner  of  the  business 
prior  to  its  transfer  to  the  coiporation. 

Section  208  of  the  Revenue  Act  of  1917  provides: 

That  in  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business  after  March  third,  nineteen  hundred  and  seventeen,  if  an  interest  or  control  in 
such  trade  or  business  of  50  per  centum  or  more  remains  in  control  of  the  same  persons, 
corporations,  associations,  partnerships,  or  any  of  them,  then  in  ascertaining  the  invested 
capital  of  the  trade  or  business  no  asset  transferred  or  received  from  the  prior  trade  or 
business  shall  be  allowed  a  greater  value  than  would  have  been  allowed  under  this  title  in 
computing  the  invested  capital  of  such  prior  trade  or  business  if  such  asset  had  not  been 
so  transferred  or  received,  unless  such  asset  was  paid  for  specifically  as  such,  in  cash  or 
tangible  property,  and  then  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible 
property  paid  therefor  at  the  time  of  such  payment. 

Section  331  of  the  Revenue  Act  of  1918  reads  as  follows: 

In  the  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade  or 
business,  or  change  of  ownership  of  property,  after  March  3,  1917,  if  an  interest  or  control 
in  such  trade  or  business  or  property  of  50  per  centum  or  more  remains  in  the  same  persons, 
or  any  of  them,  then  no  asset  transferred  or  received  from  the  previous  owner  shall,  for  the 
purpose  of  determining  invested  capital,  be  allowed  a  greater  value  than  would  have  been 
allowed  under  this  title  in  computing  the  invested  capital  of  such  previous  owner  if  such  asset 
had  not  been  so  transferred  or  received:  Provided,  That  if  such  previous  owner  was  not  a 
corporation,  then  the  value  of  any  asset  so  transferred  or  received  shall  be  taken  at  its 
cost  of  acquisition  (at  the  date  when  acquired  by  such  previous  owner)  with  proper  allow- 
ance for  depreciation,  impairment,  betterment,  or  development,  but  no  addition  to  the 
original  cost  shall  be  made  for  any  charge  or  expenditure  deducted  as  expense  or  otherwise 
on  or  after  March  1,  1913,  in  computing  the  net  income  of  such  previous  owner  for  pur- 
poses of  taxation. 


Supplementary  Bulletin  Rulings. 


1-23-22. 

Sec.  331.    Art.  941.  -13. 

The  taxpayer  states  that  the  decision  of  this  case  rests  upon  the  construction  to  be 
given  to  the  words  "interest  or  control,"  "remains  in  the  same  person,"  and  "remains  in 
control."  These  are  said  to  be  the  key  words  to  the  whole  matter.  It  is  contended  that 
the  fact  that  A  named  persons  of  his  own  family  to  receive  the  stock  of  the  corporation  is 
immaterial  in  determining  the  question  of  control,  as  the  transaction  was  entirely  bona  fide 
and  no  question  of  fraud  or  evasion  is  involved. 

The  solution  of  the  principal  question  presented  lies  in  the  effect  to  be  given  to  the  con- 
tract arising  from  the  acceptance  by  the  corporation  of  the  offer  bv  A  under  date  of  Decem- 
ber — ,  1917. 

In  a  majority  of  the  States,  where  two  parties  enter  into  an  agreement  upon  a  valid 
consideration  and  thereunder  third  persons  are  to  receive  a  benefit,  the  contract  may  be 
enforced  by  such  third  persons.  The  transaction  in  question  took  place  in  the  State  of 
Illinois,  and  this  principle  has  been  recognized  by  the  courts  of  that  State.  It  was  stated 
by  the  Supreme  Court  of  that  State  in  Cobb  v.  Heron,  180  111.  49,  54  N.  E.  189,  Aff.  78111. 
App.  654,  that  privity  or  consideration  between  a  promissor  and  a  third  person  who  is  a 
beneficiary  under  a  contract  need  not  exist  to  support  a  promise,  provided  thare  is  a  valu- 
able consideration  for  the  promise  as  between  the  principal  parties  to  the  undertaking, 
citing  Deen  v.  Walker,  107  111.  540;  Bay  v.  Williams,  1 12  111.  91.  This  principle  has  also  been 
asserted  in  numerous  cases  including  the  following:  Hart-man  v.  Pistorious,  248  111.  568 
94  N.  E.  131;  Searls  v.  Flora,  225  111.  167  80  N.  E.  98;  Harms  v.  McCormick,  132  111.  104, 
22  N.  E.  511.  Under  this  rule  then,  which  is  sustained  by  sufficient  authority,  the  moment 
the  offer  of  A  was  accepted  by  the  corporation  a  binding  contract  for  the  benefit  of  the 
third  parties  was  affected. 

As  A  chose  to  specify  in  his  offer  the  persons  who  were  to  receive  the  stock,  which,  on 
acceptance  by  the  corporation,  obligated  it  to  issue  the  shares  to  the  persons  designated 
(which  obligation  was  promptly  carried  out),  it  is  clear  that  the  limitations  of  the  statute 
do  not  apply,  notwithstanding  the  relationship  existing  between  A  and  the  persons  whom 
he  designated  to  receive  the  stock,  provided  the  transaction  was  bona  fide  and  not  designed 
to  conceal  the  real  ownership  of  the  stock. 

It  appears  from  the  evidence  that  the  transaction  was  bona  fide.  An  explanation  of  the 
transaction  lies  in  the  fact  that  A  desired  to  provide  for  his  children  during  his  own  life- 
time and  retire  from  active  business.  Almost  immediately  after  he  transferred  the  assets 
of  his  individual  business  to  the  corporation  he  retired  from  business  and  died  about  two 
months  later.  There  seems  to  be  no  doubt  that  the  issuance  of  the  stock  to  the  persons 
designated  in  the  offer  was  absolute  and  unconditional  and  that  A  made  no  attempt  to 
retain  any  interest,  either  directly  or  indirectly,  in  the  stock. 

For  these  reasons  it  is  the  opinion  of  this  office  that  A  did  not  retain  an  interest  or  con- 
trol of  50  per  cent  or  more  in  the  trade  or  business  previously  owned  and  engaged  in  by  him 
under  the  name  of  X  and  that,  therefore,  the  case  does  not  come  within  the  provisions  of 
section  208  of  the  Revenue  Act  of  1917  and  section  331  of  the  Revenue  Act  of  1918. 

It  is  immaterial  in  determining  the  question  of  invested  capital  whether  the  transaction 
in  question  constituted  a  sale  or  reorganization,  and  no  opinion  in  connection  therewith  is 
expressed. 

In  view  of  the  foregoing  opinion  of  the  Solicitor,  in  which  the  Committee 
concurs,  it  is  recommended  that  the  action  of  the  Income  Tax  Unit  be  sus- 
tained in  holding  that  A  did  not  retain  an  interest  or  control  of  50  per  cent 
or  more  in  the  trade  or  business  previously  owned  and  engaged  in  by  him 
under  the  name  of  X  and  that  the  case  does  not  come  within  the  provisions 
of  section  208  of  the  Revenue  of  Act  1917  and  article  50  of  Regulations  41 
and  section  331  of  the  Revenue  Act  of  1918  and  article  941  of  Regulations  45. 
12 


45-21-1916:  O.  D.  1097. 
In  1913,  the  M  Company  was  required  by  order  of  court  to  dissolve, 
Prior  to  such  dissolution,  a  new  corporation,  known  as  the  O  Company,  was 
was  organized  with  a  capital  stock  equal  to  the  aggregate  par  value  of  the 
capital  stock  of  the  M  Company  outstanding.  The  O  Company  then  ex- 
changed its  capital  stock  (aggregate  par  value  3x  dollars)  for  all  the  stock, 
assets,  and  liabilities  of  the  M  Company.  At  the  time  of  such  sale  the  M 
Company  had  capital  stock  outstanding  of  a  total  par  value  of  3x  dollars, 
surplus  and  undivided  profits,  x  dollars.    The  stock  of  the  new  company 


Supplementary  Bulletin  .Rulings. 


Sec.  331.    Art.  941.— 14. 


was  issued  share  for  share  to  the  stockholders  who  held  the  stock  of  the  old 
company.  The  officers  and  directors  of  the  old  company  and  the  new  com- 
pany are  identical. 

The  question  presented  is  whether  in  computing  invested  capital  of  the 
O  Company  the  value  of  the  assets  as  carried  on  the  books  of  the  M  Com- 
pany may  be  taken  up  on  its  books  and  included  at  the  same  rate  they  were 
so  carried  on  the  books  of  the  M  Company. 

Held,  that  a  change  of  entity  occurred  resulting  in  a  new  and  distinct 
corporation  and  that  as  the  property  acquired  for  stock,  including  surplus 
and  undivided  profits,  was  paid  in  prior  to  January  I,  1914,  pursuant  to 
section  207  (a)  of  the  Revenue  Act  of  1917,  the  tangible  property  received 
by  the  O  Company  may  be  included  in  invested  capital  at  its  actual  cash 
value  as  of  January  1,  1914,  to  the  extent  that  such  value  is  not  in  excess 
of  the  par  value  of  stock  or  shares  specifically  issued  therefor. 
13 


I  ('22)-3-39:  L.  O.  1081. 

INCOME  TAX— SECTION  331,  REVENUE  ACT  OF  1918. 

Section  331  of  the  Revenue  Act  of  1918  is  not  made  inapplicable  because  of  the 
fact  that  a  control  of  50  per  cent  or  more  in  the  trade,  business,  or  property 
reorganized,  consolidated,  or  transferred  subsequent  to  March  3,  1917,  does  not 
remain  in  any  of  the  previous  owners,  provided  such  control  does  remain  in  the 
same  persons  or  any  of  them. 

Where  section  331  applies  to  the  transfer  of  assets  from  one  corporation  to 
another,  the  assets  transferred  shall  be  valued,  for  invested  capital  purposes,  in 
accordance  with  the  provisions  of  section  326,  provided  such  values  do  not  exceed 
the  allowed  value,  for  invested  capital  purposes,  of  the  assets  if  such  assets  had  not 
been  transferred. 

Article  941  of  Regulations  45  should  be  amended  to  conform  herewith.1 
The  question  has  arisen  as  to  whether  article  941  of  Regulations  45  contains 
the  correct  interpretation  of  section  331  of  the  Revenue  Act  of  1918. 
Section  331  of  the  Revenue  Act  of  1918  provides  as  follows: 

Sec.  331.  In  the  case  of  the  reorganization,  consolidation,  or  change  of  ownership 
of  a  trade  or  business,  or  change  of  ownership  of  property,  after  March  3,  1917,  if  an  interest 
or  control  in  such  trade  or  business  or  property  of  50  per  cent  or  more  remains  in  the  same 
persons,  or  any  of  them,  then  no  asset  transferred  or  received  from  the  previous  owner 
shall,  for  the  purpose  of  determining  invested  capital,  be  allowed  a  greater  value  than 
would  have  been  allowed  under  this  title  in  computing  the  invested  capital  of  such  previous 
owner  if  such  asset  had  not  been  so  transferred  or  received:  Provided,  That  if  such  previous 
owner  was  not  a  corporation,  then  the  value  of  any  asset  so  transferred  or  received  shall  be 
taken  at  its  cost  of  acquisition  (at  the  date  when  acquired  by  such  previous  owner)  with 
proper  allowance  for  depreciation,  impairment,  betterment,  or  development,  but  no  addition 
to  the  original  cost  shall  be  made  for  any  charge  or  expenditure  deducted  as  e>pcn?e  or 
otherwise  on  or  after  March  1,  1913,  in  computing  the  net  income  of  such  pre\ ;  u 
for  purposes  of  taxation. 

Article  941  of  Regulations  45,  which  interprets  section  331,  reads: 
Art.  941.  Where  a  business  is  reorganized,  consolidated,  or  transferred,  or  property 
is  transferred,  after  March  3,  1917,  and  an  interest  or  control  of  50  per  cent  or  greater  in 
such  business  or  property  remains  in  any  of  the  previous  owners,  then  for  the  purpose  of 
determining  invested  capital  each  asset  so  transferred  is  valued  (a)  as  if  still  in  thp  posses- 
sion of  the  previous  owner,  if  a  corporation,  or,  if  not  a  corporation,  (b)  at  its  <^ost  to  such 
previous  owner,  with  proper  adjustments  for  losses  and  improvements.  This  provision  is 
accordingly  concerned  with  the  computation  of  invested  capital  for  the  taxable  year,  while 
section  330  of  the  statute  is  chiefly  concerned  with  the  determination  of  invested  capital 
tor  the  prewar  period. 


1  Treasury  Decision  3259  (Bulletin  51-21,  p.  17),  amending  article  041  of  Regulations 
45,  is  based  on  Law  Opinion  1081. 


Supplementary  Bulletin  Rulings. 


4-6-22. 

Sec.  331.    Art/941.— 15. 

The  validity  of  article  941,  in  so  far  as  it  provides  that  section  331  applies 
only  when  an  interest  or  control  of  50  per  cent  or  more  remains  "in  any  of 
the  previous  owners,"  has  been  questioned. 

The  following  hypothetical  case,  which  is  merely  illustrative  of  actual 
cases  which  have  arisen,  has  been  presented.  The  N  corporation  transfers 
to  O  corporation,  subsequent  to  March  3,  1917,  tangible  property  in  exchange 
for  20  per  cent  of  its  stock.  Seventy-five  per  cent  of  the  stock  of  corporations 
N  and  O  is  owned  by  the  same  individual  but  the  corporations  are  not 
affiliated. 

It  is  apparent  in  this  case  that  an  interest  or  control  of  50  per  cent  or 
more  in  the  property  does  not  remain  after  the  exchange  "in  any  of  the 
previous  owners,"  inasmuch  as  the  N  corporation,  the  previous  owner  of  the 
asset,  owns  only  a  small  proportion  of  the  outstanding  stock  of  the  0  corpo- 
ration. Thus,  if  article  941  correctly  interprets  this  section  of  the  statute, 
the  O  corporation  can  include  in  invested  capital  the  actual  value  of  the  prop- 
erty exchanged,  subject  to  the  limitations  contained  in  section  326,  even  if 
such  value  is  in  excess  of  the  allowable  value  for  invested  capital  purposes  of 
the  property  to  the  N  corporation. 

Section  331,  however,  limits  the  amounts  to  be  included  in  the  invested 
capital  of  the  new  owner  if  an  interest  or  control  in  the  property  of  50  per  cent 
or  more  "remains  in  the  same  persons  or  any  of  them."  In  the  case  stated 
above  it  is  apparent  that,  by  virtue  of  stock  holdings,  a  control  in  excess  of 
50  per  cent  in  the  property  transferred  "remains  in  the  same  persons,"  i.  e., 
the  stockholders  of  the  N  and  O  corporations. 

Article  941  of  Regulations  45,  therefore,  is  incorrect,  in  so  far  as  it  provides 
that  in  order  that  section  331  be  applicable  an  interest  or  control  of  50  per 
cent  or  more  in  the  property  exchanged  must  remain  in  the  previous  owners. 

Article  941  provides  further  that  where  section  331  applies  the  property 
transferred,  if  transferred  by  a  corporation,  is  valued,  for  the  purpose  of 
determining  invested  capital,  as  if  still  in  the  possession  of  the  previous 
owner. 

The  provisions  of  article  941  on  this  point  can  be  most  clearly  shown  by 
application  to  a  specific  case:  The  N  corporation,  which  owned  50  per  cent 
of  the  outstanding  stock  of  the  O  corporation,  transferred  subsequent  to 
March  3,  1917,  unimproved  real  estate,  which  cost  it  $100,000  but  which  at 
the  time  of  the  exchange,  due  to  a  decrease  in  market  value,  was  worth  only 
$20,000,  to  the  O  corporation  in  exchange  for  stock.  Under  the  provisions  of 
article  941  the  asset  so  transferred  should  be  valued,  for  the  purpose  of 
determining  the  invested  capital  of  the  O  corporation,  "as  if  still  in  the 
possession  of  the  previous  owner."  That  is,  the  O  corporation  should  include 
in  invested  capital,  on  account  of  the  asset  transferred,  $100,000,  the  allowable 
value  of  the  asset,  provided  for  invested  capital  purposes,  to  the  N  corporation, 
in  spite  of  the  fact  that  the  actual  cash  value  of  the  asset  at  the  time  of  the 
exchange  was  oniy  $20,000. 

Section  326  provides  that  invested  capital  includes  "the  actual  cash  value 
of  tangible  property  other  than  cash,  bona  fide  paid  in  for  stock  or  shares, 
at  the  time  of  such  payment  *  *  *."  Section  331  makes  an  exception  to  this 
general  rule  in  the  case  of  a  change  of  ownership  of  property  between  corpo- 
rations subsequent  to  March  3,  1917,  where  an  interest  or  control  of  50  per 
cent  or  more  remains  in  the  same  persons,  and  provides  that  in  such  case  the 
property  transferred  shall  not  be  allowed  a  greater  value,  for  invested  capital 
purposes,  "than  would  have  been  allowed  *  *  *  in  computing  the  in- 
vested capital  of  such  previous  owners    *    *    *."    In  the  case  stated  above, 


Supplementary  Bulletin  Rulings. 


Sec.  331.    Art.  941.— 16. 


the  asset  paid  into  the  O  corporation  for  stock  should  be  included  at  its  actual 
cash  value  at  the  time  paid  in,  under  the  provisions  of  section  326  unless 
the  case  falls  within  the  exception  covered  by  section  331.  This  latter 
section  merely  provides,  however,  that  an  asset  so  transferred  shall  not  be 
allowed  a  greater  value  than  would  have  been  allowed  the  previous  owner,  if  a 
corporation,  and  is,  therefore,  by  its  own  terms,  inoperative  unless  the  actual 
cash  value  of  the  property  at  the  time  of  the  exchange  is  in  excess  of  the 
allowable  value  of  the  property,  for  invested  capital  purposes,  in  the  hands  of 
the  previous  owner.  Inasmuch  as  the  actual  cash  value  of  the  asset  trans- 
ferred, in  the  instant  case,  was  $20,000,  a  lesser  amount  than  the  allowable 
value  of  the  asset,  for  invested  capital  purposes,  in  the  hands  of  the  N  corpora- 
tion, section  331  is  not  operative.  Therefore  the  O  corporation  should 
include  in  invested  capital,  under  section  326,  $20,000,  the  actual  cash  value 
of  the  asset  at  the  time  paid  in  for  stock. 
It  is  concluded  that: 

(1)  Section  331  of  the  Revenue  Act  of  1918  is  not  made  inapplicable 
because  of  the  fact  that  a  control  of  50  per  cent  or  more,  in  the  trade,  business, 
or  property  reorganized,  consolidated,  or  exchanged,  subsequent  to  March 
3,  1917,  does  not  remain  in  any  of  the  previous  owners,  provided  such  control 
does  remain  in  the  same  persons,  or  any  of  them. 

(2)  Where  section  331  applies  to  the  transfer  of  assets  from  one  corpora- 
tion to  another,  the  assets  transferred  shall  be  valued,  for  invested  capital 
purposes,  in  accordance  with  the  provisions  of  section  326,  provided  such 
value  does  not  exceed  the  allowable  value,  for  invested  capital  purposes,  of 
the  assets,  if  such  assets  had  not  been  transferred. 

Article  941  of  Regulations  45  should  be  amended  to  conform  herewith. 

Carl  A.  Mapes, 
Solicitor  of  Internal  Revenue. 

14 


(See  I  ^22)-4-48;  Section  326,  Article  831.    Ruling  No.  32.)  Exchange 
by  domestic  corporation  of  tangible  property  for  majority  of  stock  of  foreign 
corporation.    Revenue  Acts  of  1917  and  1918. 
15 


I('22)-14-206:    A.  R.  R.  844. 
Revenue  Act  of  1917. 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  holding  that  the  reincorporation  of  the  appellant  company  in  1914 
under  the  laws  of  the  State  of  Y  did  not  constitute  such  a  reorganization  as  would 
permit  that  company  to  claim  a  greater  amount  of  statutory  invested  capital  for 
the  year  1917  than  would  have  been  allowed  had  that  company  continued  to 
operate  under  the  charter  granted  by  the  State  of  Z,  be  sustained,  and  that  it  be 
held  that  such  a  reorganization  did  take  place  in  1902  and  the  appellant  com- 
pany's statutory  invested  capital  for  the  year  1917  be  recomputed  upon  the 
basis  of  the  values  existing  at  the  time  of  such  reorganization. 

The  Committee  has  had  under  consideration  the  appeal  of  the  M  Com- 
pany from  the  action  of  the  Income  Tax  Unit  in  reducing  the  amount  of 
invested  capital  claimed  by  the  appellant  for  the  year  1917.  The  question 
at  issue  and  the  facts  in  the  case  are  stated  in  a  memorandum  of  the  Unit  as 
follows : 

The  question  is:  Shall  the  taxpayer  be  permitted  to  include  in  invested  capital  a  paid- 
in  surplus  of  15*  dollars  (net)  representing  the  excess  of  actual  value  of  tangible  assets 
over  the  par  value  of  stock  issued  therefor  at  the  time  of  the  alleged  reorganization  De- 

Supplementary  Bulletin  Rulings. 


4-6-22. 

Sec.  331.    Art.  941.-17. 

cember  — ,  1914,  and  also  include  in  invested  capital  good  will  in  the  amount  of  20  per 
cent  of  the  outstanding  stock  on  March  3,  1917? 
Facts: 

The  business  was  established  in  187-  by  A.  He  conducted  it  individually  until  189-, 
when  the  M  Company  (the  first  M  Company  by  that  name)  was  organized  with  an  author- 
ized capital  stock  of  4x  dollars. 

In  July,  1902,  the  M  Company  (of  Z)  was  organized,  with  an  authorized  capital  stock 
of  40#  dollars,  acquiring  the  business  and  good  will  of  the  first  M  Company  of  Y.  It  was 
at  the  time  immedately  prior  to  the  organization  of  the  M  Company  of  Z  that  the  item 
of  good  will  made  its  appearance  on  the  books  of  the  old  M  Company.  The  item  of  good 
will  did  not  appear  in  the  balance  sheet  of  the  M  Company  of  Y  in  January,  1902,  but 
was  set  up  in  the  July  balance  sheet  at  183^#  dollars.  Immediately  thereafter  the  busi- 
ness was  transferred  to  the  M  Company  af  Z.  At  the  time  of  creating  the  item  of  good 
will  on  the  books  of  the  old  M  Company  the  stock  was  not  increased  but  an  asset  of  good 
will  was  created  and  a  corresponding  credit  was  made  to  surplus. 

The  M  Company  of  Z  continued  in  business  until  1914,  in  the  meantime  increasing 
its  capital  stock  to  50x  dollars. 

Under  date  of  December  — ,  1914,  the  present  M  Company  of  Y  was  organized,  with 
an  authorized  capital  stock  of  50x  dollars.  This  stock  was  issued  to  the  shareholders  of 
the  predecessor  M  Company  of  Z  share  for  share.  The  assets  of  the  old  company  were 
transferred  to  the  new  company  and  continued  on  its  books  without  change  in  value. 

In  its  return  the  taxpayer  claimed  invested  capital  computed  as  follows: 


Dollars. 

Capital  stock  j   50x 

Surplus  earned  since  1902   12* 


Add  under  Schedule  B — Paid-in  surplus  at  date  of  organization  of  second 
M  Company  of  Y  in  1914  based  on  excess  of  actual  value  of  tangible 
assets  over  book  value  at  that  date   I5}^x 


77V2x 

Deduct  under  Schedule  C — Excess  of  book  value  of  good  will 

over  20  per  cent  limitation  

Depreciation  not  charged  off   %x 

  9  Mat 


68M* 

Add  under  Schedule  D — Additional  issues  of  stock  during  taxable  year  I6x 


Invested  capital   .  84%* 

The  Income  Tax  Unit,  by  letter  of  April  — ,  1919,  recomputed  the  invested  capital  as 
follows : 

Dollars 

Capital  stock   50x 

Surplus  earned  from  December,  1914,  to  Dec.  31,  1916   tyix 


Additions  under  Schedule  D  for  additional  capital  stock  issued  during 

taxable  year   16* 


The  elimination  of  paid-in  surplus  was  based  on  the  theory  that,  granting  the  values 
claimed  by  the  company  for  its  tangible  assets  at  date  of  organization  in  1914,  it  followed 
that  the  entire  stock  of  50x  dollars  was  issued  for  tangible  property  and  that  the  paid-in 
surplus,  therefore,  represented  intangible  assets  and  could  not  be  allowed.  See  article 
63,  Regulations  41,  which  permits  a  paid-in  surplus  only  with  respect  to  tangible  property. 

The  Income  Tax  Unit,  by  letter  of  June  — ,  1920,  made  a  further  adjustment  in  the 
company's  invested  capital,  the  reason  therefor  not  being  pertinent  to  the  present  iniquiry. 
Said  letter  adhered  to  the  former  action  in  the  disallowance  of  good  will. 

It  is  appropriate  at  this  step  to  invite  attention  to  the  fact  that  the  record  indicates 
that  the  Advisory  Tax  Board  passed  upon  the  item  of  paid-in  surplus,  the  decision  being 
adverse  to  the  taxpayer.  A  formal  ruling  by  the  Board,  however,  does  not  appear  in  the 
record. 

The  company  has  rebutted  the  finding  that  the  paid-in  surplus  represented  intangible 
assets.  In  this  connection  see  pages  8  and  9  of  the  brief  showing  that  the  opening  entries 
on  the  books  in  1914  recite  that  the  capital  stock  of  the  M  Company,  then  organized, 
was  issued  specifically  for  good  will  in  the  amount  of  1834*  dollars,  and  furtherwore  that 
the  certificate  of  issue  of  capital  stock  filed  with  the  State  of  Y  discloses  that  18^*  dollars 
of  the  50*  dollars  of  capital  stock  was  specifically  issued  for  the  asset  good  will. 

Supplementary  Bulletin  Rulings. 


.Xt~,m  MA    Alt.  .093 


Sec.  331.    Art.  941.— 18. 


In  rendering  its  tax  returns  for  the  year  1917  the  appellant  took  the 
position  that  there  had  been  a  reorganization  of  the  company  in  1914  and 
that  the  value  of  the  assets  transferred  to  it  by  the  M  Company  of  Z  at  the 
time  of  such  transfer  should  be  taken  as  a  basis  for  the  establishment  of  the 
amount  of  statutory  invested  capital  allowable  in  the  computation  of  its 
profits  tax  liability  for  the  year  1917.  The  Unit  in  disallowing  a  portion 
of  the  amount  of  invested  capital  claimed  for  that  year  took  the  position 
that  inasmuch  as  the  assets  of  the  M  Company  of  Z  were  taken  over  by  the 
new  M  Company  of  Y  without  any  change  in  value  and  without  any  change 
in  business  or  amount  of  capitalization,  with  the  stockholders  of  the  new 
M  Company  of  Y  the  same  as  those  of  the  M  Company  of  Z,  there  was  no 
such  reorganization  in  1914  as  would  permit  the  M  Company  to  value  its 
assets  for  invested  capital  purposes  at  a  greater  amount  than  would  its  pre- 
decessor company  be  permitted  to  have  valued  its  assets  had  it  continued 
to  operate  under  the  charter  granted  by  the  State  of  Z. 

As  appears  from  the  records  in  the  case,  the  surrender  of  the  M  Com- 
pany's Z  charter  and  its  acquirement  of  a  Y  charter  effected  merely  a  change 
in  domicile  and  charter  without  any  accompanying  change  in  business, 
capitalization,  surplus,  or  stock  ownership,  and  therefore  the  Committee, 
adhering  to  the  opinion  expressed  by  it  relative  to  a  very  similar  case  pre- 
viously considered,  as  set  forth  in  A.  R.  R.  16  (C.  B.  2,  p.  312),  recommends 
that  the  action  of  the  Unit  in  holding  that  the  reincorporation  of  the  M 
Company  in  1914  under  the  laws  of  the  State  of  Y  did  not  permit  that  com- 
pany to  claim  a  greater  amount  of  statutory  invested  capital  for  the  year 
1917  than  would  have  been  allowed  had  that  company  continued  to  operate 
under  the  charter  issued  by  the  State  of  Z,  be  sustained. 

However,  as  shown  by  the  records,  there  was  a  decided  change  in  capital- 
ization as  well  as  a  change  in  domicile  and  character  in  1902  when  the  M 
Company  surrendered  its  first  Y  charter  and  reincorporated  under  the  laws 
of  the  State  of  Z.  At  the  time  of  such  surrrender  the  company  was  capital- 
ized at  4x  dollars,  and  it  was  reincorporated  with  an  authorized  capital  of 
40x  dollars.  Taking  this  fact  into  consideration,  the  Committee  is  of  the 
opinion  that  a  reorganization  took  place  in  1902,  and  that  the  company's 
statutory  invested  capital  for  the  year  1917  should  be  recomputed  upon 
the  basis  of  the  values  existing  at  the  time  of  such  reorganization,  with  par- 
ticular care  given  to  the  ascertainment  of  the  value  of  the  good  will  of  the 
company  as  of  July  — ,  1902,  the  date  upon  which  it  appears  the  said  reorgan- 
ization was  effected,  and  to  the  ascertainment  of  the  value  of  the  leaseholds, 
if  any,  which  were  transferred  by  the  first  M  Company  to  the  M  Company 
of  Z  on  that  date. 

In  view  of  the  foregoing,  the  Committee  recommends  that  the  action  of 
the  Income  Tax  Unit  in  holding  that  the  reincorporation  of  the  M  Company 
in  1914  under  the  laws  of  the  State  of  Y  did  not  constitute  such  a  reorgan- 
ization as  would  permit  that  company  to  claim  a  greater  amount  of  statu- 
tory invested  capital  for  the  year  1917  than  would  have  been  allowed  had 
that  company  continued  to  operate  under  the  charter  granted  by  the  State 
of  Z,  be  sustained,  and  that  it  be  held  that  such  a  reorganization  did  take 
place  in  1902  and  that  the  company's  statutory  invested  capital  for  the  year 
1917  be  recomputed  upon  the  basis  of  the  values  existing  at  the  time  of  such 
reorganization. 

16 


Supplementary  Bulletin  Rulings, 


7-20-22. 

Sec.  331.    Art.  941.— 19. 

I('22)-29-417:  A.  R.  R.  988 
Act  of  October  3,  1917,  Section  208.    Act  of  February  24,  1919,  Section  33 1 . 

Recommended,  in  the  appeal  of  the  M  Company,  that  the  action  of  the  Income 
Tax  Unit  in  requiring  the  appellant  to  file  amended  returns  for  the  taxable  years 
affected  pursuant  to  Treasury  Decision  3220  (0.  B.  5,  p.  285),  be  sustain.  ,:. 

The  Committee  has  carefully  considered  the  oral  appeal  of  the  A!  Company 
from  the  action  of  the  Income  Tax  Unit  in  requiring  it  to  file  amended  returns 
for  the  taxable  years  affected,  pursuant  to  the  provisions  of  Treasure  Decision 
3220.    [If 865  herein]. 

The  M  Company  was  organized  under  the  laws  of  the  State  of  Y  in  1897 
and  its  charter  expired  in  accordance  with  its  terms  in  September,  1917. 
The  corporation  commissioner  of  the  State  of  Y  having  held  that  under  section 
6705  of  the  State  of  Y  Laws  the  existence  of  a  corporation  could  not  be 
continued  by  the  filing  of  supplemental  articles  of  incorporation,  the  M 
Company  was  organized  September,  1917,  with  an  authorized  capital  stock 
of  30x  dollars,  which  was  the  same  as  that  of  the  original  company.  The 
stock  of  the  new  company  was  issued  to  the  stockholders  of  the  original  com- 
pany share  for  share,  and  all  the  assets  of  the  old  corporation  were  thereupon 
transferred  to  the  new  corporation  at  their  market  value  as  of  September, 
1917,  and  such  value  was  utilized  in  the  preparation  of  the  tax  returns  of 
the  company.  Under  date  of  February  — ,  1922,  demand  was  made  upon  the 
company  that  it  file  amended  returns  for  the  taxable  years  affected  by  the 
use  of  such  increased  invested  capital  in  accordance  with  the  provisions  of 
Treasury  Decision  3220  (C.  B.  5,  p.  285). 

Owing  to  the  peculiar  circumstances  existing  in  this  case  the  appellant 
was  allowed  to  file  an  oral  appeal,  and  argument  by  its  representatives  yrfcs 
heard  by  the  Committee  on  April  1922.  It  is  contended  by  the  appellant 
that  the  purpose  and  intent  of  section  208  of  the  Act  of  October  3,  1917,  and 
section  331  of  the  Act  of  February  24,  1919,  were  to  prohibit  the  inflation  of 
the  invested  capital  of  a  corporation  through  a  voluntary  reorganization,  and 
that  these  sections  should  not  apply  to  a  case  like  the  present,  in  which  the 
reorganization  or  change  of  ownership  was  wholly  involuntary  and  due  solely 
to  the  expiration  of  the  charter  of  the  original  corporation.  It  was  admitted 
by  the  representatives  of  the  appellant  at  the  oral  hearing  that  the  assets  of  the 
original  corporation  were  never  actually  distributed  to  the  stockholders  but 
were  transferred  directly  by  deed  of  the  original  corporation  to  the  new 
corporation. 

Section  208  of  the  Act  of  October  3,  1917,  provides: 

That  in  the  case  of  the  reorganization,  consolidation,  or  change  of  ownership  of  a  trade 
or  business  after  March  3,  1917,  if  an  interest  or  control  in  such  trade  or  business  of  50  per 
centum  or  more  remains  in  control  of  the  same  persons,  corporations,  associations,  partner- 
ships, or  any  of  them,  then  in  ascertaining  the  invested  capital  of  the  trade  or  business  no 
asset  transferred  or  received  from  the  prior  trade  or  business  shall  be  allowed  a  greater  value 
than  would  have  been  allow  cd  under  this  title  in  computing  the  invested  capital  of  such  prior 
trade  or  business  if  such  asset  had  not  been  so  transferred  or  received,  unless  such  asset 
was  paid  for  specifically  as  such,  in  cash  or  tangible  property,  and  then  not  to  exceed  the 
actual  cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the  time  of  such 
payment. 

The  same  provision,  with  certain  modifications  which  are  not  here  material, 
was  enacted  as  section  331  of  the  Act  of  February  24,  1919. 
Section  6699  of  the  State  of  Y  Laws  provides  that: 

All  corporations  that  expire  by  limitation  specified  in  their  articles  of  incorporation, 
*  *  *  continue  to  exist  as  bodies  corporate  for  a  period  of  five  years  thereafter,  if 
necessary  for  the  purpose  of  prosecuting  or  defending  actions,  suits,  or  proceedings  by  or 
against  them,  settling  their  business,  disposing  of  their  property,  and  dividing  their  capital 
stock,  but  not  for  the  purpose  of  continuing  their  corporate  business. 


Supplementary  Bulletin  Rulings. 


Sec.  331.    Art.  941  — 20. 


An  examination  of  section  6705  of  the  State  of/Y .Laws  leads  the  Com- 
mittee to  concur  in  the  opinion  of  the  corporation  commissioner  of  the  State 
of  Y  that  the  existence  of  the  original  corporation  could  not  have  been  con- 
tinued by  the  filing  of  supplemental  articles  of  incorporation,  and  that, 
therefore,  the  M  Company  constituted  a  new  and  separate  corporation,  but 
under  the  provisions  of  section  6699  the  assets  of  the  original  corporation 
did  not  upon  the  expiration  of  its  charter  automatically  revert  to  the  stock- 
holders, but  the  corporation  continued  for  the  purpose  of  winding  up  its 
affairs,  and  in  accordance  with  the  powers  thus  continued  to  it,  its  assets  were 
conveyed  to  the  new  corporation. 

Without  attempting  to  characterize  the  proceedings  in  this  case,  it  is  clear 
that  there  was  a  "change  of  ownership  of  a  trade  or  business"  or  "a  change 
of  ownership  of  property,"  occurring  after  March  3,  1917,  and  not  only  50 
per  centum  but  100  per  centum  of  the  interest  or  control  remained  in  the  same 
persons.  This  case,  therefore,  clearly  falls  within  the  language  of  both 
sections  208  of  the  Act  of  October  3,  1917,  and  section  331  of  the  Act  of 
February  24,  1919,  and  it  does  not  appear  to  the  Committee  that  it  is  outside 
the  purpose  and  intent  of  those  sections.  The  sections  of  the  statutes 
themselves  contain  no  exception  in  the  case  of  an  involuntary  change  of 
ownership  and  it  seems  clear  the  intent  of  Congress  was  to  prevent  the 
increase  of  the  invested  capital  of  a  corporation  by  including  therein  apprec- 
iation in  the  value  of  its  assets  upon  a  change  of  ownership  which  was  nominal 
and  not  substantial. 

The  Committee,  therefore,  finds  that  the  appeal  in  this  case  is  without 
merit  and  accordingly  recommends  that  the  action  of  the  Income  Tax  Unit 
in  requiring  the  M  Company  to  file  amended  returns  for  the  taxable  years 
affected,  pursuant  to  Treasury  Decision  3220,  be  sustained. 

17 


Supplementary  Bulletin  Rulings. 


2-20-22. 


Sec.  335.    Art.  952.— 1. 


Law  Section  335— Fiscal  Years  Ending  in  1018  or  1919  (1918  Act— -1[580, 
ante):  Ending  in  1921  or  1922  (1921  Act— 1[1054,  post). 
Article  952. — Fiscal  Year  of  Corporation  Ending  in  1918  (Reg.f45— 
11843,  ante):  Ending  in  1921  (Reg.  62— If  1250,  post). 


(See  6-19-285;  Section  328.,  Article  912.)    Application  of  section  210  of 
the  Revenue  Act  of  1917  and  sections  327  and  328  of  the  Revenue  Act  of 
1918  to  fiscal  year  returns. 
1 


Supplementary  Bulletin  Rulings. 


AZQ  .irk    All  .098 


.SS-OS-S 

pal*!— .266  noitos8  wbJ 
9tna  <££8p 


2-20-22. 


Sac  1*7.    Aft  97L—1. 

Law  Section  337.— Sale  of  Mineral  Deposits  (1918  Act— 1[586,  ante):  (1921 
Act— 1f 1057,  post). 
Article  971.— Tax  on  Sale  of  Mineral  Deposits  (Reg.  45—^853,  ante): 
(Reg.  62— H1260,  post). 

5-20-723:  O.  D.  395. 

The  fact  that  a  company  is  entitled  to  the  benefit  of  section  337  will  not 
disqualify  it  for  special  treatment  under  section  328,  neither  can  the  fact 
that  it  is  entitled  to  the  benefit  of  section  337  be  used  as  a  basis  for  claiming 
special  treatment  under  section  328.  If  a  corporation  falls  within  the  class 
specified  in  section  327,  the  tax  will  be  determined  under  the  provisions  of 
section  328.  The  effect  of  section  337  is  to  limit  the  amount  of  tax  attribut- 
able to  the  profit  made  on  the  sale  of  mines,  oil  and  gas  wells  discovered  by 
the  taxpayer  and  can  only  be  applied  after  the  tax  computed  on  such  profit 
has  been  computed  without  the  benefit  of  this  section. 
1 


37-20-1190:  O.  D.  658. 

The  limitation  provided  in  section  211  (b)  of  the  Revenue  Act  of  1918, 
with  respect  to  the  tax  attributable  to  the  sale  of  mines,  oil  or  gas  wellt,sor 
any  interest  therein  has  no  application  to  the  tax  on  profits  realized  from  the 
sale  of  oil  and  gas  produced  in  the  operation  of  such  wells, 
t 


Supplementary  Bulletin  Ruling*. 


»fb  "to  (d)  ItS  nob392  nr  babivoiq  nohsiirnii  adT 
m  1o  dlfig  sd*  ot  dldBJudnus  xfi*  ddj  oJ  iDsqan  diiw 
no  xa)  ad*  ol  nobsDtfqqfi  on  zbH  niawd*  JzraJm  yan 
doun  1o  notttisqo  ad*  m  b^uboiq  as^  bns  Iio  1o  aUs 

t 


1-4-23. 


Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 

The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding 

The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling/'  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  1921  Act  (If  1083)  are  grouped 
with  foreign  corporations  for  the  purposes  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (1921  Act)  Reg.  45.  (1918  Act) 

No  corresponding  Article  to  Article  712 

Article  712  is  the  same  as,  therefore  refer  to,  Article  713 
"  713  "  "  "  "  "  "  "  "  714 
<<     J 14  "  "     "     <<        <<        «    <<  << 

tt       yjcj  tt    tt        tt       tt  tt  tt       tt  tt 

No  corresponding  Article   .to  Article  717 

Article  716  is  the  same  as,  therefore  refer  to,  Article  719 
tt     7X7  "  "     "     <(        *'        "     <<       «  718 

"     718  "  "     "     "        "        "     "       "  720 

No  corresponding  Article  to  Article  869 

Article  869  is  the  same  as,  therefore  refer  to,  Article  870 

"  870  "  "  "  "  "  M  "  "  871 
Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 
(  The  list  is  always  up-to-date*) 


Law 
Section 
300. . . . 
301 ... . 


302 


Article 
Number 
..701.... 
.  .711.... 

712.... 

713.... 

714.... 

715.... 

716.... 

717.... 

718.... 

719.... 

720.... 
..731.... 


Last 
Ruling 
. .  None 
..1 

.  .None 
. .  None 
..11 
..2 

. .  None 
. .  None 
.  .None 

..1 

.  .None 
..1 


Law 
Section 
302 ... . 


303 


304 


305 
310 
311 


Article 

Number 

..732... 

733... 
.741... 

742... 

743... 
..751... 

752... 

753... 
.761  . 
..771... 
..781... 

782... 


Last 
Ruling 

 1 

 None 

 2 

 None 

 None 

 None 

 None 

 None 

 None 

 1 

 3 

.  None 

(Ow) 


Law           Article  Last 
Section        Number  Ruling 
311  783  1 

784  None 

785  None 

312  791  3 

320  801  1 

802  1 

325  811  2 

"  812  3 

813  9 

814  None 

815  9 

816  1 

817  1 

"  818  3 

326  831  41 

832  None 

833  5 

"  834  1 

835  3 

836  16 

837  5 

"  838  10 

839  4 

"  840  10 

841  5 

842  None 

843  2 

844  1 

"  845  9 

845A  (See  845) 

846  4 

847  None 

848  None 

849  None 

850  2 

851  6 

852  1 

853  1 


Law 

Article 

Last 

Section 

Number 

Ruling 

326 

....854  

2 

« 

855  

1 

tt 

856  

tt 

857  

5 

it 

858 

10 

it 

859 

1 

a 

860 

tt 

861 

 None 

tt 

862 

.   .  3 

u 

863 

 None 

tt 

864 

 None 

a 

865 

 None 

tt 

866 

 None 

ti 

867 

 None 

tt 

868  

 None 

tt 

869  

,  ,  ,  ,  1 

tt 

870 

 None 

tt 

871 

1 

327 

...901  

30 

328 

...911  

2 

tt 

912 

 3 

a 

913  

1 

tt 

914  . 

2 

330 

...931  

4 

,u 

932  .  , 

.  .  .  .  1 

a 

933  , 

7 

u 

934 

 None 

331 

...941  

17 

335 

. . . .951  

 None 

n 

952  

1 

a 

953  

n 

954  

u 

955  

336 

...961  

tt 

962,  . 

337 

...971  

2 

u 

972 

338 

....981  

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  52. 

Later  Bulletins ,  since  issued  (if  any),  contain  no  rulings  bearing  on  the 
1918  of  1921  excess-profits  tax  laws. 

Insert  this  page  to  face  blue  page  401. 


-2-22. 

WAR-PROFITS  AND  EXCESS- 
PROFITS  TAX  FOR  1921. 

BEING  TITLE  III  OF  THE  REVENUE  ACT  OF  1921. 

{Expires  by  limitation  December  31,  1921.) 

The  War-Profits  and  Excess-Profits  Tax  Title  (III)  of  the  Revenue  Act  of 
1918   is   reproduced,  followed   by   the   Regulations  bearing 
thereon,  beginning  on  page  301. 

CALENDAR. 

(Same  as  for  Income  Tax.) 
Return:    Domestic  corporation,  and  foreign   corporation  other  than  one 
not  having  any  office  or  place  of  business  in  the  United  States: 
Calendar  year  basis,  on  or  before  March  15. 

Fiscal  year  basis,  on  or  before  the  fifteenth  day  of  the  third  month  after 
the  close  of  the  taxable  year. 
Return:    Foreign  corporation  not  having  any  office  or  place  of  business  in 
the  United  States. 
Calendar  year  basis,  on  or  before  June  15. 

Fiscal  year  basis,  on  or  before  the  fifteenth  day  of  the  sixth  month  after 
the  close  of  the  taxable  year. 

Tax:    (a)  All  on  or  before  due  date  for  filing  return,  or 

(b)  In  four  equal  installments :  first  installment  on  or  before  due  date 
for  filing  return;  subsequent  installments  at  three-month 
intervals. 

If  any  installment  is  not  paid  on  or  before  the  due  date,  all  of  the 
unpaid  balance  of  the  tax  becomes  due  and  payable  on  notice 
and  demand. 


[The  captions  and  other  matters  in  [brackets]  are  ours.] 


TITLE  III.— WAR-PROFITS  AND  EXCESS-PROFITS  TAX  FOR  1921. 

[Expires  by  limitation  December  31,  1 921 .] 

PART  I. — GENERAL  DEFINITIONS. 

1000  Sec.  300.    That  when  used  in  this  title  the  terms  "taxable  year," 
"fiscal  year,"  "personal  service  corporation,"  "paid  or  accrued,"  and 

"dividends"  shall  have  the  same  meaning  as  provided  for  the  purposes  of 
income  tax  in  sections  200  and  201. 

[Definitions  of  terms,  extracted  from  Sections  2,  200,  and  201  of  the 
Revenue  Act  of  1921.] 

["Taxable  year"  and  "Fiscal  year."] 

1001  (1)  The  term  "taxable  year"  means  the  calendar  year,  or  the  fiscal 
year  ending  during  such  calendar  year,  upon  the  basis  of  which  the 

net  income  is  computed  under  section  212  or  section  232.  The  term  "fiscal 
year"  means  an  accounting  period  of  twelve  months  ending  on  the  last  day 
of  any  month  other  than  December.  The  first  taxable  year,  to  be  called  the 
taxable  year  1921,  shall  be  the  calendar  year  1921  or  any  fiscal  year  ending 
during  the  calendar  year  1921. 

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WAR  TAX  401  SERVICE 


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1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


["Personal  Service  Corporation."] 

1 002  (5)  The  term  "personal  service  corporation"  means  a  corporation 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the 

principal  owners  or  stockholders  who  are  themselves  regularly  engaged  in  the 
active  conduct  of  the  affairs  of  the  corporation  and  in  which  capital  (whether 
invested  or  borrowed)  is  not  a  material  income-producing  factor;  but  does 
not  include  any  foreign  corporation,  nor  any  corporation  50  per  centum  or 
more  of  whose  gross  income  consists  either  (1)  of  gains,  profits,  or  income 
derived  from  trading  as  a  principal,  or  (2)  of  gains,  profits,  commissions,  or 
other  income,  derived  from  a  government  contract  or  contracts  made  between 
April  6,  1917,  and  November  11,  1918.  both  dates  inclusive. 

["Government  Contracts."] 

1003  (11)  The  term  "government  contract"  means  (a)  a  contract  made 
with  the  United  States,  or  with  any  department,  bureau,  officer, 

commission,  board,  or  agency,  under  the  United  States  and  acting  in  its 
behalf,  or  with  any  agency  controlled  by  any  of  the  above  if  the  contract  is 
for  the  benefit  of  the  United  States,  or  (b)  a  subcontract  made  with  a  con- 
tractor performing  such  a  contract  if  the  products  or  services  to  be  furnished 
under  the  subcontract  are  for  the  benefit  of  the  United  States.  The  term 
"government  contract  or  contracts  made  between  April  6,  1917,  and 
November  11,  1918,  both  dates  inclusive"  when  applied  to  a  contract  of  the 
kind  referred  to  in  clause  (a)  of  this  subdivision,  includes  all  such  contracts 
which,  although  entered  into  during  such  period,  were  originally  not  enforce- 
able, but  which  have  been  or  may  become  enforceable  by  reason  of  subsequent 
validation  in  pursuance  of  law. 

["Paid  or  incurred"  and  "Paid  or  accrued."! 

1  004  (4)  The  term  "paid,"  for  the  purposes  of  the  deductions  and  credits 
under  this  title,  means  "paid  or  accrued"  or  "paid  or  incurred," 
and  the  terms  "paid  or  incurred"  and  "paid  or  accrued"  shall  be  construed 
according  to  the  method  of  accounting  upon  the  basis  of  which  the  net  income 
is  computed  under  section  212. 

["Dividends."] 

1005  Sec.  201  [of  the  Revenue  Act  of  1921].    (a)  That  the  term  "dividend" 
when  used  in  this  title  (except  in  paragraph  (10)  of  subdivision  (a) 

of  section  234  and  paragraph  (4)  of  subdivision  (a)  of  section  245)  means  any 
distribution  made  by  a  corporation  to  its  shareholders  or  members,  whether  in 
cash  or  in  other  property,  out  of  its  earnings  or  profits  accumulated  since 
February  28,  1913,  except  a  distribution  made  by  a  personal  service  corpora- 
tion out  of  earnings  or  profits  accumulated  since  December  31,  1917,  and  prior 
to  January  1,  1922. 

1006  (b)  For  the  purposes  of  this  Act  every  distribution  is  made  out  of 
earnings  or  profits,  and  from  the  most  recently  accumulated  earnings 

or  profits,  to  the  extent  of  such  earnings  or  profits  accumulated  since  February 
28,  1913;  but  any  earnings  or  profits  accumulated  or  increase  in  value  of 
property  accrued  prior  to  March  1,  1913,  may  be  distributed  exempt  from  the 

Copyright  1922.  by  The  Corporation  Trust  Company. 
WAR  TAX        402  SERVICE 


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1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


tax,  after  the  earnings  and  profits  accumulated  since  February  28,  1913,  have 
been  distributed.  If  any  such  tax-free  distribution  has  been  made  the  dis- 
tributee shall  not  be  allowed  as  a  deduction  from  gross  income  any  loss  sus- 
tained from  the  sale  or  other  disposition  of  his  stock  or  shares  unless,  and 
then  only  to  the  extent  that,  the  basis  provided  in  section  202  exceeds  the 
sum  of  (1)  the  amount  realized  from  the  sale  or  other  disposition  of  such 
stock  or  snares,  and  (2)  the  aggregate  amount  of  such  distributions  received 
by  him  thereon. 

1007  (c)  Any  distribution  (whether  in  cash  or  other  property)  made  by 
a  corporation  to  its  shareholders  or  members  otherwise  than  out  of 
(1)  earnings  or  profits  accumulated  since  February  28,  1913,  or  (2)  earnings 
or  profits  accumulated  or  increase  in  value  of  property  accrued  prior  to  March 
1,  1913,  shall  be  applied  against  and  reduce  the  basis  provided  in  section  202 
for  the  purpose  of  ascertaining  the  gain  derived  or  the  loss  sustained  from  the 
sale  or  other  disposition  of  the  stock  or  shares  by  the  distributee. 

1  008  (d)  A  stock  dividend  shall  not  be  subject  to  tax  but  if  after  the 
distribution  of  any  such  dividend  the  corporation  proceeds  to  cancel 
or  redeem  its  stock  at  such  time  and  in  such  manner  as  to  make  the  distribu- 
tion and  cancellation  or  redemption  essentially  equivalent  to  the  distribution 
of  a  taxable  dividend,  the  amount  received  in  redemption  or  cancellation 
of  the  stock  shall  be  treated  as  a  taxable  dividend  to  the  extent  of  the  earnings 
or  profits  accumulated  by  such  corporation  after  February  28,  1913. 

1  009    (e)  For  the  purposes  of  this  Act,  a  taxable  distribution  made  by  a 
corporation  to  its  shareholders  or  members  shall  be  included  in  the 
gross  income  of  the  distributees  as  of  the  date  when  the  cash  or  other  property 
is  unqualifiedly  made  subject  to  their  demands. 

1010  (f)  Any  distribution  made  during  the  first  sixty  days  of  any  taxable 
year  shall  be  deemed  to  have  been  made  from  earnings  or  profits 
accumulated  during  preceding  taxable  years;  but  any  distribution  made 
during  the  remainder  of  the  taxable  year  shall  be  deemed  to  have  been  made 
from  earnings  or  profits  accumulated  between  the  close  of  the  preceding  tax- 
able year  and  the  date  of  distribution,  to  the  extent  of  such  earnings  or  profits, 
and  if  the  books  of  the  corporation  do  not  show  the  amount  of  such  earnings 
or  profits,  the  earnings  or  profits  for  the  accounting  period  within  which  the 
distribution  was  ma*le  shall  be  deemed  to  have  been  accumulated  ratably 
during  such  period.  This  subdivision  shall  not  be  in  effect  after  December 
31,  192L 


PART  II.— IMPOSITION  OF  TAX. 

101  1  Sec.  301.  (a)  That  in  lieu  of  the  tax  imposed  by  Title  III*  of  the 
Revenue  Act  of  1918,  but  in  addition  to  the  other  taxes  imposed 
by  this  Act,  there  shall  be  levied,  collected  and  paid  for  the  calendar  year 
1921  upon  the  net  income  of  every  corporation  (except  corporations  taxable 
under  subdivision  (b)  of  this  section)  a  tax  equal  to  the  sum  of  the  following: 

First  Bracket. 

1012    20  per  centum  of  the  amount  of  the  net  income  in  excess  of  the 
excess-profits  credit  (determined  under  section  312)  and  not  in  excess 
of  20  per  centum  of  the  invested  capital; 

Copyright  1922.  by  The  Corporat^n  Trust  Company. 
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1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


Second  Bracket. 

1013  40  per  centum  of  the  amount  of  the  net  income  in  excess  of  20  per 
centum  of  the  invested  capital. 

1014  (b)  For  the  calendar  year  1921  there  shall  be  levied,  collected, 
and  paid  upon  the  net  income  of  every  corporation  which  derives 

in  such  year  a  net  income  of  more  than  $10,000  from  any  Government  contract 
or  contracts  made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive,  a  tax  equal  to  the  sum  of  the  following: 

1015  (1)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in  sub- 
division (a)  of  section  301  of  the  Revenue  Act  of  1918*,  as  the  part 

of  the  net  income  attributable  to  such  Government  contract  or  contracts 
bears  to  the  entire  net  income.  In  computing  such  tax  the  excess-profits 
credit  and  the  war-profits  credit  which  would  be  applicable  to  such  calendar 
year  under  the  Revenue  Act  of  1918*  if  it  had  been  continued  in  force,  shall  be 
used; 

1016  (2)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in  sub- 
division (a)  of  this  section  as  the  part  of  the  net  income  not  at- 
tributable to  such  Government  contract  or  contracts  bears  to  the  entire  net 
income. 

1017  For  the  purpose  of  determining  the  part  of  the  net  income  attributable 
to  such  Government  contract  or  contracts,  the  proper  apportionment 

and  allocation  of  the  deductions  with  respect  to  gross  income  derived  from 
such  Government  contract  or  contracts  and  from  other  sources,  respectively, 
shall  be  determined  under  rules  and  regulations  prescribed  by  the  Com- 
missioner with  the  approval  of  the  Secretary. 

1018  (c)  In  any  case  where  the  full  amount  of  the  excess-profits  credit  is  not 
allowed  under  the  first  bracket  of  subdivision  (a),  by  reason  of  the 

fact  that  such  credit  is  in  excess  of  20  per  centum  of  the  invested  capital, 
the  part  not  so  allowed  shall  be  deducted  from  the  amount  in  the  second 
bracket. 

[Maximum  Tax  Limitation.] 

1019  Sec.  302.    That  the  tax  imposed  by  subdivision  (a)  of  section  301 
shall  in  no  case  be  more  than  20  per  centum  of  the  amount  of  the  net 

income  in  excess  of  $3,000  and  not  in  excess  of  $20,000,  plus  40  per  centum  of 
the  amount  of  the  net  income  in  excess  of  $20,000;  and  the  limitations 
imposed  by  section  302  of  the  Revenue  Act  of  1918*  (upon  taxes  computed 
under  subdivision  (c)  of  section  301  of  that  Act)  are  hereby  made  applicable 
to  taxes  computed  under  subdivision  (b)  of  section  301  of  this  Act.  Nothing 
in  this  section  shall  be  construed  in  such  manner  as  to  increase  the  tax 
imposed  by  section  301  of  this  Act. 


•The  War-Profits  and  Excess-Profits  Tax  Title  (III)  of  the  Revenue  Act  of  1918  is 
reproduced,  followed  by  the  regulations  bearing  thereon,  beginning  on  page  301. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  404  SERVICE 


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1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


[Partial  Personal  Service  Corporations.] 

1  020  Sec.  303.  That  if  part  of  the  net  income  of  a  corporation  is  derived 
(1)  from  a  trade  or  business  (or  a  branch  of  a  trade  or  business) 
in  which  the  employment  of  capital  is  necessary,  and  (2)  a  part  (constituting 
not  less  than  30  per  centum  of  its  total  net  income)  is  derived  from  a  separate 
trade  or  business  (or  a  distinctly  separate  branch  of  the  trade  or  business) 
which  if  constituting  the  sole  trade  or  business  would  bring  it  within  the  class 
of  "personal  service  corporations,"  then  (under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary)  the  tax  upon  the  first 
part  of  such  net  income  shall  be  separately  computed  (allowing  in  such 
computation  only  the  same  proportionate  part  of  the  credits  authorized  in 
section  312),  and  the  tax  upon  the  second  part  shall  be  the  same  percentage 
thereof  as  the  tax  so  computed  upon  the  first  part  is  of  such  first  part: 
Provided,  That  the  tax  upon  such  second  part  shall  in  no  case  be  less  than  20 
per  centum  thereof,  unless  the  tax  upon  the  entire  net  income,  if  computed 
without  benefit  of  this  section,  would  constitute  less  than  20  per  centum  of  such 
entire  net  income,  in  which  event  the  tax  shall  be  determined  upon  the  entire 
net  income,  without  reference  to  this  section,  as  other  taxes  are  determined 
under  this  title.  The  total  tax  computed  under  this  section  shall  be  subject 
to  the  limitations  provided  in  section  302. 

[Exempt  Corporations.] 

1021  Sec.  304.    (a)  That  the  corporations  enumerated  in  section  231 
[^[1059]  shall,  to  the  extent  that  they  are  exempt  from  income  tax 

under  Title  II,  be  exempt  from  taxation  under  this  title. 

1022  (b)  Any  corporation  whose  net  income  for  the  taxable  year  is  less 
than  $3,000  shall  be  exempt  from  taxation  under  this  title. 

1  023  (c)  In  the  case  of  any  corporation  engaged  in  the  mining  of  gold, 
the  portion  of  the  net  income  derived  from  the  mining  of  gold  shall 
be  exempt  from  the  tax  imposed  by  this  title  or  any  tax  imposed  by  Title  II 
of  the  Revenue  Act  of  1917,  and  the  tax  on  the  remaining  portion  of  the  net 
income  shall  be  the  same  proportion  of  a  tax  computed  without  the  benefit 
of  this  subdivision  which  such  remaining  portion  of  the  net  income  bears  to 
the  entire  net  income. 

[Specific  Exemption  in  Relation  to  Tax  for  less  than  12  months.] 

1024  Sec.  305.    That  if  a  tax  is  computed  under  this  title  for  a  period  of 
less  than  twelve  months,  the  specific  exemption  of  $3,000,  wherever 

referred  to  in  this  title,  shall  be  reduced  to  an  amount  which  is  the  same 
proportion  of  $3,000  as  the  number  of  months  in  the  period  is  of  twelve 
months. 

Part  III.-  -Excess-Profits  Credit. 

1025  Sec.  312.    That  the  excess-profits  credit  shall  consist  of  a  specific 
exemption  of  $3,000  plus  an  amount  equal  to  8  per  centum  of  the 

invested  capital  for  the  taxable  year. 

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1026  A  foreign  corporation  or  a  corporation  entitled  to  the  benefits  of 
section  262  fl]  1083]  shall  not  be  entitled  to  the  specific  exemption  of 

$3,000. 

Part  IV. — Net  Income. 

1027  Sec.  320.    That  for  the  purpose  of  this  title  the  net  income  of  a 
corporation  shall  be  ascertained  and  returned  for  the  taxable  year 

upon  the  same  basis  and  in  the  same  manner  as  provided  for  income  tax 
purposes  in  Title  II  of  this  Act. 

Part  V. — Invested  Capital. 

1 028  Sec.  325.    (a)  That  as  used  in  this  title — 

1 029  The  term  "intangible  property"  means  patents,  copyrights,  secret 
processes   and   formulae,   good   will,   trade-marks,  trade-brands, 

franchises,  and  other  like  property; 

1030  The  term  "tangible  property"  means  stocks,  bonds,  notes,  and 
other  evidences  of  indebtedness,   bills   and  accounts  receivable, 

leaseholds,  and  other  property  other  than  intangible  property; 

1031  The  term  "borrowed  capital"  means  money  or  other  property 
borrowed,  whether  represented  by  bonds,  notes,  open  accounts,  or 

otherwise; 

1 032  The  term  "inadmissible  assets"  means  stocks,  bonds,  and  other 
obligations  (other  than  obligations  of  the  United  States),  the  divi- 
dends or  interest  from  which  is  not  included  in  computing  net  income, 
but  where  the  income  derived  from  such  assets  consists  in  part  of  gain  or 
profit  derived  from  the  sale  or  other  disposition  thereof,  or  where  all  or  part 
of  the  interest  derived  from  such  assets  is  in  effect  included  in  the  net  income 
because  of  the  limitation  on  the  deduction  of  interest  under  paragraph  (2) 
of  subdivision  (a)  of  section  234,  a  corresponding  part  of  the  capital  invested 
in  such  assets  shall  not  be  deemed  to  be  inadmissible  assets; 

1 033  The  term  "admissible  assets"  means  all  assets  other  than  inadmissible 
assets,  valued  in  accordance  with  the  provisions  of  subdivision  (a) 

of  section  326  and  section  331. 

1034  (b)  For  the  purposes  of  this  title  the  par  value  of  stock  or  shares 
shall,  in  the  case  of  stock  or  shares  issued  at  a  nominal  value  or  having 

no  par  value,  be  deemed  to  be  the  fair  market  value  as  of  the  date  or  dates  of 
issue  of  such  stock  or  shares. 

[Computing  1  'Invested  Capital."] 

1036    Sec.  326.    (a)  That  as  used  in  this  title  the  term  "invested  capital" 
for  any  year  means  (except  as  provided  in  subdivisions  (b)  and 
(c)  of  this  section) : 

1036    (1)  Actual  cash  bona  fide  paid  in  for  stock  or  shares; 

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1037  (2)  Actual  cash  value  of  tangible  property,  other  than  cash,  bona 
fide  paid  in  for  stock  or  shares,  at  the  time  of  such  payment,  but  in  no 
case  to  exceed  the  par  value  of  the  original  stock  or  shares  specifically  issued 
therefor,  unless  the  actual  cash  value  of  such  tangible  property  at  the  time 
paid  in  is  shown  to  the  satisfaction  of  the  Commissioner  to  have  been  clearly 
and  substantially  in  excess  of  such  par  value,  in  which  case  such  excess  shall 
be  treated  as  paid-in  surplus:  Provided,  That  the  Commissioner  shall  keep 
a  record  of  all  cases  in  which  tangible  property  is  included  in  invested  capital 
at  a  value  in  excess  of  the  stock  or  shares  issued  therefor,  containing  the 
name  and  address  of  each  taxpayer,  the  business  in  which  engaged,  the 
amount  of  invested  capital  and  net  income  shown  by  the  return,  the  value  of 
the  tangible  property  at  the  time  paid  in,  the  par  value  of  the  stock  or  shares 
specifically  issued  therefor,  and  the  amount  included  under  this  paragraph  as 
paid-in  surplus.  The  Commissioner  shall  furnish  a  copy  of  such  record  and 
other  detailed  information  with  respect  to  such  cases  when  required  by  reso- 
lution of  either  House  of  Congress,  without  regard  to  the  restrictions  contained 
in  section  257; 

1033    (3)  Paid-in  or  earned  surplus  and  undivided  profits;  not  including 
surplus  and  undivided  profits  earned  during  the  year; 

1  039  (4)  Intangible  property  bona  fide  paid  in  for  stock  or  shares  prior 
to  March  3,  1917,  in  an  amount  not  exceeding  (a)  the  actual  cash 
value  of  such  property  at  the  time  paid  in,  (b)  the  par  value  of  the  stock 
or  shares  issued  therefor,  or  (c)  in  the  aggregate  25  per  centum  of  the  par  value 
of  the  total  stock  or  shares  of  the  corporation  outstanding  on  March  3,  1917, 
whichever  is  lowest; 

1040  (5)  Intangible  property  bona  fide  paid  in  for  stock  or  shares  on 
or  after  March  3,  1917,  in  an  amount  not  exceeding  (a)  the  actual 
cash  value  of  such  property  at  the  time  paid  in,  (b)  the  par  value  of  the  stock 
or  shares  issued  therefor,  or  (c)  in  the  aggregate  25  per  centum  of  the  par 
value  of  the  total  stock  or  shares  of  the  corporation  outstanding  at  the  begin- 
ning of  the  taxable  year,  whichever  is  lowest:  Provided,  That  in  no  case  shall 
the  total  amount  included  under  paragraphs  (4)  and  (5)  exceed  in  the  aggre- 
gate 25  per  centum  of  the  par  value  of  the  total  stock  or  shares  of  the  corpora- 
tion outstanding  at  the  beginning  of  the  taxable  year;  but 

1  041     (b)  As  used  in  this  title  the  term  "invested  capital"  does  not  include 
borrowed  capital. 

1  042    (c)  There  shall  be  deducted  from  invested  capital  as  above  defined 
a  percentage  thereof  equal  to  the  percentage  which  the  amount  of  in- 
admissible assets  is  of  the  amount  of  admissible  and  inadmissible  assets  held 
during  the  taxable  year. 

1 043    (d)  The  invested  capital  for  any  period  shall  be  the  average  invested 
capital  for  such  period,  but  in  the  case  of  a  corporation  making  a 
return  for  a  fractional  part  of  a  year,  it  shall  be  the  same  fractional  part  of 
such  average  invested  capital. 


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[Special  Cases  Subject  to  Special  Tax.] 

1  044    Sec.  327.    That  in  the  following  cases  the  tax  shall  be  determined 
as  provided  in  section  328: 

1 045  (a)  Where  the  Commissioner  is  unable  to  determine  the  invested 
capital  as  provided  in  section  326; 

1046  (b)  In  the  case  of  a  foreign  corporation  or  of  a  corporation  entitled 
to  the  benefits  of  section  262  [1[1083]; 

104  7  (c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible 
property  has  been  paid  in  for  stock  or  for  stock  and  bonds  and  the 
Commissioner  is  unable  satisfactorily  to  determine  the  respective  valves  of 
the  several  classes  of  property  at  the  time  of  payment,  or  to  distinguish  the 
classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

1048  (d)  Where  upon  application  by  the  corporation  the  Commissioner 
finds  and  so  declares  of  record  that  the  tax  if  determined  without 

benefit  of  this  section  would,  owing  to  abnormal  conditions  affecting  the 
capital  or  income  of  the  corporation,  work  upon  the  corporation  an  exceptional 
hardship  evidenced  by  gross  disproportion  between  the  tax  computed  without 
benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  section  328.  This  subdivision  shall  not  apply  to 
any  case  (1)  in  which  the  tax  (computed  without  benefit  of  this  section) 
is  high  merely  because  the  corporation  earned  within  the  taxable  year  a 
high  rate  of  profit  upon  a  normal  invested  capital,  nor  (2)  in  which  50  per 
centum  or  more  of  the  gross  income  of  the  corporation  for  the  taxable  year 
(computed  under  section  233  of  Title  II)  consists  of  gains,  profits,  com- 
missions, or  other  income,  derived  on  a  cost-plus  basis  from  a  Government 
contract  or  contracts  made  between  April  6,  1917,  and  November  11,  1918, 
both  dates  inclusive. 

[The  Special  Tax  Applicable  to  the  Special  Cases.] 

1049  Sec.  328.    (a)  That  in  the  cases  specified  in  section  327  the  tax 
shall  be  the  amount  which  bears  the  same  ratio  to  the  net  income  of 

the  taxpayer  (in  excess  of  the  specific  exemption  of  $3,000)  for  the  taxable 
year,  as  the  average  tax  of  representative  corporations  engaged  in  a  like  or 
similar  trade  or  business,  bears  to  their  average  net  income  (in  excess  of  the 
specific  exemption  of  $3,000)  for  such  year.  In  the  case  of  a  foreign  corpora- 
tion or  of  a  corporation  entitled  to  the  benefits  of  section  262  1083]  the  tax 
shall  be  computed  without  deducting  the  specific  exemption  of  $3,000  either 
for  the  taxpayer  or  the  representative  corporations. 

1 050  In  computing  the  tax  under  this  section  the  Commissioner  shall 
compare  the  taxpayer  only  with  representative  corporations  whose 

invested  capital  can  be  satisfactorily  determined  under  section  326  and 
which  are,  as  nearly  as  may  be,  similarly  circumstanced  with  respect  to  gross 
income,  net  income,  profits  per  unit  of  business  transacted  and  capital  em- 
ployed, the  amount  and  rate  of  war  profits  or  excess  profits,  and  all  other 
relevant  facts  and  circumstances. 

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1  CS 1     (b)  For  the  purposes  of  subdivision  (a)  the  ratios  between  the  average 
tax  and  the  average  net  income  of  representative  corporations 
shall  be  determined  by  the  Commissioner  in  accordance  with  regulations 
prescribed  by  him  with  the  approval  of  the  Secretary. 

1052  (c)  The  Commissioner  shall  keep  a  record  of  all  cases  in  which 
the  tax  is  determined  in  the  manner  prescribed  in  subdivision  (a), 

containing  the  name  and  address  of  each  taxpayer,  the  business  in  which 
engaged,  the  amount  of  invested  capital  and  net  income  shown  by  the  return, 
and  the  amount  of  invested  capital  as  determined  under  such  subdivision. 
The  Commissioner  shall  furnish  a  copy  of  such  record  and  other  detailed 
information  with  respect  to  such  cases  when  required  by  resolution  of  either 
House  of  Congress,  without  regard  to  the  restrictions  contained  in  section  257. 

Part  VI. — Reorganizations. 

1053  Sec.  331.    That  in  the  case  of  the  reorganization,  consolidation, 
or  change  of  ownership  of  a  trade  or  business,  or  change  of  ownership 

of  property,  after  March  3,  1917,  if  an  interest  or  control  in  such  trade  or 
business  or  property  of  50  per  centum  or  more  remains  in  the  same  persons, 
or  any  of  them,  then  no  asset  transferred  or  received  from  the  previous 
owner  shall,  for  the  purpose  of  determining  invested  capital,  be  allowed  a 
greater  value  than  would  have  been  allowed  under  this  title  in  computing 
the  invested  capital  of  such  previous  owner  if  such  asset  had  not  been  so 
transferred  or  received:  Provided,  That  if  such  previous  owner  was  not  a 
corporation,  then  the  value  of  any  asset  so  transferred  or  received  shall  be 
taken  at  its  cost  of  acquisition  (at  the  date  when  acquired  by  such  previous 
owner)  with  proper  allowance  for  depreciation,  impairment,  betterment  or 
development,  but  no  addition  to  the  original  cost  shall  be  made  for  any 
charge  or  expenditure  deducted  as  expense  or  otherwise  on  or  after  March 
1,  1913,  in  computing  the  net  income  of  such  previous  owner  for  purposes  of 
taxation. 

Part  VII. — Miscellaneous. 

[Returns  on  Fiscal  Year  Basis.] 

1  054  Sec.  335.  (a)  That  if  a  corporation  (other  than  a  personal  service 
corporation)  makes  return  for  a  fiscal  year  beginning  in  1920  and 
ending  in  1921,  the  war-profits  and  excess-profits  tax  for  the  taxable  year 
1921  shall  be  the  sum  of:  (1)  the  same  proportion  of  a  tax  for  the  entire 
period  computed  under  the  Revenue  Act  of  1918,*  which  the  portion  of  such 
period  falling  within  the  calendar  year  1920  is  of  the  entire  period,  and  (2) 
the  same  proportion  of  a  tax  for  the  entire  period  computed  under  this  title, 
which  the  portion  of  such  period  falling  within  the  calendar  year  1921  is  of 
the  entire  period.  Any  amount  heretofore  or  hereafter  paid  on  account  of 
the  tax  imposed  for  such  taxable  year  by  the  Revenue  Act  of  1918  shall  be 
credited  towards  the  payment  of  the  tax  as  above  computed,  and  if  the 
amount  so  paid  exceeds  the  amount  of  such  tax,  the  excess  shall  be  credited 
or  refunded  to  the  corporation  in  accordance  with  the  provisions  of  section 
252  of  this  Act. 


•"The  War-Profits  and  Excess-Profits  Tax  Title  (III)  of  the  Revenue  Act  of  1918,  is 
reproduced,  followed  by  the  regulations  bearing  thereon,  beginning  on  page  301. 

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1 055  (b)  If  a  corporation  (other  than  a  personal  service  corporation) 
makes  a  return  for  a  fiscal  year  beginning  in  1921  and  ending  in  1922, 
the  war-profits  and  excess-profits  tax  for  the  portion  of  the  year  falling 
within  the  calendar  year  1921  shall  be  an  amount  equivalent  to  the  same 
proportion  of  a  tax  for  the  entire  period  computed  under  this  title,  which 
the  portion  of  such  period  falling  within  the  calendar  year  1921  is  of  the  entire 
period. 

[Returns  and  Payment  of  Taxes.] 

1  056  Sec.  336.  That  every  corporation,  not  exempt  under  section  304, 
shall  make  a  return  for  the  purposes  of  this  title.  Such  returns 
shall  be  made,  and  the  taxes  imposed  by  this  title  shall  be  paid,  at  the  same 
times  and  places,  in  the  same  manner,  and  subject  to  the  same  conditions, 
as  is  provided  in  the  case  of  returns  and  payment  of  income  tax  by  corporations 
for  the  purposes  of  Title  II,  and  all  the  provisions  of  that  title  not  inapplicable, 
including  penalties,  are  hereby  made  applicable  to  the  taxes  imposed  by  this 
title. 

[Sale  of  Mines,  Oil  or  Gas  Wells.] 

1057  Sec.  337.    That  in  the  case  of  a  bona  fide  sale  of  mines,  oil  or  gas 
wells,  or  any  interest  therein,  where  the  principal  value  of  the 

property  has  been  demonstrated  by  prospecting  or  exploration  and  discovery 
work  done  by  the  taxpayer,  the  portion  of  the  tax  imposed  by  this  title 
attributable  to  such  sale  shall  not  exceed  20  per  centum  of  the  selling  price 
of  such  property  or  interest. 

Effective  Date  of  Title. 

1058  Sec.  338.    That  this  title  shall  take  effect  as  of  January  1,  1921. 


Conditional  and  Other  Exemptions  of  Corporations. 

1  059    Sec.  231  [of  the  Revenue  Act  of  1921].    That  the  following  organiza- 
tions shall  be  exempt  from  taxation  under  this  title — 

1060  (1)  Labor,  agricultural,  or  horticultural  organizations; 

1061  (2)  Mutual  savings  banks  not  having  a  capital  stock  represented 

by  shares; 

1062  (3)  Fraternal    beneficiary    societies,    orders,    or    associations,  (a) 
operating  under  the  lodge  system  or  for  the  exclusive  benefit  of  the 

members  of  a  fraternity  itself  operating  under  the  lodge  system;  and  (b) 
providing  for  the  payment  of  life,  sick,  accident,  or  other  benefits  to  the 
members  of  such  society,  order,  or  association  or  their  dependents; 

1063  (4)  Domestic  building  andf  loan  associations  substantially  all  the 
business  of  which  is  confined  to  making  loans  to  members;  and  co- 
operative banks  without  capital  stock  organized  and  operated  for  mutual 
purposes  and  without  profit; 

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1 064  (5)  Cemetery  companies  owned  and  operated  exclusively  for  the 
benefit  of  their  members  or  which  are  not  operated  for  profit;  and 

any  corporation  chartered  solely  for  burial  purposes  as  a  cemetery  corporation 
and  not  permitted  by  its  charter  to  engage  in  any  business  not  necessarily 
incident  to  that  purpose,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual; 

1065  (6)  Corporations,  and  any  community  chest,  fund,  or  foundation, 
organized  and  operated  exclusively  for  religious,  charitable,  scientific, 

literary,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual; 

1 066  (7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade, 
not  organized  for  profit  and  no  part  of  the  net  earnings  of  which  inures 

to  the  benefit  of  any  private  stockholder  or  individual; 

1 067  (8)  Civic  leagues  or  organizations  not  organized  for  profit  but 
operated  exclusively  for  the  promotion  of  social  welfare; 

1  068    (9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recreation, 
and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  member; 

1069  (10)  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance  com- 
panies, mutual  ditch  or  irrigation  companies,  mutual  or  cooperative 

telephone  companies,  or  like  organizations  of  a  purely  local  character,  the 
income  of  which  consists  solely  of  assessments,  dues,  and  fees  collected  from 
members  for  the  sole  purpose  of  meeting  expenses; 

1070  (11)  Farmers',  fruit  growers',  or  like  associations,  organized  and 
operated  as  sales  agents  for  the  purpose  of  marketing  the  products  of 

members  and  turning  back  to  them  the  proceeds  of  sales,  less  the  necessary 
selling  expenses,  on  the  basis  of  the  quantity  of  produce  furnished  by  them; 
or  organized  and  operated  as  purchasing  agents  for  the  purpose  of  purchasing 
supplies  and  equipment,  for  the  use  of  members  and  turning  over  such  supplies 
and  equipment  to  such  members  at  actual  cost,  plus  necessary  expenses; 

1071  (12)  Corporations  organized  for  the  exclusive  purpose  of  holding 
title  to  property,  collecting  income  therefrom,  and  turning  over  the 

entire  amount  thereof,  less  expenses,  to  an  organization  which  itself  is  exempt 
from  the  tax  imposed  by  this  title; 

1072  (13)  Federal  land  banks  and  national   farm-loan   associations  as 
provided  in  section  26  of  the  Act  approved  July  17,  1916,  entitled 

"An  Act  to  provide  capital  for  agricultural  development,  to  create  standard 
forms  of  investment  based  upon  farm  mortgage,  to  equalize  rates  of  interest 
upon  farm  loans,  to  furnish  a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for  the  United  States,  and  for 
other  purposes"; 

1073  (14)  Personal  service  corporations.    This  subdivision  shall  not  be 
in  effect  after  December  31,  1921. 

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Consolidated  Returns  of  Corporations. 

1074  Sec.  240  [of  the  Revenue  Act  of  1921].    (a)  That  corporations  which 
are  affiliated  within  the  meaning  of  this  section  may,  for  any  taxable 

year  beginning  on  or  after  January  I,  1922  [see  %  1078  below],  make  separate 
returns  or,  under  regulations  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary,  make  a  consolidated  return  of  net  income  for  the 
purpose  of  this  title,  in  which  case  the  taxes  thereunder  shall  be  computed  and 
determined  upon  the  basis  of  such  return,  if  return  is  made  on  either  of  such 
bases,  all  returns  thereafter  made  shall  be  upon  the  same  basis  unless  per- 
mission to  change  the  basis  is  granted  by  the  Commissioner. 

1075  (b)  In  any  case  in  which  a  tax  is  assessed  upon  the  basis  of  a  con- 
solidated return,  the  total  tax  shall  be  computed  in  the  first  instance 

as  a  unit  and  shall  then  be  assessed  upon  the  respective  affiliated  corporations 
in  such  proportions  as  may  be  agreed  upon  among  them,  or,  in  the  absence 
of  any  such  agreement,  then  on  the  basis  of  the  net  income  properly  assignable 
to  each.  There  shall  be  allowed  in  computing  the  income  tax  only  one 
specific  credit  computed  as  provided  in  subdivision  (b)  of  section  236. 

1  076  (c)  For  the  purpose  of  this  section  two  or  more  domestic  corporations 
shall  be  deemed  to  be  affiliated  (1)  if  one  corporation  owns  directly 
or  controls  through  closely  affiliated  interests  or  by  a  nominee  or  nominees 
substantially  all  the  stock  of  the  other  or  others,  or  (2)  if  substantially  all  the 
stock  of  two  or  more  corporations  is  owned  or  controlled  by  the  same  interests. 

1077  (d)  For  the  purposes  of  this  section  a  corporation  entitled  to  the 
benefits  of  section  262  [^[1083]  shall  be  treated  as  a  foreign  corporation : 

Provided,  That  in  any  case  of  two  or  more  related  trades  or  businesses  (whether 
unincorporated  or  incorporated  and  whether  organized  in  the  United  States 
or  not)  owned  or  controlled  directly  or  indirectly  by  the  same  interests,  the 
Commissioner  may  consolidate  the  accounts  of  such  related  trades  and 
businesses,  in  any  proper  case,  for  the  purpose  of  making  an  accurate  dis- 
tribution or  apportionment  of  gains,  profits,  income,  deductions,  or  capital 
between  or  among  such  related  trades  or  businesses. 

1078  (e)  Corporations  which  are  affiliated  within  the  meaning  of  this 
section  shall  make  consolidated  returns  for  any  taxable  year  begin- 
ning prior  to  January  1,  1922,  in  the  same  manner  and  subject  to  the  same 
conditions  as  provided  by  the  Revenue  Act  of  1918  [for  which  see  page  314]. 

Consolidated  Returns  for  Year  1917. 

1079  Sec.  1331  [of  the  Revenue  Act  of  1921].    (a)  That  Title  11  of  the 
Revenue  Act  of  1917  shall  be  construed  to  impose  the  taxes  therein 

mentioned  upon  the  basis  of  consolidated  returns  of  net  income  and  invested 
capital  in  the  case  of  domestic  corporations  and  domestic  partnerships  that 
were  affiliated  during  the  calendar  year  1917. 

1 080  (b)  For  the  purpose  of  this  section  a  corporation  or  partnership 
was  affiliated  with  one  or  more  corporations  or  partnerships  (1)  when 

such  corporation  or  partnership  owned  directly  or  controlled  through  closely 
affiliated  interests  or  by  a  nominee  or  nominees  all  or  substantially  all  the 

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stock  of  the  other  or  others,  or  (2)  when  substantially  all  the  stock  of  two  or 
more  corporations  or  the  business  of  two  or  more  partnerships  was  owned  by 
the  same  interests:  Provided,  That  such  corporations  or  partnerships  were 
engaged  in  the  same  or  a  closely  related  business,  or  one  corporation  or  partner- 
ship bought  from  or  sold  to  another  corporation  or  partnership  products  or 
services  at  prices  above  or  below  the  current  market,  thus  effecting  an 
artificial  distribution  of  profits,  or  one  corporation  or  partnership  in  any  way 
so  arranged  its  financial  relationships  with  another  corporation  or  partnership 
as  to  assign  to  it  a  disproportionate  share  of  net  income  or  invested  capital. 
For  the  purposes  of  this  section,  public  service  corporations  which  (1)  were 
operated  independently,  (2)  were  not  physically  connected  or  merged,  and 
(3)  did  not  receive  special  permission  to  make  a  consolidated  return,  shall  not 
be  contrued  to  have  been  affiliated;  but  a  railroad  or  other  public  utility 
which  was  owned  by  an  industrial  corporation  and  was  operated  as  a  plant 
facility  or  as  an  integral  part  of  a  group  organization  of  affiliated  corporations 
which  were  required  to  file  a  consolidated  return,  shall  be  construed  to  have 
been  affiliated. 

1081  (c)  The  provisions  of  this  section  are  declaratory  of  the  provisions 
of  Title  II  of  the  Revenue  Act  of  1917. 

Incorporation  of  Individual  cr  Partnership  Business. 

1082  Sec.  229  [of  the  Revenue  Act  of  1921].    That  in  the  case  of  the 
organization  as  a  corporation  within  four  months  after  the  passage* 

of  this  Act  of  any  trade  or  business  in  which  capital  is  a  material  income- 
producing  factor,  and  which  was  previously  owned  by  a  partnership  or  in- 
dividual, the  net  income  of  such  trade  or  business  from  January  1,  1921, 
to  the  date  of  such  organization  may  at  the  option  of  the  individual  or 
partnership  be  taxed  as  the  net  income  of  a  corporation  is  taxed  under 
Titles  II  and  III;  in  which  event  the  net  income  and  invested  capital  of  such 
trade  or  business  shall  be  computed  as  if  such  corporation  had  been  in  existence 
on  and  after  January  1,  1921,  and  the  undistributed  profits  or  earnings  of 
such  trade  or  business  shall  not  be  subject  to  the  surtaxes  imposed  in  section 
211,  but  amounts  distributed  on  and  after  January  1,  1921,  from  the  earnings 
or  profits  of  such  trade  or  business  accumulated  after  December  31,  1920, 
shall  be  taxed  to  the  recipients  as  dividends;  and  all  the  provisions  of  Titles  II 
and  III  relating  to  corporations  shall  so  far  as  practicable  apply  to  such  trade 
or  business:  Provided,  That  this  section  shall  not  apply  to  any  trade  or  busi- 
ness, the  net  income  of  which  for  the  taxable  year  1921  was  less  than  20  per 
centum  of  its  invested  capital  for  such  year:  Provided  further,  That  any 
taxpayer  who  takes  advantage  of  this  section  shall  pay  the  tax  imposed  by 
section  1000  [Capital  Stock  Tax]  of  the  Revenue  Act  of  1918  as  if  such  tax- 
payer had  been  a  corporation  on  and  after  January  1,  1921. 

Income  From  Sources  Within  the  Possessions  of  the 
United  States. 

1083  Sec.  262  [of  the  Revenue  Act  of  192 1  J.    (a)  That  in  the  case  of 
citizens  of  the  United  States  or  domestic  corporations,  satisfying  the 

following  conditions,  gross  income  means  only  gross  income  from  sources 
within  the  United  States — 


*The  date  of  passage  of  "this  Act"  is  November  23,  1921. 

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1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


1084  (1)  If  80  per  centum  or  more  of  the  gross  income  of  such  citizen 
or  domestic  corporation  (computed  without  the  benefit  of  this  section) 

for  the  three-year  period  immediately  preceding  the  close  of  the  taxable 
year  (or  for  such  part  of  such  period  immediately  preceding  the  close  of  such 
taxable  year  as  may  be  applicable)  was  derived  from  sources  within  a  pos- 
session of  the  United  States;  and 

1085  (2)  If,  in  the  case  of  such  corporation,  50  per  centum  or  more  of  its 
gross  income  (computed  without  the  benefit  of  this  section)  for  such 

period  or  such  part  thereof  was  derived  from  the  active  conduct  of  a  trade  or 
business  within  a  possession  of  the  United  States;  or 

1 086  (3)  If,  in  the  case  of  such  citizen,  50  per  centum  or  more  of  his 
gross  income  (computed  without  the  benefit  of  this  section)  for  such 

period  or  such  part  thereof  was  derived  from  the  active  conduct  of  a  trade 
or  business  within  a  possession  of  the  United  States  either  on  his  own  account 
or  as  an  employee  or  agent  of  another. 

1087  (b)  Notwithstanding  the  provisions  of  subdivision  (a)  there  shall 
be  included  in  gross  income  all  amounts  received  by  such  citizens  or 

corporations  within  the  United  States,  whether  derived  from  sources  within 
or  without  the  United  States. 

1  083    (c)  As  used  in  this  section  the  term  "possession  of  the  United  States*' 
does  not  include  the  Virgin  Islands  of  the  United  States. 

Consolidation  of  Liberty  Bond  Tax  Exemptions. 

1089    Sec.  1328  [of  the  Revenue  Act  of  1921].    That  the  various  Acts 
authorizing  the  issues  of  Liberty  bonds  are  amended  and  supplemented 
as  follows: 

1  090  (a)  On  and  after  January  1,  1921,  4  per  centum  and  per  centum 
Liberty  bonds  shall  be  exempt  from  graduated  additional  income 
taxes,  commonly  known  as  surtaxes,  and  excess-profits  and  war-profits 
taxes,  now  or  hereafter  imposed  by  the  LTnited  States  upon  the  income  or 
profits  of  individuals,  partnerships,  corporations,  or  associations,  in  respect 
to  the  interest  on  aggregate  principal  amounts  thereof  as  follows: 

1091    Until  the  expiration  of  two  years  after  the  date  of  the  termination 
of  the  war  between  the  United  States  and  the  German  Government,* 
as  fixed  by  proclamation  of  the  President,  on  $125,000  aggregate  principal 
amount;  and  for  three  years  more  on  $50,000  aggregate  principal  amount. 

1  092  (b)  The  exemptions  provided  in  subdivision  (a)  shall  be  in  addition 
to  the  exemptions  provided  in  section  7  of  the  Second  Liberty  Bond 
Act  [1] 728  II  a],  and  in  addition  to  the  exemption  provided  in  subdivision  (3) 
of  section  1  of  the  Supplement  to  the  Second  Liberty  Bond  Act  in  respect  to 
bonds  issued  upon  conversion  of  3}^  per  centum  bonds  [^728  II  b],  but  shall  be 
in  lieu  of  the  exemptions  provided  and  free  from  the  conditions  and  limitations 
imposed  in  subdivisions  (1)  andt(2)  of  section  1  of  the  Supplement  to  Second 

*The  date  of  the  termination  of  the  war  is  July  2,  1921. 

Copyright  1922,  by  The  Corporation  Trusl  Company. 
WAR  TAX         4H  SERVICE 


1-2-22. 

1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


Liberty  Bond  Act  and  in  section  2  of  the  Victory  Liberty  Loan  Act  [1J728 
II  c,  d,  e,  f]. 

Alternative  Tax  on  Personal  Service  Corporations. 

TG93  Sec.  1332  [of  the  Revenue  Act  of  1921].  (a)  That  if  either  sub- 
division (e)  of  section  218  of  the  Revenue  Act  of  1918  or  subdivision 
(d)  of  section  218  of  this  Act  is  by  final  adjudication  declared  invalid,  there 
shall,  in  addition  to  all  other  taxes,  be  levied,  collected,  and  paid  on  the  net 
income  (as  defined  in  section  232)  received  during  the  calendar  years  1918, 
1919,  1920,  and  1921,  by  every  personal  service  corporation  (as  defined  in 
section  200)  included  within  the  provisions  of  such  subdivisions,  a  tax  equal 
to  the  taxes  imposed  by  Titles  II  and  III  of  the  Revenue  Act  of  1918  and,  in 
the  case  of  income  received  during  the  calendar  year  1921,  by  Titles  II  and  III 
of  this  Act. 

1084  (b)  In  such  event  every  such  personal  service  corporation  shall,  on 
or  before  the  fifteenth  day  of  the  sixth  month  following  the  date 
of  entry  of  decree  upon  such  final  adjudication,  make  a  return  of  any  income 
received  during  each  of  the  calendar  years  1918,  1919,  1920,  and  1921  in  the 
manner  prescribed  by  the  Revenue  Act  of  1918  (or  in  the  manner  prescribed 
by  this  Act,  in  the  case  of  income  received  during  the  calendar  year  1921). 
Such  return  shall  be  made  and  the  net  income  shall  be  computed  on  the  basis 
of  the  taxpayer's  annual  accounting  period  (fiscal  year  or  calendar  year,  as 
the  case  may  be)  in  the  manner  provided  for  other  corporations  under  the 
Revenue  Act  of  1918  and  this  Act. 

1  095    (c)  If  either  subdivision  (e)  of  section  218  of  the  Revenue  Act  of 
1918  or  subdivision  (d)  of  section  218  of  this  Act  is  so  declared  invalid, 
claims  for  credit  or  refund  of  taxes  paid  under  both  such  sections  shall  be 
allowed,  if  made  within  the  time  provided  in  subdivision  (f)  of  this  section. 

I0SS  (d)  In  case  the  claims  for  credit  or  refund,  filed  within  six  months 
from  such  date  of  entry  of  decree,  represent  less  than  30  per  centum 
of  the  outstanding  stock  or  shares  in  the  corporation,  the  amount  of  taxes 
imposed  by  this  section  upon  such  corporation  shall  be  reduced  to  that 
proportion  thereof  which  the  number  of  stock  or  shares  owned  by  the  share- 
holders or  members  making  such  claims  bears  to  the  total  number  of  stock  or 
shares  outstanding. 

10S7  (e)  The  tax  imposed  by  this  section  shall  be  assessed,  collected,  and 
paid  upon  the  same  basis,  in  the  same  manner,  and  subject  to  the 
same  provisions  of  law,  including  penalties,  as  the  taxes  imposed  by  sections 
230  and  301  of  the  Revenue  Act  of  1918  (or  by  sections  230  and  301  of  this 
Act,  in  the  case  of  income  received  during  the  calendar  year  1921),  but  no 
interest  or  penalties  shall  be  due  or  payable  thereon  for  any  period  prior  to 
the  date  upon  which  the  return  is  by  this  section  required  to  be  made  and  the 
first  installment  paid.  The  amount  of  tax  paid  by  any  shareholder  or  member 
of  a  personal  service  corporation  pursuant  to  the  provisions  of  subdivision  (e) 
of  section  218  of  the  Revenue  Act  of  1918  or  subdivision  (d)  of  section  218 
of  this  Act  shall  be  credited  against  the  tax  due  from  such  corporation  under 
this  section  upon  the  joint  written  application  of  such  corporation  and  such 
shareholder  or  member  or  his  representatives,  heirs,  or  assigns,  if  such  ap- 

C  op  y  right  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX         415  SERVICE 


1-2-22. 


1921  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAW. 


plication  is  filed  with  the  Commissioner  within  six  months  from  such  date 
of  entry  of  decree. 

1098  (f)  Notwithstanding  any  other  provision  of  law,  no  claim  for  a 
credit  or  refund  of  taxes  paid  under  subdivision  (e)  of  section  218  of 
the  Revenue  Act  of  1918  or  subdivision  (d)  of  section  218  of  this  Act,  may  be 
filed  after  the  expiration  of  six  months  from  such  date  of  entry  of  decree: 
Provided,  however.  That  a  personal  service  corporation  of  which  no  shareholder 
or  member  has  filed  such  claim  within  such  period  of  six  months  shall  not  be 
subject  to  the  tax  imposed  by  this  section. 

Repeals. 

1  099    Sec.  1400  [of  the  Revenue  Act  of  1921].    (a)  That  the  following  parts 
of  the  Revenue  Act  of  1918  are  repealed,  to  take  effect  (except  as 
otherwise  provided  in  this  Act)  on  January  1,  1922,  subject  to  the  limitations 
provided  in  subdivision  (b): 

He  *  *  *  *  * 

Title  III  (called  "War-Profits  and  Excess-Profits  Tax")  as  of  January  1, 
1921; 

*  *  *  *  *  * 

1100  (b)  The  parts  of  the  Revenue  Act  of  1918  which  are  repealed  by 
this  Act  shall  (unless  otherwise  specifically  provided  in  this  Act) 
remain  in  force  for  the  assessment  and  collection  of  all  taxes  which  have 
accrued  under  the  Revenue  Act  of  1918  at  the  time  such  parts  cease  to  be  in 
effect,  and  for  the  imposition  and  collection  of  all  penalties  or  forfeitures 
which  have  accrued  or  may  accrue  in  relation  to  any  such  taxes.  In  the  case 
of  any  tax  imposed  by  any  part  of  the  Revenue  Act  of  1918  repealed  by  this 
Act,  if  there  is  a  tax  imposed  by  this  Act  in  lieu  thereof,  the  provision  imposing 
such  tax  shall  remain  in  force  until  the  corresponding  tax  under  this  Act  takes 
effect  under  the  provisions  of  this  Act.    *    '*    *  . 


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1-8-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


OFFICIAL  RULINGS,  REGULATIONS,  OPINIONS,  AND  DECISIONS 
UNDER  THE  LAW  IMPOSING  A 
WAR-PROFITS  AND  EXCESS-PROFITS  TAX  FOR  1921 
AND  UNDER 

PRIOR  WAR-PROFITS  AND  EXCESS-PROFITS  TAX  LAWS 
MADE  AVAILABLE  DURING  1922. 


(Decision.) 

(Revenue  Act  of  1917.) 

December  15,  1921. 

Borrowed  capital  in  relation  to  the  "no  invested  capital  or  not  mere  than  a 
nominal  capital"  provision  of  Section  209  of  the  1917  Act. 

UNITED  STATES  CIRCUIT  COURT  OF  APPEALS 
Sixth  Circuit. 


Charles  E.  Cartier  and  Edward  M. 
Holland,  Co-partners  doing  business  under 
the  firm  name  and  style  of  Cartier-Holland 
Lumber  Company, 

Plaintiffs  in  Error, 

vs. 

Emanuel  J.  Doyle,  United  States  Collector 
of  Internal  Revenue  for  the  Fourth  Col- 
lection District  of  Michigan, 

Defendant  in  Error. 


(No.  3541.) 


Before  Knappen,  Denison  and  Donahue,  Circuit  Judges. 

1 101  On  the  20th  day  of  May,  1912,  Charles  E.  Cartier  and  Edward  M. 
Holland,  entered  into  a  written  contract  of  partnership  for  the 

purpose  of  manufacturing  and  dealing  in  forest  products  including  lumber, 
timber,  ties,  shingles,  laths,  etc.,  and  also  timbered,  improved  and  cut-over 
lands. 

1102  It  was  further  agreed  that  the  paid-in  capital  of  the  partnership 
should  be  thirty  thousand  dollars,  any  portion  or  all  of  which  amount 

should  be  furnished  to  the  partnership  by  Charles  E.  Cartier,  as  the  require- 
ments of  the  partnership  appear  upon  the  note  or  notes  of  the  partnership 
to  be  paid  at  the  earliest  practicable  opportunity  out  of  the  net  earnings  of 
the  partnership  business,  and  to  bear  legal  rate  of  interest. 

1 1 03  It  does  not  appear  from  the  evidence  that  this  partnership  ever 
manufactured  any  forest  products  but  it  did  purchase  lumber  and 

kindred  commodities  to  fill  current  orders  of  its  customers  but  not  for  specu- 
lative purposes  based  upon  rise  and  fall  of  the  market.    It  kept  no  lumber 

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Error  to  the  District  Court 
of  the  United  States'  for 
the  Western  District  of 
Michigan,  Southern  Di- 
vision. 


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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.  1922. 


yard  and  kept  no  lumber  in  stock,  and  the  only  lumber  owned  by  it  was 
lumber  in  transit  from  the  mill  from  which  it  was  purchased  by  the  partner- 
ship, to  the  partnership's  customers.  In  a  few  cases,  however,  where  the 
lumber  was  rejected  by  the  customer  it  was  held  by  the  partnership  until  it 
could  be  sold  to  another  purchaser.  In  1917  the  partnership  also  negotiated 
sales  for  timber  and  secured  an  option  on  a  larger  acreage  of  timber  land 
in  its  own  name,  but  in  fact  for  William  and  Samuel  Horner,  who  furnished 
the  thousand  dollars  necessary  to  be  paid  for  this  option  and  the  additional 
five  hundred  dollars  necessary  to  extend  the  option  beyond  the  sixty  days 
named  therein. 

1  104    For  services  in  this  transaction  the  partnership  received  $20,353. 00. 

which  is  by  far  the  largest  single  item  in  the  aggregate  of  the  net  in- 
come of  $47,018.00,  earned  by  the  partnership  in  1917. 

I  105    It  further  appears  from  the  record  that  after  the  organization  of  the 

partnership  which  was  known  as  the  Cartier-Holland  Lumber 
Company,  Cartier  did  furnish  it  some  money  and  took  its  notes  therefor,  but 
in  1914  a  new  arrangement  was  entered  into  by  which  the  partnership 
borrowed  the  money  required  in  its  business  directly  from  the  bank  and  exe- 
cuted its  notes  therefor.  These  notes  were  indorsed  by  both  Cartier  and 
Holland,  and  Cartier  left  upon  deposit  with  the  bank,  as  collateral  to  his 
indorsement  of  these  notes,  securities  theretofore  deposited  by  him  when  1  e 
borrowed  the  money  in  his  own  name  and  loaned  it  to  the  partnership. 
It  was  also  further  understood  and  agreed  between  the  bank  and  the  partner- 
ship, when  these  loans  were  negotiated,  that  if  at  any  time  the  collateral 
deposited  by  Cartier  seemed  to  the  bank  to  be  insufficient  to  cover  his  liability 
as  indorser  on  the  notes  of  the  partnership,  Holland  would  furnish  further 
collateral  security.  This  method  of  transacting  the  partnership  business  was 
continued  until  and  during  the  year  1917  and  in  this  way  the  partnership  ob- 
tained all  its  capital  including  the  money  required  by  it  to  discount  its 
bills  for  lumber  and  other  commodities  purchased  by  it  and  sold  to  its  cus- 
tomers. 

1 1 06  It  further  appears  that  during  the  time  the  partnership  was  operated 
Cartier  drew  out  of  the  partnership  business  $11,556.37  and  Holland 
$18,106.28,  which  amounts  were  charged  to  them  on  the  books  of  the  partner- 
ship. If  these  amounts  withdrawn  by  the  partners  are  reckoned  as  assets 
of  the  partnership,  then  on  January  1,  1917,  there  was  a  net  surplus  of  assets 
over  and  above  liabilities  of  $22,443.80;  otherwise  the  liabilities  of  the  partner- 
ship would  exceed  its  assets  by  the  sum  of  $7,218.85. 

I I  07    The  partnership  paid  an  excess  profit  tax  of  eight  per  cent  of  its  net 

income  of  $47,018.00,  for  the  year  1917  under  the  provisions  of  Section 
209  of  Title  II  of  the  Act  of  October  3,  1917,  amounting  to  $3,761.44.  Later 
a  supplemental  return  was  requested  by  the  Commissioner  of  Internal 
Revenue,  who  then  notified  the  partnership  that  its  claim  for  assessment 
based  upon  the  provisions  of  Section  209  of  the  Excess  Profits  Tax  Law  had 
been  disallowed  and  that  the  tax  had  been  computed  and  assessed  against 
it  under  Sections  201  and  210  and  Articles  18.  24  and  52  of  Regulati*  -. 
No.  41. 

1 1  OS  This  tax  based  upon  an  estimated  capital  of  $1 18,515.85  amounted  to 
$12,788.90,  or  a  balance  over  the  amount  already  paid  of  $9,027.46, 
which  additional  tax  was  paid  under  protest.  Later  the  partnership  brought 
an  action  in  the  District  Court  of  the  United  States  for  the  Western  District 
of  Michigan,  Southern  Division,  to  recover  the  additional  tax  levied  and 

Copyright  1922,  by  The  Corporation  Trust  Lompany 
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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


demanded  by  the  Internal  Revenue  Commissioner  and  paid  by  it  under 
protest. 

1  1  09  The  parties  having  expressly  waived  a  jury,  the  cause  was  submitted 
to  the  District  Court  upon  the  pleadings  and  the  evidence,  resulting 
in  judgment  for  the  defendant.  Findings  of  fact  were  submitted  by  the 
plaintiff  and  defendant,  but  the  court  refused  to  adopt  these  findings  or 
either  of  them,  and  ordered  that  its  opinion  should  constitute  its  findings  of 
fact  and  conclusion  of  law,  to  which  findings,  conclusion  and  judgment, 
exceptions  were  taken  by  the  plaintiff  in  error. 

1110  Donahue,  Circuit  Judge:    The  only  question  presented  by  this 
record  is  whether  or  not  the  partnership  of  Cartier-Holland  Lumber 

Company  during  the  year  1917  had  an  invested  capital  within  the  meaning 
of  Section  201,  207  and  210  of  Title  II  of  the  Act  of  Congress  approved 
October  3,  1917. 

1111  If  this  question  were  to  be  determined  separate  and  apart  from  the 
act  levying  this  excess  profit  tax,  then  it  would  be  of  easy  solution. 

Money  invested  in  a  partnership  business,  whether  paid  in  by  the  partners 
or  borrowed  from  a  partner  or  a  bank,  in  the  absence  of  legislation  to  the 
contrary,  would  constitute  invested  capital  in  the  ordinary  meaning  and 
acceptation  of  that  term.  Congress,  however,  evidently  for  the  purpose  of 
protecting  the  government  from  claims  of  inflated  capitalization,  thought 
it  wise  and  necessary  to  define  the  term  "invested  capital,"  which  is  made  the 
basis  of  the  computation  of  the  tax  to  be  levied  under  the  authority  conferred 
by  this  Act.  To  that  end  Section  207  provided  among  other  things  the 
following: 

"As  used  in  this  title  'invested  capital'  does  not  include  stocks,  bonds 
(other  than  obligations  of  the  United  States),  or  other  assets,  the  income 
from  which  is  not  subject  to  the  tax  imposed  by  this  title  nor  money  or 
other  property  borrowed,  and  means,  subject  to  the  above  limitations: 

"(a)  In  the  case  of  a  corporation  or  partnership:  (1)  Actual  cash 
paid  in,  (2)  the  actual  cash  value  of  tangible  property  paid  in  other  than 
cash,  for  stock  or  shares  in  such  corporation  or  partnership,  at  the  time 
of  such  payment  (but  in  case  such  tangible  property  was  paid  in  prior  to 
January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of 
such  property  as  of  January  first,  nineteen  hundred  and  fourteen,  but  in 
no  case  to  exceed  the  par  value  of  the  original  stock  or  shares  specifically 
issued  therefor),  and  (3)  paid  in  or  earned  surplus  and  undivided  profits 
used  or  employed  in  the  business,  exclusive  of  undivided  profits  earned 
during  the  taxable  year:    *    *    *  ." 

1112  In  the  construction  of  the  Act  of  Congress  of  which  this  definition  is 
a  part,  this  legislative  definition  of  the  term  "invested  capital"  must 

be  accepted  as  final  and  conclusive,  regardless  of  any  preconceived  notion  the 
public  generally,  or  this  court,  may  have  as  to  the  meaning  of  that  term. 

1113  In  the  construction  of  this  statute  it  must  also  be  remembered  that  it 
is  the  settled  rule  not  to  extend  the  provisions  of  taxing  statutes  by 

implication,  or  to  enlarge  their  operation,  so  as  to  embrace  matters  not 
specifically  covered  thereby.    Gould  v.  Gould,  245  U.  S.  141. 

1114  The  trial  court  based  its  judgment  for  the  defendant  upon  the  con- 
clusion of  law  that  the  collateral  deposited  by  Cartier  as  security  for 

his  liability  as  an  indorser  of  the  partnership  notes  became  a  part  of  the 
working  capital  and  was  used  and  employed  in  the  business  of  the  company 
to  the  same  extent  as  if  it  had  been  paid  directly  into  the  partnership  funds. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         419  SERVICE 


1-8-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


1115  This  conclusion  of  law  is  not  supported  by  the  facts  found  by  the 
court  or  by  any  evidence  in  this  record.    The  articles  of  co-partnership 

provide  that  the  paid-in  capital  of  the  partnership  is  to  be  $30,000.00,  any  or 
all  portions  of  which  amount  is  to  be  furnished  to  the  partnership,  upon  notes 
signed  by  it,  and  to  be  paid  at  the  earliest  practicable  opportunity  out  of  the 
net  earnings  of  the  partnership. 

1116  It  would  seem  unnecessary  to  say  that  a  private  contract  between 
these  parties  would  not  change  or  afiect,  in  the  slightest  degree,  the 

plain  and  positive  terms  of  the  statute,  declaring  what  shall  be  included  and 
what  shall  not  be  included  as  "invested  capital."  for  the  purpose  of  this 
tax.  If  the  articles  of  co-partnership  had  provided  that  the  paid-in  capital 
of  the  partnership  should  be  $30,000.00,  one-third  of  which  should  be  paid  in 
cash  or  in  property  by  the  partners,  and  20,000.0.  to  be  borrowed  from  a  bank 
upon  the  notes  of  the  partnership,  indorsed  by  the  nartners,  and  further 
secured  by  the  deposit  of  such  collateral  as  the  bank  might  demand,  the 
money  borrowed  in  pursuance  of  such  partnership  agreement,  fixing  the  total 
capital  of  the  partnership  at  $30,000.00,  would  necessarily  be  rejected  as 
invested  capital  in  the  computation  of  surplus  income  taxes  levied  under  this 
act.  It  logically  follows  that,  if  under  this  statutory  definition  of  invested 
capital,  money  borrowed  could  not  be  included  as  capital  where  some  sub- 
stantial amount  of  cash  had  actually  been  paid  into  the  partnership  fund  by 
the  partners,  such  borrowed  money  can  not  be  reckoned  as  invested  capital 
where  the  partners  contributed  neither  cash  nor  property  to  the  partnership 
capital. 

1117  The  original  plan  of  operation  written  in  the  partnership  agreement 
was  abandoned  as  early  as  1914,  and  thereafter  the  money  used  in 

the  partnership  business  was  borrowed  directly  from  the  bank  upon  the  notes 
of  the  partnership,  payable  unconditionally  and  at  certain  fixed  times,  regard- 
less of  net  earnings  or  any  other  contingency.  While  these  notes  were 
indorsed  by  the  individual  partners,  nevertheless  the  money  was  borrowed  by 
the  partnership  for  partnership  purposes,  and  it  was  primarily  liable  for  the 
payment  of  these  notes.  Collateral  held  by  the  bank,  a  stranger  to  the  part- 
nership, whether  the  property  of  one  or  of  both  partners,  was  a  mere  incident 
to  the  loan,  and  can  in  no  wise  affect  the  character  of  the  transaction. 

1118  It  is  therefore  wholly  unnecessary  to  determine  whether  under  the 
original  agreement  the  money  to  be  furnished  by  Cartier,  to  be  repaid 

out  of  the  partnership  earnings,  would  or  would  not  be  borrowed  money 
within  the  meaning  of  this  act.  Nor  is  it  important  at  whose  suggestion 
this  plan  of  operation  was  changed  and  the  new  plan  adopted.  It  is  sufficient 
for  the  purposes  of  this  opinion  to  determine  the  legal  effect  of  these  trans- 
actions as  they  occurred  during  the  taxing  period  of  1917.  The  evidence  in 
relation  to  these  transactions  permits  of  no  conclusion  other  than  that  the 
money  borrowed  from  the  bank  upon  the  notes  of  the  partnership  was 
"borrowed  money,"  within  the  meaning  of  Section  207  of  the  Act  of  Congress 
approved  October  3,  1917. 

1119  The  clear,  positive  and  unambiguous  language  of  Section  207  of  this 
act  is  not  subject  to  any  other  construction,  regardless  of  the  exigencies 

of  any  particular  case.  First  it  provides  that  borrowed  money  or  other 
property  shall  not  be  included  in  the  term  "invested  capital"  as  used  in  that 
title.  Paragraph  "A"  of  that  section  then  spec'fkally  states  what  shall  be 
included  in  determining  the  "invested  capital"  of  a  corporation  or  partner- 
ship as  follows:  "(1)  Actual  cash  paid  in."  There  is  no  claim  made  by  the 
government  that  there  was  any  "actual  cash  paid  in"  to  the  partnership  funds 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         420  SERVICE 


(1)1-8-22.  (2)1-24-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


other  than  the  money  borrowed  from  the  bank  on  the  notes  of  the  partnership, 
endorsed  by  the  partners,  the  endorsement  of  Cartier  being  secured  by  col- 
lateral deposited  by  him.  "(2)  The  actual  cash  value  of  tangible  property 
paid  in  other  than  cash  for  stock  or  shares  in  such  corporation  or  partnership." 
In  this  case  there  was  no  tangible  property  paid  in  by  either  partner  for  the 
purpose  named  or  for  any  other  purpose.  The  collateral  deposited  by  Cartier 
could  not  upon  any  reasonable  hypothesis  be  held  to  be  "tangible  property 
paid  in"  to  the  partnership.  It  was  not  deposited  with,  transferred  or 
assigned  to  the  partnership  and  the  partnership  never  acquired  any  right, 
title  or  property  interest  therein,  legal  or  equitable.  This  collateral  was 
deposited  with  the  bank  as  part  of  the  loan  transaction.  Cartier  never 
parted  with  the  title  or  ownership  therein.  The  bank  held  it,  not  as  owner  but 
as  pledgee  merely.  "(3)  Paid-in  or  earned  surplus  and  undivided  profits 
used  or  employed  in  the  business  exclusive  of  undivided  profits  earned 
during  the  taxable  year." 

1  1  20  Whether  this  partnership  used  or  employed  in  its  business  paid-in 
or  earned  surplus  and  undivided  profits  exclusive  of  undivided  profits 
earned  during  the  taxable  year  is  a  question  of  fact.  The  trial  court  found  as 
a  fact  that  at  the  beginning  of  the  taxable  year  the  liability  of  the  firm  exJ 
ceeded  its  assets  by  the  sum  of  $7,218.85.  This  court  has  no  authority  to 
determine  the  weight  of  the  evidence.  R.  S.  Sections  649  and  1011.  If  the 
finding  of  fact  made  by  the  trial  court  is  sustained  by  some  substantial  evi- 
dence, then  it  must  be  accepted  by  this  court  as  a  final  determination  of  the 
facts  in  issue. 

1121  There  is  practically  no  dispute  in  the  evidence  upon  which  the  trial 
court  made  this  finding  of  fact.    It  had  been  the  custom  of  each 

partner,  with  the  consent  of  the  other,  practically  from  the  time  the  partner- 
ship was  organized,  to  withdraw  earnings  of  the  partnership  in  advance  of 
the  ascertainment  of  the  exact  profits  and  a  formal  division  of  the  same. 
These  withdrawals  were  charged  against  the  partners  respectively  on  the 
partnership  books  of  account,  and  whenever  there  was  a  formal  division  of 
the  profits  the  amount  due  to  each  partner  was  credited  to  his  account  as 
against  amounts  that  were  withdrawn  by  him.  On  the  first  day  of  January,. 
1917,  it  appeared  that  Cartier  had  withdrawn  in  the  aggregate,  during  the 
life  of  the  partnership,  the  sum  of  $11,556.37,  in  excess  of  all  sums  credited  to 
him.  Holland  had  also  withdrawn  $18,106.28  in  excess  of  his  credits.  The 
evidence  further  shows  that  these  withdrawals  were  made  in  anticipation  of 
a  distribution  of  the  profits,  to  be  credited  to  them  as  against  these  with- 
drawals, that  would  finally  balance  their  accounts.  That  this  was  the 
purpose  and  understanding  of  the  partners  fully  appears  by  their  testimony, 
and  particularly  the  testimony  of  Holland,  as  follows: 

"The  Court:    It  would  be  liquidated  by  dividends  you  declared? 

"A.  Eventually. 

"The  Court:    And  credited  yourself  with? 
"A.  Yes." 

1 122  In  the  absence  of  an  express  agreement  to  the  contrary,  the. partner- 
ship  could  not  require  a  partner  to  return  to  it  his  share  of  the  actual; 

profits  anticipated  by  these  withdrawals.  The  strongest  inference  which  any- 
thing in  this  record  would  justify  as  to  the  duties  of  the  partners  to  each 
other  to  repay  these  items  charged  against  them  is  that  each  should  repay 
the  amount  he  had  withdrawn  in  excess  of  his  share  of  the  profits.  This, 
would  mean  in  the  aggregate  $7,218.85,  just  enough  to  pay  the  general 
debts  and  leave  no  surplus.    In  any  event,  these  profits  were  drawn  by  the 

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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


partners  and  were  not  used  in  the  partnership  business.  The  claim  that  they 
were  used  in  the  partnership  business  as  bills  receivable,  so  they  would  furnish 
a  basis  of  credit,  is  not  tenable.  These  partners  were  the  sole  owners  of  the 
partnership  business  and  in  full  control  of  its  affairs;  they  were  each  individu- 
ally liable  for  all  the  debts  of  the  partnership,  so  that  whether  they  were  liable 
to  the  partnership  for  the  full  amount  of  these  withdrawals,  regardless  of 
profits,  could  in  no  wise  affect  the  security  of  creditors  for  the  payment  of 
their  debts. 

1123  It  would  therefore  appear  that  this  finding  of  the  trial  court  is  fully- 
sustained  by  substantial  evidence. 

1 1 24  Section  9  [209]  of  this  act  provides  that  in  the  case  of  a  trade  or 
business  having  no  invested  capital  (and,  of  course,  that  means  in- 
vested capital  within  the  meaning  of  the  act),  or  not  more  than  a  nominal 
capital,  there  shall  be  levied,  assessed,  collected  and  paid,  in  addition  to  the 
taxes  under  existing  law  and  under  this  act,  in  lieu  of  the  tax  imposed  by 
Section  201,  a  tax  equivalent  to  eight  per  centum  of  the  net  income.  This 
section  of  the  act  would  appear  to  have  been  intended  to  cover  just  such 
conditions  as  are  here  presented. 

1  1  25    For  the  reasons  above  stated,  this  judgment  must  be  reversed  and  the 
cause  remanded  for  a  new  trial  in  accordance  with  this  opinion. 
[The  District  Court  decision  is  reported  at  269  Fed.  647.] 


1126  Allocations  of  tax:  Partnerships  and  corporations  in  consolidated 
1079     cases.  (1917-1921  Acts.) — An  opinion  is  requested  in  the  consolidated 

case  of  the  M  Company,  wherein  corporations  and  partnerships  are 
consolidated,  as  to  the  proper  basis  of  allocating  the  tax  between  the  units  of 
the  consolidation. 

1127  No  opinion  is  requested  as  to  whether  or  not  the  corporations  are 
properly  consolidated  and  no  opinion  is  expressed  upon  this  question. 

1128  In  the  request  attention  is  called  to  article  78,  Regulations  41,  on 
the  subject  of  allocating  the  excess  profits  taxes  in  consolidated  cases 

involving  corporations,  and  objections  are  pointed  out  to  allowing  taxpayers 
the  option  to  allocate  the  excess  profits  taxes  to  partnerships  in  cases  where 
both  corporations  and  partnerships  are  consolidated.  Article  78,  Regulations 
41,  reads  as  follows: 

When  affiliated  corporations  may  be  required  to  make  consolidated  returns. — Whenever 
necessary  to  more  equitably  determine  the  invested  capital  or  taxable  income,  the  Com- 
missioner of  Internal  Revenue  may  require  corporations  classed  as  affiliated  under  article 
77  to  furnish  a  consolidated  return  of  net  income  and  invested  capital.  Where  such  con- 
solidated return  is  required  it  may  be  made  by  any  one  or  more  of  such  corporations  or 
by  all  of  them  acting  jointly;  but  if  such  affiliated  corporations,  when  requested  to  file 
such  consolidated  return,  neglect  or  refuse  to  do  so,  the  Commissioner  of  Internal  Revenue 
may  cause  an  examination  of  the  books  of  all  such  corporations  to  be  made  and  a  consoli- 
dated statement  to  be  made  for  such  examination.  In  cases  where  consolidated  return* 
are  accepted,  the  total  tax  will  be  computed  in  the  first  instance  as  a  unit  upon  the  basi^- 
of  the  consolidated  return  and  will  be  assessed  upon  the  respective  affiliated  corporation -» 
in  such  proportions  as  may  be  agreed  among  them.  If  no  such  agreement  is  made  fcne 
tax  will  be  assessed  upon  each  such  corporation  in  accordance  with  the  net  mbme  and 
invested  capital  properly  assignable  to  it. 

1129  It  is  clear  that  the  above-quoted  article  applies  only  to  caset*  when 
corporations  are  consolidated,  and  not  to  cases  where  corporations 

and  partnerships  are  consolidated. 

}  1 30    Consolidated  returns  are  required  because  otherwise  opportunity 
would  be  afforded  affiliated  corporations  and  partnerships  to  evadr 
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W4*  TAX        422  SERVICE 


2-1 1-22 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.  —1922. 


taxes  by  the  shifting  of  income  through  price  fixing,  charges  for  service,  and 
other  means  by  which  income  can  be  arbitrarily  assigned  to  one  or  another 
unit  of  the  group.  The  reason  for  permitting  the  taxpayer  in  consolidated 
cases  an  option  as  to  the  allocation  of  the  excess  profits  tax  as  between  cor- 
porations is  that  all  corporations  pay  the  same  rate  of  income  tax  and  the 
allocation  of  the  excess  profits  tax  as  between  corporations  would  make  no 
difference  in  the  total  income  and  excess  profits  taxes  received  by  the  Govern- 
ment. This  reason,  however,  does  not  apply  where  partnerships  are  included 
in  the  consolidation  with  corporations,  because  the  individual  members  of 
partnerships  do  not  pay  their  income  tax  at  the  same  rate  as  corporations. 
To  allow  the  taxpayer  to  allocate  the  excess  profits  tax  in  cases  where  cor- 
porations and  partnerships  are  consolidated  might  therefore  result  in  defeat- 
ing one  of  the  purposes  for  requiring  consolidated  returns  in  affiliated  cases. 
While  individual  members  of  the  partnerships  pay  income  taxes  at  different 
rates  than  corporations,  all  individual  members  of  the  partnerships  pay 
income  taxes  at  the  same  rate.  It  appears,  therefore,  that  there  would  be 
no  objection  to  allowing  the  taxpayers  the  option  to  allocate  to  the  partner- 
ship units  the  excess  profits  tax  properly  assignable  to  the  partnership  group. 

1131  In  the  request  attention  is  called  to  the  difficulties  of  applying  the 
last  sentence  of  article  78  to  consolidated  cases  where  several  units 

of  the  consolidation  have  losses  and  where  there  is  doubt  as  to  the  invested 
capital  properly  assignable  to  each  unit.  These  difficulties  as  to  the  prac- 
tical application  of  the  article  are  recognized  in  such  cases  where  it  is  sought 
to  allocate  the  tax  according  to  the  invested  capital  and  net  income  of  each 
unit  of  the  consolidation,  but  it  is  believed  that  it  will  be  found  that  these 
difficulties  disappear  within  the  groups  if  the  corporations  are  treated  as 
one  group  and  the  partnerships  as  another.  While  the  units  of  the  two 
groups  (units  of  the  partnership  group  here  mean  the  individual  partners) 
will  pay  their  income  taxes  at  different  rates,  the  units  of  the  same  group  will 
pay  their  income  taxes  at  the  same  rates,  and  if  the  excess  profits  tax  is  allo- 
cated to  each  group,  according  to  the  invested  capital  and  net  income  assign- 
able to  the  group,  all  difficulties  disappear  and  the  tax  is  equitably  allocated. 

1132  It  is  held,  therefore,  that  where  corporations  and  partnerships  arc 
consolidated  the  excess  profits  tax  should  be  allocated  to  the  part- 
nerships as  a  group  according  to  the  invested  capital  and  net  income  assignable 
to  the  partnership  group.  After  the  proper  amount  of  the  excess  profits  tax 
has  been  allocated  to  the  partnership  group,  article  78  may  then  be  applied 
within  the  partnership  group  as  it  is  now  applied  within  the  corporation 
group.  (Law  Opinion  1085,  signed  by  Solicitor  of  Internal  Revenue  Carl  A. 
Mapes,  and  issued  January  16,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         423  SERVICE 


Form  1J22-UNITEO  STATES  INTERNAL  REVENUE  SERVICE 

INFORMATION  RETURN  OF  SUBSIDIARY  OR  AFFILIATED  CORPORATION 

WHOSE  NET  INCOME  AND  INVESTED  CAPITAL  ARE  INCLUDED  IN  RETURN  OF  A  PARENT  OR  PRINCIPAL 
REPORTING  CORPORATION  FOR  PURPOSES  OF  INCOME  AND  PROFITS  TAXES 


If  return  is  for  calendar 
year  1921,  file  it  on  or  be- 
fore Mfjcb  15,  1S22,  with 
tha  Collects?  of  Internal 
Revenue  for  tha  District  in 
vhicb  the  Subsidiary  or 
AfRBated  Corporation  bu 
its  principal  office. 

If  for  r  period  ether  iian 
a  calendar  year,  She  return 
s'lculii  bo  filed  on  or  bffuro 
Ifcs  IStn  day  of  the  third 
month  Mowing  the  c!o«2 
of  such  period. 


FOR  CALENDAR  YEAR  1921 


Or  for  period  begun     ,  1920,  and  ended   ,  1921 


(Street  end  number  or  rural  route) 



(Post  Office  tod  State) 


(D*te  Received) 


1.  Date  incorporated. 

2.  Kind  of  business.. 





Under  laws  of  what  State  ?. 


3.  Par  value  of  capital  stock  outstanding  at  beginning  of  taxable  period: 

(a)  Common,  $  ;  (b)  preferred,  $  

4.  Name  cf  parent  corporation..  

- 

5.  address  of  parent  corporation  





6.  Internal  revenue  district  in  which  consolidated  return  has  been  filed.   

(Give  district,  or  city  and  State) 

7.  The  department  prefers  that  the  entire  tax  shown  on  a  consolidated  return  bo  paid  by  the  parent  or  principal 

reporting  corporation,  in? tend  of  being  ppportionod  among  the  corporations  composing  the  affiliated  group. 

If  apportionment  is  made,  s  ate  tho  amount  of  income  and  profits  taxes  for  the  taxable  period  to  be  aas&sea 
against  the  subsidiary  or  affiliated  corporation  making  this  return    $_  _ 


We,  the  undersigned,  president  end  taea&irer  of  the  above-named  su>)sidiary  or  affiliated  corporation,  being 
bcv  orally  duly  sworn,  each  for  himself  doposra  anu  ftBys  that  the  foregoing  return,  including  the  ftce£&jlMiyiitg 
list  (if  any),  ha3  been  examined  by  him  and  is  to  the  best  of  his  knowledge  and  belief  a  true  and  compl el 
of  information  maflia  in  good  faith  pursuant  to  the  Revenue  Act  of  1921  and  the  Regulations  issued  thcreuudcr. 

Sworn  to  and  subscribed  before  mo  this 


day  of  __  _.,  1922. 


PVvn 


(Stjcntnre  of  o<V>cer  adr-dr^steriEg  w.tL) 


1  /iu*-.;;  :r. 


WAR  TAX         424  SERVICE 


I]  4MIIA)%  8p*N  ZDAJIWfft  TH3MM03 

On  the  reverse  hereof  is  reproduced 

Form  1120S — Government  Contracts  Profits  Tax  Return. 


WAR  TAX  SERVICE 

Insert  to  face  page  424 


2-28-22. 


Form  1120S 

TJ.  S.  Internal  Revenue 

GOVERNMENT  CONTRACTS  PROFITS  TAX  RETURN 

FOR  CALENDAR  YEAR  1921 
Or  for  period  begun    ,  1920,  and  ended  _    ,  1921 

DO  NOT  WKTTS  IN  THIS  STAC* 
"I  ifl'l'j 

ATTACH  THIS  FORM 
TO  YOUR  INCOME  TAX 
RETURN,  FORM  1120, 

TOR  THE  CORRE- 
SPONDING TAXABLE 
PERIOD  AS  A  PART 
OF  THAT  RETURN. 

Print  plenty  corporation'.,  turn.  and  bualrMaa  add™.. 

IKua) 
(StrMtud  Dumb*) 

(Post  OBce  and  BUM) 

KIND  OF  BUSINESS. 


IS  THLS  A  CONSOLIDATED  RETURN?. 


Horn. 

1.  Average  Net  Incoue  for  Prewar  Period  (from  Form  1120  for  1918,  page  1,  Schedule  I,  Item  «) 

- 

! 

2.  Net  Income  for  Taxable  Period  (from  Form  1120  for  1921.  pace  1.  Schedule  A.  Item  271 

r 

SCHEDULE  II— INVESTED  CAPITAL. 

Item. 

1.  Invested  Capital  for  Taxable  Period  (from  Form  1120  for  1921,  page  1,  Schedule  B  Item  9) 

2.  Average  Invibted  Capital  for  Trewar  Period  (from  Form  1120  for  1918,  page  1,  Schedule  II  Item  101   .     .  _  -.   

3.  Increase  or  Decrease  in  Invested  Capital  for  Taxable  Period  as  compared  with  Averaoe  Prewar  Invested  Cafital  (indicate  decrease  bv  "  r>  "i. 

i 

SCHEDULE  III— EXCESS  PROFITS  AND  WAR  PROFITS  CREDITS. 


EXCESS  PROFITS  CREDIT. 

1   Eiph  t  per  cent  of  invented  capital  for  taxable  period  ( Item  1 
Schedule  II)..._  „  _  C  .  

t  

WAR  PROFITS  CREDIT. 

4.  Average  net  income  for  prewar  period  ( Item  1,  Schedule  IV_ 

5.  Plus  10%  of  increase  or  minus  10%  of  decrease  shown  by 

Item  3,  Schedule  IL         -  -  _   

1  

u 

6.  (a)  Total  of  (or  diBerc-oe  between!  Items  4  and  5,  or 
(6)  10«  of  inverted' capital  for  taxable  period  (Item  1, 

3.         Excess  Profits  Credit  (Item  1  plus  Item  2)-  

$  

Schedule  II),  whichever  ia  larger  

7.  Exemption  for  domestic  corporation  ($3,000)  

*  .  . 

8.          War  Frofits  Credit  (Item  6  plus  Item  7)  

J  

SCHEDULE  IV— COMPUTATION  OF  TAXES. 
WAR  PROFITS  AND  EXCESS  PROFITS  TAX  (BRACKETS  ONE  AND  TWO). 


1.  Bracken. 

^  2.  Net  Income,  ^ 

3.  Excess  Profits  Cr*w1it 
(Item  3,  Scfaedale.il). 

A  Bl 

tlaiv*  Siit>)ect  to  Tu. 

iuw.1 

1.  Net  ii  come  not  in  excess  of  20%  of  invested  capital  

t  

1 

»  

30%  L_ 

-  !  • 

65%   



S.          Totals  _   ;   _.  

t  

 _J  

 fc_J  

$..  .. 

 lT'l. 

WAR  PROFITS  AND  EXCESS  PROFITS  TAX  (BRACKET  THREE). 


4.  Net  income  fcr  taxable  period  (Item  2,  Schedule  I). 


itnount  of  War  Profits  Credit  (Item  8,  Schedule  III).. 
Balance  _   .   


  7.  Eighty  per  cent  of  Item  6..  J$  

8.  Lees  Item  3,  column  6  (il 
...II  .    smaller  than  Item  7)  )  _. 


10.  Total  War  Profits  and  Excess  Profits  Tax  as  computed  under  Section  301(6)1  (Item  3,  roTumn  «,  plus  Item  9) 

11.  Total  War  Profits  and  Excess  Profits  Tax,  il  computed  under  Sections  302  or  337  of  the  Revenue  Act  of  1021 . 


SUMMARY— WAR  PROFITS  AND  EXCESS  PROFITS  TAX. 


12.  Total  War  Profits  and  Excess  Profits  Tax  computed  under  Sectiors  301(d),  302,  or  337,  whichever  is  the  smallest.  !$_ 

13.  Total  Excess  Profits  Tax  (Item  3  or  4.  whiohovpr  is  the  smaller  in  column  «.  Schedule  IV  Form  1120^   _  '  

11.  That  proportion  of  Item  12  which  the  income  derived -from  Government  contracts  bears  to  the  total  net  income                      ■  ■  ,  ■  ■  — 

lf>.  That  proportion  of  Item  13  which  the  income  not  derived  from  Government  contracts  bears  to  the  total  net  income    

16.  Total  War  Profit*  and  Excess  Profit*  Tax.  Item  14  plus  Item  15  (enter  as  Item  8.  Schedule  D,  Form  1120)  _  -. 

I_J  

1 

GENERAL  INSTRUCTIONS  REGARDING  TAX  ON  INCOME  DERIVED  FROM  GOVERNMENT  CONTRACTS. 

the  year  1921  a  net  income  of  more  than  $10,000  from  any  Government  contractor  contracts 


In  the  case  of  a  corporation  which  derives  during  t 
November  11.  1918,  both  dates  in-  lusive,  the  tar  shall  be 
that  year,  as  the  portion  of  the  r.»t  income  attributable  to  the  Gc  vernmeni 
smc-int  of  the  remaining  net  income  b^ars  to  the  entire  net  income.    See  St 

Government  contracts  may  include:  (a)  A  contract  with  the  United  < 
f<f>  a  subcontract  with  a  contractor  under  any  stub  contract;  provided  in  < 
eequentjy  ratified  are  treated  as  thoosb  made  when  originally  entered  into 
into  od  and  after  April  6, 1917. 


•e*n  April  <i,  1017.  ind 

rn.pu.ted  at  the  rates  for  1918,  using  the  excess  profits  credit  and  the  war  prop's  ~recV  appbcabl"  lo 
bears  to  the  entire  net  income,  plus  such  a  proportion  of  a  tax  eorjpnu»d  at  th°  rates  for  1W1  si  • 
^  i  of  the  Revenue  Act  of  1921. 

&  contract  with  an  agency  of  the  United. States,  (a  a  onn'rart  with  an  acem  y  of  su'-h  RgeacT,  a*.  I 


INSTRUCTIONS  CONCERNING  THE  FILLING  IN  OF  SCHEDULES  IN  THL-i  RETURN. 


SCHEDULE  1,  NET  INCOME,  AND  SCHEDULE  II,  INVESTED  CAPITAL. 
If  advised  that  prewar  data  called  for  in  Schedules  I  and  II  above  have  been  revised 
bv  the  Department,  enter  corrected  amounts.   Uee  space  below  for  f-tll  iwjng  schedale« 
i/ sufficient. 

SUPPORTING  SCHEDULE. 

A  schedule  should  be  submitted  respecting  Government  contracts  mad»  between  April 
6,  13i7,  and  November  11, 1918.  both  dates  inclusive,  from  which  net  ID  -oroe  in  an  amount 
exceeding  $10,000  was  derived  during  the  taxable  period .  In  the  rase  of  affiliated  compa- 
nies, this  information  should  be  shown  separately  for  each  company.  This  schedule  should 
n  the  following  information  as  !"«pcoH  each  contract: 


be  in  columnar  form  and  should  contain 
Amount  of  contract 

Grose  income  from  contract  d>ring  period 


Total'. 


There  should  also  be  shown  in  the  i 


tledm  form: 


:  c  orporal  ion 
(total). 


(d)  Total  gross  income  of  corporation. 

(e)  Percentage  which  total  ci  column  (I)  it  of  (rf). 
If)  Total  general  expenses,  losses,  and  d-turtrns  c 
(b)  Amount  of  (f  i  allocated  to  Gov 
(h)  Percentage  which  (g)  is  of  (/). 

If  the^allocation  of  general  expenses,  losses,  ard  deductions  difera  bora  the  percccaga 
which  the  greet  income  from  the  Government  contract  or  contracts  hears  to  the  total  gross 
income,  there  shall  be  submitted  a  ststement  showing  the  items  and  the  amounts  thero  f 
which  have  been  otherwise  allocated,  and  the  reasons  therefor  If  a  claim  it  made  und'r 
Section  327  of  the  statute,  gain',  pronia,  commisaicna,  or  c:b»r  income  derived  on  a  cow. 
plus  basis  from  a  Government  contract  or  coooacts  made  between  April  6,  1917,  and 
November  11,  1918.  both  date*  inclusive,  should  be  shown  separate!)  from  income  fro.* 


WAR  TAX  SERVICE 

Insert  to  face  page  425. 


2-1 1-22. 


Form  1120 

V .  R'.-  Internal  Revenue 

THIS  RETURN JJHOUIJD 
BE  FILED  NOT  LATER 
THAN  THE  1STH  DAY 
Or  THE  THjRD  MONTH 
FOLLOWING  THE  CLOSE 
OF  THE  TAXABLE 
fEMOO 


CORPORATION  INCOME  AND  PROFITS  TAX  RETURN 

FOR  CALENDAR  YEAR  1921 


Or  for  period  be  run  . 


1920,  and  ended  _  ,  1921 


PRINT  PLAINLY  CORPORATION'S  1 


PlttST  PAYMENT 


KiHH  OF  BUSINESS . 


    IS  THIS  A  CONSOLIDATED  RETURN  7  


SCHSDULE  A— TAXABLE  NET  INCOME. 


GROSS  INCOME. 


s,  leas  return:  and  allowance*  . 
of  goods  sold,  exclusive  of  ile! 


i  called  for  separately  below  (from  Schedule  A2). 


>  irota  operations  other  than  trading  or  manufacturing,  loss  aliowiocos  (from  Schedule  A3).. 

iroeton  Liberty  Bonds,  etc.  (from  Schedule  A4)._  _    _.. 

rf*trt  from  ail  other  sources.      -  


Koyalties . 

Share  of  ih 


t  income  earned  by  personal  service  corporation  (whether  received  or  not)  _  _  _. 

Invideude  on  slocV  of  foreign  and  domestic  corporations    _  _  

C.rom  iLcoino  from  ail  other  sources  (not  including  any  amount  reported  in  Item  2:1,  below)  (from  Schedule  A10)_. 
Total  cf  Itkms  1  to  10  '.    ,  


DEDUCTIONS. 

Expenses  (except  amounts  reported  in  Item  2  above,  or  called  for  separately  below)  (from  Schedule  A12).. 

.  Compensation  of  officers  (in  whatever  form  paidj  (from  Schedule  A13)   _  _   

Repairs  (including  labor,  suppliee.  etc.)  (from  Schedule  AH)       

Interest  (see  pago  2  of  Instructions,  paragraph  9)     

Tar.es  (from  Schedule  A16)   

P.ad  debts  (from  Schedule  A17)  _      _  

iit'ua' .si! ■>□,  wear  and  tear  (including  obsolescence)  (from  Schedule  A18)       

,  Depletion  (from  Schedule  A19)      _   ..... 

.  Amortization  oi  war  facilities  (from  Schedule  A20)     

Total  or  Inns  12  to  20.. _  _  _   

Itzk  11  kuius  Itim  21    _   _  

.  I'roSt  br  loss  on  sales  of  capital  assets  and  miscellaneous  investments  (from  Schedule  ASS?*.  :  

.  Losses  by  fire,  storm,  etc.  (From  Schedule  A24.)  (Extend  difference  between  or  sum  of  Items  23  and 
.  Net  income  exclusive  of  deductions  for  di\ ideods  (Item  2?  minus  24,  extended)  ,   , 


Mvideuds  deductible  under  Section  234(a)  0  of  the  Revenue  Act  of  1921,  (from  Schednle  AJ6)  . 
Nit  Income  (Item  25  minus  Item  26)  (If  return  is  for  a  period  lass  than  twelve  months,  i 


SCHEDULE  B— INVESTED  CAPITAL. 


1.  Capital,  surplus,  and  undivided  profits  at  beginning  of  taxable  period  (from  Schedule  E,  Item  11)   

2.  Pius  adjuBlmecta  by  way  of  additions  (from  Schedule  F,  Item  4) —  _    

4.  Less  edjuetmeuts  by  way  of  deductions  (from  Schedule  G,  Item  7)  

6.  Plus  or  minus  changes  in  invested  capital  during  taxable  period  (net  Increase  or  Decrease  from  Sebsdule  IT)   

7.  Total  (om  Rimainder)  _  —   —    — —  -  

8.  Less  doduction  on  account  of  inadmissible  assets  (from  Schedule  J)  L* —  


Invested  capital  for  taxable  period. 


SCHEDULE  C-EXCESS  PROFITS  CREDIT. 


1.  Eight  per  cent  of  invested  capital  for  taxable  period  (Iiem 

2.  Exemption  ($3,000)  (except  for  a  foreign  corporation 

3.  Excess  Profits  Credit  (Item  1  plus  Item  2)  


corporation  satisfying  the  conditions  provided  in  Section  2C2  of  the  Act)  . 


SCHEDULE  D— COMPUTATION  OF  TAXES. 


T 


:  Sorter  t*  Tax. 


1.  Net  income,  not  in  excess  of  20  JS  of  invested  capital  

2.  Balance  of  net  income   —  --w  

5.  Totals  computed  under  Section  301(a)   

■4.  Excess  Profits  Tax.  if  contputed  under  Sections  302,  303,  304(c)  or  337  of  the  Revenue  Act  of  1921  (see  page  2  of  Instructions,  paragraph  14) 

6.  Net  income  (Item  27,  Schedule  A) 

6.  Le'-s :  Taxable  InWn^t  oil  obligations  cf 


J  L 


9.  Eremptluii  i.'  it'-,    rnrrlurr-^llr^-T^f^-l  Mi 
limine  a  in:  :ri<  jiLt:  Qi>t  i-if  oodiag  J25.20Q- 

10.  Balance  (Item  5,  Ions  Items 6,  7,  and  9,  or  Itema  6, 8,  and  9). 


II.  Income  t£H  (lOfo  of  Item  10)  . 


13.  Total  tax  (Itom  3  or  4  the  leoex,  or  8,  plus  Items  11  and  12). 


ci  tt»  ItOTeuo*  Act  ot 
16.  Balance  of  tax  (Item  13  mij 


An  a  nr.  cr.  do*'  return  must  be  plainly 


Checks  and  drafts  will  bo  accepted  only  if  payable  at  par. 


[Page  1  of  Form  1120.] 


WAR  TAX         425  SERVICE 


Pope  2  of  Return. 


SCHEDULE  E.-CAPITAL.  SURPLUS.  AND  UNDIVIDED  PROFITS  AS  SHOWN  BY  BOOKS 
BEFORE  ANY  ADJUSTMENTS  ARE  MADE  THEREIN. 

E4.  Stock  actually  outstanding  at  the  end  of  the  preceding  taxable  period  should  he  entered  in  this  -chert  ule 
ioiild  reflect  tlieacio!' lis  un  i 1  L Ku.k \m\<  =«k '  "er.--.fb'  'i  e  do-.*,     t be  r 'eoedJnr,  taxable  period. 


itin?  rut  learnt  as  rr fumed  In  pro~n"i<  yea 

.  If  tLftcort  ^r-liun  I. a.)  en  hrmrj  b'.  ai.y  time  during  the  taxable  peric 
ntnescoverlng  the  original  issuance,  repossession  and  any  substquem 


xplajted,  be  entered  as  Item  7.  Such 


and  not  canceled.  regardless  o 


<  j]  Hi!  stork         ii  r,  „-,-]  a-f  uallyo      tuning  a' 


Surplusand  .j-  ..  profits' 


Heer.<-.o.:iHl< 


i    ...   ■  J."'  turns). . 


SCHEDULE  F.-ADJUSTMENTS  BY  WAY  OX  ADDITIONS. 


•Up  to  tbe  corporation,  {« 
dock  or  shares  issued  therefor  and  t 

upon  which  the  actual  cash  value  of  the  property  was  determined  and  tbe  date  * 
ma'e.and  fp)  the  amount  ol  depreciation  sustained  on  sucb  property  from  the  date  of  acquisition  t. 
of  theUrabta  period, 

f  2.  If  an  addition  to'  Invested  capital  is  claimed  Id  Item  2,  Schedule  F,  submit  a  statement  showing 
(a)  the  kind  o(  property,  (o)  tbe  year  in  which  it  was  acquired,  (c)  its  cost,  (d)  the  amount  of  depredation  sus- 
tained on  such  property  from  the  date  of  acquisition  to  the  b«gtnning  of  the  taxable  period.   State  also  whether 

erpefidltures,  when  made,  written  off  In  lieu  or  depreciation*  T   II  so,  explain  what  adjustments 

have  l«een  made  to  provide  for  depreciation  in  view  of  the  proposed  restoration  to  surplus.  Additions  la  this 
ilrtc  are  mtauiatlve  to  the  beginning  oi  the  taxable  period.  For  afl  additions  hereunder  provision  must  be 
n  ule  for  <} L-predatlon  to  the  beginning  of  the  taxable  period. 

F3.  If  any  addition  to  invested  capital  is  claimed  in  Item  3,  Schedule  F,  state  specifically  the  amount  of 
depreciation  written  oil  each  year  Id  tbe  books  of  the  company  and  the  amount  allowed  as  a  deduction  In  com- 
puifrjf  Let  Infome    Additions  to  this  item  arecumulotive  to  the  beginning  of  the  taxable  period. 


:j.  Depreu,tioa  or 


BMtio^lSo  <8^oTtheVevcnuehA 
irnlus  (see  Section  326  (a)  3  of  the 


consideration  paid 


;  Department  as  a  deduction  o 


SCHEDULE  C— ADJUSTMENTS  BY  WAY  OF 

Gt.  Is  any  patent,  copyright,  secret  process,  or  formula,  good  will,  trade-mark,  trade  brand,  franchise,  c 

tier  similar  Intangible  property,  paid  la  for  stock,  camod  as  an  asset  by  the  corporation*  —  ] 

L  e"''-r...]  !jjt-' locally  as  such,  in  the  Intangible  value  merged  under  any  other  lifle  or  titles  on  the  books  a 

lance  sheets  submitted  with  this  return'    Is  it  entered  on  the  Looks  at  a  value  In  excess  of  It 

!t.n!casliY&luewbenpaidlD?   In  excessof  thepar  valueof  thestock  issued  therefor?  

the  acrregateof  such  assets  acquired  prior  to  March  3.  1917,  entered  on  the  books  at  a  value  Pa  excess  of  24  pe 

I  od  March  3,  1917*   Is  the  aggregate  of  such  asset 

5  percent  of  the  par  value  of  the  slock  outstanding  at  the  beglnnin 


ovets  acquired  1 1 )  before  March  3,  1917,  and  ('.•)  on  or  after  that  date,  <o)  date  of « 
t  that  de'e,  with  a  complete  explanation  of  the  basis  upon  which  sucb  cash  vahH 
raltn  of  the  stock  issued  therefor'  (d)  par  value  of  total  stock  outstanding  March  3. 

stwk  outstanding  at  the  beginning  of  the  taxable  period  (j)  the  value  at  wblcb  sucb 


(fut  of  (4),  or  2i  percent  ol  (0,  whichever  n  lowest,  wu<  t  I  e <  u< i/red 
If  the  intangibles  wore  tcqulred  on  or  after  March  3.  19U,  the  t 
such  Intangibles  exceeds  (6)  or  fr)  relating  thereto,  or  35  per  cent  c 
Ij>  item  I,  ^beduie  0,  for  the  taxoblo  period   fYttJeW,  That  iflnt 


nt  by  which  (J)  exceeds  (61,  (e),  25  per 
?m  i ,  Schedule  C ,  lor  the  taxable  period, 
nt  by  which  the  entry  In  If)  relating  to 
,  whichever  Is  lowest,  must  beinchided 
:>les  were  acquired  before  March  3, 1917. 
□nt  Included  In  invested  capital  for  the 


»  property,  paid  lo  for  stock 
t  entered  on  the  " 

the  par  value  of  the  stock  paid  therefor? 


C3.  WeatbebusiDexsral-x-oiporated  raorganltad  i 
ebanfe  la  ownership  of  property  after  March  3.  19I7T 
prsoparcertt'or 
e  persons,  corpora!  i 
ss«ts  cniered  on  the  hooks ,0! 


r  was  not  a  cqrpr'Mifin  Ifdjadl 


t  to  that  date  fort 

Thl.lfljJ  h*;SUCbjtfT^C4T10 
1 '  1'  ■'  1  •  v  ,.  1  ■ 

1  propurty  was  ecq-.iln-J  from  a  corporal  rati  durifcs;" 

rofihelaoa.  I* perua ei. J"a*a» the 


G4.  Is  any  property  f 


■  physical  property,  m-cu-Mi 


kn  .1  of  properly,  <h)  amount  of  cash  pa.d  l 
,  fd)  how  that  value  was  determine 


ngible  property)  paid  for  with  cash 

>r'   If  so.  iu».m_ita 


If  tbe  answer  Is  "yes."  state  In  detail  lor  each  stock  dividend  received,  («)  date  received,  (ft)  from  whom 
received,  (e)  number  of  shares  received,  (e")  par  value  of  shares  received,  (t)  value  at  which  entered  on  its 
books  of  account*  u*)  whether  or  not  surplus  was  lncr»*ssd  by  this  raJue,  Ifaoswerto  (fj  Is  "yes/'ea'cr  tfca 
amount  by  which  surpl'-is  was  Increased  as  Item  6,  Schedule  0.  V  answer  U  "no,"  state  tbe  account  to 
which  It  was  Included,  (g)  date  of  sale  of  any  of  the  shares  of  stock  received  as  a  stock  dividend,  (A)  number 
of  shares  sold,  (i)  amount  received  tbertfor. 

N'otl.  —If  answers  to  the  foregoing  questions  Indicate  that  stock  di-rtdend]  recti  red  at  any  time  bars  beeo 
treated  as  an  Increase  of  surplus,  and  sucb  increase  Is  reflected  tn  the  computation  of  invested  capita)  lo 
returns  for  any  or  all  of  the  taxable  periods  1917, 1918, 1919,  and  1923,  emended  returns  should  be  Died  for  tucfi 
taxable  period  or  periods  In  which  this  error  cccurred. 


trade  mork^trade  brands  fracrtVes,  orotr  1  r  irta^p^propVrtv>". 

,  Valuation  of  tancfble  property  pnid  In  for  stock  _  

\aluatlon  0'  assets  acquired  In  ircrganlratlom-    

.  Appreciation       

Deprerlitloo,  depletion,  and  other  losses.  

Stock  dividend  ort  <tock  be  Id  In  another  corpora  I  Ion  

Totai  ntDrcnosr   


2.  The  following  instructions  should  be  follow* 
leslgnated  as  an  addition  or  deduction,  deduction  being  designated  by  red  I 
(0)  If  stock  Is  Issued  for  cash,  tbe  actual  cash  received  (but  not  tbe  ami 
n  this  schedule.   Assets  (other  than  cash)  paid  in  for  stock  must  be  valued  1 


j  Ilev 


'  IK  1 


•  p*!d  19  out  of  r 


Section  *2t,<\)  2 

profits,  tbe  cost  of  such 


(b)  If  capital  stock  of  the  corporation  Is  reacquired  t 
stock  should  be  deducted  from  lnveste<icaplia]. 

(c)  Report  dividends  paid  out  of  profits  of  prior  years  but  net  dividends  paid  out  of  profits  of  the  taxable 
period.  Any  distribution  made  during  the  first  *0  days  of  the  taxable  period  shall  be  deemed  to  tare  been  mad* 
from  earnings  or  profits  accumulated  during  preceding  taxable  years,  but  any  distribution  made  during  tt* 
remainder  0/  the  taxable  period  shall  be  deemed  to  have  been  made  from  the  profits  for  that  parted  U  the  extesst 
that  such  profits  are  sufficient.  (8ee  Section  201(f)  of  the  Revenue  Act  of  1921.) 

(•*)  The  amount  of  Federal  income  and  profits  taxes  payable  *hould  be  prorated  and  deducted  as  ai  tb* 
dates  when  due  and  payable  whether  rerervei  Lave  been  -et  >jp  on  the  hooks  or  no*.  The  average  adjusted 
deduction  to  b«  entered  In  column  7  equals  total  Income  and  profits  tax  multiplied  by  0.1236. 

are  applicable  only  to  tbe  Isi^e  or  rcocquisiUon  or  tbe  corporation's  slock. 

4.  In  column  1  enter  the  number  of  days  remaining  In  the  taxable  period  (Including  the  data  ol  change). 

5.  The  net  changes  not  reported  tn  Schedule  U  " 
in  the  balance  sheets,  should  be  fully"Teconciled  tl 


SCHT.DU!.E  J  -INADMISSIBLE  ASSETS. 


:  g*"-1'!  or  tbe  tAi.r  1*  t 
l«l|lltath||iM 


(C  Amot.,.1  t)  »J^im  kt 


[Page  2  of  Form  1120.] 


WAR  TAX 


426 


SERVICE 


2-11-22. 


Page  3  of  Return. 


QUESTIONS. 


KIND  OF  BUSINESS. 


t.  By  means  of  the  key  letters  given  below.  i.J»pt:fv  the  eorpontiua's  main  income, 
producing  activity  with  one  of  the  general  classes,  and  follow  this  by  a  special  description 
of  the  business  sufficient  to  give  the  information  called  for  under  each  general  class. 

A.— Agriculture  and  related  industries,  including  fishing,  logging,  ice  harvesting,  etc., 
and  also  the  leasing  of  such  property.  State  the  product  or  products.  B. — Mining  and 
quarrying,  including  gas  and  oil  wells,  and  also  the  leasing  of  such  property.  State 
the  product  or  products.  C. — Manufacturing.  State  ihe  product  and  also  the  materia] 
if  not  implied  by  the  name  of  the  product.  D.-^Construction — excavations,  buildingB, 
bridges,  railroads,  ships,  etc  ,  also  equipping  and  installing  eame  with  systems,  devices, 
or  machinery,  vrithout  their  manufacture.  State  nature  of  structures  built,  materials 
used,  or  fciod  of  installations.  El — Transportation— rail,  water,  local,  etc.  State  the 
kind  and  special  product  transported,  if  any.  E2.— Public  utilities — gas  (natural,  coal, 
or  water);  electric  light  or  power  (hydro  or  steam  generated);  beating  (steam  or  hot  water); 
telephone;  waterworks  or  power.  E3. — Storage — without  trading  or  profit  from  ealee — 
(elevators,  warehouses,  stockyards,  etc.)  State  product  stored.  E4.— I/Casing  transpor- 
tation or  utilities.  State  kind  of  property.  F.— Trading  in  goods  bought  and  not  pro- 
duced by  the  trading  concern.  State  manner  of  trade,  whether  wholesale,  retail,  or  com- 
mission, and  product  handled.  Sales  with  storage  with  profit  primarily  from  Bales.  G. — 
Service — domestic,  including  hotels,  restaurants,  etc.;  amusenieota.  other  professional, 
personal,  or  technical  service.  State  the  service.  H. — Finance,  including  banking, 
real  estate,  insurance  I.— Concerns  not  falling  in  above  classes  (a)  because  of  combining 
several  of  them  with  no  predominant  business,  or  (b)  for  other  reaeonB. 

2.  Concerns  whose  business  involves  activity  falling  in  two  or  more  of  the  above 
general  classes,  where  the  tarns  product  is  concerned,  should  report  business  as  identified 
with  but  one  of  the  above  general  classes;  for  example,  concerns  in  A  or  B  which  also 
transport  and  market  their  own  product  exclusively  or  mainly,  should  still  be  identified 
with  classes  A  or  B .  concerns  in  C  (manufacturing)  which  own  or  control  their  source  of 
materir  1  supply  in  A  or  B  and  which  also  transport,  sell, 
exclusively 
control  or  on 
tive  work;  concerns  i 
concerns  in  F  may  transport  or  i 
identify  them  with  A,  B,  or  C. 


3.  Answers: 

I  General  class  (u 


key  letter  designation).. 

Jucing  business  (give  s 
under  each  ley  letter,  also  whether  acting  t 
!  if  inactive  or  in  liquidation)  


i  agent  ©u  commu 


OTHER  CORPORATIONS  IN  SAME  BUSINESS. 


INCORPORATION. 

Date  of  incorporation   

Under  the  laws  of  what  State  or  country  


REORGANIZATION  AND  ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS. 

7.  Has  the  corporation,  or  enu  cfitt  vrtJuaion,  been  reorganized,  or  has  it.  or  any 
o/its  prafcawort,  tsiken  over  a  going  business  or  acquired  a  mixed  aggregate  of  tangible 
and  intangible  property,  and  paid  for  such  property  in  whole  or  in  part  with  stock  or  other 


securities  since  the  close  of  the  preceding  taxable  period  ?  

8.  If  so,  furnish  a  brief  narrative  history  of  the  business  and  submit 
showing: 

(a)  The  name  of  the  concern  taken  over  (or  from  which  the  property  was  acquired); 
(6)  The  nature  of  the  assets  and  liabilities  eo  acquired; 

(c)  The  total  par  value  of  the  stock  issued  therefor; 

(d)  The  value  at  which  each  class  of  assets  was  carried  on  the  books  of  the  concern 
rrom  which  acquired  (submit  a  balance  sheet  of  the  predecessor  concern  as  at  the  date  of 
acquisition  or  as  at  the  close  of  its  last  accounting  period  prior  thereto); 

(<)  The  value  at  which  each  item  was  carried  on  the  books  of  the  corporation  making 
this  return,  and  full  details  of  any  adjustments  subsequently  made  pertaining  thereto  and 
the  basis  on  which  such  revaluation  was  made. 

9.  If  patents,  copyrights,  secret  processes  or  formula?,  good  will,  trade-marks,  trade 
brands,  franchises,  or  other  intangible  property  were  acquired,  state  the  basis  on  which 
their  value  was  determined  and  bow  they  were  paid  for. 

-'  — y  purchase  or  reorganization  as  contemplated  in  question  7,  any 
i  books  of  the  r  


r  of  other  corporations?. 


tjie  1 


i  or  any  vendee  prede 
i  of  the  vendor  ( 


t  of  your  outstanding  voting  capital  stock  owned  by  another  cor- 
r  by  two  or  more  corporations  that  are  affiliated?.. 


13.  Is  over  70  per  cent  of  your  outstanding  voting  capital  stock  as  well  as  over  70  per 
cent  of  the  outstanding  voting  capital  stock  of  another  corporation  or  of  other  corpora- 
tions owned  or  controlled  by  the  same  individual  or  partnership  or  by  the  same  individuals 


14.  If  the  answer  to  questions  11,  12,  and  13,  or  to  any  of  them,  is  "yea,"  answer  the 
°  °(3)Dld  the  corporation  file  Affiliated  Corporations  Questionnaire,  Form  81»,  lor  1)17  or 

subsequent  taxablo  years'  '   If  the  answer  to  this  question  is  "yes/'  a 

questionnaire  is  Dot  required,  except  under  the  circumstances  described  in  question 
fb)  If  the  answer  to  this  question  is  "no,"  and  the  answer  to  questions  11,  12,  and 
13  or  to  any  of  them  is  "  ves,"  procure  from  the  Collector  of  Internal  Revenue  for  your 
district  Form  810,  whi.:h  shall  lw' filled  out  and  filed  as  a  part  of  thin  return.  If  the 
answer  to  this  question  is  "no,"  question  (b)  need  not  be  answered.  ■ 

(b)  Did  substantially  the  same  conditions,  as  are  set  out  in  the  questionnaire  filed  for 

1920  or  prior  years,  obtain  during  the  entire  taxablo  period  1921?    .._ 

If  the  answer  to  this  question  is"no,"a  statement,  setting  forth  tho  particulars  in  which 
the  situation  has  changed .  should  be  attached  to  and  made  a  part  of  this  return.  If  there 
have  been  substantial  changes  in  stockholdings,  a  complete  schedule  of  such  change* 
should  be  submitted  in  the  form  prescribed  in  Tables  3  and  8  of  the  questionnaire 
If  there  aro  companies  other  than  those  covered  by  the  questionnaire  for  1920  or  prior 
vearswhicb,  applying  the  teats  contained  in  questions  11,  12,  or  13,  may  have  come  into 
the  affiliated  group  since  1920,  a  questionnaire,  Form  819,  is  required  for  the  entire 
group  for  the  taxable  period. 

VALUATION  OF  CAPITAL  STOCK. 

15.  What  was  the  fair  value  of  the  total  capital  slock  of  the  corporation  as  determined 
ay!  of  the  capital  stock  tax?   $.._   Date  of  that 


PREDECESSOR  BUSINESS. 

16  Did  the  corporation  file  a  return  under  the  eame  nam 

period?   If  not,  was  the  corporation 

continuation,  or  reorganization  of  a  businet 


the  preceding  taxable 


t  and  address  of 


BASIS  OF  RETURN. 

17.  Is  this  return  made  on  the  basis  of  actual  receipts  and  disbursements?  

If  not,  describe  fully  what  other  basis  or  method  was  used  in  computing  net  income.. 


.  account  of  eon- 


GOVERNMENT  CONTRACTS. 

18.  Have  any  adjustments  been  made  during  the  taxable  period 
tract  or  contracts  with  the  Government  or  its  agencies  or  in  any  Government  contract  or 
contracts  from  which  the  corporation  derived  income  directly  or  indirectly,  through  the 

,  claim  board  or  otherwise?  If  the  answer  to  this  question  is 

involved  $  ;  whether  or  not  such  amounts 


operations  of  : 


was  terminated?  :         Submit  a  sebedule  showing  full  particulars  of  the  contract, 

date  entered  into,  date  tho  work  ceased  under  r-iid  contract  or  contracts,  and  the  an.ount 
and  nature  of  the  adjustment. 


AMORTIZATION. 

19.  Has  amortization  been  claimed?   

yes,  "  state  for  what  year  _   Amount  $   

LIST  OF  ATTACHED  SCHEDULES. 
Enter  below  a  list  of  oil  schedules  accompanying  this  return,  giving 
b  and  the  schedule  ntimber. 


..   If  the  answer  to  this  question 


SCHEDULE  K. — BALANCE  SHEETS. 


be  furnished  in  accordance  with  paragraph  7  of  page  1  of 


Trade  accounts  ( before  deducting  reserves  for  losses). 

Notes  receivable  from  customers. 

Outer  eccouDtsaod  cote*  receivable  (to  Declassified). 


ASSETS-Ccntmued, 
Stock  of  corporations— 

Domestic. 
To  officers  and  employees. 
Deterred  charges  to  future  operations  (to  be  detailed  I. 


ASSETS-Centlnaed. 

-continued. 

irvos  for  depreciation  (sbow  separately 


Paid  for  In  cash 


Accrued  exp:  isea  e*>d  r 


3  from  the  respective  asset  accounts  or 
AH  corporations  engaged  in  an  interiiate  aud  intrastate  trade  or  business  and  reporting  to  the  Interstate  Commerce  Col 
officer,  may  eubmit  in  lieu  of  above  form,  copies  of  their  balance  sheets  prescribed  by  said  Commission  or  State  and  municipal  auiiioriti- 


[Page  3  of  Form  1120.] 


WAR  TAX         427  SERVICE 


Page  i  ot  Rctui 


1,  laocrtu  from  PchodUe  A,  ltsra 
'  l^»fi«lS*o*,lle»tloaa  ol  las 

m  imJ?™  "aM££ 


SCHEDULE  I..    RF.CONCIL1A-!  ION  OF  NKT  INfOMF.  A,«>  ANALYSIS  OF  CHANGES  IN  : 


SCHEDULE  TO  EE  FURNiSHEB  IN  SUPPORT  OF  ITEMS  IN  SCHEDULE  A. 
Th»  following  schedules  mutt  be  funuBhod,  and  LbwK  prspaad  on  eoparate 

SCHEDULE  A2:  COST  OP  GOODS  GOLD,  EXCLUSIVE  OJ  ITEMS  CALLKD TOR  SEPAKATKLT. 

D  whicb  tba  prof^ctlon^  jparciojr-^o.-  nk  of  lawriLicdiM  of  aay  kind 


ft  OblieatfoE*. 

Utt^'*  i  Jwcfil  ALuoant). 

----- Hi.--  >(  3,  &nd  4. 

2.  V»/VX> 

3.  1135,00 

■fifCood,  Third,  tod  fojrth 

-No*!  

Totil  Tir.-.-  Tf.T.TSJrti   — 

k...  

srEEL-ITLlS  Alt!  1-.RC.-.3  OICOUS  V.-.OM  A:  L  C)  llUi  SO'jiiC  irS 


:k.        >j,.s         ica-LNiBS  ' 


tiuiis,  rultl*i)ipa93  to  7.  J 
SCIIKDU7.S  A13:  COMPENSATION  O?  OPJICCR3. 

fliii.inli.asrhadulaBbo^l.ir.  ,'or*a<-li  ofiU  to"  ( 1 )  m  i.t-.  (2)  i1u<  l.-;  .   :  tin.  .  IiiuImJ  I 
-.  ,.  k  or  -..offo!;.-.    ,n  i.-.n-icl.  ,m  "         u   ,     .  -  ^ :  .  -..o^i.  -  ...... 

aauuut  ot.ud ratuu turiuorewtt.ifwy, ovar j..-t •.•Si»{ prrlod. 

WBKOULE  Ami  WU-AW3  (tadudlns  labor,  ■      : ..  .rtrbiid,  ud  clhoi  lien 
rajajra), 
feubinit  a  scfaadjlo  *how!nf  t>.»  3 


i^.u.v.  s*0         3  of  I 


Bacttm  384(a)  3  o.'tbo  ll^.us  /.CI  of  182L) 
SCHKDUIS  A17:  BAD  Ti  JBTS. 

Hufmlt  »  %-ua1u5«  ibovrinr  rt*bt9  or  r>.r'tla 
)«eoi»l)oTt<M)  us  looooar.,  irhkb  b»v-  ban  OaflnU 
>.   .  .:..lr  : 


■orb  cL-jp!  tr.:'ide;i:nsd,  (jkkjirv:;w.  r.nd  (M 

•  of  LlM  prooartj  &3*aa*wi  ara  not  liiow 


art.-ir.r  '-era  strl-j  or  rrefrarlijat  ■ 


(9aa 


:  '<iu  i 


l>r!r.£  v. >jr  depletion  rx.  udo:.  .  .'  i . '  .    :  -..-...11 

.•until     «!•■  .  ...  .      r.bv,i!-i  wtLa  ii,;ini^t;^-  ...  rr-tf  drpieUao  uaUoodon  lor  111- 

del  jTotlued.    Ir.  cvi*  of  oir-.U.  oM-  >L     M  Ly  CHj^;      r'ott-  ^uutoa!). 


>li  of'.! 


,'5--i>>..--^iTS. 

cataolrvijpuailotproi^ 
,  caln^  t  s#p&/a>  line  for 


Bbd  ofprep«a>T 


QT  CA«r.-X  AfiC^;3  AMD  K->JiiLAmt0479 


■t  "tin s£SH':':~k' 


riwha;: 
Ifinj  0,'Lbcasa- ■.. 

valoa  of  oroparijf  raoali 


tort  ac^olraJ  ,      to  llarcb  1. 1JU 

of  pro;>tr'>J     Llt.il  ovijaa 


-:-  :    ->.r>-  :-t.c.. 


I  Clao;  (; )  daU  ofakfc.  (a) 
I    f.      '       ,-ri  r-  ■   -'  C-  *f 


Wo,  tbe  undaTEtgrtad,  piwiJent  »ad  truu-'.iror  oi  llw  rorpontion  lor  which  this  mtutu  in  >o»Jti,  bain*  eovanlly  J.  Iv  atrora,  etch  lor  biwavll  .lopoaw  »ud  amya  IW  tbia  tMu 
inclif Aiag  iho  it  ■  ompuyiDg  ■  hedulai  aoJ  biui«j!f.Lii!,  baa  bain  oiaut'ouii  by  hiut  aud  ia,  to  the  Ikmi  o!  bu  kuo» It J«o ami  Loliof,  a  tri.o  »ud  coaipUta  rfturn  ruada  in  good  lauii,  for  I 
taxabl>-  iffriod  us  euatts),  purff'iaot  to  tha  Ro\  onuo  Actoi  1921  uid  Lha  ilogiiiauons  iaauiAt  uudtrt  autbority  ilcicoL 


,  j.u  -itot 

Swom  lo  ami  aubscribod  baloro  mo  tbia  . 


fPagc  4  of  Form  1120.] 


WAR  TAX  4?S  SKRVK  I' 


2-11-22. 


Vcgo  I  of  Instruction.  :. 


INSTRUCTIONS  FOR  CORPORATION  RETURN'. 


LIABILITY  FOR  FILING  ftETURNS. 

1.  Corporations  generally. — Evory  domestic  or  resilient  corporation, 
joint-stock  Company,  .  isocir.ticn.  or  inrnrenco  company  not  specifically 
exempted  by  Soctioa  231  of  the  Revenue  Act  of  1921,  whether  or  not 
having  any  act  inccuno,  must  file  a  return. 

2.  A  corporation,  he  ring  a  not  income  of  lesa  than  $3,CfK>  for  the 
taxable  period  n<  sd  liol  fill  in  thb  schedules  pertaining  to  excess  profits 
tax,  but  if  the  ael  income  is  $3,000  or  more,  it  is  subject  to  the  excess 
profi'o  tftjt  and  wsst  file  a  complete  rofjrn  >  n  this  form. 

3.  Government  Ccrtrscts. — In  addition  thereto,  if  net  income  in 
exces*  of  $!0,nno  was  derived  during  the  tifecaWfl  period  from  a  Govem- 

1  men',  contract,  f'oim  1 120S  should  ho  semre*i  from  tho  Colhctor  pf  Inter- 
nal Revenue  for  your  district  end  filed  as  a  part  of  this  return 

i,  i.  Corporations  in  Possessions  of  the  United  States. — Domestic 
corporations  within  the. "possessions  of  the  United  States  (except  the 
Virgin  -Islands)  may  report  as  gro?3  income  only  gross  income  from 
Mfcreea  within  tho  U.~il»d  States,  provided,  (a)  80  per  cent  or  more  cf 
tlio  total  gross  income  for  the.  three-year  period  iflatnediatery  preceding 
llio  close  of  the  taxable  year  (or  such  part  thereof  as  may  ho  applicable) 
was  derived  from  sources  within  a  possession  of  tho  United  States;  and 
(b)  50  per  cent  or  more  of  the  total  gross  income  for  such  throe-year 
period  or  applicable  part  thereof  was  derived  frnm  tho  active  conduct  of 
a  trade  or  business  within  a  possession  of  the  United  States. 

.However,  a  corporation  entitled  to  the  above  boaufits  is  not  entitled 
lo  tho  specific  exemption  of  $3,000  in  computing  tho  excess  profits  fas. 
(Seo  Sections  2G2  aa'd  312,  Rove 

5.  Foreign  Corporations.—, 
regardless  of  tho  amount  of  its  n 
the  Collector  in  whose,  district 
through  which  is  transacted  tho 


Ac  t  of  1921.j 

A  foreign  corporation  subject  to  the  la-*-, 
iet  income,  is  required  to  file  a  return  with 
i3  located  its  principal  office  or  egency 
l  business  in  the  United  States.  If  it  has 
:ce  or  agency  m  tho  United  States,  tho  return  should  be  filed  with 
theCo'dector  of  Intered  Revenue,  Baltimore,  Maryland.  The  net  income 
should  be  computed  in  accordance  with  Section  217  of  tho  Revenue  Act 
of  1921. 

6.  Personal  Service  Corporations. — Personal  service  corporations 
must  file  a  return  on  Form  1065. 

CONSOWDATED  RETURNS. 

7.  The  parent  or  principal  reporting  company  of  affiliated  corpora 
tiona  as  defined  in  Section  240  of  the  Act  must  file  a  coreciidatcd  return 
«a  this  form  with  tho  collector  of  the  district  in  which  its  principal  ofliee 
■Is  bested  and  attach  thereto  a  schedule  sho«rog  the  names  and  addresses 
of  all  tSLUstcd  corporations  in  the  group,  and  if  the  tax  is  apportioned 
•«awag  th'ae  corporations,  'da  amount  allocated  to  each.  (See  paragri^h  . 
9,  below.)  Each  of  ibo  other  affiliated  corporations  shall  file  Form  1122 
in  the  ofTico  of  the  Collector  of  its  district. 

Consolidated  kivestc d  Capita]  must  be  computed  as  at  tho  beginning 
of  tho  taxable  porad  of  the  parent  or  principal  reporting  company  and 
consolidated  income  most  bt  computed  on  the  basis  of  ite  taxable  period. 

All  supplementary  and  supporting  schedules  should  be  prepared  in 
columnar  form,  one  co:umn  being  provided  for  each  corporation  included 
in  tho  consolidation,  one  column  tor  a  total  of  liko  items  before  adjust- 
ments aro  made,  one  column  for  intercompany  eliminations  and  adjust- 
ments, and  one  column  for  a  total  of  like  items  after  giving  effect  to  the 
eliminations  and  adjustments.  The  items  included  in  the  column  for 
eliminations  and  adjustments  should  be  symbolized  so  as  to  readily 
identify  contra  items  affected,  and  if  necessary,  in  order  to  give  a  correct 
understanding  of  these  entries,  suitable  explanations  should  be  appended. 

8.  If  one  domestic  corporation  owns  95  per  cent  or  more  of  the 
outstanding  voting  stock  of  another,  or  if  95  per  cent  or  more  of  tho 
outstanding  voting  stock  of  iwo  or  more  domestic  corporations  is  owned 
by  the  samo  individual  or  individuals,  partnership  or  partnerships,  in 
substantially  the  gjasie,  proportion,  a  consolidated  return  miu»t  be  filed 
by  such  corporations,  fe^ccpt  that  the  purpose  of  tho  statute  being  to 
prevent  the  avoidance  or  reduction  of  tax  liability,  corporations  encased 
in  entirely  dirtinct  and  unrelated  linos  of  business,  there  being  no 
common  dealings  between  them  giving  rLe  to  opportunity  to  avoid  or 
reduce  tax  liability,  stall  not  bo  required  to  Clo  a  consolidated  return. 
If  the  ownership  ia  less  than  95  per  cent  of  tho  outstanding  voting  stock, 
but  exceeds  70  per  cent,  the  parent  or  principal  corporation  of  an,}'  group 
of  affiliated  corporations  must  furnish  tho  information  coliod  for  in  casea- 
tions 11  to  14,  page  3. 

9.  The  Department  prefers  that  the  entire  tax  shown  on  a  consoli- 
dated return  be  paid  by  the  parent  or  principal  reporting  corporation, 
instead  of  being  apportioned  among  the  corporations  competing  the 
affiliated  group. 

If  apportionment  is  made,  eacf>  subsidiary  or  affiliated  corporation 
should  state  on  its  Form  1122  the  amount  of  "income  and  profits  taxes 
to  bo  assessed  against  it  for  the  taxable  period. 

PERIOD  COVERED. 

10.  The  taxable  period  is  the  calendar  year  or  tho  fiscal  period  ended 
in  such  calendar  year,  rind  the  net  income  shall  be  computed  upon  the 
basis  of  the  corporation's  annual  accounting  period  (calendar  year  or  fiscal 
period)  in  aceordance  with  the  method  of  keeping  the  books,  unless 
sueh  method  docs  not  clearly  refl°ct  the  income.  The  accounting  period 
established  for  the  taxable  year  irajaedisteJy  preceding  must  bo  adhered 
to  unless  permission  has  been  received  from  the  Commissianer  to  make  a 
change. 

In  the  cose  cf  a  return  for  a  period  of  less  than  one  year,  the  net 
income  shall  be  placed  on  an  annual  basis  by  multiplying  the  amount 


thereof  by  twelvo  and  dividing  by  tho  number  of  months  included  in  such 
poriod;  and  the  tax  shrill  be  such  part  of  a  tax  computed  on  such  annual 
basis  as  the  number  of  ru»nths  hi  nuch  period  is  of  twelvo  months. 

If  the  period  for  which  the  first  or  final  return  is  mede  includes 
fractions  of  months,  thoro  shall  bo  added  to  the  number  of  complete 
months  as  many  thirtieths  of  a  month  as  there  are  days  in  the  fractional 
parts  of  months. 

11.  If  a  corporation  ctsaageB  ite  tccotultirJ^  period,  it  shall  ai  soon 
as  possible  give  ro  the  Collector  for  tranaoismnn  to  tne  Commissioner 
written  notice  of  such  change  und  of  its  rontons  thareior.  Upon  approval 
by  the  Conuni'.-i'mrr,  tho  corporation  ai-itll  thereafter  make  its  returns 
upon  the  bans  of  the  new  accounting  period.  See  Sections  212(e)  nod 
226,  Revenue  Act.  of  1921. 

TIME  AND  PLACE  FOP.  FILING. 

12.  Tho  return  must  be  sent  to  the  Collector  of  Internal  Revenue  for 

the  district  In  which  the  corporation's  rrhi'-na!  office  h  locafod,  so  as  to 
reach  tho.  Collector's  office  on  or  Worn  the  fifteenth  day  of  the  third  mouth 
following  tho  close  of  tho  taxrAlo  period.  In  the  case  of  a  foreign  cor- 
poration not  having  any  office  or  place  of  business  in  tho  United  States 
the  return  shall  be  filed  on  or  beforo  Uio  fifteenth  day  of  the  sizfh 
,  month  following  the  close  of  the  taxabio  period." 

13.  Th3  Collector  is  authorized  to  grant  sn  extension  =if  nol  more 
than  thirty  days  for  filing  rotous  in  cases  of  nbztf.r.c  or  .fids**?..  In 
meritorious  cas'ea  the  Cornmisriorjer  is  authorized  to  g'ttit  a  farther  ex- 
tension. 

SIGNATURES  AND  VERIFICATION. 

14.  The  return  shall  he  swnrA  to  by  tho  president,  vice  president,  or 
other  principal  officer  and  by  the  treasurer  or  assistant  treasurer.  The 
return  of  a  foreign  corporation  having  e.n  £-,'ent  in  the  United  States  shall 
bo  sworn  to  by  such  cg'.-nf.  If  receivers,  trustees  in  bankruptcy,  or 
assignees  axe  operating  the  property  or  business  of  the  corporation,  such 
reeoivers.  trustees,  or  asaigneea  shall  execute  the  return  for  aucb  corpora- 
tion, under  oath. 

1  PAYMEeiT  OF  TAXES. 

15.  Trie  tax  should  he  psiil  by  sending  0r  bringing  with  the  retttrtt ' 
ft  check  or  money  order  drawn  to  the  enter  of  "Collector  of  ItitemaS 
Revenue  at  (insert  mmo  of  city  and  State)." 

16.  'Do  not  oend  cs^h  through  the  mail  or  pay  it  in  person  except  at 
the  offioe  of  the  Collector. 

17.  The  Jtcta!  tax  may  be  paid  at  the  time  of  filing  the  return  or  is 
fear  oquoi  installments,  as  follows: 

Hie  first  installment  shail  be  paid  at  the  tiuie  fixed  by  law  for  filing 
Ijie  return,  the  accord  irsttdln.tnt  shall  be  paid  on  tho  fifteenth  day  os 
the  third  month,  tho  third  iostaliracnt  on  Uio  fifteenth  day  ci  the  eixtk 
mosth,  sad  the  fourth  Instaiiment  on  tho  f'toenth  day  of  the  ninth  asoaih 
n'ter  the  time  fis£d  Dy  law  for  fiiiag  the  return. 

PEIi/i-TrES. 
For  H»kin£  Fuu  «r  Fx«ikduton.t  Katuro.. 

18.  Not  exceeding  51 0.CP0  or  not  exceeding  one  year'c  icjpriaanment, 
or  both,  in  tho  discration  pi  the  court,  and,  in  addition,  50  per.  ceatutp  of 
the  total  tax  evaded. 

For  F«Hlr.|t     Mots  Rclurr.  on  Ttm*. 

10.  Not  mere  than  8 1 ,000,  end ,  ia  addition,  25  per  eenlurn  of  the  totsi 
amount  of  the  tax. 


For  F»IBr.g  t 


.  Pay  Tox  V.'hnn  Dun  or  Underatxtomertt  of  Tet,  TTu-curi 
N«s!is:»r.c»,  Etc. 


20.  Five  per  centum  of  the  tax  due  but  unpaid  plus  interest  at  the 
rate  of  1  per  centum  per  month  during  tho  period  in  which  it  remnioa 
unpaid. 

WORKING  FAPER3. 

21.  Every  corporation  should  preserve,  available  for  inspection  by  a 
revenue  officer,  working  paprrs  showing  — 

(a)  The  balance  in  each  account  on  tho  corporation's  books  that  was 

used  in  preparing  Schedule  A. 
(5)  The  amount  deducted  from  sach  such  balance  on  account  of  each 
<das3  cf  nnEtaxablo  iccomo,  umJlowabla  deductions,  and  other 
adjustments  indicated  in  Scliedole  L,  with  a  reference  to  the 
Eumber-  of  the  item  in  Schedule  Ii  in  which  esch  amount  so 
deducted  vria  ineliided. 
(c)  The  remainder  of  each  such  balance,  analyzed  to  show  the 
amount  included  in  each  item  of  Schedule  A,  with  a  reference 
to  the  number  ot  the  item  in  Schedule  A  in  whioh  each  9uch 
i  included. 


INFORMATICN  AT  THE^OL'RCE. 

22.  Every  corporation  making  psyments  of  salaries,  wages,  interest, 
rent,  coiamiasions,  or  other  fcsecf  or  determinable  income  of  $1,000  or 
more  duiiag  tho  calendar  yejr,  to  any  individual  or  partnership,  is  re- 
quired to  make  s  true  and  sficrtrate  rehirn  to  the  Commissioner  of  Internal 
F.erecne,  showing  the  nature  of  such  psymsntsi'Dd  the  name  end  eddr^sa 
cf  the  recipient.  Foras  1096  and  1009,  for  reporting  such  information, 
will  be  furn^hoi  by  5^7  cauector  of  intemf!  revenue.  Such  returns  of 
information  ccverig  r±e  calendar  year  1921  must  be  forwarded  to  the 
Commissioner  of  Internsl  Revenue,  Sorting  Section,  Washington,  D.  C, 
in  time  tc  be  report  -d  act  la  tar  thttn  March  15,  1922.  ,  IMn 


[Page  5  of  Form  1120. 


WAR  TAX         429  SERVICE 


Pase  2  of  Instructions. 


1.  Railroad  rorpiit 
tr.  «uhuiit  statements  ( 
public  officer  may  sut 


INSTRUCTIONS  REGARDING  INCOME,  CREDITS,  COMPUTATION  OF  TAX,  ETC. 


lite,  "he 


:OME  AND  DEDUCTIONS. 


jhili  Hie  its  return  on  this  form,  and  report  as  a  deduction  in  Scheduled  12  subject  to  the 
approval  of  the  Commissioner,  such  portion  of  the  net  addition  (not  required  by  law)  made 
tt-ithin  the  taxable  period  to  reserve  funds  as  may  be  required  for  the  protection  of  the 
holders  of  such  policies  only. 

4.  An  insurance  company  (other  than  a  lifo  insurance  company)  should  report  ae 
ft  deduction  in  Schedule  A  i-  of  this  form,  li)  the  net  addition  required  by  lau*  to  be  made 
within  the  taxable  period  to  reserve  funds  (including  in  the  case  of  an  assessment  insur- 
ance company  the  actual  deposit  of  same  with  State  or  Territorial  officers  pursuant  to  law 
as  additions  to  guarantee  or  reserve  funds),  and  (6)  the  sums  other  than  dividends  paid 
within  the  taxal  !e  period  on  policy  and  annuity  contracts. 

5.  A  mutual  marine  insurance  company  should  report  as  Item  3,  Schedule  A,  of  this 
form,  the  gross  premiums  collected  and  received,  less  amounts  paid  for  reinsurance,  and 
report  as  a  deduction  in  Schedule  AI2  amounts  repaid  to  policyholders  on  account  of 
premiums  previously  paid  by  them  and  interest  paid  upon  such  amounts  between  ascer- 
tainment and  the  payment  thereof. 

6.  The  receipts  of  a  shipowners'  mutual  protection  and  indemnity  association,  not 
organized  for  profit,  and  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  member,  are  exempt  from  taxation,  but  such  association  shall  be 
subject  as  a  corporation  to  the  tax  upou  its  net  income  from  interest,  dividends,  and  rents. 

7.  A  mutual  insurance  company  (including  interinsurance  and  reciprocal  under- 
writers, but  not  including  a  mutual  life  or  mutual  marine  insurance  company)  requiring  its 
members  to  make  premium  deposits  to  provide  for  losses  and  expenses,  should  report  in 
Schedule  A12  of  this  form,  the  amount  of  premium  deposits  returned  to  its  policyholders 
and  the  amount  of  premium  deposits  retained  for  the  payment  of  losses,  expenses,  and 
reinsurance  reserves  (unless  other-vise  allowed  in  Schedule  £). 

8.  Incidental  repairs,  which  do  not  add  to  the  value  or  appreciably  prolong  the  life  of 
property,  are  deductible  as  expenses  (Item  14,  Schedule  A).  Expenditures  fur  new  build- 
ings, machinery,  equipment,  or  for  permanent  improvement  or  betterments  which  increase 
the  value  of  the  property  are  chargeable  to  capital  account.  Expenditures  fur  rest. ring 
or  replacing  property  aro  not  deductible  under  this  or  any  other  item  of  the  return.  Such 
expenditures  are  chargeable  to  capital  account  or  to  depreciation  reserve,  depending  on 
the  treament  of  depreciation  on  the  books  of  the  taxpayer. 

9.  The  amount  of  interest  deductible  in  Item  15,  Schedule  A,  is  the  amount  of 
interest  paid  within  the  taxable  period  on  the  corporation's  indebtedness,  except  on  indebt. 
edncss  incurred  or  continued  to  purchase  or  carry  obligations  or  securities  (other  than 
obligations  of  the  United  States  issued  after  September  24,  1V17,  and  originally  subscribed 
for  by  the  corporation),  the  interest  upon  which  is  wholly  exempt  from  taxation.  (See 
Sections  234(d)  2  and  234(6)  of  the  Revenue  Act  of  1921.) 

10.  The  amount  deductible  on  account  of  depreciation  in  Item  IS,  Schedule  A,  is  an 
amount  charged  off  which  fairly  measures  the  loss  during  the  year  in  the  value  of  physical 
property  by  reseon  of  exhaustion,  wear,  tear,  and  obsolescence.  Such  aa  amount  sho  uld 
be  determined  upon  the  basis  of  the  cost  of  the  property  or,  if  acquired  prior  to  March 
1,  1913,  the  fair  mtrket  value  on  that  date  and  the  probable  number  of  years  remaining  of 
its  useful  life.  The  capital  sum  to  be  replaced  should  be  charged  off  over  the  probable 
life  of  the  property  either  in  equal  annual  installments  or  in  accordance  with  any  other 
recognized  trade  practice,  such  as  an  apportionment  of  the  capital  sum  over  units  of 
production.  Whatever  plan  or  method  is  adopted  must  be  reasonable  and  should  be 
described  in  the  return.  Stocks,  bonds,  and  like  securities  are  not  subject  to  exhaustion, 
wear  and  tear  within  the  meaning  of  the  law. 

11.  If  property  is  compulsonly  or  involuntarily  converted  into  cash  or  its  equivalent 
as  a  result  of  (o)  its  destruction  in  whole  or  in  part,  (6)  theft  or  seizure,  or  (c)  an  exercise 
of  the  power  of  requisition  or  condemnation,  or  the  threat  or  imminence  thereof;  and  if  the 
taxpayer  proceeds  forthwith  in  good  faith,  under  regulations  prescribed  by  the  Commis- 
sioner with  the  approval  of  the  Secretary,  to  expend  the  proceeds  of  Btich  conversion  in 
the  acquisition  of  other  property  of  a  character  similar  or  related  in  service  or  use  to  the 
property  so  converted,  or  in  the  acquisition  of  80  per  centum  or  more  of  the  stock  orsharos 
of  a  corporation  owning  such  other  property,  or  in  the  establishment  of  a  replacement  fund, 
then  there  shall  be  allowed  as  a  deduction  such  portion  of  the  gain  derived  as  the  portion 
of  the  proceeds  so  expended  bears  to  the  entire  proceeds.  The  gross  receipts  and  deduc- 
tions claimed  should  be  included  in  Schedule  A23.  (See  Section  234(a)  14  of  the 
Revenue  Act  of  1921.) 


12.  If  a  credit  is  claimed  in  Item  14,  Schedule  D,  a  copy  of  Form  1118,  completely 
filled  out  and  sworn  to  or  r.flirmed,  must  bo  submitted  with  this  return.  If  credit  is  sought 
for  taxes  already  paid,  the  form  must  have  attached  to  it  the  receipt  for  each  such  tax 
payment.  If  credit  is  sought  for  taxes  accrued,  the  form  must  have  attached  to  it  the 
return  on  which  each  such  accrued  tax  was  based. 

13.  When  a  credit  is  claimed  for  accrued  taxes,  the  Commissioner  may,  as  a  condition 
precedent  to  tho  allowance  of  this  credit,  require  the  corporation  to  givo  a  bond  (Form 
1119),  with  sureties  satisfactory  to  and  to  be  approved  by  him  in  such  penal  sum  aa  he 
may  require,  conditioned  for  the  payment  by  the  taxpayer  of  any  amount  of  taxes  found 
due  if  tho  taxes  when  paid  di0er  from  the  amount  claimed  in  respect  thoreof. 

PROVISIONS  AFFECTING  COMPUTATION  OF  TAX. 

14.  Schedule  D,  "Computation  oi  Tax, "  may  be  subject  to  one  or  more  of  the  follow- 
Log  provwio-- 


.   (u)  Return  for  a  fiscal  year.— If  return  is  for  a  fiscal  yearendoj  in  1921,  the  tax  should 

be  computed  in  accordance  with  Sections  203, 236<c),  and" 335(a) of  the  Revenue  Act  of  1921, 
(6)  Limitation  on  income  tax.— If  the  net  income  reported  as  Item  5,  Schedule1 
D,  is  more  than  $25,000  tho  tax  of  10  per  Centum  imposed  by  Section  230  of  the  Act  on  the 
amount  of  the  net  income  shall  not  exceed  the  tax  which  would  be  payable  U  the  $2,000 
credit  were  allowed,  plus  the  amount  of  the  net  income  in  excess  of  $2'<.0OO. 

(r)  Limitations  on  excess  profits  tax.— The  maximum  excess  profits  tax  imposed  shall 
In  no  cose  be  more  than  20  percentof  the  net  income  in  excess  of  $3,000  and  not  hi  excess 
of  $20,0i>.,  plus  40  per  cent  of  the  net  incomo  in  excess  of  $20,000  (Section  302).  unless  net 
income  amounting  to  more  than  $10,000  was  derived  from  a  Government  contract,  when 
the  tax  on  such  income  shall  be  ass.^eed  under  Section  301(6).  in  which  case  the  maximum 
excess  and  war  profits  tax  imposed  upon  this  proportion  of  the  net  income  shall  not  be  more 
than  30  per  cent  of  the  amount  of  net  income  in  excess  of  $3,000  and  not  in  excess  of 
$20,000  i-'us  SO  per  cent  of  the  amount  of  not  income  in  excess  of  $20,000.  (Sec  Section  302  ) 
(Y)  Tat  of  corporation  whose  inco.ae  is  derived  in  part  from  "Personal  Service.*'— It 
part  of  the  net  inc., me  (not  less  than  30  percent)  is  derived  from  a  separate  trade  or  business 
of  the  character  of  "personal  service*'  taanx  shall  be  computed  in  accordance  with  the 

(«•)  Tat  on  corporation  engaged  in  mining  of  gold.— If  a  corporation  is  engaged  in 
the  mining  of  gold,  its  excess  profits  tax  shall  be  that  proportion  of  Item  3,  Schedule  D, 
which  the  net  income  not  derived  from  the  mining  of  gold  bears  to  the  total  net  income. 
(Joe  Section  304(c)  of  the  Ac** 

(/)  Tax  on  profits  from  safe  of  mineral  deposits.— In  the  case  of  a  bona  6de  sale  of 
mines,  oil  or  gas  wells,  or  any  itipwest  therein,  where  the  principal  value  of  the  p*-?crty 
has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work  done  by  the 
taxpayer,  the  portion  of  the  excess  profits  tax  attributable  to  such  sale  shall  not  exceed 
20  per  cent  of  the  selling  price  of  such  property  or  interest.   (See  Section  337  of  the  Act  ) 

The  Grst  step  is  to  find  the  excess  profits  tax  computed  without  regard  to  this  provision; 
the  second  is  to  find  of  the  tax  thus  computed  such  portion  as  the  net  income  from  the 
sale  bears  to  the  total  net  income.  If  this  portion  equals  or  does  not  exceed  20  per  cent 
of  the  selling  price,  then  no  adjustment  is  permitted.  Should  such  portion  exceed  20  per 
cent  of  the  selling  price,  the  tax  will  be  that  portion  of  the  excess  profits  tax  which  the 
net  income  not  attributable  to  the  sale  bears  to  the  total  net  income  plus  20  per  cent  of 
the  selling  price  of  the  mineral  deposits. 

15.  Statement  of  basis  of  claims.— If  a  corporation  claims  the  benefit  of  any  of  the 
provisions  outlined  in  (a*),  (r),  or  t  /  >.  A  should  attach  to  the  return  a  complete  statement  of 
thebasb  for  Buch  claim  and  a  computation  of  the  tax  payable  in  the  event  that  such  claim 
is  allowed.    The  amount  of  tax  o  computed  should  be  entered  in  Schedule  D.  ' 

SPECIAL  CASES. 

16.  Definition  of  special  cases.— Section  327  of  the  Act  provides  that  in  the  following- 
cases  the  tax  shall  be  determined  as  provided  in  Section  32S: 

(a)  Where  the  Commissioner  is  unable  to  determine  the  invested  capital  as  provided 


026. 


(5)  In  the  case  of  a  foreign  corporation  or  a  corporation  entitled  to  the  benefits  of 
Section  262  of  the  Revenue  Act  of  1921.   See  paragraph  4,  page  1  of  Instructions. 

(c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible  property  has  been 
paid  in  for  stock  of  for  stock  and  bonds  and  the  Commissioner  is  unable  satisfactorily  to 
determine  the  respective  values  of  the  several  classes  of  property  at  the  time  of  payment, 
or  to  distinguish  the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively. 

(rf)  Where,  upon  application  by  the  corporation,  the  Commissioner  finds  and  declares 
of  record  that  the  tax  if  determined  without  benefit  of  this  section  would,  owing  to  abnormal 
conditions  affecting  the  capital  oi  income  of  the  corporation,  work  upon  the  corporation 
an  exceptional  hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the  representative 
corporations  specified  in  Section  328.  This  subdivision  shall  not  apply  to  any  case;  (1)  In 
which  the  tax  (computed  without  benefit  of  this  section)  is  high  merely  because  the  corpo- 
ration earned  within  the  taxable  period  a  high  rate  of  profit  upon  a  normal  invested  capital, 
nor  (2)  in  which  50  per  centum  or  more  of  the  gross  income  of  the  corporation  for  the  taxable 
period  (computed  under  Section  233  of  the  Act)  consisted  of  gains,  profits,  commissions, 
or  other  income  derived  on  a  cost-plus  basis  from  a  Government  contract  or  contracts 
made  between  April  6,  1917,  and  November  11,  1918,  both  dates  inclusive. 

17.  Treatment  of  special  cases.— In  the  cases  specified  in  Section  327  the  tax  will  be 
specially  determined  under  the  provisions  of  Section  328.  A  corporation  which  comes 
within  the  provisions  of  subdivision  (rf)  of  Section  327  (paragraph  16,  abovo)  may  make 
application  for  aasessment  under  the  provisions  of  Section  323,  which  application  shall 
be  attached  to  its  return  in  the  form  of  a  statement  setting  forth  in  full:  (a)  The  reasons 
why  the  tax  should  be  so  determined;  (6)  the  facts  upon  which  such  reasons  are  basod, 
(c)  an  exact  description  of  each  trade  or  business  or  important  branch  of  a  trade  or  business 
carried  on  by  it;  (d)  a  statement  of  the  invested  capital  and  net  income  for  each  year 
since  the  beginning  of  the  prewar  period;  and  (r)  a  statement  showing  the  amount  of 
gains,  profits,  commissions,  or  other  income  derived  on  a  cost-plus  basis  from  Government 
contracts  made  between  April  5,  1917,  and  November  12,  1918,  both  dates  inclusive, 
and  showing  the  per  cent  which  such  income  is  of  the  total  income  of  the  corporation. 

18.  Returns  in  special  cases.— Corporations  other  than  foreign  corporations  making 
claim  for  assessment  under  Section  328  of  the  Act  should  answer  all  questions  and  file  all 
schedules  as  far  as  possible  and  attach  a  statement  explaining  why  it  is  impracticable  to 
fill  out  the  entire  return. 

UNDISTRIBUTED  PROFITS  TAXABLE  TO  STOCKHOLDERS. 

19.  If  any  corporation,  however  created  or  organized,  is  formed  or  availed  of  for  th» 
purpose  of  preventing  the  imposition  of  the  surtax  upon  its  stockholders  or  members  through 
tho  medium  of  permitting  gains  and  profits  to  accumulate  instead  of  being  divided  or 
distributed,  thcro  shall  be  levied,  collected  and  paid  fer  each  taxable  year  upon  the  net 
income  of  such  corporation  a  tax  equal  to  twenty-five  percent  (25$ )  of  tho  amount  thereof, 
which  shall  be  in  addition  to  the  tax  imposed  by  Section  230,  Revenue  Act  of  1921.  and 
shall  be  computed,  collected  and  paid  upon  the  same  basis  and  in  the  same  manner  and 
subject  to  the  same  provisions  of  law,  including  penalties,  as  that  ux.  (See  Saction  220, 
Revenue  Act  of  1921 1  a-<w» 


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2-2Q-2Z.    C^  i  n  Regulations  6 2, 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


REGULATIONS  62,  PART  II-B 
Relating  Specifically  to  the 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  FOR  1921. 

[Promulgated  February  15,  1922. —  Released  for  publication,  March  1,  1922.] 

CONTENTS 

Always  up-to-date.   Paragraph  references  to  all  amendments. 

[The  section  numbers  refer  to  the  statute  and  the  article  numbers  to  the  regulations.] 

Paragraph 

Section  300.    General  definitions   1000  to  1010 

Article  701.    War  profits  and  excess  profits  tax   1134 

Section  301.    Imposition  of  tax   1011 

Article  711.    Imposition  of  tax   1135 

712.  (Art.  713  of  Reg.  45,  1918  Act.)    Computation  of  tax  for  1921.  .  1136 

713.  (Art.  714  of  Reg.  45,  1918  Act.)    Computation  of  tax  on  income 

from  Government  contracts   1137 

714.  (Art.  715  of  Reg.  45,  191S  Act.)    Allocation  of  net  income  to  par- 

ticular source   1138 

715.  (Art.  716  of  Reg.  45,  1918  Act.)      Illustration  of  computation  of 

tax   1139 

716.  (Art.  719  of  Reg.  45,  1918  Act.)   Illustration  of  computation  where 

net  income  derived  from  Government  contract   1144 

717.  (Art.  718  of  Reg.  45,  1918  Act.)   Illustration  of  computation  where 

excess  profits  credit  not  exhausted  under  first  bracket.  .  1152 

718.  (Art.  720  of  Reg.  45,  1918  Act.)   Illustration  of  computation  where 

return  is  for  period  of  less  than  12  months   1157 

Section  302.    Limitation  of  tax   1019 

Article  731.    Limitation  of  tax  ^   1158 

732.  Limitation  when  return  for  fractional  part  of  year   1161 

733.  Illustration  of  computation  of  limitation  of  tax   1162 

Section  303.      Tax  when  partly  personal  service  business   1020 

Article  741.    Apportionment  of  invested  capital  and  net  income.   1163 

742.  Computation  of  tax  upon  net  income  -   1164 

743.  Illustration  of  computation  of  tax  where  partly  personal  service 

business   1166 

Section  304.    Exemptions   1021 

Article  751.    Corporations  exempt  from  tax   1173 

752.  Net  income  exempt  from  tax   1174 

753.  Illustration  of  computation  of  tax  where  net  income  is  from  gold 

mining   1175 

Section  305.    Apportionment  of  specific  exemption   1024 

Article  761.    Apportionment  of  specific  exemption   1176 

Section  312.   Excess  profits  credit   1025 

Article  791.    Excess  profits  credit   1177 

Section  320.    Net  income   1027 

Article  801.    Net  income   1178 

Section  325.    Terms  relating  to  invested  capital   1028 

vv  Article  811.    Intangible  and  tangible  property   1179 

812.    Borrowed  capital:    securities   1180 

'813.    Borrowed  capital:    amounts  left  in  business   1181 

'  814.    Borrowed  capital:    other  illustrations   1182 

815.  Inadmissible  assets  .  1183 

816.  Inadmissible  assets:    Government  bonds   1184 

817.  Inadmissible  assets:    partial  exception   1185 

Hi.'  I.  .818.    Admissible  assets  ,   1186 

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?.- 50-22.    (2)  7-18-22.  Regulations  62. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


Paragraph 


Section  325.    Invested  capital   1035 

Article  831.     Meaning  of  invested  capital   1187 

832.  Cash  paid  in:    bonus  stock   1188 

833.  Tangible  property  paid  in:    evidences  of  indebtedness   1189 

834.  Tangible  property  paid  in:    inadmissible  assets   1190 

835.  Tangible  property  paid  in:     mixture  of  tangible  and  intangible- 

property   1191 

836.  Tangible  property  paid  in:    value  in  excess  of  par  value  of 

stock  1192;  A,  1288 

837.  Surplus  and  undivided  profits:  paid-in  surplus   1193 

838.  Surplus  and  undivided  profits:  earned  surplus   1194 

839.  Surplus  and  undivided  profits:  allowance  for  depletion  and  depre- 

ciation  1195 

840.  Surplus  and  undivided  profits:  additions  to  surplus  account   1196 

841.  Surplus  and  undivided  profits:    limitation  of  additions  to  surplus 

account   1201 

842.  Surplus  and  undivided  profits:  property  paid  in  and  subsequently 

written  off   1206 

843.  Surplus  arid  undivided  profits:  patents   1209 

844.  Surplus  and  undivided  profits:  reserve  for  depreciation  or  depletion  1210 

845.  Surplus  and  undivided  profits:     reserve  for  income  and  excess 

profits  taxes   1214 

846.  Surplus  and  undivided  profits:  insurance  on  officers   1215 

847.  Surplus  and  undivided  profits:    property  taken  for  debt  or  in  ex- 

change  1216 

848.  Surplus  and  undivided  profits:  discount  on  sale  of  bonds   1217 

849.  Surplus  and  undivided  profits:  miscellaneous   1218 

850.  Surplus  and  undivided  profits:  current  profits   1219 

851.  Intangible  property  paid  in   1220 

852.  Percentage  of  inadmissible  assets   1221 

853.  Changes  in  invested  capital  during  year   1222 

854.  Computation  of  average  invested  capital   1223 

855.  Invested  capital  for  full  year  or  less   1224 

856.  Illustration  of  invested  capital  for  fractional  part  of  year   1225 

857.  Method  of  determinine;  available  net  income   1226 

858.  Effect  of  ordinary  dividend   1229 

859.  Effect  of  stock  dividend   1230 

S60.     Impairment  of  capital   1231 

861.  Surrender  of  stock   1232 

862.  Purchase  of  stock   1233 

863.  Invested  capital  and  other  measures  of  capital   1234 

864.  Affiliated  corporations:  invested  capital   1235 

S65.    Affiliated  corporations:  intangible  property  paid  in   1236 

866.  Affiliated  corporations:  inadmissible  assets   1238 

867.  Affiliated  corporations:  stock  of  subsidiary  acquired  for  cash   1239 

868.  Affiliated  corporations:  stock  of  subsidiary  acquired  for  stock..  .  .  1240 

869.  (Art.  870  of  Reg.  45,  1918  Act.)     Insurance  companies   1241 

870.  (Art.  871  of  Reg.  45,  1918  Act.)    Foreign  corporations   1242 

Section  327.    Special  cases   1044 

Article  901.    Treatment  of  special  cases   1243 

Section  328.    Computation  of  tax  in  special  cases   1049 

Article  911.    Computation  of  tax  in  special  cases   1244 

912.  Determination  of  first  installment  of  tax  in  special  cases   1245 

913.  Determination  of  first  installment  of  tax  in  the  case  of  foreign 

corporation  or  a  corporation  entitled  to  the  benefits  of  Sec.  262.  .  1246 

914.  Payment  of  tax  in  special  cases   1247 

Section  331.    Reorganizations   1053 

Article  941.    Valuation  of  asset  upon  change  of  ownership   1248 

Section  335.    Fiscal  years  ending  in  1921  or  1922   1054 

Article  951.    Fiscal  year  with  different  rates   1249 

952.  Fiscal  year  of  corporation  ending  in  1921   1250 

953.  Credits  in  the  case  of  fiscal  year  ending  in  1921   1251 

954.  Fiscal  year  of  corporation  ending  in  1922   1252 

955.  Illustrations  of  computation  of  tax  for  fiscal  year   1253 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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2-20-22.  Regulations  62. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


Paragraph 

Section  336.    Returns   1056 

Article  961.    Returns  #   1258 

962.    Returns  in  special  cases   1259 

Section  337.    Sale  of  mineral  deposits   1057 

Article  971.    Tax  on  sale  of  mineral  deposits   1260 

972.    Illustration  of  computation  of  tax  where  sale  of  mineral  deposits..  1261 

Section  338.    Effective  date  of  title   1058 

•       Article  980.    Effective  date   1262 

Section  1331.    Article  1735*  Consolidated  returns  for  year  1917  1263 


1133  Important  Comment. — Each  Article  of  Regulations  62,  Part  II 
(Excess-Profits  Tax)  printed  on  the  pages  immediately  following  is 
captioned  prominently  in  bold-face  type.  Without  exception  the  Articles  of 
Regulations  62,  referring  specifically  to  the  excess-profits  tax  law  for  1921, 
that  is,  the  7-hundred  (701),  the  8-hundred  (801)  and  the  9-hundred  (901) 
series,  are  printed  in  regular  numerical  order.  Thus  any  particular  Article 
may  be  located  without  difficulty.  The  fact  that  there  are  missing  Article 
numbers  (as  Art.  702  to  710)  in  the  7-,  8-,  and  9-hundred  series,  indicates 
with  certainty  that  on  March  1,  1922,  there  were  no  Articles  bearing  such 
missing  number  designations.  Attention  is  called  to  the  purely  supplementary 
Bureau  Rulings,  reproduced  herein  in  full,  as  originally  issued  by  the  Govern- 
ment, on  the  white  pages  following  immediately  after  the  blue  1918  excess- 
profits  tax  index  at  page  400.  The  reader  is  earnestly  cautioned  to  read  the 
foretvord  to  these  Bureau  Rulings. 


GENERAL  DEFINITIONS. 

1 134  Art.  701.  War-profits  and  excess-profits  tax. — The  war-profits  and 
1000     excess-profits  tax,  like  the  income  tax,  is  a  tax  upon  net  income. 

It  applies  only  to  corporations.  The  terms  "taxable  year,"  "fiscal 
year,"  "personal  service  corporation,"  "paid  or  accrued,"  and  "dividends," 
and  in  general  all  other  terms  used  in  connection  with  the  income  tax,  have 
here  the  same  meaning  as  provided  for  the  purposes  of  the  income  tax. 
(See  sees.  2,  200,  and  201  [beginning  at  1f  1001  and  at  ^[8084].)  For  other  terms 
see  sections  310  and  325  and  articles  771  and  811-818. 

IMPOSITION  OF  TAX 

1  1 35  Art.  711.  Imposition  of  tax. — The  tax  is  imposed  upon  the  net  income 
101 1  attributable  to  the  calendar  year  1921,  of  every  corporation,  domestic 
or  foreign,  except  life  insurance  companies,  personal  service  cor- 
porations and  certain  other  classes  of  corporations.  (See  sec.  304  of  the 
statute  and  arts.  751-753.)  Special  provisions  of  the  statute  deal  with  cor- 
porations deriving  net  income  from  Government  contracts  (see  sec.  2  [^[1003]), 
corporations  partly  partaking  of  the  nature  of  personal  service  corporations 
(see  sec.  303),  corporations  engaged  in  the  mining  of  gold  (see  sec.  304),  foreign 
and  abnormal  corporations  (see  sec.  327),  reorganized  and  consolidated  cor- 
porations (see  section  331),  corporations  making  their  returns  upon  the 
basis  of  a  fiscal  year  (see  sec.  335),  and  corporations  which  have  sold  mines 
or  oil  or  gas  wells  (see  sec.  337).  For  the  requirements  as  to  rendering  re- 
turns see  section  336. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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2-20-22.  Regulations  62. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


1136  Art.  712.*    Computation  of  tax  for  1921.— -For  the  calendar  year 
1011      1921,  (a)  if  the  net  income,  as  defined  in  section  320  of  the  statute, 

is  not  in  excess  of  20  per  cent  of  the  invested  capital,  as  defined  in 
section  326,  then  under  the  first  bracket  the  tax  payable  is  20  per  cent  of 
the  amount  of  the  net  income  in  excess  of  the  excess  profits  credit,  as  defined 
in  section  312,  and  the  second  bracket  is  not  applicable,  (b)  If  the  net  income 
is  in  excess  of  20  per  cent  of  the  invested  capital,  then  under  the  first  bracked 
the  tax  is  20  per  cent  of  the  excess  of  an  amount  of  net  income  equal  to  20 
per  cent  of  the  invested  capital  over  the  excess  profits  credit,  and  under  the 
second  bracket  the  tax  is  40  per  cent  of  the  amount  of  the  remaining  net  in- 
come less  any  excess  profits  credit  not  exhausted  under  the  first  bracket. 
The  sum  of  the  taxes  computed  under  the  two  brackets  is  the  tax  payable. 
But  see  the  following  article  and  section  302. 

*Was  Art.  713  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  713  in  the  Supplementary  Bulletin  Rulings. 

1137  Art.  713.*    Computation  of  tax  on  income  from  Government  con- 
1014     tracts. — In  the  case  of  a  corporation  which  derives  in  the  calendar 

year  1921  a  net  income  of  more  than  $10,000  from  any  Government 
contracts  made  after  April  5,  1917,  and  before  November  12,  1918,  the  tax 
shall  be  the  sum  of  the  following:  (1)  Such  a  proportion  of  a  tax  computed 
at  the  rates  for  1918,  specified  in  subdivision  (a)  of  section  301  of  the  Revenue 
Act  of  1918,  as  the  portion  of  the  net  income  attributable  to  the  Government 
contracts  bears  to  the  entire  net  income,  and  (2)  such  a  proportion  of  a  tax 
computed  at  the  rates  for  1921,  specified  in  section  301(a)  of  the  Revenue 
Act  of  1921,  as  the  amount  of  the  remaining  net  income  bears  to  the  entire 
net  income.  In  computing  the  tax  under  (1),  however,  the  excess  profits 
credit  and  the  war  profits  credit  which  would  have  been  applicable  to  the 
calendar  year  1921  under  the  revenue  act  of  1918,  if  it  had  been  continued  in 
force,  shall  be  used.  [For  example  of  computation  of  tax  sec  *1144.]  But 
see  section  302  of  the  statute.  The  part  of  the  net  income  attributable  to 
such  Government  contracts  shall  be  determined  in  accordance  with  the 
following  article.    (See  also  sec.  2  [Law  ^1003]  and  art.  1510.) 

*Was  Art.  714  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  714  in  the  Supplementary  Bulletin  Rulings. 

1 138  Art.  714.*  Allocation  of  net  income  to  particular  source. — Whenever 
1017     it  is  necessary  to  determine  the  portion  of  the  net  income  derived 

from  or  attributable  to  a  particular  source,  the  corporation  shall 
allocate  to  the  gross  income  derived  from  such  source,  and  to  the  gross 
income  derived  from  each  other  source,  the  expenses,  losses,  and  other  deduc- 
tions properly  appertaining  thereto,  and  shall  apply  any  general  expenses, 
losses,  and  deductions  (which  can  not  properly  be  directly  apportioned) 
against  gross  income  from  the  respective  sources  upon  a  reasonable  basis 
that  will  assign  to  each  source  a  proper  proportion  of  such  deductions.  The 
gross  income  derived  from  a  particular  source,  less  the  deductions  properly 
appertaining  thereto  and  less  its  proportion  of  any  general  deductions,  shall 
be  the  net  income  derived  from  such  source.  The  corporation  shall  submit 
with  its  return  a  statement  fully  explaining  the  manner  in  which  such  expenses, 
losses,  and  deductions  were  allocated  or  distributed. 

*Was  Art.  715  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  715  in  the  Supplementary  Bulletin  Rulings. 

Copyright  1922,  by  The  Corporation  Trust  Lomfiany. 
war'tax        434  SERVICE 


2-20-22.  Regulations  62. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.—1922. 


1 139    Art.  715.*  Illustration  of  computation  of  tax. — A  corporation  has  an 
invested  capital  for  calendar  year  1921  of  $110,000  and  a  net  income 
of  $40,000. 

1  1 40    The  excess  profits  credit  is  a  specific  exemption  of  $3,000,  plus  8 
per  cent  of  the  invested  capital  for  taxable  year  (i.  e.,  8  per  cent  of 
$110,000)  or  $8,800,  making  a  total  of  $11,800.    (See  sec.  312  of  the  statute 
and  art.  791.) 

1141  First  bracket:  The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  the  excess  profits  credit  ($11,800)  and  not  in  excess  of 
20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $110,000)  or  $22,000, 
is  $10,200.  The  tax  computed  under  this  bracket  is  20  per  cent  of  this  amount 
(i.  e.,  20  per  cent  of  $10,200)  or  $2,040. 

1  142    Second  bracket:  The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of 
$110,000)  is  $18,000.    The  tax  computed  under  this  bracket  is  40  per  cent 
of  this  amount  (i.  e.,  40  per  cent  of  $18,000)  or  $7,200. 

1  143     Total  tax:  The  total  excess  profits  tax  is  the  sum  of  the  taxes  com- 
puted under  the  two  brackets  (i.  e.,  $2,040  plus  $7,200)  or  $9,240. 
*fFas  Art.  716  of  Reg.  45.    Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  716  in  the  Supplementary  Bulletin  Rulings. 

1 1 44  Art.  716.*  Illustration  of  computation  where  net  income  derived  from 
1016     Government  contract. — A  corporation  has  an  average  prewar  invested 

capital  of  $60,000;  an  average  prewar  net  income  of  $10,000;  a  net 
income  for  calendar  year  1921  of  $40,000  which  includes  $15,000  of  net 
income  from  Government  contracts  and  an  invested  capital  for  calendar 
)  year  1921  of  $110,000.  The  tax  for  calendar  year  1921  will  be  the  sum  of 
the  amounts  computed  under  clauses  (1)  and  (2)  of  section  301(b)  of  the 
statute. 

1145  (1)  Under  clause  (1)  the  excess  profits  credit  is  $11,800,  the  same 
as  under  clause  (2).    The  war  profits  credit  is  a  specific  exemption 

of  $3,000,  plus  the  average  prewar  net  income,  or  $10,000,  plus  10  per  cent 
of  $50,000  (the  difference  in  invested  capital)  or  $5,000,  making  a  total  war 
profits  credit  of  $18,000. 

1146  First  bracket:   The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  the  excess  profits  credit  ($11,800)  and  not  in  excess  of 

20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $110,000)  or  $22,000, 
is  $10,200.  The  tax  computed  under  this  bracket-is  30  per  cent  of  this  amount 
(i.  e.,  30  per  cent  of  $10,200)  or  $3,060. 

1147  Second  bracket:  The  amount  or  portion  of  the  net  income  ($40,000) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of 

$110,000)  or  $22,000,  is  $18,000.  The  tax  computed  under  this  bracket  is 
65  per  cent  of  this  amount  (65  per  cent  of  $18,000)  or  $11,700. 
1  148  Third  bracket:  Eighty  per  cent  of  the  amount  in  excess  of  the  war 
profits  credit  (i.  e.,  80  per  cent  of  the  amount  by  which  $40,000 
exceeds  $18,000,  or  $22,000)  is  $17,600.  The  amount  of  the  tax  computed 
under  the  first  and  second  brackets  ($3,060  plus  $11,700)  is  $14,760.  The 
tax  computed  under  this  bracket  is  the  amount  by  which  $17,600  exceeds 
$14,760,  or  $2,840. 

1 149    The  portion  of  the  tax  computed  under  clause  (1)  is  the  same  pro- 
portion of  the  total  amount  computed  under  the  above  brackets  at 
the  rates  for  1918  (i.  e.,  $3,060  plus  $11,700  plus  $2,840)  or  $17,600,  as  the 
part  of  the  net  income  attributable  to  Government  contracts  ($15,000)  is 

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of  the  entire  net  income  ($40,000).  This  portion  of  the  tax  is  therefore  three- 
eighths  of  $17,600,  or  $6,600. 

1 1 50  (2)  The  portion  of  the  tax  computed  under  clause  (2)  is  the  same 
proportion  of  the  total  amount  computed  at  the  rates  for  1921,  or 

$9,240  (for  the  details  see  illustration  for  1921  under  article  715)  as  the  part 
of  the  net  income  attributable  to  Government  contracts  ($25,000)  is  of 
the  entire  net  income  ($40,000).  This  portion  of  the  tax  is  therefore  five- 
eighths  of  $9,240,  or  $5,775. 

1 151  (3)  The  total  tax  for  the  year  1921  is  the  sum  of  the  amounts  com- 
puted under  paragraphs  (1)  and  (2)  above  ($6,600  plus  $5,775)  or 

$12,375. 

*Was  Art.  719  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  719  in  the  Supplementary  Bulletin  Rulings. 

1 1 52  Art.  717.*  Illustration  of  computation  where  excess  profits  credit  not 
1018     exhausted  under  first  bracket. — A  corporation  has  an  invested  capital 

for  calendar  year  1921  of  $20,000  and  a  net  income  of  $7,000. 
1  1 53    The  excess  profits  credit  is  a  specific  exemption  of  $3,000  plus  8  per 

cent  of  the  invested  capital  (i.  e.,  8  per  cent  of  $20,000)  or  $1,600,  a 
total  of  $4,600. 

1  154    First  bracket:  The  excess  profits  credit  ($4,600)  exceeds  20  per  cent 
of  the  invested  capital  (20  per  cent  of  $20,000)  or  $4,000,  and  there 
is  no  amount  taxable  under  this  bracket. 

1 155  Second  bracket:  The  portion  of  the  net  income  ($7,000)  in  excess  of 
20  per  cent  of  the  invested  capital  (20  per  cent  of  $20,000)  or  $4,000, 
is  $3,000.  In  this  case,  however,  the  full  amount  of  the  excess  profits  credit 
could  not  be  allowed  under  the  first  bracket,  so  that  the  $3,000  which  would 
ordinarily  be  taxable  under  this  bracket  is  reduced  by  the  amount  of  the  excess 
profits  credit  not  allowed  under  the  first  bracket  ($600),  leaving  only  $2,400 
taxable  under  this  bracket.  The  tax  computed  under  this  bracket  is  40  per 
cent  of  this  amount  (i.  e.,  40  per  cent  of  $2,400)  or  $960. 
1  156  Total  tax:  The  total  excess  profits  tax  for  calendar  year  1921  would 
be  the  sum  of  the  taxes  computed  under  the  two  brackets  (i.  e., 
nothing  plus  $960),  or  $960,  were  it  not  that  section  302  provides  that  the 
maximum  tax  shall  not,  in  this  case,  exceed  $800.  (See  arts.  731-733.)  The 
total  excess  profits  tax  for  calendar  year  1921  is  therefore  $800. 

*Was  Art.  718  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  718  in  the  Supplementary  Bulletin  Rulings. 

1 157    Art.  718.*   Illustration  of  computation  where  return  is  for  period  of 
1024     less  than  12  months. — A  corporation  which  has  reported  on  the  basis 
1043     of  the  fiscal  year  ending  March  31,  1921,  later  changes  to  a  calendar 
year  basis  and  files  a  return  covering  the  9  months  from  April  1,  1921, 
to  December  31,  1921.    It  has  an  invested  capital  for  the  nine  months, 
ending  December  31,  1921,  of  $120,000,  and  a  net  income  for  such  period 
of  $50,000.    The  excess-profits  credit  is  computed  by  adding  the  specific 
exemption  of  $3,000  to  8  per  cent  of  the  full  invested  capital  of  $120,000,  or 
$9,600,  a  total  of  $12,600.    The  income  is  placed  on  an  annual  basis  in 
accordance  with  section  226(c)  by  multiplying  the,  amount  thereof,  $50,000, 
by  12  and  dividing  by  9,  or  $66,666.67. 

First  bracket. — The  amount  or  portion  of  the  net  income  ($66,666.67)  in 
excess  of  the  excess-profits  credit  ($12,600)  and  not  in  excess  of  20  per  cent 


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of  the  invested  capital  (i.  e.,  20  per  cent  of  $120,000),  or  $24,000,  is  $11,400. 
The  tax  computed  under  this  bracket  is  20  per  cent  of  this  amount  (i.  e.,  20 
per  cent  of  $11,400),  or  $2,280. 

Second  bracket. — The  amount  or  portion  of  the  net  income  ($66,666.67) 
in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $120,000), 
or  $24,000,  is  $42,666.67.  The  tax  computed  under  this  bracket  is  40  per 
cent  of  this  amount  (i.  e.,  40  per  cent  of  $42,666.67),  or  $17,066.67. 

Total  tax. — Nine-twelfths  of  the  sum  of  the  taxes  computed  under  the 
two  brackets  (i.  e.,  $2,280  plus  $17,066.67),  or  $14,510. 

*Was  Art.  720  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  720  in  the  Supplementary  Bulletin  Rulings. 

LIMITATION  OF  TAX. 

1 158    Art.  731.   Limitation  of  tax. — In  any  case  where  the  net  income  is 

1019  at  least  $20,000  the  computation  under  section  302  of  the  statute  may 
be  shortened  as  follows:    The  tax  imposed  by  subdivision  (a)  of 

section  301  shall  not  exceed  $3,400,  plus  40  per  cent  of  the  amount  of  the  net 
income  in  excess  of  $20,000. 

1  1 59    Where  the  net  income  is  less  than  $20,000  the  tax  shall  not  exceed 
20  per  cent  of  the  amount  of  the  net  income  in  excess  of  $3,000. 

I  1  60    Where  net  income  in  excess  of  $10,000  is  derived  during  the  calendar 

year  1921  from  Government  war  contracts,  the  limitations  imposed 
in  such  a  case  by  the  Revenue  Act  of  1918  are  continued  in  effect  by  the 
present  statute. 

1161    Art.  732.  Limitation  when  return  for  fractional  part  of  year.— When 
a  return  is  rendered  for  a  fractional  part  of  a  year,  the  limitation 
shall  be  computed  in  the  same  manner  as  if  the  period  covered  by  the  return 
were  a  full  taxable  year. 

I I  62    Art.  733.    Illustration  of  computation  of  limitation  of  tax. — A  cor- 

poration has  an  invested  capital  for  calendar  year  1921  of  $20,000 
and  a  net  income  of  $9,000.  The  excess  profits  tax  computed  under  section 
301  (a)  of  the  statute  would  be  $1,760.  Section  302  provides,  however,  that 
the  tax  under  section  301(a)  shall  not  be  more  than  20  per  cent  of  the  net 
income  in  excess  of  $3,000  and  not  in  excess  of  $20,000.  In  this  case  the  tax 
must  not  exceed  20  per  cent  of  $6,000  (i.  e.,  20  per  cent  of  the  net  income  in 
excess  of  $3,000)  or  $1,200.  The  tax  under  section  301(a),  amounting  to 
$1,760,  will  accordingly  be  reduced  to  $1,200. 

TAX  WHEN  PARTLY  PERSONAL  SERVICE  BUSINESS. 

1 1  63    Art.  741.   Apportionment  of  invested  capital  and  net  income. — For 

1020  the  purpose  of  determining  whether  or  not  a  corporation  partly  par- 
taking of  the  nature  of  a  personal  service  corporation  is  within  the 

scope  of  section  303  of  the  statute  and  also  for  the  purpose  of  establishing  the 
basis  for  the  computation  of  the  tax,  the  corporation  shall  apportion  or 
allocate  its  invested  capital  between  each  trade  or  business  or  branch  thereof 
as  nearly  as  may  be  in  accordance  with  the  actual  facts,  and  shall  submit  with 
its  return  an  explanatory  statement  setting  forth  the  manner  in  which  the 
apportionment  of  the  invested  capital  employed  in  the  production  of  each 
part  of  its  net  income  has  been  determined.   There  must  be  assigned  to  any 

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personal  service  trade  or  business  or  branch  thereof  an  amount  of  invested 
capital  at  least  as  great  as  that  which  would  ordinarily  be  employed  by  a 
personal  service  corporation  of  similar  size  and  standing  for  the  payment 
of  salaries  and  office  expenses,  maintenance  of  library  and  equipment,  credit 
advances  to  clients,  etc.  For  the  method  of  determining  the  portion  of  the 
net  income  derived  from  each  trade  or  business  or  branch  thereof  see  article 
714.  For  the  definition  of  "personal  service  corporation"  see  [Law  *  1002  and] 
articles  1523-1532. 

1 1  64    Art.  742.   Computation  of  tax  upon  net  income. — (1)  The  tax  upon 
the  nonpersonal  service  part  of  the  net  income  is  computed  upon  the 

basis  of  (a)  such  part  of  the  entire  invested  capital  for  the  taxable 
year  as  has  been  employed  in  the  production  of  the  net  income  upon  which 
the  tax  is  being  computed;  and  (b)  the  same  proportion  of  the  specific  exemp- 
tion as  the  proportion  which  the  part  of  the  net  income  upon  which  the  tax 
is  being  computed  is  of  the  entire  net  income. 

I  1  65    (2)  The  tax  upon  the  personal  service  part  of  the  net  income  is  the 

same  percentage  thereof  as  the  tax  computed  under  (1)  is  of  the  non- 
personal  service  part  of  the  net  income.  The  tax  under  this  paragraph  shall 
in  no  case  be  less  than  20  per  cent  of  the  personal  service  part  of  the  entire 
net  income,  unless  the  tax  upon  the  entire  net  income  if  computed  in  the 
ordinary  way  would  be  less  than  20  per  cent  of  such  entire  net  income.  In 
that  event,  and  in  any  case  in  which  the  amount  of  the  total  tax  as  computed 
under  this  article  is  the  same  as  or  greater  than  the  tax  as  computed  in  the 
ordinary  way,  the  tax  shall  be  computed  under  section  301  of  the  statute. 
(See  sec.  302  and  arts.  711-718  and  731-733.) 

I I  66    Art.  743.   Illustration  of  computation  of  tax  where  partly  personal 

service  business. — A  corporation  is  engaged  in  contracting  and  con- 
struction work  (a  nonpersonal  service  business  in  which  the  employment  of 
capital  is  necessary)  and  also  renders  consulting  engineering  service  (a  per- 
sonal service  business  which,  if  constituting  its  sole  business,  would  bring  it 
within  the  class  of  personal  service  corporations).  It  has  an  invested  capital 
for  1921  of  $100,000  (of  which  $81,000  is  used  in  contracting  and  $19,000  in 
engineering);  and  a  net  income  for  1921  of  $90,000  (of  which  $30,000  is  derived 
from  contracting  and  $60,000  from  engineering). 

1  1  67  (1)  In  computing  the  tax  upon  the  first  or  nonpersonal  service  part 
of  the  net  income  (i.  e.,  $30,000  derived  from  contracting)  the  specific 
exemption  is  $1,000  (i.  e.,  the  same  proportion  of  $3,000  which  $30,000  is  of 
the  entire  net  income  of  $90,000).  The  excess  profits  credit  is  a  specific 
exemption  of  $1,000,  plus  8  per  cent  of  the  invested  capital  used  in  con- 
tracting (i.  e.,  8  per  cent  of  $81,000)  or  $6,480,  a  total  of  $7,480. 

1168  First  bracket:    The  amount  of  the  net  income  derived  from  con- 
tracting ($30,000)  in  excess  of  the  excess  profits  credit  ($7,480)  and 

not  in  excess  of  20  per  cent  of  the  invested  capital  (i.  e.,  20  per  cent  of  $81,000) 
or  $16,200,  is  $8,720.  The  tax  under  this  bracket  is  20  per  cent  of  this  amount 
(i.  e.,  20  per  cent  of  $8,720)  or  $1,744. 

1169  ^Second  bracket:   The  amount  of  the  net  income  derived  from  con- 

tracting ($30,000)  in  excess  of  20  per  cent  of  the  invested  capital  used 
in  contracting  (i.  e.,  20  per  cent  of  $81,000)  or  $16,200  is  $13,800.  The  tax 
computed  under  this  bracket  is  40  per  cent  of  this  amount  (40  per  cent  of 
$13,800)  or  $5,520. 


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1  1  70     Tax:  The  tax  upon  the  first  portion  of  the  net  income  (i.  e.,  $30,000, 
derived  from  contracting)  is  the  sum  of  the  taxes  computed  under 
the  two  brackets  (i.  e.,  $1,744  plus  $5,520)  or  $7,264.   This  is  24.214  per  cent 
of  $30,000,  the  net  income  from  contracting. 

1171     (2)  The  tax  upon  the  second  or  personal  service  part  of  the  net 
income  (i.  e.,  $60,000,  derived  from  engineering)  is  the  same  per- 
centage of  such  part  of  the  net  income  (i.  e.,  24.214  per  cent  of  $60,000)  or 
$14,528. 

1  1  72    (3)  The  total  tax  is  the  sum  of  $7,264  (the  tax  upon  the  first  part 
of  the  net  income  derived  from  contracting)  and  $14,528  (the  tax 
upon  the  second  part  of  the  net  income  derived  from  engineering)  or  $21,792. 

EXEMPTIONS. 

I  1  73    Art.  751.   Corporations  exempt  from  tax. — A  corporation  whose  net 
1021     income  for  a  full  taxable  year  of  twelve  months  is  less  than  $3,000  is 

exempt  from  the  tax.  [For  return  requirements  in  such  cases  see 
If 851.]  If  the  taxable  period  is  less  than  twelve  months  the  corporation  is 
exempt  from  the  tax  if  its  net  income  for  the  period  is  less  than  the  same 
proportion  of  $3,000  as  the  number  of  months  in  the  period  is  of  twelve  months, 
any  fractional  part  of  a  month  being  counted  as  the  number  of  days  in  such 
part  of  a  month  divided  by  30.  Life  insurance  companies  are  not  subject 
to  the  tax.  (See  art.  661.)  Certain  classes  of  corporations,  including  per- 
sonal service  corporations,  named  in  section  231  of  the  statute  [Law  ^[1059] 
are  also  exempt.    (See  arts.  511-522.) 

I I  74    Art.  752.  Net  income  exempt  from  tax. — If  a  corporation  is  engaged 

1023  in  the  mining  of  gold,  the  portion  of  its  net  income  derived  from  that 
source  is  exempt  from  the  tax  imposed  by  this  title  and  also  from  the 

tax  imposed  by  Title  II  of  the  Revenue  Act  of  1917.  The  tax  on  the  remaining 
portion  of  its  net  income  is  the  proportion  of  the  tax  that  would  have  been 
payable  had  the  entire  net  income  been  derived  from  other  sources  than  the 
mining  of  gold,  which  such  remaining  portion  of  the  net  income  bears  to  the 
entire  net  income.  For  the  method  of  determining  the  net  income  derived 
from  the  mining  of  gold  see  article  714. 

1 1  75  Art.  753.  Illustration  of  computation  of  tax  where  net  income  is  from 
gold  mining. — In  the  case  of  the  corporation  used  as  an  illustration 
in  article  715,  let  it  be  assumed  that  it  is  engaged  in  the  mining  both  of  gold 
and  other  rare  metals;  that  the  Commissioner  finds  under  article  714  that 
$25,000  of  its  gross  income  is  properly  attributable  to  the  mining  of  gold;  and 
that  $15,000  of  the  deductions  allowed  are  properly  applicable  to  the  gross 
income  from  that  source.  The  portion  of  the  net  income  attributable  to  the 
mining  of  gold  and  exempt  from  tax  would  be  $10,000.  The  remaining  portion 
of  the  net  income  is  $30,000,  and  the  tax  thereon  is  the  same  proportion  of  the 
tax  computed  on  the  entire  net  income  without  the  benefit  of  the  exemption 
(i.e.,  a  tax  of  $9,240)  which  the  remaining  portion  of  the  net  income  ($30,000) 
bears  to  the  entire  net  income  ($40,000).  The  tax  will  therefore  be  three- 
fourths  of  the  tax  of  $9,240  computed  without  benefit  of  the  exemption, 
or  $6,930. 

APPORTIONMENT  OF  SPECIFIC  EXEMPTION 
1176    Art.  761.   Apportionment  of  specific  exemption. — Full  effect  is  given 

1024  to  section  305  by  placing  the  income  on  an  annual  basis  as  provided 
in  section  226(c).    See  articles  718,  855,  and  856. 

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EXCESS-PROFITS  CREDIT 
1  177  Art.  791.  Excess  profits  credit — The  excess  profits  credit  consists  of 
1025  the  specific  exemption  of  $3,000  plus  an  amount  equal  to  8  per  cent 
|  of  the  invested  capital  for  the  taxable  year.  In  the  case  of  affiliated 
corporations  making  a  consolidated  return  only  one  specific  exemption  of 
$3,000  is  allowed.  (See  also  sees.  240  [law  ^[1078]  and  305  of  the  statute  and 
arts.  716-718,  743,  and  761.) 

NET  INCOME 

1178  Art.  801.  Net  income. — The  net  income  of  a  corporation  for  the 
1027     purpose  of  the  imposition  of  the  excess  profits  tax  is  the  same  net 

income  [see  If  1089]  as  determined  for  the  purpose  of  the  income  tax. 

TERMS  RELATING  TO  INVESTED  CAPITAL 

1179  Art.  811.  Intangible  and  tangible  property. — Intangible  property 
1029     includes  patents  and  good  will  and  other  like  property.  Tangible 

1040  property  includes  all  property  other  than  intangible  property.  Most 
contracts  are  ntangible  property   and  in  the  absence  of  a  specific 

ruling  by  the  commissioner  to  the  contrary  should  be  so  regarded  for  the 
purpose  of  making  returns.  A  contract  may  be  treated  as  tangible  property 
only  after  he  submission  of  a  full  statement  as  to  its  exact  nature,  showing 
to  the  satisfaction  of  the  commissioner  that  it  relates  to  rights  in  tangible 
property  to  uch  an  extent  that  its  value  arises  chiefly  therefrom.  Associated 
Press,  United  Press,  and  similar  franchises,  and  subscription  lists  and  mailing 
lists  are  intangible  property. 

1180  Art.  812.  Borrowed  capital:  securities.— Any  interest  in  a  corpora- 
1031     tion  represented  by  bonds,  debentures,  or  other  securities,  by  what- 

1041  ever  name  called,  if  with  respect  to  the  payment  of  either  interest 
or  principal  it  ranks  with  or  prior  to  the  interest  of  the  general 

creditors,  is  borrowed  capital  and  can  not  be  included  in  computing  invested 
capital. 

1181  Art.  813.  Borrowed  capital:  amounts  left  in  business. — Whether  a 
1031  given  amount  pa'd  into  or  left  in  the  busines;  of  a  corporat  on  con- 
1041      stitutes   borrowed   capital   or   paid-in   surplus   is    a    question  of 

fact.  Thus,  indebtedness  to  stockholders  canceled  and  left  in 
the  business  would  ordinarily  constitute  paid-in  surplus,  while  amounts 
le  t  in  the  business  representing  salaries  of  officers  in  excess  of  their  actual 
withdrawals,  or  deposit  accounts  in  favor  of  partners  in  a  partnership  suc- 
ceeded by  the  corporation,  will  be  considered  paid-in  surplus  or  borrowed 
capital  according  to  the  facts  of  the  particular  case.  The  general  principle 
is  that  if  interest  is  paid  or  is  to  be  paid  on  any  such  amount,  or  if  the  stock- 
holder's o  officer's  right  to  repayment  of  such  amount  ranks  with  or  before 
that  of  the  general  creditors,  the  amount  so  left  with  the  corporation  must 
be  considered  as  borrowed  capital  and  be  so  treated  in  computing  invested 
capital. 

1182  Art.  814.  Borrowed  capital:  other  illustrations.  -Items  such  as 
1031  deposits  or  amounts  due  to  other  banks  shown  in  the  balance  sheet 
1041     of  a  bank,  unexpired  subscriptions  shown  in  the  balance  sheet  of  a 

publishing  concern,  etc.,  are  deemed  liabilities  and  can  not  be  included 
in  computing  invested  capita1. 

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1 183  Art.  815.  Inadmissible  assets. — Stocks,  bonds,  and  other  obligations 
1032     (other  than  obligations  of  the  United  States),  the  dividends  or  interest 

from  which  are  not  required  to  be  included  in  computing  net  income, 
are  inadmissible  assets  even  though  no  such  dividends  or  interest  have  been 
actually  paid  or  received  during  the  taxable  year.  The  failure  to  pay  or  to 
receive  dividends  or  interest  does  not  change  the  status  of  such  securities  as 
inadmissible  assets.  A  corporation  can  not  by  including  the  income  from 
inadmissible  assets  as  taxable  income  create  the  right  to  have  such  assets 
considered  admissible  assets 

[For  Federal  Reserve  Bank  stock  see  1f744.  For  War  Finance  Corporation 
bonds  see  1f745.] 

1 184  Art.  816.  Inadmissible  assets:  Government  bonds. — Obligations  of  a 
1032     State  or  Territory,  or  any  municipal  or  other  political  subdivision 

thereof,  of  the  District  of  Columbia,  or  of  any  possession  of  the 
United  States,  and  Federal  farm  loan  bonds,  not  being  obligations  o  the 
United  States  within  the  meaning  of  the  statute,  are  inadmissible  assets. 
See  sec.  213  (b)  of  the  statute  and  arts.  74-85. 

1185  Art.  817.  Inadmissible  assets:  paitial  exception.— (a)   Where  the 

1032  income  derived  from  inadmissible   assets  consists  in  part  of  profit 
from  the  disposition  thereof,  or  (b)  where  all  or  a  part  of  the  interest 

derived  from  such  assets  is  in  effect  included  in  net  income  because  the  interest 
paid  on  indebtedness  incurred  or  continued  to  purchase  or  carry  such  assets 
may  not  be  deducted  from  gross  income,  in  either  case  a  corresponding  part 
of  the  capital  invested  in  such  assets  shall  be  deemed  an  admissible  asset. 
This  article  applies  separately  to  each  issue  or  c'ass  of  inadmissible  securities 
held  by  a  corporation.  For  example,  it  may  hold  A  company  stock  costing 
$100,000  and  B  company  stock  costing  $200,000.  During  the  year  it  receives 
$8,000  in  dividends  from  A  company  and  $5,000  from  B  company,  and  on 
September  30  sells  part  of  its  B  company  stock  at  a  profit  of  $3,000.  For  the 
period  from  January  1  to  September  30,  $75,000  of  its  holdings  of  B  company 
stock  become  admissible.  After  September  30  its  remaining  holdings  of  B 
company  stock  are  inadmissible,  but  the  proceeds  of  the  sale  are  admissible 
unless  invested  in  inadmissibles.  (See  arts.  852  and  854.) 

1186  Art.  818.    Admissible  assets. — Admissible  assets  include  all  assets 

1033  other  than  inadmissible  assets.  ^ Organization  expenses  and  deferred 
charges  against  future  income  are  admissible  assets.  For  all  pur- 
poses of  computing  invested  capital  admissible  assets  must  be  valued  in 
accordance  with  the  provisions  of  sections  326  and  331  of  the  statute  and  the 
articles  thereunder.  Thus,  for  example,  intangible  property  paid  in  for 
stock  or  shares  is  an  admissible  asset,  but  it  can  not  be  valued  at  an  amount 
in  excess  of  that  at  which  it  may  be  included  in  computing  invested  capital 
under  paragraphs  (4)  and  (5)  of  section  326  (a). 

INVESTED  CAPITAL 

1 187  Art.  831.  Meaning  of  invested  capital. — Invested  capital  within  the 
1035     meaning  of  the  statute  is  the  capital  actually  paid  into  the  corpo- 
ration by  the  stockholders,  including  the  surplus  and  undivided 

profits,  and  is  not  based  upon  the  present  net  worth  of  the  assets,  as  shown 
by  an  appraisal  or  in  any  other  manner.    The  basis  or  starting  point  in 

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the  computation  of  invested  capital  is  found  in  the  amount  of  cash  and  other 
property  paid  in,  the  valuation  at  which  such  other  property  may  be  included 
being  determined  in  accordance  with  the  statute  and  the  regulations.  The 
computation  does  not  stop,  however,  with  such  original  entries  or  amounts, 
but  also  takes  into  account  the  surplus  and  undivided  profits  of  prior  years 
left  in  the  business.  The  invested  capital  of  a  corporation  includes,  generally 
speaking,  (a)  the  cash  paid  in  for  stock,  (b)  the  tangible  property  paid  in 
for  stock,  (c)  the  surplus  and  undivided  profits,  and  (d)  the  intangible  proper! y 
paid  in  for  stock  (to  a  limited  amount),  less,  however,  the  same  proportion 
of  such  aggregate  sum  as  the  amount  of  inadmissible  assets  bears  to  the  amount 
of  the  admissible  assets  and  the  inadmissible  assets  held  during  the  taxable 
year.  Invested  capital  does  not  include  borrowed  capital.  (See  sec.  325 
of  the  statute  and  arts.  811-818.)  The  fair  market  value  of  the  assets  as 
of  March  1,  1913,  has  no  bearing  on  invested  capital.  (See  sec.  202  and 
art.  1561.) 

1188  Art.  832.  Cash  paid  in:  bonus  stock.— Capital  stock  issued  as  a 

1036  bonus  in  connection  with  the  sale  of  a  corporation's  bonds  may  not 
be  included  in  invested  capital  unless  the  corporation  proves  to  the 

satisfaction  of  the  Commissioner  that  such  stock  bonus  enabled  the  corpo- 
ration to  secure  a  higher  price  for  the  bonds  than  it  could  otherwise  have 
secured.  Wherever  this  fact  is  established  such  stock  shall  be  included  in 
computing  invested  capital  to  the  extent  of  the  difference  between  the  selling 
price  of  the  bonds  and  the  price  at  which  they  could  have  been  sold  if  issued 
without  such  stock  bonus.  The  excess  of  the  face  value  of  such  bonds  over 
the  price  at  which  they  could  have  been  sold  if  issued  without  the  stock  bonus 
is  deemed  discount  and  is  subject  to  amortization.    (See  art.  39.) 

1189  Art.  833.  Tangible  property  paid  in:  evidences  of  indebtedness. — 

1037  Enforcible  notes  or  other  evidences  of  indebtedness,  either  interest- 
bearing  or  noninterest-bearing,  of  the  subscriber  received  by  a  cor- 
poration upon  a  subscription  for  stock  may  be  considered  as  tangible  property 
in  computing  its  invested  capital  to  the  extent  of  the  actual  cash  value  of  such 
notes  or  other  evidences  of  indebtedness  at  the  time  when  paid  in,  but  only 
(a)  if  such  notes  or  evidences  of  indebtedness  could  under  the  laws  of  the 
jurisdiction  in  which  the  corporation  was  organized  legally  be  received  in 
payment  for  stock,  and  (b)  if  they  were  actually  received  by  the  corporation 
as  absolute,  and  not  as  conditional,  payment  in  whole  or  in  part  of  the  stock 
subscription. 

1 190  Art.  834.  Tangible  property  paid  in:  inadmissible  assets. — Stocks, 

1038  bonds,  and  other  obligations  (other  than  obligations  of  the  United 
States),  the  dividends  or  interest  from  which  are  not  included  in 

computing  net  income,  when  bona  fide  paid  in  for  stock  or  shares,  may  like 
other  tangible  property  be  included  in  computing  the  invested  capital  of  the 
corporation  at  their  actual  cash  value  when  paid  in.  For  the  purpose  of  the 
reduction  required  fn  articles  852  and  854,  however,  account  must  be  taken 
of  such  assets  in  the  same  manner  as  of  an)-  other  inadmissible  assets. 

1191  Art.  835.  Tangible  property  paid  in:  mixture  of  tangible  and  intan- 
1037     gible  property. — Where  stock  or  shares  and  bonds  or  other  obligations 

have  been  issued  for  a  mixed  aggregate  of  tangible  and  intangible 
property,  it  will  be  presumed  in  the  absence  of  satisfactory  c\  idence  to  the 

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contrary  that  the  bonds  were  issued  for  tangible  property  and  that  the  stock 
was  issued  for  the  balance  of  the  tangible  property,  if  any,  and  for  the  intan- 
gible property.  Where  stock  or  shares  have  been  issued  for  a  mixed  aggregate 
of  tangible  and  intangible  property  and  certain  liabilities  have  been  assumed 
in  connection  with  the  transaction,  it  will  be  presumed  that  such  liabilities 
are  to  be  charged  against  the  tangible  property  and  the  intangible  property 
in  the  order  named,  unless  it  is  shown  by  evidence  satisfactory  to  the  Com- 
missioner that  this  presumption  is  not  in  accordance  with  the  facts.  (See 
further  sec.  327  (c)  of  the  statute.) 

i  182    Art.  836.  Tangible  property  paid  in:  value  in  excess  of  par  value  of 

1037  stock. — Evidence  offered  to  support  a  claim  for  a  paid-in  surplus 
must  be  as  of  the  date  of  the  payment,  and  may  consist  among  other 

things  of  (a)  an  appraisal  of  the  property  by  disinterested  authorities  made 
on  or  about  the  date  of  the  transaction;  (b)  certification  of  the  assessed  value 
in  the  case  of  real  estate;  and  (c)  proof  of  a  market  price  in  excess  of  the  par 
value  of  the  stock  or  shares.  The  additional  value  allowed  in  any  case  is 
confined  to  the  value  definitely  known  or  accurately  ascertainable  at  the 
time  of  the  payment.  No  claim  will  be  allowed  for  a  paid-in  surplus  in  a 
case  in  which  the  additional  value  has  been  developed  or  ascertained  sub- 
sequently to  the  date  on  which  the  property  was  paid  in  to  the  corporation, 
or  in  respect  of  property  which  the  stockholders  or  their  agents  on  or  shortly 
before  the  date  of  such  payment  acquired  at  a  bargain  price,  as  for  instance, 
at  a  receiver's  sale.  Generally,  allowable  claims  under  this  article  will  arise 
out  of  transactions  in  which  there  has  been  no  substantial  charge  of  beneficial 
interest  in  the  property  paid  in  to  the  corporation,  and  in  all  cases  the  proof 
of  value  must  be  clear  and  explicit. 

1193  Art.  837.  Surplus  and  undivided  profits:  paid-in  surplus. — Where 

1038  it  is  shown  by  evidence  satisfactory  to  the  Commissioner  that  tangible 
property  has  been  paid  in  by  a  stockholder  to  a  corporation  as  a  gift 

or  at  a  value  definitely  known  or  accurately  ascertainable  as  of  the  date 
of  such  payment  clearly  and  substantially  in  excess  of  the  cash  or  other  con- 
sideration paid  by  the  corporation  therefor,  then  the  amount  of  the  excess 
shall  be  deemed  to  be  paid-in  surplus.  Substantially  the  same  kind  of 
evidence  will  be  required  under  this  article  as  under  article  836.  (See  further 
art.  813.) 

1 194  Art.  838.  Surplus  and  undivided  profits:  earned  surplus. — Only  true 
1038     earned  surplus  and  undivided  profits  can  be  included  in  the  computa- 
tion of  invested  capital,  and  if  for  any  reason  the  books  do  not  properly 

reflect  the  true  surplus  such  adjustments  must  be  made  as  are  necessary  in 
order  to  arrive  at  the  correct  amount.  In  the  computation  of  earned  surplus 
and  undivided  profits  recognition  should  first  be  given  to  all  expenses  incur- 
red and  losses  sustained  from  the  original  organization  of  the  corporation 
down  to  the  taxable  year,  including  among  such  expenses  and  losses  reasonable 
allowances  for  depreciation,  obsolescence,  or  depletion  of  property  (irrespec- 
tive of  the  manner  in  which  such  property  was  originally  acquired),  and  for 
the  amortization  of  any  discount  on  its  bonds.  There  can,  of  course,  be  no 
earned  surplus  or  undivided  profits  until  any  deficit  or  impairment  of  paid-in 
capital  has  been  made  good.  Where  explicit  and  convincing  evidence  is 
presented  that  the  amounts  written  off  or  deducted  in  previous  returns  of 
net  income  are  in  the  aggregate  incorrect  or  unreasonable,  adjustments 

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must  be  made,  and  the  taxpayer  will  be  allowed  a  refund  in  respect  of  any 
taxes  overpaid  in  prior  years,  or  in  the  case  of  an  underpayment  of  taxes 
will  be  additionally  assessed. 

1 1 95  Art.  839.  Surplus  and  undivided  profits:  allowance  for  depletion  and 

1038  depreciation. — Depletion,  like  depreciation,  must  be  recognized  in 
all  cases  in  which  it  occurs.  Depletion  attaches  to  each  unit  of 
mineral  or  other  property  removed,  and  the  denial  of  a  deduction  in  comput- 
ing net  income  under  the  act  of  August  5,  1909,  or  the  limitation  upon  the 
amount  of  the  deduction  allowed  under  the  act  of  October  3,  1913,  does  not 
relieve  the  corporation  of  its  obligation  to  make  proper  provision  for  depletion 
of  its  property  in  computing  its  surplus  and  undivided  profits.  Adjustments 
in  respect  of  deprecation  or  depletion  in  prior  years  will  be  made  or  per- 
mitted only  upon  the  basis  of  explicit  and  convincing  evidence  (and  calcula- 
tions based  upon  a  theoretical  formula  are  not  such  evidence)  that  as  at  the 
beginning  of  the  taxable  year  the  amount  of  depreciation  or  depletion  written 
off  in  prior  years  was  insufficient  or  excessive,  as  the  case  may  be,  and  in 
every  such  case  due  regard  must  be  given  to  expenditures  made  by  the 
taxpayer  to  maintain  the  effective  usefulness  of  the  property.  Where  deduc- 
tions for  depreciation  or  depletion  have,  either  on  the  books  of  the  corpora- 
tion or  in  its  returns  of  net  income,  been  included  in  the  past  in  expense  or 
other  accounts,  rather  than  specifically  as  depreciation  or  depletion,  or  where 
capital  expenditures  have  been  charged  to  expense  in  lieu  of  depreciation  or 
depletion,  a  statement  indicating  the  extent  to  which  this  practice  has  been 
carried  should  accompany  the  return. 

[In  connection  with  the  foregoing  read  at  H"877.] 

1196  Art.  840.  Surplus  and  undivided  profits:  additions  to  surplus  ac- 

1038     count. — A  corporation's  books  of  account  will  be  presumed  to  show 
the  facts.    If  it  claims  that  its  capital  or  surplus  account  is  under- 
stated the  burden  of  proof  will  rest  upon  it.    Additions  to  such  accounts 
will  be  accepted  to  the  following  extent: 

1197  (1)  Excessive  depreciation  heretofore  charged  off  on  property  still 
owned  and  in  use,  if  it  is  now  shown  by  explicit  and  convincing  proof  to 

have  been  excessive  and  such  excess  is  substantial  in  amount,  whether  or  not 
disallowed  by  the  Commissioner  as  a  deduction  from  net  income,  may  be 
restored  to  the  surplus  account.  No  such  amount  shall  be  restored,  how- 
ever, unless  it  is  shown  that  adequate  depreciation  has  been  deducted  upon 
all  other  property  of  the  corporation  still  in  use,  nor  in  any  case  in  which 
such  amount  has  been  allowed  as  a  deduction  for  amortization  under  section 
234  (a)  (8)  of  the  statute,  or  in  which  the  cost  of  the  property  has  been  recov- 
ered through  being  included  in  the  price  of  goods  or  services,  as  for  example, 
in  the  case  of  patterns,  dies,  plates,  special  tools,  etc.,  or  under  a  munition 
contract  with  a  foreign  Government. 

1198  (2)  Amounts  which  have  been  expended  before  January   1,  1917, 
for  the  acquisition  of  plant,  equipment,  tools,  patterns,  furniture, 

fixtures,  or  like  tangible  property,  having  a  useful  life  extending  substantially 
beyond  the  year  in  which  the  expenditure  was  made,  and  which  have  been 
charged  as  current  expense,  may  (less  proper  deductions  for  depreciation  or 
obsolescence)  be  added  to  the  surplus  account  when  such  assets  are  still  owned 
and  in  active  use  by  the  corporation  during  the  taxable  year.    Special  tools, 

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patterns,  and  similar  assets  shall  not  be  assigned  any  value  if  their  cost  has 
been  recovered  through  having  been  included  in  the  price  of  goods.  If 
their  cost  has  not  been  so  recovered  and  they  are  held  foronly  occasional  use, 
they  shall  not  be  assigned  a  value  in  excess  of  the  fair  value  based  upon 
the  earnings  actually  arising  from  their  current  use,  and  in  no  case  shall 
such  value  be  more  than  the  cost  less  depreciation.  Assets  of  this  kind  not 
in  current  use  shall  not  be  valued  at  more  than  their  nominal  or  scrap  value. 

1  1  99  (3)  Amounts  which  have  been  expended  in  the  past  for  intangible 
property  of  any  kind  can  be  restored  to  capital  or  surplus  account 
only  to  the  extent  that  the  corporation  specifically  paid  such  amounts  for 
the  intangible  property  as  such.  For  provisions  relating  to  patents  sec 
article  843. 

1200  (4)  Adjustments  necessary  to  correct  other  errors  found  in   t  he- 
books  of  account  may  be  made.    But  see  the  following  article. 

1201  Art.  841.  Surplus  and  undivided  profits:  limitation  of  additions  to 
1048     surplus  account. — Additions  to  surplus  which  a  corporation  may 

desire  to  make  under  the  preceding  article  fall  broadly  into  two 

classes: 

1202  (1)  To  correct  returns  of  net  income  for  prior  years  in  which  actual 
errors  have  been  made,  as  for  example  where  excessive  depreciation 

has  been  deducted,  additions  to  plant  and  equipment  or  other  capital  charges 
have  been  charged  off  as  an  expense,  inventories  have  been  taken  upon  a 
wrong  basis  of  valuation,  etc. 

1203  (2)  To  reinstate  in  surplus  deductions  from  income  which  are  as  a 
matter  of  good  accounting  to  some  extent  optional,  such  as  experi- 
mental expenses,  patent  litigation,  development  of  good  will  through  adver- 
tising or  otherwise,  etc. 

1  204  Adjustments  falling  in  class  (1)  will  be  permitted  for  all  years  whether 
before  or  after  March  1,  1913,  provided  amended  returns  of  net 
income  are  filed  for  each  year  in  which  an  erroneous  return  has  been  made. 
Due  consideration  will  be  given  to  the  assessment  of  penalties  in  any  case 
in  which  a  fraudulent  return  has  been  made.  Adjustments  falling  in  class 
(2)  can  not  usually  be  permitted,  as  in  such  cases  where  the  treatment  of  the 
item  was  optional  and  the  decision  made  at  the  time  conformed  to  the  best 
accounting  practice,  it  is  considered  that  the  corporation  has  exercised  a 
binding  option  in  deducting  such  expenses  from  income.  An  election  of 
this  sort  which  was  made  concurrently  with  the  transaction  can  not  now  be 
revised,  and  amended  returns  in  respect  thereof  can  not  be  accepted. 

1 205  The  corporation  shall  submit  with  its  return  a  statement  of  the  addi- 
tions proposed,  specifying  the  kinds  and  amounts  of  property  involved, 
the  years  in  which  the  expenditures  were  made,  and  the  method  followed  in 
distinguishing  between  capital  outlays  and  current  expenses,  and  showing 
that  adequate  provision  has  been  made  for  depreciation,  obsolescence,  and 
depletion  of  such  of  the  assets  affected  by  the  additions  as  are  subject  to  recog- 
nized depreciation,  obsolescence,  or  depletion.  In  any  case  in  which  there 
is  an  operating  deficit  amounts  restored  must  first  be  set  off  against  the 

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deficit  and  only  the  excess  can  be  actually  included  in  the  computation  of 
invested  capital. 

1206  Art.  842.  Surplus  and  undivided  profits:  property  paid  in  and  subse- 
1038     quently  written  off. — Where  tangible  or  intangible  property  has  been 

paid  in  to  a  corporation  for  stock  or  shares  or  where  tangible  property 
has  been  paid  in  as  a  paid-in  surplus  and  has  subsequently  been  in  whole  or 
in  part  written  off  the  books,  the  amount  so  written  off  may  upon  evidence 
satisfactory  to  the  Commissioner  be  restored  to  the  capital  or  surplus  account 
subject  to  the  following  limitations: 

1207  (1)  The  amount  restored  must  be  reduced  by  a  proper  deduction 
for  any  depreciation,  obsolescence,  or  depletion;  and 

1208  (2)  The  aggregate  amount  included  in  computing  invested  capital 
on  account  of  such  property  shall  not  exceed  the  amount  which 

might  have  been  included  if  such  property  had  not  been  written  off. 

1209  Art.  843.  Surplus  and  undivided  profits:  patents. — From  the  stand- 
1038     po'nt  of  assets  a  patent,  or  more  particularly  a  group  of  patents,  is 

closely  analogous  to  good  will.  Their  value  is  contingent  upon 
and  measured  by  their  earning  power.  While  patents  have  a  definite 
life,  there  is  a  common  tendency  to  extend  that  life  by  improvements  upon 
the  original,  and  in  a  successful  business  the  patent  value  merges  more  or  less 
completely  into  a  trade  name  or  other  form  of  good  will.  Therefore,  while 
deductions  in  respect  to  the  depreciation  of  patents  based  upon  a  normal  l'fe 
period  of  seventeen  years  are  allowable  in  computing  net  income  for  the  pur- 
pose of  the  income  tax,  such  deductions  are  not  obligatory,  but  are  optional 
with  each  taxpayer.  Where  since  January  1 ,  1909,  a  corporation  has  exerc'sed 
that  option  to  its  own  benefit  in  computing  its  taxable  net  income  the  amount 
so  deducted  can  not  now  be  restored  in  computing  invested  capital.  Where, 
however,  the  cost  of  patents  has  been  charged  against  surplus  or  otherw'se 
disposed  of  in  such  a  manner  as  not  to  benefit  the  corporation  in  computing 
its  taxable  net  income  since  January  1,  1909,  any  amount  so  written  off  may 
be  restored  in  computing  invested  capital,  if  it  be  shown  to  the  satisfaction 
of  the  Commissioner  that  the  amount  so  written  off  represented  a  mere  book 
entry  ascribable  to  a  conservative  policy  of  management  or  accounting  and 
did  not  represent  a  realized  shrinkage  in  the  value  of  such  assets.  Any 
amount  so  restored  may  not  be  written  off  by  way  of  deductions  from  taxable 
net  income  in  any  subsequent  year  or  years.  Where  a  corporation  has 
charged  to  current  expenses  the  cost  of  developing  or  protecting  patents,  no 
amount  in  respect  thereof  expended  since  January  1,  1909,  can  be  restored  in 
computing  invested  capital.  In  respect  of  expenditures  made  before  January 
1,  1909,  a  corporation- now  seeking  to  restore  them  must  be  prepared  to  show 
to  the  satisfaction  of  the  commissioner  that  all  such  items  are  proper  capital 
expenditures.  It  can  not  be  said  that  the  correct  computation  of  surplus 
and  undivided  profits  necessarily  requires  a  deduction  in  respect  of  the  expira- 
tion of  patents.  It  follows,  therefore,  that  where  a  corporation  in  the  exercsc 
of  its  option  has  not  written  down  the  cost  of  patents,  it  is  not  ordinarily  neces- 
sary to  reduce  the  surplus  and  undivided  profits  in  computing  invested  capital, 
whether  the  patents  have  been  acquired  for  stock  or  shares  or  for  cash  or  other 
tangible  property.  Due  consideration  will  be  given  to  the  facts  in  any  case 
in  which  this  rule  seems  obviously  unreasonable.    (See  art.  167.) 

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1210  Art.  844.  Surplus  and  undivided  profits:  reserve  for  depreciation 
1038     or  depletion. — If  any  reserves  for  depreciation  or  for  depletion  are 

included  in  the  surplus  account  it  should  be  analyzed  so  as  to  separate 
such  reserves  and  leave  only  real  surplus.  Reserves  for  depreciation  or 
depletion  can  not  be  included  in  the  computation  of  invested  capital,  except 
to  the  following  extent: 

1211  (1)  Excessive  depletion  or  depreciation  included  therein  and  which 
if  charged  off  could  be  restored  under  art'ele  840  may  be  included  in 

the  computation  of  invested  capital;  and 

1212  (2)  Where  depreciation  or  depletion  is  computed  on  the  value  as  of 
March  1,  1913,  or  as  of  any  subsequent  date,  the  proportion  of 

depreciation  or  depletion  representing  the  realization  of  appreciation  of  value 
at  March  1,  1913,  or  such  subsequent  date,  may  if  undistributed  and  used 
or  employed  in  the  business  be  treated  as  surplus  and  included  in  the  com- 
putation of  invested  capital. 

1213  For  the  purpose  of  computing  invested  capital,  depreciation  or  deple- 
tion computed  on  the  value  as  of  March  1,  1913,  or  as  of  any  subse- 
quent date  shall,  if  such  value  exceeded  cost,  be  deemed  a  pro  rata  realization 
of  cost  and  appreciation  and  be  apportioned  accordingly.  Except  as  above 
provided,  value  appreciation  which  has  not  been  actually  realized  and  in 
respect  of  amounts  accrued  since  March  1,  1913,  reported  as  income  for  the 
purpose  of  the  income  tax,  can  not  be  included  in  the  computation  of  invested 
capital,  and  if  already  reflected  in  the  surplus  account  it  must  be  deducted 
therefrom. 

1214  Art.  845 .  Surplus  and  undivided  profits :  reserve  for  income  and  excess 
1038     profit  taxes. — For  the  purpose  of  computing  invested  capital,  Federal 

income  and  war  profits  and  excess  profits  taxes  are  deemed  to  have 
been  paid  out  of  the  net  income  of  the  taxable  year  for  which  they  are  levied. 
It  is  immaterial,  therefore,  whether  reserves  for  the  payment  of  such  taxes 
for  the  preceding  year  have  been  set  up  or  not,  or  if  set  up  whether  such 
taxes  when  paid  have  actually  been  charged  against  such  reserves.  Amounts 
payable  on  account  of  such  taxes  for  the  preceding  year  may  be  included  in  the 
computation  of  invested  capital  only  until  such  taxes  become  due  and  payable. 
A  deduction  from  the  invested  capital  as  of  the  beginning  of  the  taxable  year 
must  therefore  be  made  for  such  taxes  or  any  installment  thereof,  averaged 
for  the  proportionate  part  of  the  taxable  year  after  the  date  when  the  tax  or 
the  installment  is  due  and  payable.  Where  as  a  result  of  an  audit  by  the 
Commissioner,  or  the  acceptance  of  an  amended  return,  or  for  any  other 
reason,  the  amount  of  any  such  tax  for  the  preceding  year  is  subsequently 
changed,  a  corresponding  adjustment  will  be  made  in  the  invested  capital 
for  the  taxable  year  upon  the  same  basis  as  if  the  corrected  amount  of  the 
tax  for  the  preceding  year  had  been  used  in  the  original  computation  of  the 
invested  capital  for  the  taxable  year.    (See  arts.  1541  and  1542.) 

1215  Art.  846.  Surplus  and  undivided  profits:  insurance  on  officers.— 

1038     Where  insurance  is  carried  by  the  corporation  on  the  life  of  an  officer 
or  employee,  the  policy  may  be  included  as  an  admissible  asset  and 
reflected  in  the  surplus  account  at  the  cash  surrender  value  as  of  the  beginning 
of  the  taxable  year.    The  whole  amount  of  premiums  paid  on  such  insurance 

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can  not  be  included  in  surp'us,  but  the  surplus  will  be  considered  as  increased 
as  of  the  beginning  of  each  taxable  year  by  the  amount  added  to  the  cash 
surrender  value  of  the  policy.    (See  art.  294.) 

1216  Art.  847.  Surplus  and  undivided  profits:  property  taken  for  debt 
1038     or  in  exchange. — Real  or  personal  property  taken  by  a  corporation  in 

payment  or  satisfaction  of  a  debt,  or  property  received  in  exchange 
for  other  property,  will  be  an  admissible  asset  at  its  fair  market  value  upon 
receipt.  The  profit  or  loss,  if  any,  resulting  from  the  transaction  will  not 
be  reflected  in  invested  capital  until  the  succeeding  taxable  year.  But  see 
as  to  the  foreclosure  of  a  mortgage  article  153.  (See  also  sec.  202  of  the 
statute  and  arts.  1561-1570.) 

1217  Art.  848.  Surplus  and  undivided  profits:  discount  on  sale  of  bonds. — 

1038  Discount  allowed  on  the  sale  of  bonds  is  in  effect  an  advance  on 
account  of  interest,  so  that  the  effective  rate  of  interest  in  such  a  case 
is  equal  to  the  sum  of  the  nominal  rate  plus  the  rate  necessary  to  amortize  the 
discount  over  the  life  of  the  bonds.  Where,  under  incorrect  accounting 
practices,  the  discount  on  bonds  has  been  charged  to  a  property  account  or 
otherwise  incorrectly  carried  as  an  asset,  and  is  so  reflected  in  the  surplus 
account,  it  is  necessary  in  computing  invested  capital  to  make  an  adjustment 
in  respect  of  such  discount.    (See  art.  563.) 

1218  Art.  849.  Surplus  and  undivided  profits:  miscellaneous. — Only  the 
1038     amount  of  discount  which  has  actually  been  reported  by  a  bank  in  a 

prior  year  as  taxable  income  and  credited  to  surplus  account  may  be 
included  in  surplus  as  of  the  beginning  of  the  taxable  year.  For  the  treatment 
of  surplus  arising  out  of  sales  on  the  installment  plan  see  articles  42-46,  and 
from  compensation  for  propertv  lost,  damaged,  or  condemned,  see  articles 
49  and  261-263. 

1219  Art.  850.  Surplus  and  undivided  profits:  current  profits.— Profits 

1038  earned  during  any  year  can  not  be  included  in  the  computation  of 
invested  capital  for  that  year,  even  though  during  the  year  such 

profits  are  set  up  as  surplus  on  the  books  or  assumed  to  be  distributed  in  the 
form  of  stock  dividends.  If  a  dividend  is  declared  and  paid  during  any 
year  out  of  profits  of  that  year  and  the  stockholders  pay  back  into  the  cor- 
poration all  or  a  substantial  part  of  the  amount  of  such  dividends,  the  amount 
so  paid  back  can  not  be  included  in  the  computation  of  invested  capital  unless 
the  corporation  shows  by  evidence  satisfactory  to  the  Commissioner  that  the 
dividends  were  paid  in  good  faith  and  without  any  understanding,  express  or 
implied,  that  they  were  to  be  paid  back. 

1220  Art.  851.  Intangible  property  paid  in. — The  actual  cash  value  of 

1039  intangible  property  paid  in  for  stock  or  shares  must  be  determined 

1040  in  the  light  of  the  facts  in  each  case.    Among  the  factors  to  be  con- 
sidered are  (a)  the  earnings  attributable  to  such  intangible  assets 

while  in  the  hands  of  the  predecessor  owner;  (b)  the  earnings  of  the  corporation 
attributable  to  the  intangible  assets  after  the  date  of  their  acquisition;  (c) 
representative  sales  of  the  stock  of  the  corporation  at  or  about  the  date  of  the 
acquisition  of  the  intangible  assets;  and  (d)  any  cash  offers  for  the  purchase 
of  the  business,  including  the  intangible  property,  at  or  about  the  time  of  ts 
acquisition.    A  corporation  claiming  a  value  for  intangible  property  paid  in 

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for  stock  or  shares  should  file  with  its  return  a  full  statement  of  the  facts 
re'ating  to  such  valuation.    (See  also  art.  835.) 

1221  Art.  852.  Percentage  of  inadmissible  assets. — For  the  purpose  of 

1042  ascertaining  the  deductible  percentage  under  section  326  (c)  the 
amount  of  inadmissible  assets  held  during  the  year  may  ordinarily 

be  determined  by  dividing  by  two  the  sum  of  the  amount  of  such  assets  held 
at  the  beginning  of  the  year  and  the  amount  held  at  the  end  of  the  year.  The 
total  amount  of  admissible  and  inadmissible  assets  held  during  the  year  may 
ordinarily  be  determined  by  dividing  by  two  the  sum  of  the  amount  of  such 
assets  held  at  the  beginning  of  the  year  and  the  amount  at  the  end  of  the  year. 
If  at  any  time  a  substantial  change  has  taken  place  either  in  the  amount  of 
inadmissible  assets  or  in  the  total  amount  of  admissible  and  inadmissible 
assets,  the  effect  of  such  change  shall  be  averaged  exactly  from  the  date 
on  which  it  occurred.  In  any  case  where  the  Commissioner  finds  that  either 
amount  dete  mined  as  above  provided  does  not  substantially  reflect  the 
average  situation  throughout  the  year,  and  that  the  amount  of  each  kind  of 
assets  held  on  a  given  day  of  each  month  throughout  the  year  or  at  more 
frequent  regular  intervals  can  be  determined,  the  amount  of  inadmissible 
assets  and  the  amount  of  both  kinds  of  assets  held  during  the  year  shall  be 
determ'ned  by  averaging  the  amounts  held  at  such  several  times.  In  making 
the  computations  under  this  article  the  valuation  at  which  each  asset  is  carried 
shall  be  adjusted  in  accordance  with  the  provisions  of  the  statute  and  of  the 
regulations  relating  to  the  valuation  of  assets  for  the  purpose  of  computing 
invested  capital,  including  in  such  adjustment  the  amount  of  reserves  for 
depreciation,  depletion,  amortization  and  other  reserves  which  represent  the 
valuation  of  assets'.  It  is  immaterial  whether  any  asset  was  acquired  out  of 
invested  capital  or  out  of  profits  earned  during  the  year  or  borrowed  capital. 

1222  Art.  853.  Changes  in  invested  capital  during  year. — The  invested 

1043  capital  as  of  the  beginning  of  any  period  of  one  year  or  less  should 
be  adjusted  by  an  appropriate  addition  or  deduction  for  each  change 

in  invested  capital  during  the  period.  The  amount  so  added  or  deducted  in 
each  case  is  the  amount  of  the  change  averaged  for  the  time  remaining  in  the 
period  during  which  it  is  in  effect.  The  fraction  used  in  finding  such  average 
is  the  number  of  days  remaining  in  the  period  (including  the  day  on  which 
the  change  occurs)  over  the  number  of  days  in  the  period.  Thus  if  a  return 
is  made  for  the  calendar  year  ending  December  31,  1921,  and  if  $100,000  of 
additional  capital  was  paid  in  on  February  17,  1921,  this  addition  to  invested 
capital  is  in  effect  for  318  days,  and  the  amount  to  be  added  to  the  invested 
capital  as  of  the  beginning  of  the  year  would  be  318/365  of  $100,000,  or 
$87,123.29.  If  $50,000  of  this  amount  was  withdrawn  on  October  31,  1921, 
the  amount  to  be  deducted  would  be  62/365  of  $50,000,  or  $8,493.15. 

1223  Art.  854.  Computation  of  average  invested  capital. — For  the  purpose 
1043     of  computing  invested  capital  for  any  period  of  one  year  or  less  each 

corporation  shall  add  together  its  paid-in-capital  and  its  paid-in  or 
earned  surplus  and  undivided  profits  (under  whatever  name  it  may  be  called) 
as  shown  by  its  books  at  the  beginning  of  the  period.  The  total  so  obtained 
shall  be  adjusted  (a)  for  any  property  paid  in,  or  for  any  asset  reflected  in 
surplus  and  undivided  profits,  which  is  not  carried  on  the  books  at  the  valua- 
tion prescribed  by  the  statute  or  by  the  regulations,  and  (b)  for  any  changes 
:n  paid-in  capital  or  in  paid-in  or  earned  surplus  and  undivided  profits  (not 

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ncluding  surplus  and  undivided  profits  earned  during  the  period)  occurring 
during  the  period,  averaged  for  the  time  for  which  such  changes  are  effective. 
(See  art.  853.)  The  total  so  obtained  and  adjusted  is  the  average  invested 
capital  for  the  period,  unless  the  corporation  at  any  time  during  the  period 
held  any  nadmissible  assets,  in  which  case  such  total  must  be  reduced  by  a 
percentage  thereof  equal  to  the  percentage  which  the  amount  of  inadmissible 
assets  held  during  the  period  is  of  the  total  amount  of  admissible  and  inadmis- 
sible assets  held  dur'ng  the  period.  (See  art.  852.)  The  invested  capital 
can  not  be  determined  by  adding  the  amounts  of  the  assets  of  a  corporation. 

1224  Art.  855.  Invested  capital  for  full  year  or  less. — In  the  case  of  a 
1043     corporation  making  a  return  for  a  full  year  of  12  months,  its  invested 

capital  for  the  year  is  the  average  invested  capital  for  the  year.  In 
the  case  of  a  corporation  making  a  return  for  a  fractional  part  of  a  year  for 
the  method  of  computing  the  changes  in  its  invested  capital  made  during  the 
period,  see  article  856.  Since  in  accordance  with  sections  239  and  226  the 
income  is  placed  upon  a  yearly  basis,  the  full  average  invested  capital  for  the 
period  should  be  used  in  computing  the  tax  under  this  title.    (See  art.  718.) 

1 225  Art.  856.  Illustration  of  invested  capital  for  Pactional  part  of  year. — 

1043     A  corporation  was  organized  July  1,  1921,  and  makes  a  return  for  the 
six  months  ending  December  31,  1921.    The  invested  capital  consists 
of  $100,000  paid  in  on  July  1  and  $100,000  paid  in  on  October  1.    The  average 
invested  capital  for  such  period  would  be  $100,000  plus  92/184  (not  92/365) 
of  $100,000,  or  $50,000,  a  total  of  $150,000. 

1226  Art.  857.  Method  of  determining  available  net  income. — Whether  at 
1038     the  time  of  any  payment  made  during  the  taxable  year  there  is  suffi- 
cient income  of  the  taxable  year  available  for  such  payment,  or 

whether  the  surplus  or  undivided  profits  as  of  the  beginning  of  the  taxable 
year  must  be  reduced  by  the  amount  of  such  payment,  shall  be  determined 
according  to  the  following  principles: 

122  7  (1)  The  aggregate  amount  of  earnings  of  the  taxable  year  aA'ailable 
for  all  purposes  up  to  any  given  date  will  be  determined  upon  the 
bas  s  of  the  same  proportion  of  the  net  income  for  the  taxable  year  (as  finally 
determined  for  the  purpose  of  ncome  and  excess  profits  taxes)  as  the  part  of 
the  year  already  elapsed  is  of  the  entire  year  (determined  in  the  manner  pro- 
vided in  article  853),  unless  the  corporation  shows  from  its  books  or  other 
records  that  a  greater  proportion  of  its  earnings  for  the  year  was  available  on 
such  date. 

1 228  (2)  The  aggregate  amount  available  will  be  deemed  to  be  applied 
for  the  following  purposes  in  the  order  in  which  they  are  stated:  (a) 
Accrued  Federal  income  and  war  profits  and  excess  profits  taxes  for  the  tax- 
able year  (see  art.  845),  and  (b)  dividends  paid  after  the  expiration  of  the  first 
sixty  days  of  the  taxable  year  (see  sec.  201  of  the  statute  and  art.  1541)  and 
other  corporate  purposes,  including  the  purchase  of  outstanding  stock  of  the 
corporation  previously  issued  (see  art.  862).  In  any  case  where  the  above 
computation  would  be  indeterminate  because  of  the  effect  of  the  provisions 
of  this  article  upon  the  invested  capital  for  the  year,  the  amount  of  such 
invested  capital  for  the  purpose  of  this  computation  may  be  deemed  to  be 
the  invested  capital  as  of  the  beginning  of  the  taxable  year,  plus  any  additional 

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capital  paid  in  during  such  year  and  minus  any  specific  withdrawal  or  liquida- 
tion of  capital  during  such  year. 

1229  Art.  858.  Effect  of  ordinary  dividend. — A  dividend  other  than  a 
1038     stock  dividend  affects  the  computation  of  invested  capital  from  the 

date  when  the  dividend  is  payable  and  not  from  the  date  when  it  is 
declared,  except  that  where  no  date  is  set  for  its  payment  the  date  when 
declared  will  be  considered  also  the  date  when  payable  for  the  purpose  of  this 
article.  For  the  purpose  of  computing  invested  capital  a  dividend  paid  after 
the  expiration  of  the  first  sixty  days  of  the  taxable  year  will  be  deemed  to  be 
paid  out  of  the  net  income  of  the  taxable  year  to  the  extent  of  the  net  income 
available  for  such  purpose  on  the  date  when  it  is  payable.  (See  art.  857.) 
The  surplus  and  undivided  profits  as  of  the  beginning  of  the  taxable  year  will 
be  reduced  as  of  the  date  when  the  dividend  is  payable  by  the  entire  amount 
of  any  dividend  paid  during  the  first  sixty  days  of  the  taxable  year  and  by  the 
amount  of  any  other  dividend  in  excess  of  the  current  net  income  available 
for  its  payment.  In  the  case  of  a  dividend  paid  during  the  first  sixty  days 
of  a  taxable  year  which  exceeds  in  amount  the  surplus  and  undivided  profits 
as  of  the  beginning  of  the  taxable  year  the  excess  will  be  deemed  to  be  paid 
out  of  earnings  of  the  taxable  year  available  at  the  date  when  the  dividend 
is  payable,  and  to  the  extent  that  such  earnings  are  insufficient  it  will  be 
deemed  to  be  a  liquidation  of  paid-in  capital  or  surplus.  From  the  date  when 
any  dividend  is  payable  the  amount  which  the  several  stockholders  are 
entitled  to  receive  will  be  treated  as  if  actually  paid  to  them,  whether  or  not 
it  is  so  paid  in  fact,  and  the  surplus  and  undivided  profits,  either  of  the  tax- 
able year  or  of  the  preceding  years,  will  in  accordance  with  the  foregoing 
provisions  be  deemed  to  be  reduced  as  of  that  date  by  the  full  amount  of  the 
dividend.  Amounts  paid  to  stockholders  in  anticipation  of  dividends,  or 
amounts  withdrawn  by  stockholders  in  excess  of  dividends  declared,  will 
in  computing  invested  capital  have  the  same  effect  as  if  actually  paid  as 
dividends.  (See  also  art.  813,  and  see  generally  sec.  201  [1fl005]  and  arts. 
1541-1549.) 

1230  Art.  859.  Effect  of  stock  dividend. — Neither  the  payment  nor  the 
1038     receipt  of  a  true  stock  dividend  has  any  effect  upon  the  amount  of 

invested  capital.  Such  items  as  appraised  value  of  good  will,  appreci- 
ation in  value  of  real  estate  or  other  tangible  property,  etc.,  although  carried 
to  surplus  and  distributed  as  stock  dividends,  can  not  in  this  manner  be 
capitalized  and  included  in  computing  invested  capital.  If  a  corporation 
has  paid  a  stock  dividend  in  excess  of  its  true  surplus,  it  can  not  be  deemed  to 
have  any  greater  invested  capital  than  could  have  been  computed  had  no  such 
stock  dividend  been  paid. 

1231  Art.  860.  Impairment  of  capital. — Capital  or  surplus  actually  paid 
1036     in  is  not  required  to  be  reduced  because  of  an  operating  deficit,  but 

where  there  has  been  directly  or  indirectly  a  liquidation  or  return  of 
their  investment  to  the  stockholders,  full  effect  must  be  given  to  any  liquida- 
tion of  the  original  capital. 

1232  Art.  861.  Surrender  of  Stock. —  Where  stock  which  has  originally 
[1036     been  issued  or  exchanged  by  the  corporation  for  property  (tangible 

or  intangible)  is  returned  to  the  corporation  as  a  gift  or  for  a  consider- 
ation^substantially  less  than  its  par  value,  the  stock  so  returned  shalijiot 

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be  treated  as  a  part  of  the  stock  issued  or  exchanged  for  such  property.  The 
proceeds  derived  in  cash  or  its  equivalent  from  the  resale  of  the  stock  so 
returned  shall,  however,  be  included  in  computing  invested  capital.  (See 
art.  543.) 

1233  Art.  862.  Purchase  of  stock. — Where  a  corporation  either  directly 
1036     or  indirectly,  as  for  example  through  a  trustee,  has  prior  to  the  tax- 
able year  bought  its  own  stock,  either  for  the  purpose  of  retirement 

or  of  holding  it  in  the  treasury  or  for  other  purposes,  the  entire  cost  of  such 
stock  must  be  deducted  from  the  aggregate  invested  capital  as  of  the  begin- 
ning of  the  taxable  year,  if  such  deduction  has  not  already  been  made.  Where 
such  stock  is  purchased  during  the  taxable  year  a  deduction  from  the  invested 
capital  as  of  the  beginning  of  the  taxable  year  and  effective  from  the  date  of 
such  purchase  is  required  only  to  the  extent  that  such  stock  has  not  been 
purchased  out  of  the  undivided  profits  of  the  taxable  year.  (See  art.  857). 
The  full  amount  derived  in  cash  or  its  equivalent  from  the  resale  of  such  stock 
may  be  included  in  the  invested  capital  from  the  date  of  such  resale,  unless 
such  stock  had  been  purchased  out  of  earnings  of  the  taxable  year.  fSee 
art.  543.) 

1234  Art.  863.  Invested  capital  and  other  measures  of  capital. — (a)  The 

1035  invested  capital  as  here  defined  may  differ  from  the  capital  as  shown 
on  the  books  of  the  corporation.  In  such  event  no  changes  should  be 
made  in  the  books  themselves.  The  corporation  should,  however,  in  all 
cases  keep  a  permanent  record  of  the  adjustments  which  are  made  in  comput- 
ing invested  capital,  (b)  Section  1000  [T[3100]  of  the  statute  imposes  a  tax 
on  the  fair  value  of  the  capital  stock  of  corporations.  As  in  the  case  of  the 
excess  profits  tax  the  invested  capital  is  based  upon  the  actual  investment 
of  the  stockholders  in  the  corporation,  irrespective  of  the  present  value  of  its 
assets,  and  in  the  case  of  the  capital  stock  tax  the  fair  value  looks  to  the 
present  value  of  the  corporation's  assets,  irrespective  of  the  amount  of  the 
investment  of  the  stockholders  therein,  the  amount  determined  as  the  fair 
value  of  the  capital  stock  for  the  purpose  of  the  capital  stock  tax  can  have  no 
bearing  upon  the  determination  of  invested  capital.    (See  also  art.  1561.) 

1235  Art.  864.  Affiliated  corporations:  invested  capital. — The  invested 
1078     capital  of  affiliated  corporations,  as  defined  in  section  240  (c)  of  the 

statute  and  article  633,  for  the  taxable  year  is  the  invested  capital  of 
the  entire  group  treated  as  one  unit  operated  under  a  common  control.  As  a 
first  step  in  the  computation  a  consolidated  balance  sheet  should  be  prepared 
in  accordance  with  standard  accounting  practices,  which  will  reflect  the  actual 
assets  and  liabilities  of  the  affiliated  group.  In  preparing  such  a  balance  sheet 
all  intercompany  items,  such  as  intercompany  notes  and  accounts  receivable 
and  payable,  should  be  eliminated  from  the  assets  and  the  liabilities,  respec- 
tively, and  proper  adjustments  should  be  made  in  respect  of  intercompany 
profits  or  losses  reflected  in  inventories  which  at  the  beginning  or  end  of  the 
taxable  year  contain  merchandise  exchanged  between  the  corporations 
included  in  the  affiliated  group  at  prices  above  or  below  cost  to  the  producing 
or  original  owner  corporation.  Such  consolidated  balance  sheet  will  then  show 
(a)  the  capital  stock  of  the  parent  or  principal  company  in  the  hands  of  the 
public;  (b)  the  consolidated  surplus  belonging  to  the  stockholders  of  the  parent 
or  principal  company;  and  (c)  the  capital  stock,  if  any,  of  subsidiary  companies 
of  which  substantially  all  the  capital  stock  is  not  owned  or  controlled  by  the 

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parent  or  principal  company,  together  with  the  surplus,  if  any,  belonging  to 
such  minority  interest.  In  computing  consolidated  invested  capital  the 
starting  point  is  furnished  by  the  total  of  the  amounts  shown  under  (a),  (b). 
and  (c)  above.  This  total  must  be  increased  or  diminished  by  any  adjust- 
ments required  to  be  made  under  the  provisions  of  sections  325,  326  and  331 
of  the  statute  and  articles  811-818,  831-869,  and  941  of  the  rcguiat1 
except  as  otherwise  provided  in  articles  865-868. 

1236  Art.  865.  Affiliated  corporations:  intangible  property  paid  in. — (1) 

1078  In  respect  of  corporations  whose  affiliation  is  in  the  nature  of  parent 
and  subsidiary  companies:  (a)  In  the  case  of  intangible  property  bona 
fide  paid  in  for  stock  or  shares  prior  to  March  3,  1917,  there  may  be  nclu dcd 
in  invested  capital  an  amount  not  exceeding  the  actual  cash  value  of  such 
property  at  the  time  paid  in,  or  the  par  value  of  the  stock  or  shares  issued 
therefor,  or  in  the  aggregate  25  per  cent  of  the  par  value  of  the  total  stock  or 
shares  of  the  consolidation  outstanding  on  March  3,  1917  (determined  as 
indicated  in  items  (a)  and  (c)  in  art.  864),  or  in  the  aggregate  25  per  cent  of 
the  par  value  of  the  total  stock  or  shares  shown  on  the  consolidated  balance 
sheet,  being  the  amount  of  the  capital  stock  included  in  items  (a)  and  (c) 
in  article  864  at  the  beginning  of  the  taxable  year,  whichever  is  lowest;  and 
(b)  in  the  case  of  intangible  property  bona  fide  paid  in  for  stock  or  shares  on 
or  after  March  3,  1917,  there  may  be  included  in  invested  capital  an  amount 
not  exceeding  the  actual  cash  value  of  such  property  at  the  time  paid  in,  or 
the  par  value  of  the  stock  or  shares  issued  therefor,  or  in  the  aggregate  25  per 
cent  of  the  par  value  of  the  total  stock  or  shares  shown  by  the  consolidated 
balance  sheet,  being  the  amount  of  the  capital  stock  included  in  items  (a) 
and  (c)  in  article  864  outstanding  at  the  beginning  of  the  taxable  year,  which- 
ever is  lowest,  (c)  When  intangible  property  has  been  acquired  in  part  before 
and  in  part  after  March  3,  1917,  the  amounts  shall  be  ascertained,  respec- 
tively, under  (a)  and  (b)  above  and  in  the  aggregate  shall  in  no  case  exceed 
25  per  cent  of  the  par  value  of  the  total  stock  or  shares  outstanding  at  the 
beginning  of  the  taxable  year  shown  in  the  consolidated  balance  sheet,  being 
the  amount  of  the  capital  stock  included  in  items  (a)  and  (c)  in  article  864. 

1237  (2)  In  respect  of  corporations  affiliated  by  reason  of  stock  owne  ship 
or  control  by  the  same  interests,  the  limitations  set  forth  in  para- 
graphs (4)  and  (5)  of  subdivision  (a)  of  section  326  of  the  statute  shall  be 
applied  to  each  corporation  separately  and  the  aggregate  of  the  intangible 
property,  so  valued,  shall  be  included  in  invested  capital  in  the  consolidated 
return.  In  respect  of  each  of  the  affiliated  corporations  the  aggregate  of  the 
amounts  ascertained  under  the  provisions  of  paragraphs  (4)  and  (5)  shall  in 
no  case  exceed  25  per  cent  of  the  outstanding  capital  stock  of  such  corporation 
at  the  beginning  of  the  taxable  year. 

1 238  Art.  866.  Affiliated  corporations:  inadmissible  assets. — Where  adjust- 
1078     ment  is  required  in  respect  of  inadmissible  assets  in  accordance  with 

the  provisions  of  subdivision  (c)  of  section  326  of  the  statute,  such 
adjustment  shall  be  made  on  the  basis  of  the  consolidated  balance  sheet  with 
due  regard  to  the  adjustments  and  eliminations  set  forth  in  articles  864  and 
865  and  to  the  provisions  of  articles  815-818. 

1239  Art.  867.  Affiliated  corporations:  stock  of  subsidiary  acquired  for 
1078     cash. — When  all  or  substantially  all  of  the  stock  of  a  subsidiary 

corporation  was  acquired  for  cash,  the  cash  so  paid  shall  be  the  basis 
to  be  used  in  determining  the  value  of  the  property  acquired. 

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1  240  Art.  868.  Affiliated  corporations:  stock  of  subsidiary  acquired  for 
1078  stock. — Where  stock  of  a  subsidiary  company  was  acquired  with  the 
stock  of  the  parent  company,  the  amount  to  be  included  in  the  con- 
solidated invested  capital  in  respect  of  the  company  acquired  shall  be  com- 
puted in  the  same  manner  as  if  the  net  tangible  assets  and  the  intangible  assets 
had  been  acquired  instead  of  the  stock.  If  in  accordance  with  such  acquisition 
a  paid-in  surplus  is  claimed,  such  claim  shall  be  subject  to  the  provisions  of 
article  837. 

1241    Art.  869.*  Insurance  companies.— The  reserve  funds  of  insurance 
1031     companies  (other  than  life)  the  net  additions  to  which  are  deductible 
1041     from  gross  income  under  the  provisions  of  section  234  of  the  statute, 
may  be  included  in  computing  invested  capital.      See  sees.  325  and 
326  and  arts.  569  and  814. 

*Was  Art.  870  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  870  in  the  Supplementary  Bulletin  Rulings. 

1  242    Art.  870.*  Foreign  corporations. — Inasmuch  as  the  excess  profits  tax 
1044     in  the  case  of  a  foreign  corporation  or  of  a  corporation  entitled  to 
1046     the  benefits  of  section  262  [^Tl 083]  is  not  based  on  the  invested  capital 
of  the  corporation,  but  is  computed  in  accordance  with  section  328  of 
the  statute,  the  provisions  of  section  326  and  of  articles  831-868  have  no  appli- 
cation to  foreign  corporations.    For  the  same  reason,  when  rendering  a 
return  of  income  on  Form  1120  for  a  foreign  corporation,  no  entry  of  invested 
capital  should  be  made  thereon.    (See  art.  962.) 

*Was  Art.  871  of  Reg.  45.  Therefore,  for  Supplementary  Bulletin  Rulings 
bearing  on  this  Article,  refer  to  Art.  871  in  the  Supplementary  Bulletin  Rulings. 

SPECIAL  CASES 

1243  Art.  901.  Treatment  of  special  cases. — In  the  cases  specified  in  sec- 
1044     tion  327  of  the  statute  the  tax  will  be  specially  determined  under 

the  provisions  of  section  328,  but  the  tax  will  not  ordinarily  be  com- 
puted under  section  328  merely  because  the  corporation's  form  or  manner  of 
organization,  or  the  limitations  imposed  by  section  326,  result  in  a  greater  tax 
than  would  otherwise  be  payable.  A  corporation  which  comes  within  the 
provisions  of  subdivision  (d)  of  section  327  may  make  application  for  assess- 
ment under  the  provisions  of  section  328,  which  application  shall  be  attached 
to  its  return  in  the  form  of  a  statement  setting  forth  in  full:  (a)  The  reasons 
why  the  tax  should  be  so  determined;  (b)  the  facts  upon  which  such  reasons 
are  based;  (c)  an  exact  description  of  each  trade  or  business  or  important 
branch  of  a  trade  or  business  carried  on  by  it;  (rf)  a  statement  of  the  invested 
capital  and  net  income  for  each  year  since  the  beginning  of  the  prewar  period; 
and  (e)  a  statement  showing  the  amount  of  gains,  profits,  commissions,  or 
other  income  derived  on  a  cost-plus  basis  from  Government  contracts  made 
after  April  5,  1917,  and  before  November  12,  1918,  and  showing  the  per  cent 
which  such  income  is  of  the  total  income  of  the  corporation.  (See  sees.  2 
[1,1003]  and  326  and  arts.  831-870  and  1510.) 

COMPUTATION  OF  TAX  IN  SPECIAL  CASES 

1244  Art.  911.  Computation  of  tax  in  special  cases. — In  the  cases  specified 
1049     in  section  327  of  the  statute  the  tax  is  to  be  computed  by  comparison 

with  representative  corporations  whose  invested  capital  can  be  satis- 

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factorily  determined  under  section  326  and  which  are  engaged  in  a  like  or 
similar  trade  or  business  and  similarly  circumstanced.  The  provisions  of 
section  328  do  not  permit  the  determination  of  a  general  average  for  any 
trade  or  business.  In  each  case  which  comes  under  the  provisions  of  section 
327  the  Commissioner  will  determine,  as  nearly  as  may  be,  the  group  or  class 
of  corporations  with  which  the  corporation  should  be  compared  and  the 
amount  which  bears  the  same  ratio  to  the  net  income  of  the  corporation  (in 
excess  of  the  specific  exemption  of  $3,000)  for  the  taxable  year  as  the  average 
tax  of  such  representative  corporations  bears  to  their  average  net  income 
(in  excess  of  the  specific  exemption  of  $3,000)  for  such  year.  The  comparison 
will  take  account  of  similarity  with  respect  to  character  of  business,  size  and 
condition  of  plant,  gross  income,  net  income,  profit  per  unit  of  business 
transacted  and  capital  employed,  the  amount  and  rate  of  war  profits  or  excess 
profits,  and  all  other  relevant  facts  and  circumstances. 

1245  Art.  912.    Determination  of  first  installment  of  tax  in  special 
1049    cases. — In  the  case  of  any  corporation,  other  than  a  foreign  corpora- 
tion or  a  corporation  entitled  to  the  benefits  of  section  262  [1fl083], 

where  no  data  are  available  for  the  determination  of  invested  capital 
for  the  taxable  year,  the  installments  of  the  tax  shall  in  the  first  instance  be 
determined  upon  the  basis  of  an  excess  profits  tax  equal  to  20  per  cent  of  the 
net  income  in  excess  of  $3,000,  but  not  in  excess  of  $20,000,  plus  40  per  cent 
of  the  net  income  in  excess  of  $20,000.  In  any  other  case  under  section  328 
of  the  statute,  other  than  the  case  of  a  foreign  corporation  or  a  corporation 
entitled  to  the  benefits  of  section  262  [1fl083],  but  including  a  case  where 
the  invested  capital  for  the  taxable  year  can  not  be  accurately  determined,  but 
where  a  minimum  amount  of  invested  capital  can  be  determined  with  reason- 
able accuracy,  the  installments  shall  in  the  first  instance  be  determined 
upon  the  basis  of  an  excess  profits  tax  computed  by  using  the  minimum 
invested  capital,  the  tax  in  any  such  case  not  to  exceed  20  per  cent  of  the 
net  income  in  excess  of  $3,000,  but  not  in  excess  of  $20,000,  plus  40  per 
cent  of  the  net  income  in  excess  of  $20,000. 

1246  Art.  913.  Determination  of  first  installment  of  tax  in  the  case  of 
1049    foreign  corporation  or  a  corporation  entitled  to  the  benefits  of  section 

262. — In  the  case  of  a  foreign  corporation  or  a  corporation  entitled  to 
the  benefits  of  section  262  [U 1083]  the  installments  of  the  tax  shall  in  the  first 
instance  be  determined  upon  the  basis  of  a  war  profits  and  excess  profits  tax 
computed  by  using  its  invested  capital  for  the  taxable  year  1917,  such  tax 
for  the  calendar  year  1921  not  to  exceed  20  per  cent  of  the  net  income  not  in 
excess  of  $20,000,  plus  40  per  cent  of  the  net  income  in  excess  of  $20,000. 
For  the  purpose  of  this  article  the  invested  capital  for  1917  shall  be 
adjusted  for  any  subsequent  changes  in  its  amount  due  to  cash  or  pro- 
perty paid  in  or  withdrawn  or  to  surplus  or  undivided  profits  of  prior 
years  retained  in  the  business  and  properly  attributable  to  its  business  within 
the  United  States.  If  the  tax  for  1917  was  determined  under  section  210 
of  the  revenue  act  of  1917,  the  constructive  capital  which  would  result  in  a 
tax  equivalent  to  the  tax  determined  under  that  section  shall  be  used.  In 
the  case  of  a  foreign  corporation  or  a  corporation  entitled  to  the  benefits  of 
section  262  [If  1083]  which  was  organized  subsequent  to  the  taxable  year  1917, 
or  which  had  no  income  from  sources  within  the  United  States  during  1917, 
the  installments  of  the  tax  shall  in  the  first  instance  be  determined  upon  the 
basis  of  an  excess  profits  tax  equal  to  20  per  cent  of  the  net  income  not  in 
excess  of  $20,000,  plus  40  per  cent  of  the  net  income  in  excess  of  $20,000. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

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Regulations 

WAR- PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


1247  Art.  914.  Payment  of  tax  in  special  cases.— In  any  case  falling  under 
1049     the  last  two  articles  the  installments  shall  be  paid  upon  the  basis 

therein  provided  until  the  Commissioner  notifies  the  corporation  of 
the  amount  of  tax  computed  under  section  328.  The  installments  shall  then  be 
recomputed  upon  the  basis  of  an  excess  profits  tax  of  such  amount,  and  if  the 
amount  already  paid  is  less  than  the  amount  which  would  have  already  become 
due  if  the  installments  had  originally  been  computed  upon  that  basis,  the 
additional  amount  shall  be  due  and  payable  ten  days  after  notice  and  demand 
from  the  collector. 

REORGANIZATIONS 

1248  Art.  941.  Valuation  of  asset  upon  change  of  ownership. — Where  a 

1053  business  is  reorganized,  consolidated,  or  transferred,  or  property  is 
transferred,  after  March  3,  1917,  and  an  interest  or  control  of  50  per 

cent  or  greater  in  such  business  or  property  remains  in  the  same  persons  or 
any  of  them,  then  for  the  purpose  of  determining  invested  capital  each  asset 
so  transferred  is  valued  (a)  at  an  amount  representing  its  actual  cash  value, 
subject  to  the  limitations  imposed  by  section  326,  but  not  exceeding  its 
allowable  value,  for  invested  capital  purposes,  in  the  possession  of  the  pre- 
vious owner,  if  a  corporation,  or,  if  not  a  corporation  (b)  at  its  cost  to  such 
previous  owner,  with  proper  adjustments  for  losses  and  improvements. 

FISCAL  YEARS  ENDING  IN  1921  OR  1922 

1 249  Art.  951.  Fiscal  year  with  different  rates. — Section  335  of  the  statute 

1054  applies  to  the  war  profits  and  excess  profits  tax.    For  provisions  with 
respect  to  the  income  tax  see  section  205  of  the  statute  and  articles 

1621-1624.  Subdivision  (a),  which  deals  with  fiscal  years  beginning  in  1920 
and  ending  in  1921,  and  subdivision  (b)  which  deals  with  fiscal  years  begin- 
ning in  1921  and  ending  in  1922,  apply  to  corporations  other  than  personal 
service  corporations. 

1250  Art.  952.  Fiscal  year  of  corporation  ending  in  1921. — The  method 
1054     provided  for  computing  the  tax  for  a  fiscal  year  beginning  in  1920 

and  ending  in  1921  is  as  follows:  (a)  The  tax  attributable  to  the  cal- 
endar year  1920  is  found  by  computing  the  income  of  the  taxpayer  and  the  tax 
thereon  in  accordance  with  the  revenue  act  of  1918  as  if  the  fiscal  year  was  the 
calendar  year  1920,  and  determining  the  proportion  of  such  tax  which  the 
number  of  months  falling  within  the  calendar  year  1920  is  of  the  number  of 
months  in  the  entire  period;  (b)  the  tax  attributable  to  the  calendar  year 
1921  is  found  by  computing  the  income  of  the  taxpayer  and  the  tax  thereon 
in  accordance  with  the  present  statute  as  if  the  fiscal  year  was  the  calendar 
year  1921,  and  determining  the  proportion  of  such  tax  which  the  number  of 
months  falling  within  the  calendar  year  1921  is  of  the  number  of  months  in  the 
entire  period;  and  (c)  the  tax  for  the  fiscal  year  is  found  by  adding  the  tax 
attributable  to  the  calendar  year  1920  and  the  tax  attributable  to  the  calendar 
year  1921. 

1251  Art.  953.    Credits  in  the  case  of  fiscal  year  ending  in  1921. — 

1054     Amounts  previously  paid  by  the  taxpayer  on  account  of  the  excess 
profits  tax  for  its  fiscal  year  ending  in  1921  shall  be  credited  towards 
the  payment  of  the  excess  profits  tax  imposed  for  such  fiscal  year  by^the 

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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


present  statute.  Any  excess  shall  be  credited  or  refunded  in  accordance  with 
the  provisions  of  sect:on  252  of  the  statute.  For  credits  for  foreign  taxes,  see 
section  238  of  the  statute  and  article  611. 

1252  Art.  954.  Fiscal  year  of  corporation  ending  in  1922. — The  method 
1055     provided  for  computing  the  tax  for  a  fiscal  year  beginning  in  1921 

and  ending  in  1922  is  as  follows:  The  tax  attributable  to  the  calendar 
year  1921  is  found  by  computing  the  income  of  the  taxpayer  and  the  tax 
thereon  in  accordance  with  the  statute  as  if  the  fiscal  year  was  the  calendar 
year  1921,  and  determining  the  proportion  of  such  tax  which  the  number  of 
months  falling  within  the  calendar  year  1921  is  of  the  number  of  months  in 
the  entire  period.  For  credits  for  foreign  taxes,  see  section  238  of  the  statute 
and  artic  e  611. 

1253  Art.  955.  Illustrations  of  computation  of  tax  for  fiscal  year. — 

1054  (a)  A  corporation  makes  its  return  on  the  basis  of  a  fiscal  year  ending 
March  31,  1921.    Its  invested  capital  and  net  income  are  $100,000 

and  $74,000,  respectively,  as  computed  under  the  revenue  act  of  1918,  and 
$100,000  and  $68,000,  respectively,  as  computed  under  the  present  statute. 
Such  a  difference  in  amounts  of  net  income  may  readily  occur  owing  to 
differences  in  the  provisions  of  the  two  statutes. 

1254  (1)  The  excess  profits  tax,  computed  under  the  revenue  act  of  1918 
upon  the  basis  of  an  invested  capital  of  $100,000  and  a  net  income  of 

$74,000,  is  $23,400. 

1255  (2)  The  excess  profits  tax  computed  under  the  revenue  act  of  1921, 
upon  a  basis  of  an  invested  capital  of  $100,000  and  a  net  income  of 

$68,000,  is  $21,000. 

1256  (3)  The  total  excess  profits  tax  for  the  fiscal  year  ending  March 
31,  1921,  will  be  the  sum  of  (a)  the  proportion  of  the  tax  computed 

under  the  revenue  act  of  1918  which  the  portion  of  the  fiscal  year  falling  within 
the  calendar  year  1920  is  of  the  entire  period  (i.e.,  nine-twelfths  of  the  excess- 
profits  tax,  $23,400,  computed  under  revenue  act  of  1918)  or  $17,550,  and  (b) 
the  proportion  of  the  tax  computed  under  the  revenue  act  of  1921  which  the 
portion  of  the  fiscal  year  falling  within  the  calendar  year  1921  is  of  the  entire 
period  (i.  e.,  three-twelfths  of  the  excess  profits  tax,  $21,000,  computed  under 
the  revenue  act  of  1921)  or  $5,250.  The  total  excess  profits  tax  is  $17,550 
plus  $5,250,  or  $22,800. 

1257  (b)  The  excess  profits  tax  for  a  fiscal  year  ending  in  1922  will  be 

1055  an  amount  equivalent  to  the  same  proportion  of  a  tax  computed  under 
this  statute  which  the  portion  of  such  period  falling  within  the  calendar 

year  1921  is  of  the  entire  period.  In  the  case  of  a  corporation  making  its 
return  on  the  basis  of  a  fiscal  year  ending  March  31,  1922,  having  an  invested 
capital  and  net  income  of  $100,000  and  $68,000  respectively,  the  excess 
profits  tax  computed  under  the  revenue  act  of  1921  will  be  $21,000.  The  tax 
applicable  to  the  fiscal  year  ending  March  31,  1922,  is  $15,750  (i.  e.,  nine- 
twelfths  of  the  excess  profits  tax,  $21,000). 


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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


RETURNS 

1258  Art.  961.  Returns. — Every  corporation,  except  life  insurance  com- 

1056  panies,  domestic  or  foreign,  not  exempt  under  section  304  of  the 
statute  and  article  751,  shall  make  a  return  for  the  purpose  of  excess 

profits  tax  on  form  1120.  The  return  shall  be  made  and  the  tax  shall  be  paid 
as  provided  in  the  case  of  a  return  for  and  payment  of  the  income  tax  by  cor- 
porations. See  generally  Parts  II  A  and  III  of  the  regulations  and  particu- 
larly sections  239,  240,  241,  250,  and  253  of  the  statute  and  the  articles 
thereunder. 

1259  Art.  962.  Returns  in  special  cases. — Where  a  corporation  coming 
1014  under  the  provisions  of  section  301  (b)  of  the  statute  computes 
1049     its  war  profits  credit  upon  the  basis  of  the  sum  of  {a)  the  specific 

exemption  and  (b)  an  amount  equal  to  10  per  cent  of  the  invested 
capital  for  the  taxable  year,  the  items  on  form  1120  which  relate  solely  to  the 
net  income  or  to  the  invested  capital  for  the  prewar  period  need  not  be  filled 
in.  Where  such  a  corporation  enters  on  its  return  a  war  profits  and  excess 
profits  tax  equal  to  the  amount  of  the  maximum  tax  determined  under  section 
302  of  the  statute,  the  items  on  form  1120  which  relate  solely  to  the  net 
income  for  the  prewar  period  and  the  items  which  relate  to  the  invested  capital 
for  the  prewar  period  and  for  the  taxable  year  need  not  be  filled  in.  Likewise 
in  the  case  of  a  foreign  corporation,  or  a  corporation  entitled  to  the  benefits 
of  section  262,  the  same  items  may  be  disregarded,  except  that  balance  sheets 
as  of  the  beginning  and  the  end  of  the  taxable  year  for  the  entire  business 
of  the  corporation  both  within  and  without  the  United  States  shall  be  sub- 
mitted. See  article  870.  The  Commissioner  may  at  any  time  specifically 
call  for  all  or  any  part  of  the  information  which  under  this  article  is  not 
required  to  be  entered  on  the  return.  In  any  case,  however,  where  a  claim 
is  made  under  sections  327  and  328  of  the  statute,  other  than  in  the  case  of  a 
foreign  corporation,  or  a  corporation  entitled  to  the  benefits  of  section  262, 
the  corporation  should  fill  out  all  items  of  the  return  so  far  as  possible  and 
submit  a  statement  explaining  why  it  is  impracticable  to  fill  out  the  entire 
return. 

SALE  OF  MINERAL  DEPOSITS 

1260  Art.  971.  Tax  on  sale  of  mineral  deposits. — In  the  case  of  a  sale  of 

1057  mines,  oil  or  gas  wells,  or  any  interest  therein,  as  described  in  article 
13,  the  portion  of  the  war  profits  and  excess  profits  tax  attributable 

to  such  a  sale  shall  not  exceed  20  per  cent  of  the  selling  price.  To  determine 
the  application  of  this  provision  to  a  particular  case  the  corporation  should 
compute  the  war  profits  and  excess  profits  tax  in  the  ordinary  way  upon  its 
net  income,  including  its  net  income  from  any  such  sale.  The  proportion 
of  the  total  tax  indicated  by  the  ratio  which  the  taxpayer's  net  income  from 
the  sale  of  the  property,  computed  as  prescribed  in  article  714,  bears  to  its 
total  net  ncome  is  the  portion  of  the  tax  attributable  to  such  sale,  and  if  it 
exceeds  20  per  cent  of  the  selling  price  of  the  property  such  portion  of  the  tax 
shall  be  reduced  to  that  amount.    (See  arts.  219-221.) 

1261  Art.  972.  Illustration  of  computation  of  tax  where  sale  of  mineral 

1057     deposits. — In  the  case  of  the  corporation  used  as  an  illustration  in 
article  715,  let  it  be  assumed  that  its  gross  income  for  1921  included 
$15,000  derived  from  a  bona  fide  sale  of  an  oil  well,  the  principal  value  of 

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which  had  been  demonstrated  by  exploration  and  discovery  work  done  by 
the  corporation,  and  that  the  Commissioner  finds  under  article  714  that  only 
$800  of  the  deductions  allowed  arc  properly  applicable  to  the  gross  income 
derived  from  the  sale.  The  portion  of  the  net  income  attributable  to  the  sale 
would  be  $14,200,  which  is,  35.5  per  cent  of  the  entire  net  income  of  $40,000, 
and  the  portion  of  the  tax  for  that  year  attributable  to  the  sale  will  be  35.5 
per  cent  of  the  entire  tax  of  $9,240,  or  $3,280.20.  But  this  portion  of  the  tax 
can  not  exceed  20  per  cent  of  the  selling  price  ($15,000)  and  is  accordingly 
reduced  to  $3,000.  The  total  tax  will  be  $5,959.80  (the  portion  of  the  tax 
not  affected)  p  us  $3,000,  or  $8,959.80  (instead  of  $9,240). 

EFFECTIVE  DATE  OF  TITLE 

1262    Art.  980.  Effective  dates. — This  title  takes  effect  as  of  January  fcj 
1058     1921.    It  imposes  no  tax  for  any  period  prior  to  that  date  or  subse- 
quent to  December  31,  1921. 


CONSOLIDATED  RETURNS  FOR  YEAR  1917 

1  263    Art.  1735.  Consolidated  returns  for  year  1917. — Section  1331  applies 
1079     only  to  the  tax  [war-profits  and  excess  profits  taxes]  levied  by  the 
Revenue  Act  of  1917.    See  Regulations  41. 


RULES  AND  REGULATIONS 

1  264    Art.  1800.  Promulgation  of  regulations. — In  pursuance  of  the  statute 
the  foregoing  regulations  are  hereby  made  and  promulgated  and  all 
rulings  inconsistent  herewith  are  hereby  revoked. 

David  H.  Blair, 
Commissioner  of  Internal  Revenue. 

Approved  February  15,  1922. 
A.  W.  Mellon, 

Secretary  of  the  Treasury. 


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4-19-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.-1922. 


1265  Consolidated  Returns  for  Year  1917. — The  Committee  has  carefully 
1079  considered  the  appeal  of  the  M  Company  from  the  action  of  the 
1263  Income  Tax  Unit  in  requiring  consolidated  returns  from  the  appellant 
company  and  the  O  Company  for  the  years  1917,  1918,  and  1919. 

The  relevant  facts  indicate  that  the  M  Company  was  organized  for  the  pur- 
pose of  engaging  in  the  real  estate  brokerage  business;  that  its  income  is  deriv- 
ed solely  from  commissions  earned  from  the  sales  and  rental  of  real  estate,  from 
placing  insurance,  and  from  activities  of  a  similar  nature;  that  the  0  Company- 
was  organized  by  A  for  the  purpose  of  holding  such  parcels  of  real  estate  as 
he  might  from  time  to  time  acquire.  During  the  year  1917  the  O  Company 
made  no  purchases  or  sales  of  any  property,  and  its  income  consisted  of  rents 
received  from  houses  owned.  Since  the  organization  of  the  two  corporations 
the  only  intercompany  transactions  which  have  occurred  are  two  loans  of  x 
dollars  each;  in  each  instance,  however,  interest  was  charged  at  a  commercial 
and  legal  rate  of  6  per  cent.  During  1917  A  owned  100  per  cent  of  the  capital 
stock  of  the  0  Company  and  86  per  cent  of  the  stock  of  the  M  Company; 
A's  wife  owned  4  per  cent  of  the  stock  of  the  M  Company;  and  the  remaining 
10  per  cent  of  the  stock  of  that  corporation  was  owned  by  the  secretary  of 
the  corporation,  who  also  acted  as  secretary  of  the  0  Company. 

In  considering  the  point  at  issue  so  far  as  concerns  the  taxable  year  1917, 
the  Committee  has  referred  to  articles  77  and  78  of  Regulations  41  issued  under 
the  Revenue  Act  of  1917  and  the  provisions  of  T.  D.  2662.  Consideration 
has  also  been  given  to  section  1331  of  the  Revenue  Act  of  1921,  which  treats 
of  the  conditions  and  requirements  for  the  filing  of  consolidated  returns  for 
the  taxable  year  1917. 

Section  1331,  Revenue  Act  of  1921,  provides  tf[1079  herein]. 

A  careful  analysis  of  the  provisions  of  the  above-quoted  section  when 
considered  in  connection  with  the  facts  and  conditions  obtaining  in  this  case 
leads  the  Committee  to  the  conclusion  that  the  M  Company  and  the  O  Com- 
pany were  not  affiliated  or  interrelated  to  the  extent  of  requiring  a  consolidated 
return  for  the  taxable  year  1917. 

However,  consideration  of  this  matter  for  the  years  1918  and  1919 
presents  a  different  situation  and  requires  a  determination  under  the  pro- 
visions of  section  240,  Revenue  Act  of  1918,  as  amplified  by  article  631  of 
Regulations  45.    Section  240,  Revenue  Act  of  1918,  provides  as  follows: 

(a)  That  corporations  which  arc  affiliated  within  the  meaning  of  this  section  shall 
*    *    *    make  a  consolidated  return  of  net  income  and  invested  capital    *    *  *. 

(b)  For  the  purpose  of  this  section  two  or  more  domestic  corporations  shall  be  deemed 
to  be  affiliated  (1)  if  one  corporation  owns  directly  or  controls  through  closely  affiliated 
interests  or  by  a  nominee  or  nominees  substantially  all  the  stock  of  the  other  or  others, 
or  (2)  if  substantially  all  of  the  stock  of  two  or  more  corporations  is  owned  or  controlled  by 
the  same  interests. 

This  section  provides  that  corporations  are  affiliated  when  substantially 
all  of  the  stock  is  merely  controlled  by  the  same  interest.  It  also  omits  the 
three  limiting  provisions  of  section  1331,  Revenue  Act  of  1921,  which  apply 
to  returns  for  the  taxable  year  1917.  While  it  is  true  that  the  requirement 
of  consolidated  returns  is  based  upon  the  principle  of  levying  the  tax  according 
to  the  true  net  income  and  invested  capital  of  a  single  business  enterprise, 
even  though  the  business  is  operated  through  more  than  one  corporation, 
section  240  specifically  defines  affiliated  corporations  and  provides  that  such 
corporations  shall  file  consolidated  returns.  It  necessarily  follows  that 
whether  the  corporations  in  the  instant  case  should  file  consolidated  returns 
for  1918  and  1919  depends  wholly  on  the  question  as  to  whether  or  not  sub- 

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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


stantially  all  of  their  stock  was  owned  or  controlled  by  the  same  interests 
during  these  years.  The  foregoing  statement  of  facts  indicates  that  the  sole 
stockholder  of  the  0  Company  owned  86  per  cent  of  the  stock  of  the  M 
Company  and  that  10  per  cent  of  the  stock  of  the  latter  company  was  owned 
by  the  secretary  of  the  O  Company. 

Upon  such  facts  the  Committee  is  brought  to  the  conclusion  that  such 
stock  ownership  constitutes  control  within  the  meaning  of  section  240  of  the 
Revenue  Act  of  1918  and,  accordingly,  that  these  corporations  were  affiliated 
to  the  extent  of  requiring  consolidated  returns  for  the  years  1918  and  1919. 

The  Committee  therefore  recommends  in  the  appeal  of  the  M  Company 
that  consolidated  returns  should  be  required  for  the  years  1918  and  1919  in 
accordance  with  the  requirements  of  section  240,  Revenue  Act  of  1918,  and 
that  such  returns  should  not  be  required  for  1917  under  the  provisions  of 
articles  77  and  78  of  Regulations  41,  issued  under  the  Revenue  Act  of  1917, 
and  section  1331,  Revenue  Act  of  1921.  (1-16-234  :A.  R.  R.  855  — Bulletin 
I  C22)-16.) 


(T.  D.  3328.) 

1266  War  Excess  Profits  Tax  (1917  Act) .  Article s  2  7  and  46  of  Regulations 
41  amended. — Articles  27  and  46  of  Regulations  41  are  hereby 

amended  to  read  as  follows: 

1267  Art.  27.   Dividends  received  from  a  foreign  corporation  which  is 
subject  to  Federal  Income  Tax. — In  the  case  of  income  derived  by 

a  corporation  or  partnership  from  dividends  upon  the  stock  of  a  foreign 
corporation,  part  of  whose  net  income  is  subject  to  the  income  tax,  there  shall 
be  deducted  the  amount  of  the  dividends  received  upon  such  stock. 

1268  Dividends,  upon  the  stock  of  a  foreign  corporation,  part  of  whose 
net  income  is  subject  to  the  income  tax,  received  by  an  individual, 

as  a  part  of  his  income  from  trade  or  business,  shall  not  be  included  in  his 
net  income  in  computing  the  war  excess  profits  tax.* 

1 269  Art.  46.  Treatment  of  stock  of  foreign  corporations  when  held  by 
domestic  corporations  or  partnerships  or  by  citizens  or  residents  of 

the  United  States. — In  the  case  of  domestic  corporations  or  partnerships 
and  of  citizens  or  residents  of  the  United  States,  holding  stock  in  a  foreign 
corporation,  part  of  whose  net  income  is  subject  to  the  income  tax,  the  value 
of  the  stock  in  such  foreign  corporation  shall  not  be  included  in  invested 


*Prior  to  its  amendment  by  T.  D.  3328,  ^1267  and  ^1268  above,  Article  27  of  Regula- 
tions 41  read  as  follows: 

Art.  27.  Dividends  received  from  a  foreign  corporation  which  is  subject  to  Federal 
income  tax. — In  the  case  of  income  derived  by  a  corporation  or  partnership  from  dividends 
upon  the  stock  of  a  foreign  corporation,  part  of  whose  net  income  is  subject  to  the  income 
tax,  there  shall  be  deducted  only  that  proportion  of  the  dividends  received  upon  such  stock 
which  the  net  income  of  such  foreign  corporation  from  sources  within  the  United  States 
is  of  its  entire  net  income. 

Where  dividends  upon  the  stock  of  a  foreign  corporation  are  received  by  an  individual, 
as  a  part  of  his  income  from  trade  or  business,  there  shall  be  included  in  the  net  income 
that  proportion  of  the  dividends  received  upon  such  stock  which  the  net  income  of  such 
corporation  from  sources  outside  the  United  States  is  of  its  entire  net  income. 

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WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 


capital.*  (T.  D.  3328,  signed  by  Commissioner  D.  H.  Blair,  and  dated 
May  12,  1922.) 


*Prior  to  its  amendment  by  T.  D.  3328,  1fl269  above,  Article  46  of  Regulations  41 
read  as  follows: 

Art.  46.  Treatment  of  stock  of  foreign  corporations  when  held  by  domestic  corporations 
or  partnerships  or  by  citizens  or  residents  of  the  United  States. — In  the  case  of  domestic 
corporations  or  partnerships  and  of  citizens  or  residents  of  the  United  States  holding 
stock  in  a  foreign  corporation  part  of  whose  net  income  is  subject  to  the  income  tax,  there 
shall  be  included  in  invested  capital  such  proportion  of  the  value  of  the  stock  in  such 
foreign  corporation  as  the  net  income  of  such  foreign  corporation  from  sources  outside 
the  United  States  is  of  its  entire  net  income. 


(T.  D.  3334.) 

1270  Revenue  Act  of  1917:  Decision  of  Court:  Invested  Capital:  Selling 
Agent:  Taxability  Under  Section  209. — Plaintiff  corporation  acted 

as  sole  agent  for  a  mining  company  under  an  arrangement  contemplating  that 
it  should  discount  drafts  in  the  case  of  foreign  shipments  and  pay  the  amount 
of  the  invoices  in  the  case  of  domestic  shipments,  retaining  in  both  cases 
only  commissions  and  interest,  so  that  the  principal  was  constantly  in  the 
corporation's  debt  for  advances.  The  corporation  was  incorporated  for 
$25,000,  and  in  1917  had  capital,  at  the  beginning  of  the  year,  of  $51,074, 
and  income  of  $26,890.34  from  commissions  from  selling  for  account  of  its 
principal,  $22,133.25  profits  from  buying  and  selling  on  its  own  account,  and 
$5,851.90  from  interest.  In  1915,  the  proportion  of  gross  profits  from  trading 
on  its  own  account  was  23%;  in  1916,  9.8%;  and  in  1917,  45%.  Its  profits 
during  1917  were  retained,  and  not  distributed  as  dividends,  and  its  officers 
made  substantial  advances  to  aid  it  in  financing  the  business.  The  capital 
of  the  corporation  was  not  used  merely  to  pay  ordinary  expenses,  but  to  assist 
in  paying  advances  to  its  principal,  as  well  as  to  trade  on  its  own  account. 
During  1917  its  capital  was  engaged  in  its  business  and  was  being  turned  over 
in  connection  with  sales,  its  advances  including  capital  available  or  capital 
repaid  from  advances.  On  December  31,  1917,  when  its  bank  balance  was 
larger  than  in  any  other~month  of  the  year,  it  was  only  $16,501.67,  while  its 
capital  and  surplus  amounted  to  $78,330.  Held,  that  such  corporation  did 
not  merely  buy  and  sell  on  commission  but  traded  substantially  on  its  own 
account,  and  had  a  substantial  invested  capital  which  was  employed  in  making 
advances  to  or  on  account  of  its  principal,  and  also  in  buying  merchandise  on 
its  own  account  for  profitable  sale,  and  hence  it  was  not  entitled  to  assessment 
under  Section  209  of  the  Revenue  Act  of  1917,  which  applies  only  to  businesses 
having  no  invested  capital  or  not  more  than  a  nominal  capital. 

1271  The  decision  [syllabus  only,  If  1270  above]  of  the  United  States 
District  Court  for  the  Southern  District  of  New  York,  rendered 

March  10,  1922,  in  the  case  of  R.  H.  Martin,  Inc.  v.  William  H.  Edwards, 
Collector,  the  syllabus  of  which  appears  above  is  published  not  as  a  ruling 
of  the  Treasury  Department,  but  for  the  information  of  internal  revenue 
officers  and  others  concerned.  (T.  D.  3334,  signed  by  Commissioner  D.  II. 
Blair,  and  dated  May  25,  1922.) 


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1  272  Consolidated  returns  for  year  1917.— The  Committee  has  had  under 
1079  consideration  the  appeal  of  the,  M  Company,  the  O  Company,  and 
1263  P  Company  from  the  ruling  of  the  Income  Tax  Unit  that  these  com- 
panies were  affiliated  and  must  file  consolidated  returns  of  net  income 

for  the  years  1917,  1918,  and  1919. 

1273    The  O  Company  and  the  P  Company  were  old  established  businesses 
even  prior  to  1913,  and  on  January  1,  1917,  the  capital  stock  out- 
standing was  held  as  follows: 


\  o 

Company 

Company 

Per  cent. 
35.0 
15.0 
.2 
49.8 

Per  cent. 
50 
None 
25 
25 

1  274    B  is  the  wife  of  A;  D  is  the  wife  of  C,  and  the  sister  of  A. 

1275  In  a  sworn  statement  of  facts  filed  with  the  case  it  is  stated: 

In  the  years  prior  to  1917,  C  had  made  numerous  attempts  to  acquire  a  more  sub- 
stantial holding  in  the  O  Company,  but  none  of  the  stockholders  in  the  O  Company  would 
part  with  any  of  their  stock.  Early  in  1917,  C  succeeded  in  getting  the  stockholders  of 
the  0  Company  to  agree  to  sell  certain  of  the  assets  of  the  O  Company  to  a  new  corporation, 
the  M  Company,  with  a  capital  of  x  dollars,  in  which  company  he  was  to  have  10  per  cent 
of  the  stock  with  the  understanding  that  if  the  new  corporation  subsequently  increased  its 
capital  stock,  as  was  then  contemplated,  he  was  to  have  the  privilege  of  increasing  his 
holdings.  At  the  date  of  the  incorporation  of  said  company,  A  acquired  49  9/10  per  cent 
of  the  stock;  B  acquired  1/10  per  cent,  and  D  acquired  40  per  cent  of  the  stock.  On  Jan- 
uary 2,  1918,  the  capital  stock  was  increased  to  1.3*  dollars,  after  which  increase,  C  owned 
15  per  cent  of  the  stock;  D  owned  35  per  cent  of  the  stock;  the  other  holdings  remaining 
approximately  the  same.  On  August  1,  1918,  the  capital  stock  was  further  increased, 
after  which  increase  C  owned  22  per  cent  of  the  stock,  D  owned  28  per  cent  of  the  stock, 
the  other  holdings  remaining  approximately  the  same.  It  will  be  noted  that  the  stock- 
holdings in  the  M  Company  were  in  different  proportions  than  the  stockholdings  in  either 
of  the  other  two  corporations. 

1276  The  record  shows  that  the  O  Company  and  the  P  Company  ceased 
active  operations  on  August  — ,  1917,  when  the  M  Company  was 

organized  and  commenced  operations.  The  appellants  state  that  it  was  the 
intention  to  liquidate  the  two  companies  first  named  as  soon  as  possible, 
but  this  was  not  finally  accomplished  until  April,  1919,  the  reason  for  the 
delay  being  that  the  stockholders  could  not  agree  on  the  value  of  the  good  will 
of  the  old  companies,  on  account  of  the  fact  that  the  four  individual  stock- 
holders owned  different  amounts  of  stock  in  each  of  these  companies  and  their 
individual  interests  were  affected  differently  in  each  company;  that  it  was 
not  until  the  full  effect  of  the  Food  Administration  rules  upon  the  business 
could  be  determined  that  it  was  possible  for  the  conflicting  interests  to  reach 
an  agreement  as  to  the  value  of  this  good  will,  and  that,  pending  final  settle- 
ment, a  temporary  arrangement  was  entered  into  through  which  the  new  com- 
pany paid  to  the  old  companies  certain  royalties  per  unit  of  output.  It  is 
further  stated  that  in  the  early  part  of  1919,  after  the  suspension  of  control  by 
the  Food  Administration,  it  was  apparent  that  the  good  will  of  the  old  com- 
panies had  practically  been  destroyed  and  that  the  future  of  the  new  company 
must  be  based  primarily  on  its  own  efforts  and  ability  to  stay  in  the  business. 
Proper  action  was  then  taken  to  liquidate  the  affairs  of  the  old  companies, 
which  were  finally  dissolved  in  April,  1919. 

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1  2  77  Frbftl  the  above  it  is  apparent  that  at  all  times  A  and  his  wife  and 
C  and  his  wife  together  owned  exactly  50  per  cent  of  the  stock  in 
each  of  the  three  corporations  and  the  Unit  has  held  that,  as  the  interests 
of  husband  and  wife  are  identical,  the  capital  stock  of  the  three  companies 
was  held  by  the  same  interests  in  the  same  proportion  and  that  consolidated 
returns  must  be  filed.  It  is  from  this  ruling  that  the  companies  have  appealed, 
on  the  ground  that  the  interests  of  husband  and  wife  are  separate  and  distinct; 
that  no  partnership  existed  between  husband  and  wife  as  to  property  owner- 
ship and  that  because  of  the  wide  disparity  of  stockholdings  of  the  individuals 
in  each  of  the  three  corporations,  consolidated  returns  should  not  be  required. 
1  278  Under  the  old  common-law  rules  it  appears  that  a  husband  and  wife 
were  considered  as  one  and  the  same,  but  within  the  past  few  years 
the  rights  and  liabilities  of  husband  and  wife  have  undergone  vast  changes, 
particularly  in  some  States.  This  has  been  brought  about  partly  by  the  courts 
and  partly  by  the  State  legislatures,  the  general  effect  of  which  has  been  to 
secure  to  the  wife  the  right  of  independent  control  of  her  own  property  and 
the  right  to  contract,  sue,  and  be  sued  without  her  husband,  under  certain 
restrictions. 

1  279    The  Committee  has  examined  the  statutes  of  the  State  of  Wisconsin, 
where  the  corporations  in  question  and  all  of  the  individual  stock- 
holders are  domiciled. 

1  280    Section  2340  of  the  statutes  provides: 

The  real  estate  of  every  description,  including  all  held  in  joint  tenancy  with  her  husband, 
and  the  rents,  issues  and  profits  thereof  of  any  female  now  married  shall  not  be  subject  to 
the  disposal  of  her  husband,  but  shall  be  her  sole  and  separate  property  as  if  she  were  un- 
married. 

1281  Section  2341  of  the  statutes  provides: 

The  real  and  personal  property  of  any  female  who  may  hereafter  marry  and  which  she 
shall  own  at  the  time  of  marriage  and  the  rents,  issues  and  profits  thereof  shall  not  be 
subject  to  the  disposal  of  her  husband  nor  be  liable  for  his  debts  and  shall  continue  her  sole 
and  separate  property. 

1282  Section  2342  of  the  statutes  provides: 

Any  married  female  may  receive  by  inheritance  or  by  gift,  grant,  devise  or  bequest 
from  any  person,  hold  to  her  sole  and  separate  use,  convey  and  devise  real  and  personal 
property  and  any  interest  or  estate  therein  of  any  description,  including  all  held  in  joint 
tenancy  with  her  husband,  and  the  rents,  issues  and  profits  thereof  in  the  same  manner  and 
with  like  effect  as  if  she  were  unmarried, and  the  same  shall  not  be  subject  to  the  disposal  of 
her  husband  nor  be  liable  for  his  debts.  Any  conveyance,  transfer  or  lien  executed  by 
either  husband  or  wife  to  or  in  favor  of  the  other  shall  be  valid  to  the  same  extent  as 
between  other  persons. 

1283  Section  2343  of  the  statutes  provides: 

The  individual  earnings  of  every  married  woman,  except  those  accruing  from  labor 
performed  for  her  husband,  or  in  his  employ  or  payable  by  him,  shall  be  her  separate 
property  and  shall  not  be  subject  to  her  husband's  control  or  liable  for  his  debts. 

12  84  Section  2345  of  the  statutes  provides  that  a  married  woman  may  sue 
in  her  own  name,  and  shall  have  all  the  remedies  of  an  unmarried 
woman  in  regard  to  her  separate  property  or  business,  and  to  recover  her 
earnings,  and  shall  be  liable  to  be  sued  in  respect  to  her  separate  property  or 
business,  and  judgments  may  be  rendered  against  her  and  be  enforced  against 
her  and  her  separate  property  in  all  respects  as  if  she  were  unmarried. 

1285  Section  2346  of  the  statutes  provides  that  a  husband  is  not  liable 
for  the  individual  debts  of  his  wife,  but  that  she  is  liable  therefor,  as 

if  she  were  unmarried. 

1286  A  careful  study  of  the  facts  in  this  case  convinces  the  Committee 
of  the  clear  independence  of  action  of  the  four  stockholders  in  these 

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companies  in  acquiring  and  disposing  of  their  stock  and  it  seems  equally 
clear  that  the  State  statutes  gave  to  them  the  right  to  such  independence. 
The  absence  of  any  ulterior  motive  on  the  part  of  the  stockholders  has  also 
been  fully  established.  The  Committee,  therefore,  is  of  the  opinion  that 
because  of  the  disparity  of  stockholdings  of  the  stockholders  in  these  three 
corporations  the  Bureau  would  be  unable  to  compel  the  corporations  to  pay  a 
tax  based  upon  a  consolidated  return  of  net  income  unless  the  corporations 
voluntarily  paid  such  tax,  and  that,  therefore,  consolidated  returns  in  this  case 
should  neither  be  required  nor  permitted. 

1287  It  is  therefore  recommended,  in  the  appeal  of  the  M  Company,  the 
O  Company,  and  the  P  Company,  that  the  ruling  of  the  Income  Tax 
Unit  that  these  companies  were  affiliated  and  should  file  consolidated  returns 
for  the  years  1917,  1918,  and  1919,  be  reversed,  and,  accordingly,  that  the 
appeal  be  sustained.    ( 1-26-373:  A.  R.  R.  942.— Bulletin  I  f22)-26.) 


(T.  D.  3367.) 

1 288    Article  836,  Regulations  45,  (1920  edition)  and  Article  836,  Reg- 
757     ulations  62,  amended. — Article  836,  Regulations  45,  (1920  edition) 
1192     and  Article  836,  Regulations  62,  are  hereby  amended  to  read  as 
follows : 

Article  836.  Tangible  property  paid  in;  value  in  excess  of  par  value  of 
stock. — The  paid-in  surplus  allowed  in  any  case  is  confined  to  the  value  def- 
initely known  or  accurately  ascertainable  at  the  time  the  property  is  paid  in. 
Evidence  offered  to  support  a  claim  for  a  paid-in  surplus  must  be  as  of  the 
date  of  the  payment.  It  may  consist  among  other  things  of  (a)  an  appraisal 
of  the  property  by  disinterested  authorities;  (b)  a  certificate  of  the  assessed 
value  in  the  case  of  real  estate,  or  (c)  evidence  of  a  market  price  in  excess  of 
the  par  value  of  the  stock  or  shares.  Opinion  evidence,  expert  or  otherwise, 
of  the  value  of  property  as  of  a  prior  date  will  not  be  accepted.  Retrospective 
appraisals  submitted  in  support  of  a  claim  for  a  paid-in  surplus  will  not  be 
accepted  in  any  case  where  other  reasonably  satisfactory  evidence  is  available 
and  in  any  case  will  be  accepted  only  after  rigid  scrutiny  and  will  be  followed 
only  to  the  extent  to  which  their  reasonableness  is  fully  established.  The 
property  which  was  paid  in  is  the  basis  of  the  appraisal,  and  the  appraisal 
must  reconcile  the  accounts  so  as  to  reflect  accurately  the  actual  value  on  the 
date  as  of  which  the  appraisal  is  made  and  the  depreciation  sustained.  Proper 
consideration  must  in  all  cases  be  given  to  depreciation  and  the  expired  and 
remaining  serviceable  life  of  the  property  must  be  shown.  To  be  acceptable 
retrospective  appraisal  must  show:  (1)  the  history  of  the  business  and  manner 
in  which  the  information  or  data  was  acquired;  (2)  the  manner  in  which  the 
appraisals  were  constructed;  (3)  the  inventory  on  the  date  of  the  appraisal 
in  detail;  (4)  the  date  of  acquisition  of  all  items  remaining  in  the  inventory 
as  of  the  date  of  appraisal;  (5)  the  elimination  from  the  inventory  of  all 
items  acquired  subsequent  to  the  date  as  of  which  the  appraisal  is  made  and 
how  this  was  effected  (all  items,  the  date  of  acquisition  of  which  can  not  be 
definitely  determined,  should  be  listed  separately  and  all  the  facts  bearing 
upon  the  date  of  acquisition  given);  (6)  the  replacement  cost  at  the  date  as  of 
which  the  appraisal  is  made  of  each  item  accepted  as  on  hand  on  that  date 
determined  upon  competent  data,  with  a  statement  of  the  method  employed 
in  arriving  at  such  cost  (estimate  and  general  statements  will  not  be  accepted); 
(7)  the  rate  and  total  amount  of  depreciation  as  shown  by  the  books;  (8)  the 

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rate  and  total  amount  of  depreciation  taken  upon  each  item  included  in  the 
appraisal  for  the  purposes  of  the  appraisal  (if  other  than  normal  rates  of 
depreciation  are  used  the  reason  therefor  and  the  method  of  computing 
depreciation  must  be  fully  explained);  (9)  the  actual  cost  when  ascertainable 
of  each  item  included  in  the  appraisal;  (10)  the  book  value  on  the  date  as  of 
which  the  appraisal  is  made  of  all  the  items  included  in  the  appraisal,  and 
(11)  a  detailed  statement  of  all  plant  facilities  and  additions,  represented  by 
capital  expenditures  previously  written  off,  which  were  still  in  use  on  the  date 
as  of  which  the  appraisal  was  made  and  all  the  depreciation  actually  sustained 
or  accrued  on  such  items.  No  claim  will  be  allowed  for  paid-in  surplus  in 
any  case  in  which  the  addition  of  value  has  been  developed  or  ascertained 
subsequent  to  the  date  on  which  the  property  was  paid  in  to  the  corporation, 
or  in  respect  of  property  which  the  stockholders  or  their  agents  on  or  shortly 
before  the  date  of  such  payment  acquired  at  a  bargain  price,  as  for  instance, 
at  a  receiver's  sale.  Generally,  allowable  claims  under  this  article  will  arise 
out  of  transactions  in  which  there  has  been  no  substantial  change  of  beneficial 
interest  in  the  property  paid  in  to  the  corporation  and  in  all  cases  the  proof 
of  value  must  be  clear  and  explicit.  (T.  D.  3367,  signed  by  C.  P.  Smith, 
Acting  Commissioner  of  Internal  Revenue,  and  dated  July  10,  1922.) 

[Comment:  All  in  amended  Article  836,  as  printed  above,  relating  to 
retrospective  appraisals  is  new.  Otherwise  no  change  in  effect  except  that 
the  word  "evidence"  in  (c)  in  the  third  sentence  was  formerly  "proof." — 
The  Corporation  Trust  Company.] 


(T.  D.  3389). 

[Note:  This  amendment  of  Arts.  77  and  78,  of  Regulations  41,  1917  Act, 
is  in  conformity  zoith  the  provisions  of  Section  1331  of  the  Revenue  Act  of  1921 
(1fl079-l08l).  For  reference  purposes  T.  D.  2662  {March  6,  1918),  as  amended 
by  T.  D.  2901  (July  29,  1919),  is  produced  below  as  a  footnote(see  page  468). — 
The  Corporation  Trust  Company.] 

1289  [1917  Act]  Articles  77  and  78,  Regulations  41,  amended,  Treasury 
1079  Decision  2662,  as  amended  by  T.  D.  2901,  superseded. — Treasury 
1263  Decision  2662,  as  amended  by  Treasury  Decision  2901,  is  hereby 
1265  superseded  and  Articles  77  and  78,  of  Regulations  41,  are  hereby 
1272     amended  to  read  as  follows:  ^ 

1 290  Art.  77.   When  affiliated  corporations  or  partnerships  must  furnish 
information  as  to  intercompany  relations. — For  the  purpose  of  the 

excess  profits  tax,  every  corporation  or  partnership  will  describe  in  its  return 
all  its  intercompany  relationships  with  other  corporations  and  partnerships 
with  which  it  is  affiliated,  and  will  furnish  such  information  in  relation  thereto 
as  will  enable  the  Commissioner  of  Internal  Revenue  to  compute  the  amount 
of  the  tax  properly  due  from  each  corporation  or  partnership  on  the  basis 
of  an  equitable  and  lawful  accounting. 

1291  For  the  purpose  of  this  Regulation  a  corporation  or  partnership  is 
affiliated  with  one  or  more  corporations  or  partnerships  (1)  when 

such  corporation  or  partnership  owns  directly  or  controls  through  closely 
affiliated  interests  or  by  a  nominee  or  nominees  all  or  substantially  all  of 
the  stock  of  the  other  or  others,  or  (2)  when  substantially  all  of  the  stock 

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of  two  or  more  corporations  or  the  business  of  two  or  more  partnerships  is 
owned  by  the  same  interests  and  in  both  (1)  and  (2)  it  is  found  that  (a)  such 
corporations  or  partnerships  are  engaged  in  the  same  or  a  closely  related 
business,  or  (b)  one  corporation  or  partnership  buys  from  or  sells  to  another 
corporation  or  partnership  products  or  services  at  prices  above  or  below 
the  current  market,  thus  effecting  an  artificial  distribution  of  profits,  or 
(c)  one  corporation  or  partnership  in  any  way  so  arranges  its  financial  rela- 
tionships with  another  corporation  or  partnership  as  to  assign  to  it  a  dis- 
proportionate share  of  net  income  or  invested  capital. 

1  292  The  owning  or  controlling  of  95  per  cent  or  more  of  the  outstanding 
voting  capital  stock  (not  including  stock  in  the  treasury)  at  the  begin- 
ning of  and  during  the  taxable  year  will  be  deemed  to  constitute  an  affilia- 
tion within  the  meaning  of  the  statute,  provided  the  corporations  or  part- 
nerships were  engaged  in  the  same  or  a  closely  related  business  or  there  were 
such  inter-company  transactions  as  are  specified  in  clauses  (b)  and  (c)  in 
the  preceding  paragraph. 

1293  Art.  78.  Consolidated  returns. — A  consolidated  return  shall  be  filed 
by  the  parent  or  principal  corporation  or  partnership  in  the  office  of 
the  collector  of  the  district  in  which  it  has  its  principal  place  of  business  or 
principal  office.  Each  of  the  other  affiliated  corporations  or  partnerships 
shall  file  in  the  office  of  the  collector  of  its  respective  district  a  return,  enter- 
ing thereon  its  name  and  address  and  replying  to  the  questions  in  Schedule 
I,  and  to  questions  1,2,  3,  4  and  lion  page  4  of  Form  1103;  and  stating  also 
(1)  that  the  corporation  or  partnership  is  affiliated  with  a  designated  parent 
or  principal  corporation  or  partnership,  (2)  that  its  return  is  included  in  the 
consolidated  return  of  such  parent  or  principal  corporation  or  partnership, 
and  (3)  the  district  in  which  the  consolidated  return  is  filed.  When  corpora- 
tions or  partnerships  required  to  file  such  consolidated  return,  neglect  or 
refuse  to  do  so,  the  Commissioner  of  Internal  Revenue  may  cause  an  exam- 
ination of  the  books  of  all  such  corporations  or  partnerships  to  be  made  and 
a  consolidated  statement  to  be  made  from  such  examination.  In  cases  where 
consolidated  returns  are  accepted,  the  total  tax  will  be  computed  in  the 
first  instance  as  a  unit  upon  the  basis  of  the  consolidated  return  and  will 
be  assessed  upon  the  respective  affiliated  corporations  and  upon  the  part- 
nerships in  such  proportions  as  may  be  agreed  among  them.  If  no  such 
agreement  is  made,  the  tax  will  be  assessed  upon  each  such  corporation  and 
partnership  in  accordance  with  the  net  income  and  invested  capital  properly 
assignable  to  it. 

1  294  When  all,  or  substantially  all  of  the  stock  of  a  subsidiary  corpora- 
tion was  acquired  for  cash,  the  cash  so  paid  shall  be  the  basis  to  be 
used  in  determining  the  value  of  the  property  acquired.  Where  stock  of  a 
subsidiary  company  was  acquired  with  the  stock  of  the  parent  company, 
the  amount  to  be  included  in  the  consolidated  invested  capital  in  respect  of 
the  company  acquired  shall  be  computed  in  the  same  manner  as  if  the  net 
tangible  assets  and  the  intangible  assets  have  been  acquired  instead  of  the 
stock.  If  in  accordance  with  such  acquisition,  a  paid-in  surplus  is  claimed, 
such  claim  shall  be  subject  to  the  provisions  of  Articles  55  and  63  of  Regula- 
tions 41. 

1295    Affiliated  corporations  or  partnerships  filing  a  consolidated  return 
shall  include  in  such  return  (1)  a  specific  statement  of  the  number 
or  proportion  of  the  shares  in  the  affiliated  corporations  held  by  the  parent 
or  controlling  corporation  or  partnership  during  the  taxable  year,  and  (2)  a 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  467  SERVICE 


8-28-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


schedule  showing  the  proportionate  amount  of  the  total  tax  which  it  is  agreed 
among  them  is  to  be  assessed  upon  each  affiliated  corporation  or  partnership. 
1296  Railroads,  gas,  electric,  water  and  other  public  service  corporations 
when  (a)  operated  independently  and  (b)  not  physically  connected 
or  merged — particularly  when  situated  in  different  jurisdictions  and  subject 
to  regulation  by  public  service  commissions— will  not  be  required  or  per- 
mitted, without  special  permission  obtained  in  advance,  to  make  a  consoli- 
dated return.  When,  however,  a  railroad  or  other  public  utility  is  owned 
by  an  industrial  corporation  and  is  operated  as  a  plant  facility  or  as  an  in- 
tegral part  of  a  group  organization  of  affiliated  corporations,  and  such  affili- 
ated corporations  are  required  to  file  a  consolidated  return,  the  return  of 
such  railroad  or  other  public  utility  shall  be  included  therein."  (T.  D.  3389, 
signed  by  D.  H.  Blair,  Commissioner  of  Internal  Revenue,  and  dated  August 
24,  1922.) 


T.  D.  2662  (March  6,  1918)  as  amended  by  T.  D.  2901  (July  29,  1919) 

Pursuant  to  article  78  of  regulations  41  relative  to  war  excess-profits  tax,  aff  Hated  corporations  as 
limited  and  defined  in  paragraphs  C  and  D  below  are  hereby  directed  to  make  consolidated  returns  for  the 
purpose  of  excess-profits  tax.  Affiliated  corporations  other  than  these  falling  within  the  provisions  of 
paragraphs  C  and  D  may  make  a  consolidated  return  only  after  having  secured  permission  in  writing  from 
the  Commissioner  of  Internal  Revenue.  Affiliated  corporations  are  defined  in  article  77  of  the  regulations 
as  follows: 

For  the  purpose  of  this  regulation  two  or  more  corporations  will  be  deemed  to  be  affiliated  (1)  when 
one  such  corporation  owns  directly  or  controls  through  closely  affiliated  interests  or  by  a  nominee  or 
nominees,  all  or  substantially  all  of  the  stock  of  the  other  or- others,  or  when  substantially  all  of  the  stock 
of  two  or  more  corporations  is  owned  by  the  same  individual  or  partnership,  and  both  or  all  of  such  corpo- 
rations are  engaged  in  the  same  or  a  closely  related  business;  or  (2)  when  one  such  corporation  (a)  buys 
from  or  sells  to  another  products  or  services  at  prices  above  or  below  the  current  market,  thus  effecting 
an  artificial  distribution  of  profits,  or  (b)  in  any  way  so  arranges  its  financial  relationships  with  another 
corporation  as  to  assign  to  it  a  disporportionate  share  of  net  income  or  invested  capital. 

A.  Two  or  more  corporations  are  not  "affiliated"  merely  because  all  or  substantially  all  of  the  stock 
therein  is  owned  by  the  same  corporation,  individual,  or  partnership;  they  must  also  be  engaged  in  the  same 
or  a  closely  related  business. 

B.  For  purposes  of  regulation  by  public"  service  commissions  or  similar  authorities,  the  identity 
of  public  service  corporations,  when  not  grouped  into  one  operating  unit,  must  be  maintained  even  though 
they  are  owned  by  the  same  corporation  or  taxpayer,  and  under  such  regulation  the  accounts  of  such 
public  service  corporations  are  deemed  to  reflect  the  true  invested  capital  and  income  of  each  operating 
unit.  Accordingly  railroads,  gas,  electric,  water  and  other  public  service  corporations  when  operated 
independently  and  not  physically  connected  or  merged — particularly  when  situated  in  different  jurisdictions 
and  subject  to  regulation  by  public  service  commissions — will  not  be  required  or  permitted  without  special 
permission  obtained  in  advance  to  make  a  consolidated  return.  When,  however,  a  rajlroad  or  other 
public  utility  is  owned  by  an  industrial  corporation  and  is  operated  as  a  plant  facility  or  as  an  integral 
part  of  a  group  organization  of  affiliated  corporations,  and  such  affiliated  corporations  are  required  to  file 
a  consolidated  return,  the  return  of  such  railroad  or  other  public  utility  shall  be  included  therein. 

C.  The  words  "all  or  substantially  all  of  the  stock"  as  used  in  the  above  definition  (Art.  77"!  will, 
until  further  notice,  be  interpreted  as  meaning  an  ownership  of  95  per  cent  or  more  of  such  stock  by  the 
same  taxpayer  during  the  taxable  year. 

I).  In  case  of  affiliated  corporations  among  which  there  exist  contracts  or  trade  or  financial  practices 
which  arbitrarily  or  artificially  influence  or  determine  the  amount  of  the  invested  capital  or.net  income  of 
one  or  more  of  the  corporations  so  affiliated  and  where  95  per  cent,  or  more  of  the  stock  of  the  subsidiary 
corporations  is  owned  by  a  parent  or  controlling  corporation  or  by  an  individual  or  partnership,  a  con- 
solidated return  will  be  required. 

E.  A  consolidated  return  shall  be  filed  by  the  parent  or  principal  corporation  in  the  office  of  the. col- 
lector of  the  district  in  which  it  has  its  principal  office.  Each  of  the  other  affiliated  coiporations  shall  file 
in  the  office  of  the  collector  of  its  respective  district  a  return,  entering  thereon  its  name  and  address  and 
replying  to  the  questions  in  Schedule  I,  and  to  questions  1,  2,  3,  4,  and  11  on  page  4  of  Form  1103;  and 
stating  also  (1)  that  the  corporation  is  affiliated  with  a  designated  parent  or  principal  corporation,  (a)  that 
its  return  is  included  in  the  consolidated  return  of  such  parent  or  principal  corporation,  and  (3)  the  district 
in  which  the  consolidated  return  is  filed. 

F.  When  all,  or  substantially  all,  of  the  stock  of  a  subsidiary  corporation  was  acquired  for  cash,  the 
cash  so  paid  shall  be  the  basis  to  be  used  in  determining  the  value  of  the  property  acquired.  Where  stock 
of  a  subsidiary  company  was  acquired  with  the  stock  of  the  parent  company,  the  amount  to  be  included 
in  the  consolidated  invested  capital  in  respect  of  the  company  acquired  shall  be  computed  in  the  same 
manner  as  if  the  net  tangible  assets  and  the  intangible  assets  had  been  acquired  instead  of  the  stock.  If 
in  accordance  with  such  acquisition  a  paid  in  surplus  is  claimed,  such  claim  shall  be  subject  to  the  provisions 
of  Articles  55  and  63  of  Regulations  41. 

G.  Affiliated  corporations  filing  a  consolidated  return  shall  include  in  such  return  (1)  a  specific 
statement  of  the  number  or  proportion  of  the  shares  in  the  affiliated  corporations  held  by  the  parent  or 
controlling  corporation  during  the  taxable  year,  and  (2)  a  schedule  showing  the  proportionate  amount  of 
the  total  tax  which  it  is  agreed  among  them  is  to  be  assessed  upon  each  affiliated  ctfrooraMoto. '  apgf 

H.  If  the  Commissioner  of  Internal  Revenue  upon  examination  of  any  consolidated  return  finds  that 
the  tax  can  not  in  his  judgment  be  properly  assessed  upon  the  basis  of  such  return,  the  affiliated  corporations 
covered  by  such  consolidated  return  shall,  upon  notice  from  the  Commissioner  of  Internal  Revenue/. Ilk 
separate  returns. 

b  (£)  bns  afdfiXBJ  9'Ai  srrmrb  qirfmrmsa  to  nbitino^fOD  gnillortno^  to 

Copyright  1922,  by  The  Corporation  Trust  Company. 
THE  FEDERAL  INCOME  TAX  SKRVICE 


WAR  TAX  468  SERVICE 


8-28-22. 

EXCESS  PROFITS  TAX. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

War-Profits  and  Excess-Profits  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 
T.  D.  Subject  Paragraph 

1918  Law  Provisions   500 

Reg.  45,  Pt.  II-B  Regulations  under  1918  Act  (revision  of  January  28,  1921)  as 

amended   and  supplemented  to  December  20, 

1921   596 

Special  Relief  for  1919  under  Sec.  328  not  determined:  compu- 

tation and  payment  of  tax  for  1920.    (March  23, 

1921.)   861 

3220  Amended  returns  required  within  90  days  when  inflated 

values  have  been  used  in  determining  invested 

capital.    (August  26,  1921.)   865 

Mim.  2848  Interpretation  of  the  foregoing.    (October  19,  1921.). .  869 

3243  Extension  of  time  for  foregoing.   (November  14,  1921.)  875 

A.  R.  M.  106  Surplus  and  undivided  profits:  Adjustments  because  of 

alleged  failure  to  charge  off  depreciation.  (Febru- 
ary 26,  1921.)   877 

Special  Explanation  of  the  foregoing.    (July  6,  1921.)   879 

Special  Supplementing  the  foregoing.   (November  1,  1921.) .. .  885 

Decision  La  Belle  Iron  Works  vs.  U.  S.    U.  S.  Supreme  Court 

decision,  Act  of  1917.    Invested  capital.  (May 

16,1921.)   889 

Decision  DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs. 

Iredell.  District  Court  decision,  Act  of  1917.  A 
corporation  whose  entire  income  is  derived  from 
royalties  on  patents  in  which  it  has  no  investment 
is  entitled  to  assessment  under  Section  209  as  being 
engaged  in  a  trade  or  business  having  no  invested 
capital  or   not   more  than   a   nominal  capital. 

(November  9,  1920.)  _   913 

Decision  Lincoln  Chemical  Co.  vs.  Edwards.    District  Court 

decision,  1917  Act.  Additions  to  surplus  account: 
Earned  surplus  expended  in  developing  and  im- 
proving a  secret  process,  or  used  to  repay  borrowed 
money  so  expended.    (T.  D.  3183,  June  24,  1921.)  926 

The  matters  listed  above  are  fully  indexed  on  the  blue  index  following  page  393. 


For  running  table  of  contents  of  matters  relating  to  the  1921  Act,  and  to  all  matters 
issued  since  the  passage  of  that  Act,  see  Excess-Profits  Tax 
Supplementary  Page  2,  over. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess-Profits  Tax  Supplementary  Page  1. 


8-28-22. 

EXCESS  PROFITS  TAX.— RUNNING  TAELE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

War-Profits  and  Excess-Profits  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 
T.  D  Subject  Paragraph 

The  regulations,  rulings,  etc.,  listed  below,  are  those  issued  during  1922. 

1921  Law  Provisions   1000 

Decision  Cartier-Holland  Lumber  Co.,  vs.  Doyle.   U.  S.  Circuit 

Court  of  Appeals  decision,  1917  Act.  Borrowed 
capital  in  relation  to  the  "no  invested  capital  or  not 
more  than  a  nominal  capital"  provision  of  Sec.  209 
of  the  1917  Act.    (December  15,  1921.)...   1101 

Special  Allocation  of  tax:  partnerships  and  corporations  in  con- 
solidated cases  under  1917-1921  Acts  (Jan.  16, 
1922)   1126 

Reg.  62,  Pt.  II-B  Regulations  under  1921  Act  (1922  Edition).  Promulgated  Febru- 
ary 15,  1922.  Released  for  publication  March  1, 
1922   ti*3 

Special  Consolidated  returns  for  1917  (A.  R.  R.  855)   1265 

3328  Arts.  27  and  46,  Reg.  41  (1917  Act)  amended.— Divi- 
dends received  from  foreign  corporations;  stock 
holdings  in  foreign  corporations   1266 

3334  Court  decision,  1917  Act. — Invested  capital:  Selling 

agent:  Taxability  under  Sec.  209  (May  25,  1922)  1270 

Special  Consolidated  returns  for  1917  (A.  R.  R.  942)   1272 

3367  Art.  836,  Regs.  45  and  62  amended. — Tangible  property  paid  in; 

value  in  excess  of  par  value  of  stock   1288 

3389  Arts.  77  and  78,  Reg.  41  (1917  Act)  amended— Consolidated  re- 
turns, 1917  (August  24;  1922   1289 


Insert  this  page  immediately  before  the  blue  Excess-Profits  Tax — 1921  Act — Index, 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

F.xcess-Profits  Tax  Supplementary  Page  2. 


2-27-22. 

EXCESS-PROFITS  TAX  INDEX— 1921  ACT. 

[The  references  are  to  paragraph  numbers.] 

Accounts  receivable.  .1030,  1179 
Administrative  provisions.  .1264,  8000 

Claim  for  refunds.  .8022 

Payment  of  taxes.  .  1056,  1245-1247,  1258 
Admissible  assets ..  1033,  1186 

Affiliated  corporations:  consolidated  returns.  .1074,  1235 
Excess  profits  credits.  .1075,  1177 
Invested  capital,  in  general.  .  1074,  1235-1240 
Inadmissible  assets.  .  1238 
Intangible  property  paid  in.  .  1236 
Stock  of  subsidiary  acquired  for  cash.  .  1239 
Stock  of  subsidiary  acquired  for  stock.  .  1240 
Liberty  bond  holdings.  .735,  736 
Special:  For  1917.  .1079,  1126,  1263 
Agricultural  organizations,  exemption.  .  1060 
Allocation,  net  income  to  particular  source,.  .  1017,  1138 

Amortization:  Restoration  of  depreciation  allowance  to  surplus  account ..  1 197 
Apportionment  of  specific  exemption  from  excess-profits  tax.  .  1024,  1176 
Appreciated  values,  use  of  in  determining  invested  capital.  .865,  889 
Assessment,  excess-profits  tax  in  special  cases.  .  1044,  1049,  1243,  1244 
Assets:  transfer  of.  .  1053,  1248^ 

Valuation  of,  upon  reorganization.  .  1053,  1248 
Associated  Press  franchises,  intangible  property.  .1179 
Associations,  exemption.  .  1059,  1173 
Authority  for  regulations.  .  1264 
Average  invested  capital.  .1043,  1222 
Bank:  deposits,  invested  capital.  .  1182 

Discounts,  invested  capital.  .1218 
Beneficiary  societies,  exemption.  .1062 
Bills  receivable.  .1030,  1 179 
Bonds:  Discount  on,  deduction.  .  1217 

Invested  capital.  .  1217 

Liberty  bonds.  .1089 

United  States:  Security.  .8075 

War  Finance  Corporation.  .726,  732,  745 
Bonus  stock,  invested  capital.  .1188 
Borrowed  capital:  amount  left  in  business.  .  1181 

Bank  deposits.  .1182 

Court  decision.  .1101 

Invested  capital  in  general. .  1031,  1041,  1180,  1187 
Securities.  .1180 
Unexpired  subscriptions.  .1182 
Building  and  loan  association,  exemption.  .  1063 

Burden  of  proof:  Understatement  of  capital  or  surplus  account.  .  1196 
Business  leagues,,  exemption.  .  1066 

Cancelled  indebtedness  to  stockholders,  borrowed  capital.  .1181 
Capital:  Impairment  of ..  1231 
Cartier-Holland  Lumber  Co.  vs.  Doyle.  .  1101 
Cash  paid  in,  invested  capital.  .1036,  1188,  1231 
Cemetery  companies,  exemption.  .  1064 

Certificates  of  indebtedness,  medium  of  payment  of  tax.  .8020 

Change  in  ownership  during  taxable  year,  return  by  affiliated  corporations ..  1050,  1053 
1248 

Charitable  corporations,  exemption.  .1065 

Citation  of  act.  .8082^ 

Civic  leagues,  exemption. .  1067 

Claims  of  refund.  .8022 

Clubs,  exemption.  .  1068 

Collectors  of  Internal  Revenue:  List  of.  .see  page  1711 
Commissions,  selling  securities:  invested  capital.  .752 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess  Profits  Tax— 1921  Act— Index  Page  1 


2-27-22. 


EXCESS-PROFITS  TAX  IKDEX — 1921  ACT 


The  references  are  to  paragraph  numbers. 

Computation: 

Excess  profits  tax:  fiscal  year.  .1054,  1249 

Corporations  entitled  to  the  benefits  of  Sec.  262  [^[1083].  .  1046,  1242,  1243-1247 
1259 

Foreign  corporations ..  1046,  1242,  1243-1247,  1259 

Government  contracts.  .1137 

Illustrations.  .1139,  1166,  1175 

Sale  of  mineral  deposits.  .1057,  1260,  1261 

Special  cases..  1044,  1049,  1243-1247 

Year  1921.  .1011,  1136,  1137 
Invested  capital.  .865,  889,  1035,  1187,  1223,  1234 
Limitation  of  excess  profits  tax..  1019,  1158,  1161 
Conditional  exemptions.  .1059 

Consolidated  returns,  affiliated  corporations.  .1074,  1235,  1258 

Special  for  1917..  1079,  1126,  1263 
Consolidations:  excess  profits  tax.  .1053,  1248 
Constitutionality.  .889 
Contracts: 

Government.  .  1003,  1137 

Intangible  property.  .  1179 
Cooperative  banks:  exemption.  .1063 
Copyrights.  .  1029,  1179 
Corporations:  affiliated ..  1074,  1235 

Apportionment  of  specific  exemption.  .  1024,  1157,  1176 

Conditional  and  other  exemptions.  .  1021,  1059 

Entitled  to  benefits  of  Section  262  [^f  1083] .  .(See  all  references  at  "Foreign  Corpora- 
tions.") 

Exempt  from  tax..  1021,  1059,  1173 
Foreign.  .1026,  1044,  1049,  1242,  1259 

Liberty  bond  exemptions.  .733 
Gold  mining.  .1023,  1174 
Life  insurance  companies  .  .  1 135,  1 173 
Net  income.  .1027,  1178 

Personal  service  corporations.  .1002,  1073,  1135,  1173 

Partial  personal  service  corporations.  .1020,  1163,  1164 
Possible  alternative  tax  on.  .  1093 
Returns.  .  1056,  1258 

Consolidated.  .1074,  1235 
Courts,  jurisdiction  of.  .8003 
Court  decisions: 

Cartier-Holland  Lumber  Co.  vs.  Doyle.  .  1101 
De  Laski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell.  .913 
La  Belle  Iron  Works  vs.  U.  S..  .889 
Lincoln  Chemical  Co.  vs.  Edwards.  .926 
Credits: 

Corporations  entitled  to  benefits  of  Sec.  262  ffll083].  .  1026,  1242 
Excess  profits.  .1025,  1177 
Foreign  corporations.  .  1026,  1242 
Definitions: 

"Admissible  assets"  ..  1033,  1186 

"Affiliated  corporations" ..  1076,  1078,  1080,  1235 

"Borrowed  capital" ..  1031,  1101,  1180 

"Collector"..  8092 

"Commissioner".  .8091 

"Corporation".  .8086 

"Dividends".  .1005,  1134 

"Domestic  corporation".  .8087 

"Excess  profits  tax".  .  1000 

"First  taxable  year".  .  1001 

"Fiscal  year".  .1001,  1134 

"Foreign  corporation".  .8088 

"Government  contract". .  1003 

"Inadmissible  assets".  .  1032,  1183 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Excess  Profits  Tax— 1921  Act— Index  Page'_2 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX— 1921  ACT 


The  references  are  to  paragraph  numbers. 

Definitions: — Concluded. 

"Intangible  property" ..  1029,  1179 

"Invested  capital".  .865,  869,  1035,  1187 

"Military  or  naval  forces".  .8094 

"Net  income".  .  1027,  1178 

"Paid".  .1004 
rV'Taid  or  accrued".  .  1004,  1 134 
S    "Person".  .8085 

"Personal  service  corporation".  .  1002,  1134 

"Revenue  Act  of  1916".  .8078 

"Revenue  Act  of  1917".  .8080 

"Secretary".  .8090 

"Tangible  property".  .1030,  1179 

"Taxable  year"..  1001,  1134 

"Taxpayer". .8093  > 

"Terms  relating  to  invested  capital".  .  102S 

"United  States".  .8089 
Depletion  allowance,  invested  capital.  .877,  879,  1194,  1195 
De  Laski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell.  .913 
Depletion  reserve,  invested  capital.  .1210 
Deposit  of  United  States  bonds  as  security.  .8075 
Deposits,  bank,  invested  capital.  .1182 
Depreciation  adjustments.  .877,  879,  885 

Depreciation  allowance,  invested  capital.  .877,  879,  885,  1194-1196 
Depreciation  reserve,  invested  capital.  .1210 
Discount:  banks,  invested  capital.  .  1218 

Bonds,  invested  capital.  .1217 
District  courts,  jurisdiction  of.  .8003 

District  of  Columbia,  obligations,  invested  capital.  .  1184,  1190 
Dividends.  .  1005 

Invested  capital.  .889,  1219,  1229,  1230 

Stock  dividends.  .889,  1230 
Earned  surplus,  invested  capital.  .877,  1038,  1194 
Educational  corporations,  exemption.  .1065 
Effective  date  of  Title  III .  .  1058 

Election  of  business  enterprise  to  be  taxed  as  corporation.  .1082,  (839) 
Evidence:  Understatement  of  capital  or  surplus  account.  .  1196 
Evidences  of  indebtedness,  invested  capital.  .1189 
Excess  profits  tax: 

Affiliated  corporations:  credits ..  1075,  1177 
Invested  capital.  .  1074,  1235-1240 
Special  for  1917 ..  1079,  1126,  1263 

Allocation  of  net  income  to  particular  source.  .  1017,  1138 

Application  for  assessment.  .1048,  1243 

Apportionment  of  specific  exemption.  .  1028,  1176 

Assessment .  .  1243 

Associated  Press  franchises,  intangible  property.  .1179 
Change  of  ownership  .  .  1248 
Computation:  fiscal  year.  .  1054,  1249-1253 

Corporation  entitled  to  benefits  of  Sec.  262  [1(1083].  .  1046,  1243,  1244,  1246 

Foreign  corporation ..  1046,"  1243,  1244,  1246 

Fractional  part  of  year.  .1157,  1173,  1176 

Government  contracts.  .1137 

Illustrations.  .1139-1157,  1166,  1175 

Limitation.  .1019,  1158,  1161 

Sale  of  mineral  deposits.  .1057,  1243,  1261 

Special  cases..  1044,  1243,  1244,  1246 

Year  1921.  .1011,  1014,  1136,  1137,  1144 
Consolidations.  .  1053,  1248 

Corporations  entitled  to  benefits  of  Sec.  262  [^1083] .  .1046,  1242,  1243-1247,  1259 

Credits.  .  1025,  1177 

Definitions.  .  1000,  1134 

Exemptions.  .1021,  1024,  1059,  1173,  1176 

Copyright  1922,  hy  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess  Profits  Tax— -1921  Act— IndexfPa§<3. 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX — 1921  ACT 


The  references  are  to  paragraph  numbers. 

Excess  profits  tax: — Concluded. 

Fiscal  years  ending  in  1921  or  1922.  .1054,  1250,  1252 

Different  rates.  .  1054,  1249 

Illustration  of  computation  of  lax.  .  1253 
Foreign  corporations ..  1046,  1242,  1243-1247,  1259 
Gas  wells,  sale  of.  .1057,1260,  1261 
Gold  mining,  computation  of  tax.  .  1 175 
Illustrations,  computation  ..  1 139-1 157,  1  166,  1175 

Computation  of  limitation .  .  1 162 
Imposition.  .  1011,  1135 
Intangible  property,  definition.  .1029,  1179 
Installment  payments.  .  1245 
Invested  capital.    See  Invested  capital. 
Limitation  of  tax.  .1019,  1158,  1161 
Mailing  lists,  intangible  property.  .1179 
Mineral  deposits,  sale  of..  1057,  1260,  1261 
Net  income.  .1027,  1074,  1178 
Oil  wells,  sale  of.  .1057,  1260,  1261 
Payment.  .1056,  1245-1247,  1258 

Personal  service  corporation:    apportionment  of  invested  capital  and  net  income.. 
1020,  1163 

Computation  of  tax  on  net  income.  .1164,  1166 
Refunds.  .1054,  1251,  8022 
Reorganizations ..  1053,  1248 
Returns.  .1056,  1258 
Special  cases.  .  1044,  1259 
Subscription  lists,  intangible  property.  .1179 
Tangible  property,  definition.  .1030,  1179 
United  Press  franchises,  intangible  property.  .1179 
Exempt  corporations.  .  1021,  1059,  1173 

Corporation  having  net  income  of  less  than  $3,000.  .  1022,  1173 

Gold  mining  corporations  (income  from  such  mining).  .1023,  1174 

Life  insurance  companies.  .  1135,  1173 

Personal  service  corporations.  .1002,  1073,  1135,  1173 

Partial  personal  service  corporations.  .1020,  1163,  1164 
Possible  alternative  tax.  .  1093 
Exemption;  specific.  .1025,  1177 

Affiliated  corporations.  .1075,  1177 

Apportionment;  return  for  period  of  less  than  12  months.  .1024,  1176 
Corporation  entitled  to  benefits  of  Sec.  262  ffll083].  .1026,  1049,  1246 
Foreign  corporation ..  1026,  1049,  1246 

Expenses,  computation  of  earned  surplus.  .926,  1194 

Extension  of  existing  statutes.  .8000 

Farm  loan  bonds,  invested  capital.  .1032,  1037,  1184,  1190 
Farmers,  cooperative  association,  exemption.  .  1069 
Farm  loan  bonds,  invested  capital.  .1184,  1190 
Federal  Reserve  bank  stock.  .744 

Fire  insurance,  exemption  of  association  or  mutual  company.  .  1069 
Fiscal  year,  definition.  .  1001 

1920-1921  or  1921-1922 ..  1054,  1250,  1252 

Different  rates  of  tax.  .  1054,  1249 

Illustration  of  computation  of  excess-profits  tax.  .  1253 
Fixtures,  addition  to  surplus  account  of  amounts  expended  for.  .  1 196 
Foreign  corporations:  computation  of  excess-profits  tax..  1046,  1242,  1243,  1246 

Credits,  excess  profits.  .1026,  1049,  1246 

Definition.  .8088 

First  installment  of  excess-profits  tax.  .  1246 

Invested  capital.  .1049,  1242,  1259 

Liberty  bond  exemptions.  .733 
Fractional  part  of  year:  computation  of  excess-profits  tax.  .1  157,  1173,  1  176 

Invested  capital.  .1224,  1225 
Franchises,  intangible  property.  .1179 
Fraternal  beneficiary  societies,  exemption.  .  1062 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Excess  Profits  Tax— 1921  Act— Index  Page  4 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX — 1921  ACT 


The  references  are  to  paragraph  numbers. 

Furniture,  addition  to  surplus  account  of  amounts  expended  for.  .1198 

Gas  wells,  excess  profits  tax  on  sale.  .  1260 

Gifts  to  corporations,  invested  capital.  .  1193,  1232 

Gold  mining:  computation  of  excess  profits  tax.  .  1023,  1  175 

Exemption  from  excess-profits  tax.  .  1 174 
Good  will,  intangible  property.  .1029,  1179 
Good  will,  invested  capital.  .1029,  1179,  1201,  1209 

Government  contracts,  computation  of  excess  profits  tax.  .  1017,  1048,  1  137,  1213' 
Horticultural  organizations,  exemption.  .  1060 

Illustrations:  computation  of  excess  profits  tax..  1  139,  1  166,  1  175,  1253,  1261 

Computation  of  limitation  of  excess  profits  tax.  .1161 
Impairment  of  capital.  .  1231 
Improvement  of  secret  process.  .926 
Inadmissable  assets ..  1032,  1042,  1183,  1221 
Income  and  excess  profits  taxes;  reserves  for.  .  1214 

Installment  due-and-payable  dates  govern.  .785 
Income.  .  1027,  1178 

Inflated  values,  use  of  in  determining  invested  capital.  .865,  889 
Installments,  payment  of  tax  in  special  cases  (Sec.  328).  .  1245-1247 
Insurance: 

Companies  invested  capital.  .1241 

Premiums,  corporation  officer,  invested  capital.  .  1215 
Intangible  property,  definition.  .1029,  1179 

Paid  in,  invested  capital.  .1039,  1040,  1220 
Interest: 

Invested  capital ..  1 180,  1181,  1183,  1  185 
Liberty  bonds.  .  1089 
United  States  obligations.  .  1089 
War  Finance  Corporation  bonds,  credits.  .726 
Invested  capital: 

Admissable  assets.  .1033,  1186 
Affiliated  corporations.  .1074,  1235-1240 
Appreciated  values.  .865,  889 
Rank  deposits .  .  1 182 
Bonus  stock .  .  1 183 

Borrowed  capital ..  103 1,  1041,  1101,  1180-1182,  1187 
Cancelled  indebtedness  to  stockholders.  .1181 
Cash  paid  in,  bonus  stock.  .1188 
Changes  during  year.  .  1222 

Computation.  .865,  889,  1035,  1049,  1  187,  1223,  1234 

Average  invested  capital.  .1043,  1157,  1222 
Corporations  entitled  to  the  benefits  of  Sec.  262  [^[1083] .  .  1049,  1242,  1259 
Definition.  .865,  871,  889,  1035,  1187 
Dividends.  .889,  1219,  1229,  1230 
District  of  Columbia  obligations.  .1184,  1190 
Effect  of  ordinary  dividend.  .  1229 

Stock  dividend.  .889,  1230 
Expenses  of  organization.  .  1186 
Federal  farm  loan  bonds  .  .  1 184,  1 190 
Foreign  corporations.  .1049,  1242,  1259 
Fractional  part  of  year.  .  1225,  1226 
Good  will.  .  1029,  1179 
Impairment  of  capital.  .  1231 

Inadmissible  assets ..  1032,  1042,  1183-1185,  1190,  1221 

Inflated  values.  .865,  889 

Insurance  companies. .  1241 

Intangible  property  defined.  .1029,  1179 

Paid  in.  .1039,  1040,  1220 
Interest.  .1180,  1181,  1183,  1185 
Measures  of  capital.  .  1234 

Method  of  determining  available  net  income.  .  1226 
Nominal,  under  1917  Act.  .913 
Organization  expenses.  .  1186 


Copyright  1921,  by  The  Corporation  Trust  Company, 
WAR  TAX  SERVICE 

Excess  Profits  Tax— 1921  Act—Index  Page  5 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX— 1921  ACT 


The  references  are  to  paragraph  numbers. 

Invested  capital: — Concluded. 
Patents.  .  1029,  1179 

Percentage  of  inadmissible  assets.  .  1042,  1221 

Possessions  of  United  States  obligations.  .  1184,  1  190 

Purchase  of  stock.  .  1233 

Reorganizations.  .  1053,  1248 

Return  for  fractional  part  of  year.  .  1225 

Securities.  .  1032,  1180,  1183 

Special  cases..  9 13,  1044,  1049,  1101,  1243,  12  11 

State  obligations.  .1184,  1190 

Subscriptions  of  publishing  concerns.  .  1  192 

Surplus.    See  Surplus  and  undivided  profits. 

Surrender  of  stock.  .  1232 

Tangible  property  paid  in.  .  1037 

Evidences  of  indebtedness.  .  1 189 

Inadmissible  assets  ..  1037,  1190 

Mixture  of  tangible  and  intangible  property.  .  1037,  1191 
Value  in  excess  of  par  value.  .  1037,  1  192 
Territorial  obligations.  .1184,  1190 

Undivided  profits.    See  Surplus  and  undivided  profits. 
Jurisdiction  of  district  courts.  .8003 
La  Belle  Iron  Works  vs.  U.  S..  .889 
Leaseholds.  .  1030,  1179 
Liberty  bonds: 

Affiliated  corporations.  .735,  736 

Interest,  taxability.  .  1089 
Life  insurance  companies  are  exempt.  .  1135,  1173 
Life  insurance,  corporation  officers,  invested  capital.  .1215 
Limitation,  excess  profits  tax..  1019,  1158,  1161 
Lincoln  Chemical  Co.  vs.  Edwards.  .926 
Loans  as  invested  capital.  .1031,  1180 

Location  of  mining  claims,  effect  as  to  tax  on  sale  of  mineral  deposits.  .  1260 

Lodges,  exemption.  .  1062 

Losses,  computation  of  earned  surplus.  .  1194 

Mailing  lists,  intangible  property.  .1179 

Medium  of  payment  of  tax.  .8020 

Mines:  depletion ..  1 195 

Sale  of  minerals.  .  1057,  1260,  1261 
Net  income.  .  1023,  1027,  1174,  1178 
Nominal  capital  under  1917  Act.  .913 
Notes,  invested  capital.  .1037,  1189 

Obsolescence,  losses  from,  computation  of  earned  surplus.  .1194 

Oil  wells:   excess  profits  tax  on  sale.  .1057,  1260,  1261 

Ore,  depletion.  .  1038,  1195 

Paid-in  surplus:  invested  capital.  .1038,  1193 

Impairment  of.  .  1231 
Partnership: 

Election  to  be  taxed  as  corporation.  .  1082,  (839) 

Taxability — tax  applies  to  corporations  only.  .1011,  1135 
Patents: 

Intangible  property ..  1029,  1179 

Invested  capital.  .913,  1029,  1038,  1201,  1209 
Patterns,  additions  to  surplus  account  of  amounts  expended  for.  .  1196 
Payment  of  taxes.  .1056,  1258 

Certificates  of  indebtedness  and  Victory  notes  as  medium.  .8020 

Fractional  part  of  cent..  .8019 

Medium.  .8020 

Special  cases  (Sec.  328).  .  1245-1217 
Personal  property  taken  for  debt,  invested  capital.  .  1216 
Personal  service  corporations.  .  1002 

Exempt.  .1073,  1  135,  1  173 

Partial  personal  service  corporations.  .  1020.  1163,  1164 
Possible  alternative  tax  on.  .  1093 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Excess  Profits  Tax — 1921  Act — Index  Page  6 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX— 1921  ACT 


The  references  are  to  paragraph  numbers. 

Possessions  of  United  States;  income  from  sources  within  (Sec.  262).  .  1083 

Taxation  of  corporations  entitled  to  benefits  of  Sec.  262.  .1046,  1242,  1243-1247,1259 
Possessions  of  United  States,  obligations,  invested  capital.  .1032,  1184,  1190 
Premiums,  insurance,  corporation  officers,  invested  capital.  .1215 
Promissory  notes,  invested  capital.  .  1037,  1189 
Rates  of  tax,  1011,  1136,  1137 

P.eal  estate,  taken  for  debt,  invested  capital.  .  1216 
Refunds.  .1194,  8022 
Regulations,  authority  for.  .  1264 
Regulations  62  (1922  Edition),  .page  431 
Religious  corporations,  exemption.  .  1065 
Reorganization.  .1053,  1248 

Reserves:  depletion  or  depreciation,  invested  capital.  .  1210 
Income  and  excess  profits  taxes,  invested  capital.  .  1214 
Installment  due-and-payable  dates  govern.  .785 
Returns.  .1056,  1258 

Affiliated  corporations ..  1074,  1078,  1235,  1258 

For  1917.  .1079,  1126,  1263 
Amended  where  inflated  values  used  in  determining  invested  capital.  .865 
Consolidated  returns  of  corporations.  .1074,  1078,  1258 

For  1917.  .1079,  1126,  1263 
Corporation  entitled  to  benefits  of  Sec.  262  ffll083].  .  1259 
Foreign  corporations.  .  1259 
Forms.  .  1258 

Fractional  part  of  year.  .  1157,  1161,  1176 

No  taxable  income.  .851 
Sales:  mineral  deposits,  excess  profits  tax.  .  1057,  1260,  1261 
Savings  bank,  exemption.  .1061 
Scientific  corporations,  exemption.  .  1065 
Secret  formulae  or  processes.  .  1029,  1179 
Securities,  invested  capital ..  1031,  1032,  1180,  1183 
Social  clubs,  exemption.  .  1068 
Specific  exemption.  .1025,  1177 

Affiliated  corporations .  .  1075,  1177 

Apportionment;  return  for  period  of  less  than  12  months.  .  1024,  1176 
Corporations  entitled  to  benefits  of  Sec.  262  flfl083].  .  1026,  1049,  1246 
Foreign  corporations.  .1026,  1049,  1246 

State  obligations,  invested  capital.  .1032,  1184,  1190 

Stock: 

Bonus,  invested  capital.  .1183 
Dividends,  invested  capital.  .1230 

Intangible  property  paid  in  for  stock.  .  1039,  1040,  1220 

Purchase,  invested  capital.  .  1233 

Surrender,  invested  capital.  .1232 

Tangible  property  paid  in  for  stock.  .1037,  1189-1192 

Treasury.  .1232,  1233 

Valuation  for  property  paid  in  for  stock.  .1037,  1039,  1040,  1189-1192,  1220 
^         'ptions,  publishing  concern,  invested  capital.  .  1182 

Lists,  intangible  property.  .1179 
Surplus  and  undivided  profits.  .926,  1038,  1193,  1226 

Additions  to  surplus  account.  .  1196,  1201 

Current  profits.  .1219 

Depletion  allowance.  .877,  879,  1195 
Reserve.  .1210 

Depreciation  allowance.  .877,  879,  1195 
Reserve. .  1210 

Discount  reported  by  bank. .  1218 
Sale  of  bonds.  .1217 

Earned  surplus.  .926,  1194 

Insurance  on  corporation  officers. .  1215 

Paid-in  surplus.  .1193 

Patents.  .1209 

Property  paid  in  and  subsequently  written  off. .  1206 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess  Profits  Tax— 1921  Act— Index  Page  7 


2-27-22. 


EXCESS-PROFITS  TAX  INDEX— 1921  ACT 


The  references  are  to  paragraph  numbers. 

Surplus  and  undivided  profits — Concluded. 

Property  taken  for  debt.  .  1216 

Reserve  for  depletion  or  depreciation.  .  1210 
Income  and  excess  profits  taxes.  .  1214 
Surrender  of  stock,  invested  capital.  .  1232 
Tangible  property,  definition.  .1030,  1179 

Paid  in,  invested  capital.  .1037,  1189-1192 
Tax.  .1011,  1135 

Computation  of,  in  special  cases.  .1049,  1244 
Telephone  companies;  mutual  or  cooperative  :  exemption.  .  1069 
Territories,  obligations,  invested  capital.  .1032,  1037,  1  184,  1190 
Time: 

Filing  returns.  .  1056,  1258 

Payment  of  taxes.  .  1056,  1258 
Tools,  addition  to  surplus  account  of  amounts  expended  for.  .  1196 
Trade  brands.  .1029,  1179 
Trademarks.  .  1029,  1179 
Trade  names.  .1029,  1179 
Treasury  stock.  .  1232,  1233 
Uncertified  checks,  payment  of  tax.  .8020 
Undivided  profits.    See  Surplus  and  undivided  profits. 
United  Press  franchises,  intangible  property.  .  1179 
United  States: 

Possessions;  income  from  within  (Sec.  262).  .  1083 

Taxation  of  corporations  entitled  to  benefits  of  Sec.  262.  .  1046,  1242,  1243-1247, 
1259 

Possessions,  obligations,  invested  capital.  .1032,  1037,  1184,  1190 

Taxability  and  exemption  of  interest  upon  obligations.  .  1089 
Valuation  of  assets  upon  reorganization  of  business  enterprise.  .1053,  1248 
Valuation  of  property  paid  in  for  stock.  .865,  889,  1036,  1037,  1039,  1040,  1187,  1189-1192, 

1220,  1231,  1234. 
Victory  notes.  .728 

War  Finance  Corporation,  interest  on  bonds.  .732 
As  admissible  and  inadmissible  assets.  .745 


Ccpyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Excess  Profits  Tax— 1921  Act— Index  Page  8 


I) 

f) 

') 

Si 


1-2-22.    (2)  6-22-22. 

CAPITAL  STOCK  TAX  1921  ACT 

OR 

SPECIAL  EXCISE  TAX  ON  CORPORATIONS. 
BEING  PART  OF  TITLE  X  OF  THE  REVENUE  ACT  OF  1921. 
In  effect  on  and  after  July  1,  1922. 


Return:    To  be  filed  during  July  (on  or  before  July  31)  each  year. 
Tax:    To  be  paid  within  10  days  after  notice  and  demand.    See  ^[3088. 


3000  Sec.  1000  [of  Title  X  of  the  Revenue  Act  of  1921].    (a)  That  on  and 
after  July  1,  1922,  in  lieu  of  the  tax  imposed  by  section  1000  of  the 

Revenue  Act  of  1918 — 

[Domestic  Corporations.] 

3001  (1)  Every  domestic  corporation  shall  pay  annually  a  special  ex- 
cise tax  with  respect  to  carrying  on  or  doing  business,  equivalent  to 

$1  for  each  $1,000  of  so  much  of  the  fair  average  value  of  its  capital  stock 
for  the  preceding  year  ending  June  30  as  is  in  excess  of  $5,000.  In  estimating 
the  value  of  capital  stock  the  surplus  and  undivided  profits  shall  be  included; 

[Foreign  Corporations.] 

3002  (2)  Every  foreign  corporation  shall  pay  annually  a  special  excise  tax 
with  respect  to  carrying  on  or  doing  business  in  the  United  States, 

equivalent  to  $1  for  each  $1,000  of  the  average  amount  of  capital  employed 
in  the  transaction  of  its  business  in  the  United  States  during  the  preceding 
year  ending  June  30. 

[Exempt  Corporations.] 

3003  (b)  The  taxes  imposed  by  this  section  shall  not  apply  in  any  year 
to  any  corporation  which  was  not  engaged  in  business  (or,  in  the 

case  of  a  foreign  corporation,  not  engaged  in  business  in  the  United  States) 
during  the  preceding  year  ending  June  30,  nor  to  any  corporation  enumerated 
in  section  231  [for  list  of  exempt  corporations  read  at  ^[3063];  nor  to  any 
insurance  company  subject  to  the  tax  imposed  by  section  243  or  246. 

[Secrecy  of  Returns.] 

3004  (c)  Section  257  [of  Title  II,  "Income  Tax,"  of  the  Revenue  Act  of 
1921]  shall  apply  to  all  returns  filed  with  the  Commissioner  for 

purposes  of  the  tax  imposed  by  this  section.    [See  ^[3086.] 


[General  Administrative  Provisions  of  Law.] 

[Read  under  "Miscellaneous"  at  the  back  of  the  book.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         601  SERVICE 


TDA 


JATI4A3 


For  Regulations  64  (1922  Edition) 
relating  to  the 
Capital  Stock  Tax— 1921  Act 
see  page  609  immediately  following  the  return  forms  opposite. 


WAR  TAX 


602 


SERVICE 


6-1-22. 


Form  707 

U  3  Ntekxal  RlVKNl'E 

1923  RETURN 

CAPITAL  STOCK  TAX 

FOR  DOMESTIC  CORPORATIONS 

(Collection  district.) 
Asscameul  List,  Form  23  A. 

(Month  j  (Ye»r.) 

TO  B£  ST*M«D  BY  CO 

(SEC.  1000.  REVENUE  ACT  OF  l»21) 

File  with  Collector  of  Internal  Revenue  for  your  dietrict 
on  or  before  July  31,  1922,  to  avoid  penalty. 

(Page.)  (Line.) 
Audited  by : 

2.  Address . 


(Print  name  ol corporation.  Join 


(The  address  r. 

3.  Name  of  parent  company,  if  any  


ck  company,  or  association.) 


[  olthe  principal  placo  o(  business.   Give  "Street  and  numb 


r  name,  lfchjmred.) 


ty  or  town,"  and  "State.") 
  (Dietrict  filed  . 


(Or  attach  list  and  state  number  of  shares  held,  also  districts  where  filed.; 
5.  Nature  of  business  in  detail  


No.  shares  held 


(District  filed 


6.  Incorporated  or  organized  in  State  of   Month  

7.  Return  for  previous  year  filed  in  District.  Fire  insurance  carried,  if  any,  $.. 


  Year  

( A  i  of  date." E  irjibi  tX) ' 


TAX  PAYABLE  ANNUALLY  IN  ADVANCE 
RETURN  FOR  TAXABLE  PERIOD  JULY  1.  1»22,  TO  JUNE  30,  1823,  BASSO  ON  FAIR  AVERAGE  VALUE  OF  CAPITAL  STOCK  FOR  PRECEDINC 
CAREFULLY  READ  ALL  INSTRUCTIONS  BEFORE  MAKING  RETURN 


JUNE  30,  1922. 


Cum.  or 


8.  Common  stock  outstanding  

9T  First  preferred  stock  outstanding. 

10.  Second  prefer'd  stock  outstanding. 

11.  Surplus  (estimate  if  necessary)   

12  Undivided  profits  (estimate  if  necessary) 
13.  Total  


P.»r 


TOTAL. 


This  column  for  iiieef  Department. 


COMPUTATION  OF  TAX. 


14.  Fair  value  of  total  capital  stock  for  fiscal  year  determined  by  Exhibit  

15.  Deduction  allowed  by  law   _  

1C.  Amount  in  excess  of  $5,000  (Omit  cents) 

17.  Tax  at  rate  of  $1  for  each  full  $1,000  in  excess  of  $i,O0J  (Omit  cents) 

18.  ^Penalty  fot  delinquency  in  filing  return  _  .#_  „ 

19.  ..    Total  tax  and  penalty  


TO  FACILITATE  COLLECTION  OF  TAX  A  REMITTANCE  IN  THE  AMOUNT  REPORTED  MAY  ACCOMPANY  THIS  RETURN 

CLAIM  SETTLEMENT  RECORD 
Amount  5  

ALLOWED  $  

Rejected  s  

Kadi  Value  t  

Basis   


Every  corporation  must  flic  a  return  or  sub- 
mit conclusive  evidence  that  It  Is  npt  liable. 
Determination  ot  liability  rests  wltn  tlie 
Commissioner.  Tbls  applies  to  all  companies 
claiming  exemption.  See  Arts.  17  ana  31, 
Regulations  64. 


ADDITIONAL  ASSESSMENT  RECORD 


l'Atz....  ,  

Additional  Tax,  I.. 


ALL  TAXFS  ARE  PAYABLE  TO  THE  COLLECTOR  OF  THE  DISTRICT  IN  WHICH  RKTURN  IS  FILED. 

(See  I>tsteuction-s  ON  Paoe  l.> 


(I) 

{Page  1  of  Form  707.J 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         603  SERVICE 


3ttu.  ru  tti  this  duucUr  arc  caafidentul  *ni  tn  open  to  uiiftcctioa  only  iraW  condition*  ipedfied  so  Section  257.  R«»«nue  Act  ol  1921 

EXHIBIT  A.    (See  Special  Instructions  No.  3,  page  4) 

CONDENSED  BALANCE  SHEET  AS  OF    _ 

REPORT  AS  OF  JUNE  30,  1922,  IF  POSSIBLE,  BUT  IN  NO  CASE  EARLIER  THAN  DECEMBER  31,  1*21 


DEBITS  AND  ASSETS. 

BOOKS  OP  ACCOUNT. 

PAIR  VALUE. 

DIFFERENCE. 
•(Explain  iaj  Imt»  amount*.) 

Real  eetate  

s  

1  

$  

Buildings  _  

Machinery  

1 

Stock  in  subsidiaries  

Other  securities  

Caeh  _  _  

Notes  receivable  



::::::: 

::::::: 

Accounts  receivable  | 

Inventory   _  | 



 1 

— 

:  :. 



Good  will,  patents,  etc   

z 

— s 

Deferred  charges  

Totals  

$  

*  1  

$  

CREDITS  AND  LIABILITIES. 

books  Uf  Aeeouref. 

HAIR  VAJL.UK. 

DlFFJULETfClf. 

f  

$  

Mortgagee  



1 

Notes  payable  



1 

Taxes  

1 

| 

 1 

 _                _     .  .   

.... 

Capital  stock: 

Comjion.  

i 

,  1  

Profit  and  loss  

 — -  



Totals  _  

$  -. 

 1  

 .  

$  

MUM  CI 

RECAPITULATION  OF  EXHIBIT  A. 

TM»  column 

Th*  column 

»■*>« 

Total  of  debits  and  assets  after  deducting  itei 
I.eas  total  of  credits  and  liabilitieu  after  dedi 

ns  not  actual  aase««   

5. 

cling  capital  stock,  surplus,  and 

I>itlArf.nr«  Ivftlue  af  trttfll  partital  Rtiu-V  ipfli-rterl  )iv  Kxlliliit  k\ 

1  ?  

U*teri*l  differenooa  will  aot  be  allowed  unless  sauslactoril y  explained. 


(2) 


(8t»  IjfSTBVc-no.vj  on  Paoi  «.) 


[Page  2  of  Form  707. j 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  604  SERVICE 


6-1-22. 


EXHIBIT  B.    (See  Special  Instructions  No.  4,  page  4.) 
QUOTATIONS  OR  OUTSIDE  SALES  PRICES  


i  of  exchange  or  specify  ' '  Outside  sales. ' 


July,  1921  

August,  19'   

September,  1921 

October,  1921  

November,  1921.. 
December,  1921.. 

January,  1922  

February,  1922... 

March,  1922  

April,  1922  

May,  1922   

June,  1922  

Total  

Average   


FiRST  PREFERRED. 


Number  ol  shaies 


X  X  X  X  X  X 


SPECIAL  INFORMATION 

Manufacturing  and  trading  corporations 
will  report  annual  eroes  sales  for  the  five 
years  shown  under  Exhibit  C. 


FISCAL 
TEAR 
ENDED— 


191  ... 
191 
19 
19 
19 


?  


RECAPITULATION  OF  EXHIBIT  B. 


This  column  lor  us«  ol 


Average  gale  value  of  common  stock  per  share,  $  _.  ,  multiplied 

by  number  of  shares  outstanding  _  

Average  sale  value  of  first  preferred  stock  per  share,  $  ,  multiplied 

by  number  of  shares  outstanding  


Average  sale  value  of  second  preferred  stock  per  share,  $ 

by  number  of  shares  outstanding  

Total  (value  of  total  capital  stock  reflected  by  Exhibit  B) 


 ,  multiplied 


Approximate  number  of  shares  traded  in  during  the  year:  Common  .  Preferred... 

EXHIBIT  C.    (See  Special  Instructions  No.  5,  page  4.) 
ANNUAL  INCOME 


NET  INCOME. 


DEDUCTIONS. 


ADDITIONS. 


DIVIDENDS  DECLARED. 


preferred,  preferred 


DEPRECIATION. 


Aver'g*  *- 


X  X  X  X  X  X 


RECAPITULATION  OF  EXHIBIT  C. 


Average  annual  income  as  adjusted  _..  

Capitalized  at....  per  cent  (value  of  total  capital  stock  reflected  by  Exhibit  C). 


 * 

 % 

 % 

 * 


Thli  column  lor  i 


1=1 


State  of  :  | 

\ss: 

County  of"  _  _  J 

We,  —  _  „  ,  President,  and      ,  Treasurer, 

;  of  the  above-named  company  whose  return  for  special  excise  tax  is  herein  set  forth,  being  severally  duly  sworn,  each  for  himself,  deposes  and  says 
I  that  the  items  entered  in  the  foregoing  report  and  in  any  additional  list  or  lists  attached  to  or  accompanying  this  return  are,  to  his  beet  knowledge  and 
belief  and  from  such  information  as  he  has  been  able  to  obtain,  true  and  correct. 

Sworn  to  and  subscribed  before  me  this  .     day 


President. 


(3) 


(Page  3  of  Form  707.J 


Copyright  1922,  by  The  Corporation  Trust  Company. 

war  tas;        605  SERVIC? 


SPECIAL  INSTRUCTIONS 


r  doing  business,  equivalent  to  tl  for  each  II  ,000  of  s 
"ing  year  ending  Jane  30  as 
s  organized  for  profit  or  has 
i capital  stock  represented  by  shares. 

For  the  purpose  of  this  tax  the  fair  value  of  the  entire  capital  stock  as  a  going  < 


regardless  of  stock  ownership  or  the  cbliity  of  Individual  stockholders  to  liquidate 
no  sales  prices  for  any  number  of  shares 
necessarily  Indicative  of  the  fair  value  of  the  i 


their  holdings,  is  required 
majority  Interest  are  notn 

The  hook  value,  the  kind  oiasseis.the  nature  of  the  business,  good  will, franchises  earning 
rapacity,  etc. ,  ere  Important  factors  that  affect  the  worth  of  enterprises  and  must  be  given 
dueconsiderstlonin  arriving  p.t.  the  fair  value  at  any  given  date. 


If  the  stock  Is  listed,  the  iuim  of  the  exchange  taw 
most  be  shown  In  the  space  provided  therefor,  and  I 
the  highest,  and  of  the  lowest  bid  price  during  each  l 
year  will  be  obtained.  If  the  taxpayer  prefers, 


I  be  obtained.   _ . 
showing  the  highest  and  lowest  bid  price  a 
and  the  average  obtained  therefrom. 

If  the  stock  is  not  listed  and  outside  sales  have  been 
by  the  officers  making  this  report,  such  pr 
number  of  shares  Involved  and  the  -..ndit 
exchange  quotations  must  accompany  this 
f  ying  purposes,  or  sales  which  are  restru -i  ed  as  to  resale,  or  sale 

t  be  considered  ropiesenfative  of  the  fair  value  of  the 


'tached  to  this  retn 


i  stock  was  quotto  for  each  day  of  the  year 


it  prlcM  known  or  determinable 
I  be  reported  herein.   A  statement  of  the 
,dor  which  sales  were  msde  at  other  tnan 
Pales  toemplovees  or  directors  forqimll- 
'  ■peclallv 
llalnock 


:  be  included. 


or  state  why  tho  required  data  are  not  available. 

Exhibit  A  provides  for  adjusting  any  overstated  or  understated  values  contained  In  the 
taxpayer's  books  of  account,  and  Exhibit  C  provides  for  showing  an  adjusted  income,  which 
should  be  the  actual  operating  Income  to  be  used  for  capitalising  on  a  percentage  basis  fixed 
by  Its  officers  as  fairly  representinc,  conditions  obtaining  in  the  trade  and  in  the  locality.  If 
the  reconstructed  book  value  shown  by  Exhibit  A,  the  market  value  shown  by  Exhibit  B, 
cr  the  valuation  reflected  bv  Exhibit  C  is  greater  than  the  valuation  returned  by  1 


£.  uAtumn.-The  three  exhibits,  A.  B,  and  C,  are  provided  to  indicate  the  information 
desired  and  the  manner  in  which  it  should  be  furnished.  So  fir  as  adaptable  these  forms 
should  be  completed  by  taxpayers,  but  if  they  find  it  more  convenient  they  may  attach  to 
this  return  their  own  statements  (as  in  the  case  of  banks),  provided  substantially  the  same 
Information  Is  furnished.  In  any  event,  taxpayers  should  attach  any  additional  statements 
that  will  aid  in  a  comprehensive  understanding  of  the  taxpayer's  return  so  that  the  Commis- 
sioner of  Intorna!  Ttcvenue  may  equitably  determine  the  correctness  of  the  fair  value  reported 
in  Item  14  on  page  1  hereof. 


"JBooki  of  account."— These  columns  most  show  the  amounts  as  carried  in  tho  taxpayer's 
books  of  account. 

"Fair  value." — Refer  to  article  1  above,  defining  the  value  required,  and  in  the  event  that 
the  columns  "  Books  of  account  "  contain  any  overstated  or  understated  values,  show  heroin 
the  actual  values.  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits,  and  timber, 
valuations  establish  ri1  a--  tin-  bar.  s-f  ilepletion  in  computing  Income  and  profits  taxes  shoula 
be  shown  in  the  "Fair  value"  column.  If  any  different  valuation  Is  claimed  than  reported 
in  the  "  Fair  value  "  column  it  may  be  stated  and  should  bo  supported  by  reasonably  conclu- 
sive evidence. 

"Difference."— These  columns  will  show  the  difference  between  the  columns  "Books  of 
account''  and  "Fair  value."  Any  material  di (Terences  must  be  ezpiaincd  in  such  manlier  as 
toonablethc  Commissioner  of  Internal  Revenue  to  determine  if  they  are  proper  and  accept- 
able. For  this  purpose  tho  differences  shown  herein  need  not  be  covered  by  corresponding 
adjustments  in  the  taxpayer's  books  of  account. 

•'Profit  and  lost"— If  the  "Profit  and  loss''  balance  Is  a  debit,  the  amount  should  be  shown 
in  red. 

Reserves  for  the  payment  or  future  dividends,  whether  declared  or  not,  will  not  be  consid- 
ered as  liabilities,  but  a  reasonable  amount  to  cover  the  preceding  dividend  period  may  be  so 
considered  If  the  dividend  has  been  declared  and  not  disbursed.  If  deducted,  show  date 
declared  and  date  of  actual  payment. 


4.  Exhibit  B:  Quotation-  or  Outside  Bales  Prices.— Furnish  under  Exhibit  B  the 
prices  quoted  on  a  recognized  stock  exchange  or  on  the  New  York  curb,  or  the  prices  at  which 
outside  sales  were  made  if  the  stock  is  not  listed,  for  the  period  of  12  months  ending  Juno  30, 


First.  If  no  change  occurred  in  the  number  of -hare  out  -t  m^i.ng  ^-ir'nc  rre  year,  total  the 
quotations  or  sales  prices  tor  the  months  reported  and  divide  by 'tho  number  of  months  In 
which  quotations  or  sales  prices  are  shown. 
Second.  If  any  change  occurred  in  the  number  of  shares  outstanding  during  the  year, 
v'erage  market  price  per  share  for  the  period  during  which  the  capital  stick 
»2,  has  been  outstanding  by  the  number  of  shares  out  standing  as  of  that  date. 

5.  Exhibit  C:  Annual  Income  — Furnish  under  Exhibit  C  the  annual  Income  and  other 
data  for  the.  five  fiscal  veers  ended  with  tho  close  of  the  tax  payer's  fiscal  year,  or  for  the  period 
during  which  the  corporation  hjs  been  engaged  in  business  if  for  »  shorter  period. 

"Net  income."— In  this  column  wiil  be  shown  the  income  returned  for  the  purpose  of  the 
Income  tax  ami  excess  profits  tax. 

"Dc&vctims"  and  "  Addition*. "— Refer  to  article  1  of  these  Special  Instructions,  and  show 
in  these  columns  such  amounts  as  should  he  deducted  lio:n  or  added  to  "  Net  income  '  to 
errive  at  tho  adjusted  Ireome  whl-h  may  In.  capitalized  to  determine  the  fair  value  of  tho 
capital  stock.  A  comprehensive  erialysis  of  any  a  ~ 
to  this  return.  Some  ol  tho  principal  Items  treat 


Dcducltom: 
Incomo  and  profits  taxes 
Interest  charges  not  dedu 
Losses  not  fully  deductlb 


t  deductible  in  computing  Income  subject  to  tax. 
ble  in  computing  income  subject  to  tax. 
n  computing  income  subject  to  tax. 


AddVinns: 

Dividends  fram  other  corporations  not  included  in  computing  income  subje-t  to  tax. 
Income  from  securities  of  a  State,  municipality,  or  of  the  United  States,  not  Included  In 

the  income-tax  return. 
The  difference  between  depiction  allowed  In  determining  net  Income  subject  to  Federal 

income  tax  and  the  actual  deoletion  based  on  cost. 
Expenditures  made  for  additions  and  betterments,  or  reserves  for  such  purposes,  charged 

against  income,  whether  direct  or  through  expenses. 


oounts  resulting  from  the  adjustment 


•Adjured  income  "—  This  co'unua  will  reflect  the  [ 
the  amounts  shown  in  the  thre*  preceding  column 

'Number  of  thorei."— Herein  should  be  given  the  total  number  of  share'  of  all  classes  of 

>ck  outstanding  et  the  dose  of  each  Qscal  year. 

■Divider^  lieeU-ri  "—Herein  should  ba  reported  the  percentage  of  dividends  declared  on 
represented  by  the  percentages 


•Net  I 


'  or  "Adjusted 


Capitalizing  net  income.— The  officers  making  the  return 
income  on  a  Dercentage  basis  that  fairly  represents,  uc.-ler  the  condition 
trade  in  the  locality,  what  representative  enterprises  must  earn  in  order  I 
stock  at  car.  In  other  words,  i  f  enterprises  engaged  in  asirailer  business  must  on  the  average 
earn  12  per  cent  on  their  Issued  capital  stock  lo  keep  tho  value  of  their  stock  at  par,  the  pet 
income  should  be  capitalized  by  dlvldiiig  it  by  .12. 


verage  annual 
itaininf  In  the 
maintain  their 


GENERAL  INSTRUCTIONS 


2.  Date  or  Fdjno  RgnrsNS.—  During  July  of  oach  year. 

3.  Tentative  Return.— Filing  of  a  tentative  return  will  avoid  penalty  for  dolinquer.t 
filing,  but  does  not  authorise  withholding  of  the  tax.  Complete  roturn  a .  far  a;  possible 
and  submit  an  approximate  estimate  as  a  ba^is  in  order  that  an  initial  asses-men*  may  be 
inade.   See  Art.  21,  Reg.  64. 

4.  Examination  or  Records  and  Witnesses.— For  the  purpose  of  ascertaining  tiie 
correctness  of  any  return  or  of  making  a  return  where  none  has  been  made  or  of  prepariac, 
a  new  return  whore  the  one  submitted  is  false  or  fraudulent  the  Ckirnmissioner  has  authority 
to  designate  a  revenue  agent  or  inspector  to  examine  witnesses  aud  books,  records,  papers, 
or  other  memoranda. 

5.  Extension  of  Time.— If  on  account  of  sickn«sr  or  absence  of  the  officer  charged  with 
making  the  return,  it  i ,  irppnssihlo  to  prepare  end  file  a  return  on  or  hef.**  July  31,  the  col- 
lector, upon  application  in  writing,  may  allow  an  extension  of  not  e-ce<-.iine  30  days  for 
making  and  filing  the  relorn.  Jf  extension  Is 
attached  to  tho  return  Neither  tho  Commissi 
an  extension  greater  than  3u.dayjfroui  July  31. 


S  Sionatures  and  VFRincAnoN. — Returns  must  be  signed  and  verified  by  two  officers 
of  the  coiporation,  that  is,  by  the  president,  vice  president,  or  other  pruicipaj  officer,  and 
by  tho  treasurer  or  other  financial  officer,  and  most  be  sworn  to  before  an  •frrcer  authorired 
to  acrntni.,t.:r  oaths,  and  the  seal  of  the  attesting  officer,  If  he  is  required  !  a  have  a  seel,  mirt 
be  Impressed  on  the  return.  Tho  name  of  the  corporation  and  the  names  of  the  officers 
signing  the  return  should  be  plainly  written  or  printed  on  tho  return.  If,  however,  the  lax 
covered  by  thi3  roturn  does  not  exceed  tlO,  the  return  may  be  signed  or  acknowledged 
before' two  witnesses  instead  of  under  oath. 


Penalties.— In  case  of  any  failure  to  make  and  file  a  r 


t  wilhir,  the  time  pre- 


i  thai  the  failure 


sioner  of  Internal  Revenue  shall  add  to  the 
of  the  tax  is  pavable  to  the  collector  at  any  I 
mcnt  do  not  attach  until  ten  days  after  noli 
pon  the  taxpayer.  (See  sections  lOfM 


60  per  centum  of  its  amount.  The  amount 
'  time  alter  July  1,  1722,  but  penalties  for  nonpay- 

lu  e  and  demand  has  been  sen  ed  by  the  collector 
302,  and  1311.  Revenue  Act  of  1921,  aad  section 


184?  R.S.)8 

9.  KcOULations.-Fot  further  information  rcgardiof  the  tax  ki  Rafulatkeu  44. 


[Page  4  of  Form  707.] 


Copyright  1922.  by  The  Corporation  Trust  Company. 
WAR  TAX  606  SERVICE 


1923  RETURN 

CAPITAL  STOCK  TAX 
FOR  FOREIGN  CORPORATIONS 

(Sec.  1000,  Revenue  Act  of  1921). 


(Year.' 
"("iin'e" 


Audited  by  

Fila  with  Collector  of  Internal  Revenue  for  your  district  on  or  before  July  31,  1922,  to  avoid  penalty. 


1.  Name. 


(Print  name  of  corporation,  Joint-stock  company,  or  association.)  (Show  former  naror.  ii  ihancnd 

(The  address  In  the  Cmicd  state .  mint  be  that  of  the  principal  ptac '  of  tnisuievt  "f  the  corporative.) 
~  "(GiVc'street  and 


her,  city  or  town,  and  country.) 
  (Return  for  previous  year  filed  In  _  District.) 


2.  Address   _,   

3.  Home  Office  located  at  

4.  Nature  of  business  in  detail  

5.  Affiliated  company  or  companies  .  _  

TAX  PAYABLE  ANNUALLY  IN  ADVANCE. 
Retain  for  taxable  period  July  1,  1922,  to  Juno  30,  1923,  based  on  the  avetage  amount  of  capital  employed  in  the  transaction  of  its  business  in  the 
 United  States  for  preceding  y<!ar.  • 


COMPUTATION  OF  TAX 
Foreign  Corporations.    (S*e  General  Instructions  3.) 
Average  <  apilal  employed  in  the  transaction  of- business  in  the 
United  State?  and  elsewhere,  if  available: 


Capital    $.. 

Surplus  

Undivided  profits   „ 

ToTAi   $_ 


Average  capital  employed  in  tbe  transaction  of  business  in  the 
United  States: 


Real  estate  

Mortgage  loan*   

Bond?  held  in  the  United  States... 
Stocks  held  in  the  United  States. 

Cash  

Other  assets..  

Total  


Total  net  income   $  

8  Tax  at  the  rate  of  SI  for  each  full  $1,000.... 
9.  Penalty  for  delinquency  in  filing  return. 
10^  Total  tax  and  penalty  


Net  income  from  Mmrces  in  United  State* 


COMPUTATION  IN  SPECIAL  CASES. 

In  the  case  of  transportation  companies  owning  or  operating  ves?eb  plying  between  the  United  States  and  other  countries,  and  any  other  com- 
fjaKee  where  the  nature  of  the  business  involves  the  employment  of  capital  in  the  United  States  that  is  not  physically  maintained  in  this  country, 
the  following  method  of  computation  may  be  considered: 

11.  Gross  amount  of  business  for  the  year  in  the  United  States  and  elsewhere   $  I 


12.  Gross  amount  of  business  for  the  year  in  the  United  States  _  

13.  Proportion  (expressed  in  percentage;  which  item  12  bears  to  item  U  

11  Taxable  amount  (apply  percentage  found  in  item  13  to  item  6)  .._    ,     $. 

15.  Tax  at  rate  of  $1  for  each  full  $1,000;  . 

16.  Penalty  for  delinquency  in  filing  return......   J 

17.  Total  tax  and  penalty   ...     $. 


State  of  ... 
County  or 


To  facilitate  collection  of  tax  a 
remittance  in  the  amount  reportad 
may  accompany  this  return. 


I    ,  of  the  United  States  branch  of  the  above-named  foreign  company,  whose 

(Ajent,  attorney,  or  other  r.fricial  capacity  j 

return  for  special  excise  tax  is  herein  set  forth,  being  duly  sworn,  depose  and  say  that  the  items  entered  in  the  foregoing  report  and  in  any  additional 
list  or  lists  attached  to  or  accompanying  this  return  are,  to  my  best  knowledge  and  belief,  and  from  such  information  a"  1  have  been  able  to  obtain, 
true  and  correct  in  each  and  every  particular.  * 

Sworn  to  and  subscribed  before  me  this  day  of  ,  192 


rssAi  or  omccB  n 

LtaSONG  OTIDAVn  J   ""(AsentyalioVr^yr^r'otheV'V.'neialV^^a^'y".; ' 

(OHicial  capacity.)  (Name  of  ollieer  oi  a^-i''  to  whom  <  orrc^potejer.    --hoiild  be  addressed 

SEE  INSTRUCTIONS  ON  REVERSE  SIDE. 


[Page  1  of  Form  708.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         607  SERVICE 


Returns  of  this  character  arc  confidential  and  are  open  to  inspection  only  under  conditions  specified 
in  Section         Revenue  Act  of  .1921. 


GENERAL  INSTRUCTIONS. 


J.  Nature  of  tax.— The  capital  stock  tax  due  July  1,  1922,  is  an  excise 
tax.  payable  in  advance,  for  the  privilege  of  doing  business  from  Juiy  1( 
1922,  to  June  30,  1923.  The  amount  of  the  tax  is  computed  upon  the 
average  amount  of  capital  employed  by  a  foreign  corporation  in  the 
transaction  of  its  business  in  tho  United  States  for  the  preceding  fiscal 
year. 

2.  Time  for  filing  returns.— During  the  month  of  July,  and  annually 
thereafter. 

3.  Foreign  corporations  required  to  make  returns. — Every  corp  )ration 
engaged  in  business  in  the  United  States  shall  make  return  on  this 
'form  irrespective  of  the  amount  of  capital  employed  in  this  country  in 
tho  transaction  of  its  business,  unless  such  corporation  was  not  engaged 
in  business  in  the  United  States  during  the  preceding  focal  year, 
July  X,  1321,  to  Juno  30,  1922,  or  is  specifically  exempt  under  the  pro- 
visions cf  Section  231,  Title  II,  of  the  Revenue  Act  of  1921. 

In  supplying  data  under  item  7,  details  relating  to  real  estate,  mort- 
gage loans,  etc.,  may  be  omitted,  but  a  supplementary  statement 
shctild  be  attached  explaining  how  the  average  amount  of  capital  em- 
ployed in  the  transaction  of  its  business  in  the  United  States  has  been 
computed. 

4.  Examination  of  records  and  witnesses. — For  the  purpose  of  ascer- 
tnining  the  correctness  of  any  return  or  of  making  a  return  where 
none  has  been  made  or  of  preparing  u  new  return  where  the  cue  sub- 
mitted is  false  or  fraudulent  the  Commissioner  has  authority  to  desig- 
nate a  revenue  agent  or  inspector  to  examine  witnesses  and  books, 
records,  papers,  or  other  memoranda. 

5.  Extension  of  time. — If  on  account  of  sickness  or  absence  of  the 
officer  charged  with,  making  the  return  it  is  impossible  to  prepare  and 
file  a  return  on  or  before  July  31,  the  collector,  upon  application  in 
writing,  may  allow  an  extension  of  net  exceeding  30  days  for  making 
and  filing  the  return.  If  extension  is  granted,  the  letter  of  the  collector 
must  be  attached  to  the  return.  Neither  the  Commissioner  nor  the 
collector  has  authority  to  grant  an  extension  greater  than  30  days 
from  July  31. 

6  Tentative  return. — Filing  of  a  tentative  return  will  avoid  penalty 
for  delinquent  filing,  but  does  not  authorize  withholding  cf  the  tax. 
Complete  return  as  far  as  possible  and  submit  an  approximate  estimate 
as  a  basis  in  order  that  an  initial  assessment  may  be  made.  (See  Art 
21,  Reg.  64.) 

7.  Signatures  and  verification.— Returns  must  be  signed  and  verified 
by  the  agent  or  attorney,  or  other  principal  officer,  in  charge  of  the 
United  States  branch  of  the  foreign  corporation,  and  must  be  sworn  to 


before  an  officer  authorized  to  administer  oaths,  and  the  seal  of  tb« 
attesting  officer,  if  hp  is  required  to  have  a  seal,  niuot  bo  impressed  on 
the  return  in  the  space  pro\ided  for  that  purpose.  If,  however,  the 
tax  covered  by  this  return  docs  not  exceed  $10,  the  return  may  be  signed 
or  acknowledged  before  two  witnesses  instead  of  under  oath. 

8.  Corporations  liable  to  tax.— Every  corporation  created  or  orr-anized 
outside  the  United  States  and  engaged  in  business  in  the  United  State*, 
shall  be  liable  to  the  capital  stock  tax  except  such  companies  and  asso- 
ciations as  are  specifically  exempt  under  Section  231  of  Title  II  of  the 
Revenue  Act  of  1921 

9  New  corporations. — This  tax  shall  not  be  imposed  upon  any  cor- 
poration not  engaged  in  business  in  the  United  States  for  any  |>ortion 
of  the  fiscal  year  July  1,  1921,  to  June  30,  1922. 

10.  Computation  of  tax.— The  method  of  computation  is  prescribed  on 
the  faco  of  this  form. 

11  Tax.— The  tax  is  at  the  rate  of  $1  for  each  full  $1,000  of  the  aver- 
age amount  cf  capital  employed  in  the  transaction  of  bfJMneM  iu  the 
United  States. 

Transportation  companies  owning  or  operating  vessels  plying  be- 
tween the  United  States  and  other  countries,  and  any  other  cjmp.iiiivs 
whose  business  methods  involve  the  employment  of  capital  in  the 
United  States  which  is  not  physically  maintained  in  this  country,  may 
use  the  special  method  of  computation  suggested  on  the  face  of  the 
return. 

12.  Penalties. — In  case  of  any  failure  to  make  and  file  a  return  or  list 
within  the  time  prescribed  by  law,  or  prescribed  by  the  Commissioner 
of  Internal  Revenue  or  the  collector  in  pu"suaose  of  law,  the  Commis- 
sioner of  Internal  Revenue  shall  add  to  the  taK  25  per  centum  of  ita 
amount,  except  that  when  a  return  is  filed  after  such  time  and  it  ia 
shown  that  the  failure-  to  file  it  was  due  to  a  reasonable  cause  and  not 
to  willful  neglect,  no  such  addition  shall  be  made  to  the  tax.  In  case 
a  falsa  or  fraudulent  return  or  let  is  willfully  made,  the  Coramisssioner 

Internal  Revenue  shall  add  to  the  tax  50  per  centum  of  its  amount. 
The  tax  is  payable  to  the  coliector  any  time  after  July  1.  1921,  but 
penalties  for  nonpayment  do  not  attach  until  ten  days  af:;r  notice  acd 
demand  hes  been  served  by  the  collector  upon  the  taxpayer.  (Soo 
Sections  1004,  1302,  and  1311,  Revenue  Act  of  1521,  and  Section  3164, 
R.  S.) 

11.  Regulations. — For  further  information  regarding  the  tax  fee 
Reg.  No  64. 


[Page  2  of  Form  708.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  60S  SERVICE 


6-22-22. 


Reg.  64.— 1922  Edition. 

CAPITAL  STOCK  TAX  REGULATIONS. 


REGULATIONS  64 

(1922  EDITION) 
(Promulgated  June  15,  1922.    Released  for  publication  June  22,  1922.) 
RELATING  TO  THE 

CAPITAL  STOCK  TAX 

UNDER  THE 
REVENUE  ACT  OF  1921 


CONTENTS 

Paragraph 

Article    1.    The  law   3005 

Section  1000(a).  Effective  date   3000 

Article    2.    Due  date  of  tax   3006 

Section  2.  Corporations  defined  and  distinguished  ,  8086 

Article   3.    Corporations   3007 

4.  Associations  and  joint-stock  companies   3008 

5.  Limited  partnerships  as  corporations   3009 

6.  Limited  partnerships  as  partnerships   3010 

7.  Partnership  banks   3011 

8.  Massachusetts  trusts   3012 

9.  Domestic  corporations   3013 

10.    Foreign  corporations   3014 

Section  1000(a).  (1)  Tax  on  domestic  corporations   3001 

Article  11.    Basis  of  the  tax:  "Carrying  on  or  doing  business"   3015 

12.  "Carrying  on  or  doing  business"  illustrated  •   3020 

13.  Not  "doing  business"   3033 

14.  Computation  of  tax   3036 

15.  Fair  average  value  of  capital  stock   3039 

16.  Surplus  and  undivided  profits   3047 

Section  1300. \r>  :  oftn»  OAA1 

1307  jReturns  8000,  8001 

Article  17.    Return  by  domestic  corporation   3048 

18.  Return  by  affiliated  corporation.   3049 

19.  Verification  of  return   3051 

20.  Time  for  making  return   3052 

21.  Tentative  return   3054 

Section  1000  (a).  (2)  Tax  on  foreign  corporations   3002 

Article  22.    Basis  of  the  tax   3055" 

23.  Capital  employed  in  the  United  States   . .  .  3057 

24.  Capital  employed  in  the  United  States  illustrated   3058 

25.  Return  by  foreign  corporation   3059 

26.  Computation  of  tax   3060 

27.  Measure  of  tax  ;   3061 

Section  1000  (b).  Exemption  from  tax   3003 

Article  28.    Corporation  not  in  business  during  preceding  year   3062 

29.  Organizations  and  insurance  companies  exempt   3063 

30.  Claims  for  exemption   3081 

31.  Return  by  corporation  claiming  exemption   3082 

Section  229.  Election  to  be  taxed  as  a  corporation   1082 

Article  32.    El&ction  to  be  taxed  as  a  corporation   3084 

Section  1000.  (c)  Returns  public  records   3004 

Article  33.    Inspection  of  returns   3086 

34.    No  authority  for  credit  of  excess  payment  of  capital  stock  tax   3087 

Section  1300.    Laws  made  applicable   8000 

1308.    Examination  of  books  and  witnesses   8002 

1301.    Method  of  collecting  tax   8012 

Article  35.    Time  for  payment  of  tax   3088 

36.    Abatement  and  refund  of  taxes   3089 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         609  SERVICE 


6-22-22.  Reg.  64.-1922  Edition. 


CAPITAL  STOCK  TAX  REGULATIONS. 


kfl   l     rOTT        I  I  O'iTf.  Paragraph 

Section  1315.    Refunds  fP. .  9.  ff  V**^".!**?!   8023 

1323.    Fraudulent  returns   80*7 

1325.    Medium  of  payment  of  tax   8020 

Article  37.    Payment  of  tax  by  uncertified  checks   3092 

38.    Procedure  with  respect  to  dishonored  checks   3093 

Section  1004.    Penalty  for  doing  business  without  payment  of  tax   7693 

Article  39.    Doing  business  without  payment  of  tax   3094 

Section  1302.    Penalties..  .X AT. .  .20QT3  .  J^TIHAQ   8014 

Article  40.    Penalty  for  nonpayment  of  tax   3095 

41.    Penalties  for  failure  to  make  return  and  for  false  return   3096 

Section  1309.    Unnecessary  examinations   8006 

1310.  Jurisdiction  of  courts   8003 

1311.  Amendments  to  Revised  Statutes   80':0 

Sec.  3164.    Collector  to  report  willful  violations   8061 

3165.    Powers  of  revenue  officers   8062 

3167.    Penalties  for  unlawful  disclosures   8063 

3172.  Canvass  for  taxable  persons  and  objects   8061 

3173.  Responsibilities  of  persons  liable  to  tax   806  r> 

3176.    Delinquent  returns   S071 

1312.  Final  determinations  and  assessments   8007 

1313.  Administrative  review   c00  - 

1314.  Retroactive  regulations   801! 

Article  42.    Section  3228  R.  S.  (refunds)  retroactive   3101 

Section  1316.    Time  for  refund  of  capital  stock  tax   309'7 

1318."! 

1 320*  1  Limitations  upon  suits  and  prosecutions   8048 

1321J 

1322.    Assessments   3102 

Article  43.    Section  1322  R.  S.  (assessments)  retroactive   3102 

Section  1324.    Interest  on  refunds  and  judgments   8036 

1303.    Authority  for  regulations   8009 

1400.    Repeals.   8076 

Article  44.    Promulgation  of  regulations   3104 


3005  Article  1.    The  law.- — The  main  provisions  of  existing  law  with  re- 
spect to  this  tax  are  embodied  in  section  1000  of  the  Revenue  Act  of 

1921,  referred  to  hereinafter  as  the  act. 

EFFECTIVE  DATE. 

3006  Art.  2.    Due  date  of  tax.— The  act  was  approved  November  23,  192  J , 
3100     but  the  tax  is  effective  from  July  1,  1922,  except  upon  t lie  incorpora- 
tion of  an  individual  or  partnership  business  (see  art.  32).    This  is 

a  special  tax  and  like  all  special  taxes  is  due  and  payable  annually  in  advance 
from  July  1  of  each  year.  No  portion  of  the  tax  so  paid  is  refundable  to  a 
corporation  which  ceases  to  do  business  during  the  year. 

CORPORATIONS  DEFINED  AND  DISTINGUISHED. 

Hf8086  to  1|8089.] 

3007  Art.  3.  Corporations. — The  term  "corporation"  includes  associations, 

3001  and  joint-stock  companies,  whether  created  by  statute  or  by  contract, 

3002  but  no  partnerships,  properly  so  called.    It  is  immaterial  whether  trie 
companies  were  organized  for  profit  or  have  a  capital  stock  represented 

by  shares. 

3008  Art  4.   Associations  and  joint-stock  companies. — Associations  and 
joint-stock   companies  include  organizations,  by  whatever  name 

known,  which  act  or  do  business  in  an  organized  capacity,  whether  created 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  610  SERVICE 


6-22-22. 


Reg.  64.-1922  Edition. 

CAPITAL  STOCK  TAX  REGULATIONS. 


under  and  pursuant  to  State  laws,  agreements,  declarations  of  trust,  or 
otherwise,  the  net  income  of  which,  if  any,  is  distributable  among  the  members 
or  shareholders  on  the  basis  of  the  capital  stock  held  by  each,  or,  where 
there  is  no  capital  stock,  on  the  basis  of  the  proportionate  share  of  capital 
which  each  has  or  has  invested  in  the  business  or  property  of  the  organization. 
But  see  articles  5,  6,  7,  8.  An  organization,  the  membership  interests  in  which 
are  transferable  without  the  consent  of  all  of  the  members,  however  the 
transfer  may  be  otherwise  restricted,  and  the  business  of  which  is  conducted 
by  trustees  or  directors  and  officers  without  the  active  participation  of 
all  the  members  as  such,  is  an  association. 

3009  Art.  5.    Limited  partnerships  as  corporations. — Partnerships  with 
limited  liability  or  partnership  associations  authorized  by  the  statutes 

of  Pennsylvania  and  a  few  other  States  are  only  nominally  partnerships. 
Such  so-called  limited  partnerships,  offering  opportunity  for  limiting  the 
liability  of  all  the  members,  providing  for  the  transferability  of  partnership 
shares,  and  capable  of  holding  real  estate  and  bringing  suit  in  the  common 
name,  are  more  truly  corporations  than  partnerships,  and  are  taxable  as 
corporations.  In  all  doubtful  cases  limited  partnerships  will  be  treated 
as  corporations  unless  they  submit  satisfactory  proof  that  they  are  not 
in  effect  so  organized.  Michigan  partnership  associations  are  corporations. 
The  liability  of  Virginia  limited  partnerships  is  determined  in  each  case 
from  a  consideration  of  the  certificate  of  partnership  and  all  pertinent  facts 
relative  thereto. 

3010  Art.  6.    Limited  partnerships  as  partnerships. — So-called  limited 
partnerships  of  the  type  authorized  by  the  statutes  of  New  York  and 

most  of  the  States  are  partnerships  and  not  corporations  within  the  meaning 
of  the  statute.  Such  limited  partnerships  which  can  not  limit  the  liability 
of  the  general  partners,  although  the  special  partners  enjoy  limited  liability 
so  long  as  they  observe  the  statutory  conditions,  which  are  dissolved  by  the 
death  or  transfer  of  the  interest  of  a  general  partner,  and  which  can  not 
hold  real  estate  or  sue  in  the  partnership  name,  are  so  like  common  law 
partnerships  that  they  can  not  be  differentiated  therefrom  for  tax  purposes. 
Michigan  and  Illinois  limited  partnerships  are  partnerships.  California 
special  partnerships  are  partnerships. 

3011  Art.  7.    Partnership  banks. — A  partnership  bank,  conducted  like  a 
corporation  and  so  organized  that  the  interests  of  its  members  may  be 

transferred  without  the  consent  of  the  other  members,  is  a  joint-stock  com- 
pany or  association  within  the  meaning  of  the  statute.  A  partnership  bank, 
the  interests  of  whose  members  can  not  be  so  transferred,  is  a  partnership. 

3012  Art.  8.    Massachusetts  trusts. — The  test  of  liability  in  all  cases 
involving  trusts  of  the  Massachusetts  type  is  whether  the  cestuis 

que  trustent  have  by  the  terms  of  the  trust  agreement  a  voice  in  the  manage- 
ment or  control  of  the  trust.  Where  the  trustees  are  in  complete  control  of  the 
business,  the  beneficiaries  having  no  control  except  the  right  of  filling  vacancies 
among  the  trustees  or  of  consenting  to  a  modification  of  the  terms  of  the 
trust  or  of  dissolving  the  trust,  no  association  exists.  If,  however,  the  cestuis 
que  trustent  have  a  voice  in  the  control  or  management  of  the  business  of  the 
trust,  whether  through  the  right  to  elect  trustees  periodically  or  to  remove 
the  trustees  or  to  restrict  the  trustees  as  to  the  management  of  the  trust  or 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  611  SERVICE 


6-22-22. 


Reg.  64  —1922  Edition. 

CAPITAL  STOCK  TAX  REGULATIONS. 


otherwise,  the  trust  is  an  association  within  the  meaning  of  the  statute. 
Where  the  trustees  hold  in  their  own  right  a  sufficient  number  of  the  cer- 
tificates of  beneficial  interest  to  constitute  control  as  between  the  beneficiaries, 
the  trust  will  be  held  to  be  an  association  regardless  of  the  powers  conferred 
upon  the  trustee  by  the  instrument  creating  the  trust. 

3013  Art.  9.    Domestic  corporations. — A  domestic  corporation  is  a  cor 
poration  created  or  organized  in  the  United  States,  which  includes  the 

States,  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

3014  Art.  10.    Foreign  corporations. — A  foreign  corporation  is  a  corpora- 
tion created  or  organized  outside  the  United  States  as  defined  in 

Article  9. 

TAX  ON  DOMESTIC  CORPORATIONS. 

30?5    Art.  11.   Basis  of  the  tax:  "Carrying  on  or  doing  business."— The 

basis  of  the  tax  in  the  case  of  a  domestic  corporation  is  "carrying  on 

or  doing  business"  in  the  capacity  of  a  corporation  or  association.  The  words 
"carrying  on  or  doing  business"  must  be  given  their  ordinary  and  natural 
signification.  "Business"  is  a  very  comprehensive  term  and  embraces  what- 
ever occupies  the  time,  attention  or  labor  of  men  for  the  purpose  of  livelihood 
or  profit.  In  other  words,  business  necessarily  involves  the  idea  of  gain. 
301  S    The  true  basis  of  distinction  is,  in  the  first  instance,  between — 

(a)  A  corporation  organized  for  the  purpose  of  doing  business  as  above 

defined,  and 

(b)  A  corporation  organized  for  the  sole  purpose  of  owning  and  holding 

property  and  distributing  its  avails; 
and,  in  the  second  instance,  between — 

(c)  A  corporation  of  class  (a)  which  is  continuing  the  body  and  sub- 

stance of  the  business  for  which  it  was  organized  or  is  still  active 
and  maintaining  its  organization  for  the  purpose  of  continued 
efforts  in  the  pursuit  of  profit  or  gain,  and 

(d)  A  corporation  which,  although  included  in  class  (a),  has  substantially 

retired  from  the  business  for  which  it  was  organized  and  ha1? 
reduced  its  activities  to  the  mere  ownership  and  holding  of 
property,  distributing  its  avails,  and  doing  only  the  acts  necessary 
to  the  maintenance  of  its  corporate  existence  and  the  private 
management  of  its  purely  internal  affairs. 
301  7    The  distinction  in  each  case  must  depend  upon  the  peculiar  facts  in 
the  case.    Corporations  of  class  (a)  will  be  presumed  to  be  subject 
to  the  tax  unless  they  submit  proof,  satisfactory  to  the  Commissioner, 
that  they  are  not  actually  carrying  on  or  doing  business.    If  a  corporation 
claim  exemption  on  the  ground  that  it  belongs  to  class  (b),  it  will  be  required 
to  file  an  excerpt  from  its  charter  setting  forth  its  corporate  powers  together 
with  a  full  and  comprehensive  statement  showing  the  nature  of  the  activities 
in  which  it  is  and  has  been  actually  engaged.    If  it  claim^exemption  on  the 
ground  that  it  belongs  to  class  (d),  it  will  be  required  to  furnish  a  copy  of  any 
amendment  of  its  charter,  or  other  evidence,  satisfactory  to  the  Commissioner, 
showing  that  it  has  reduced  its  activities  to  the  mere  ownership  of  property, 
receipt  of  its  avaisl,  and  the  doing  of  only  what  is  necessary  to  the  main- 
tenance of  its  corporate  existence. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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CAPITAL  STOCK  TAX  REGULATIONS. 


3018  A  corporation  that  has  "substantially  retired  from  business"  is  one 
that  has  changed  its  status,  as,  for  instance,  by  divesting  itself  of  all 

control  over  and  management  of  the  property  formerly  employed  by  it  in 
the  doing  of  business,  and  has  reduced  its  activities  accordingly. 

3019  The  leasing  of  all  the  property  of  a  corporation  whereby  it  divests 
itself  of  control  and  management  thereof,  or  the  sale  of  all  the  prop- 
erty of  a  corporation  and  the  reduction  of  its  activities  to  the  collection  of 
the  proceeds  of  the  sale  on  an  installment  plan,  are  instances  of  a  corporation 
substantially  retiring  from  business. 

3020  Art.  12.    *  'Carrying  on  or  doing  business"  illustrated. — Corpora- 
tions organized  for  the  purpose  of  and  actually  engaged  in  such 

activities  as  buying,  selling,  or  dealing  in  mineral  or  timber  land  or  other 
real  estate;  leasing  property,  collecting  rents,  managing  office  buildings, 
making  investments  of  profits;  leasing  lands  and  collecting  royalties,  man- 
aging wharves,  dividing  profits;  and  in  some  cases  investing  the  surplus, 
are  engaged  in  "carrying  on  or  doing  business"  within  the  meaning  of  the 
statute. 

3021  A  corporation  may  complete  its  organization  and  sell  its  capital 
stock  for  cash  without  incurring  liability,  but  other  activities,  such 

as  entering  into  contracts  for  the  purchase  of  property  or  construction  of  a 
plant  are  corporate  business  acts,  and  constitute  doing  business.  In  other 
words,  it  is  not  necessary  that  a  company  be  actually  engaged  in  the  manu- 
facture of  its  intended  product  or  that  it  be  actually  creating  profit  or  gain 
to  incur  liability.  The  making  of  contracts,  buying  of  materials  or  machin- 
ery, constructing  buildings,  employing  and  discharging  of  individuals  are 
necessary  business  acts  leading  to  the  more  profitable  end  of  manufacturing 
certain  products. 

3022  The  letting  of  a  contract  and  construction  of  a  hotel  preparatory 
to  engaging  in  the  hotel  business  is  sufficient  to  incur  liability. 

3023  A  corporation  organized  for  the  purpose  of,  and  actually  engaged 
in,  buying  mineral  or  timber  land  or  other  real  estate  and  holding  it 

with  a  view  to  future  sale  at  an  advance  is  carrying  on  or  doing  business. 

3024  A  corporation  organized  for  the  purpose  of  owning  and  leasing  real 
estate  which  has  leased  all  of  the  property  under  its  control  is  still 

engaged  in  doing  business  unless,  under  the  terms  of  its  lease,  its  activities 
have  been  reduced  to  the  mere  receipt  and  distribution  of  the  avails  of  the 
leases  at  the  actual  cost  of  so  doing.  If  it  is  still  maintaining  its  organization 
for  the  purpose  of  continued  effort  in  the  pursuit  of  profit  and  gain  it  is  doing 
business. 

3025  A  corporation  owning  or  managing  real  estate  which  leases  all  of 
its  property,  but  under  the  terms  of  the  lease  is  required  to  maintain 

or  keep  the  property  in  repair,  is  doing  business. 

3026  No  particular  amount  of  business  is  required  in  order  to  bring  a 
company  within  the  terms  of  the  act. 

3027  A  corporation  engaged  in  mining  or  in  developing  and  speculating 
in  mineral  lands  is  doing  business. 

3028  A  corporation  engaged  in  buying  and  selling  securities  or  other 
property  is  doing  business,  even  though  for  a  period  it  makes  hp 

purchases  or  sales  because  of  unfavorable  market  conditions. 

3029  A  corporation  formed  to  take  over  miscellaneous  stocks,  bonds,  or 
other  property  (as  of  an  estate),  to  negotiate  sales  of  various  items 

from  time  to  time  as  opportunity  and  judgment  dictate,  and  to  distribute 

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CAPITAL  STOCK  TAX  REGULATIONS. 


the  profits  from  time  to  time  as  liquidation  is  effected,  is,  while  so  engaged, 
carrying  on  or  doing  business. 

3  030    A  parent  corporation  which  finances  or  manages  the  operations  of 
its  subsidiaries  is  doing  business. 

3031  A  so-called  holding  company  which,  under  its  charter,  is  authorized 
to  and  doeskin  addition  to  receiving  and  distributing  the  avails  of 

the  property  or  securities,  held  by  it,  finance  the  operations  of  its  subsidiaries, 
is  engaged  in  doing  business. 

3032  A  corporation  organized  for  the  purpose  of  taking  over  and  holding 
securities^  timber  land,  coal  lands,  or  other  real  estate,  is  held  to  be 

doing  business,  if  it  makes  investments  or  reinvestments  of  its  surplus  income 
or  funds  in  excess  of  an  amount  necessary  to  maintain  its  original  investments. 

3033  Art   13.    Not  "doing  business." — Holding  companies   as  distin- 
guished from  parent  corporations,  and  corporations  all  of  whose 

property  and  business  is  operated  by,  or  is  in  the  hands  of,  a  receiver  or  the 
Alien  Property  Custodian,  are  not  doing  business. 

3034  A  holding  company  is  denned  as  one  whose  corporate  powersTaro 
limited  to  the  mere  owning  and  holding  of  property  and  distribution 

of  its  avails,  or  one  which,  although  incorporated  for  the  purpose  of  doing 
business  as  defined  in  article  11,  has  substantially  retired  from  the  business 
for  which  it  was  organized  and  has  reduced  its  activities  to  the  mere  owner- 
ship and  holding  of  property,  distributing  its  avails,  and  doing  only  such  acts 
as  are  necessary  to  the  maintenance  of  its  corporate  existence  and  the  private 
management  of  its  purely  internal  affairs. 

3035  A  holding  company,  as  above  defined,  will  not|be  considered  to  be 
doing  business  by  reason  of  the  reinvestment  of  its  surplus  income  or 

funds  to  the  extent  only  of  maintaining  its  original  investments. 

3036  Art.  14.    Computation  of  tax. — The  tax  is  imposed  at  the  rate  of 
$1  for  each  full  $1,000  of  the  fair  average  value  of  the  capital  stock 

of  the  corporation  in  excess  of  the  prescribed  deduction  of  $5,000. 

3037  The  tax  being  payable  in  advance  is  prospective  and  is  measured  by 
the  fair  average  value  for  the  year  preceding  the  taxable  year,  not 

the  fair  value  of  the  average  capital  stock.  If  a  corporation  begins  business 
within  the  preceding  year  or  increases  or  decreases  its  capital  within  the  pre- 
ceding year,  thereby  materially  changing  the  fair  value  of  the  capital  stock, 
the  tax  is  measured  by  the  fair  value  of  the  capital  stock  outstanding  at  the 
date  of  incidence  of  the  tax  (June  30).  Therefore,  while  Form  707  permits,  as 
a  matter  of  convenience  to  the  taxpayer,  the  using  of  a  balance  sheet  as  of  a 
date  prior  to  June  30,  but  not  prior  to  the  preceding  December  31,  if  there  is  a 
material  change  in  the  condition  and  affairs  of  the  company  affecting  the 
fair  value  of  the  capital  stock  subsequent  to  the  closing  of  the  books  and  prior 
to  the  date  of  the  incidence  of  the  tax  (June  30),  the  financial  condition  should 
be  reported  under  Exhibit  A  as  of  June  30,  giving  effect  to  such  material 
changes.  Under  Exhibit  B,  the  market  value  will  be  determined  by  mul- 
tiplying the  average  market  price  per  share  for  the  period  during  which  the 
capital  stock  as  of  June  30  has  been  outstanding  by  the  number  of  shares 
outstanding  as  of  that  date. 

3038  No  deduction  is  allowed  corporations  organized  in  the  United  States 
for  capital  invested  outside  of  the  United  States.    If  the  corporation 

is  doing  business  it  is  taxed  on  its  entire  capital  stock  even  though  most  of 
it  may  not  be  employed  in  the  business. 

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Reg.  64—1922  Edition. 

CAPITAL  STOCK  TAX  REGULATIONS. 


3039  Art.,  15.    Fair  average  value  of  capital  stock. — The  fair  average  value 
of  the  capital  stock  for  the  purpose  of  determining  the  amount  of 

the  capital  stock  tax  must  not  be  confused  with  the  market  value  of  the  shares 
of  stock  where  it  may  be  necessary  to  determine  such  value  under  other  pro- 
visions of  the  revenue  laws.  The  fair  average  value  of  the  capital  stock,  the 
statutory  basis  of  the  tax,  is  not  necessarily  the  book  value  or  the  value  based 
on  prices  realized  in  current  sales  of  shares  of  stock  or  the  value  determined 
by  capitalization  of  earnings. 

3040  Form  707  [page  603]  provides  Exhibit  A  for  the  book  or  fair  valut 
of  the  assets,  Exhibit  B  for  the  market  value  of  the  shares,  and 

Exhibit  C  for  the  value  of  the  capital  stock  based  on  the  capitalized  earnings. 
All  information  called  for  must  be  given  in  every  case  where  it  is  procurable. 
The  fair  average  value  of  the  capital  stock  of  a  corporation  and  the  tax 
payable  thereon  shall  be  determined  from  a  consideration  of  the  data  con- 
tained in  the  return  as  well  as  all  elements  and  factors  affecting  values,  which 
should  be  harmonized  so  far  as  possible  in  the  ultimate  fair  value  found. 
Fair  value  is  required  irrespective  of  the  exhibit  used  or  the  method  employed 
in  its  determination. 

3041  Exhibit  A. — The  character  of  the  assets  is  probably  the  most  im- 
portant factor  in  determining  the  reliability  of  the  value  reflected 

by  this  exhibit  as  being  indicative  of  the  fair  value  of  the  capital  stock.  If 
the  market  value  of  the  assets  be  established  the  fair  value  of  the  capital 
stock  is  held  to  be  not  materially  less  than  the  fair  market  value  of  the  net 
assets.  Attempts  to  average  the  assets  as  a  means  of  estimating  the  fair 
average  value  of  the  capital  stock  are  not  permitted. 

3042  Exhibit  B. — The  market  is  regarded  as  a  factor,  but  only  of  im- 
portance when  the  underlying  factors  upon  which  the  market  has 

been  established  are  sound  in  all  essential  particulars. 

3043  Exhibit  C. — The  weight  attaching  to  this  exhibit  is  largely  de- 
pendent upon  the  nature  of  the  business  and  character  of  the  assets. 

3044  In  capitalizing  the  net  earnings  of  the  corporation,  which  should 
reflect  the  true  earning  capacity,  the  officers  should  use  a  rate  fairly 

representing  the  conditions  obtaining  in  the  trade  and  in  the  locality,  with 
due  regard  to  other  important  factors,  including  the  worth  of  money.  But 
such  fair  value  must  not  be  greatly  at  variance  with  the  reconstructed  book 
value  shown  by  Exhibit  A,  unless  the  corporation  is  materially  affected  by 
extraordinary  conditions  which  support  a  lower  valuation.  In  any  such  case 
a  full  explanation  must  accompany  the  return.  The  commissioner  will 
estimate  the  fair  value  of  the  capital  stock  in  cases  regarded  as  involving 
any  understatement  or  undervaluation. 

3045  The  fair  value  of  the  capital  stock,  as  provided  under  section  1000  (a) 
(1)  of  the  Revenue  Act  of  1921,  and  invested  capital  under  the  excess- 
profits  tax  provisions  of  the  Revenue  Act  of  1921  are  not  necessarily  the 
same. 

3046  For  the  purpose  of  capital-stock  tax  the  fair  value  of  the  capital 
stock  is  estimated,  and  is  predicated  on  present  values,  including 

actual  appreciation  of  property,  whether  realized  or  unrealized,  and  such  in- 
tangible assets  as  good  will,  trade-marks,  and  patents  to  the  extent  reflected 
by  the  earning  power,  whereas,  for  the  purpose  of  excess-profits  tax,  the 
invested  capital  is  based  upon  the  actual  investment  of  the  stockholders  in 
the  corporation,  irrespective  of  the  present  value  of  its  assets.  In  the  case 
of  the  capital-stock  tax  the  fair  value  looks  to  the  present  net  value  of  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  615  SERVICE 


6-22-22. 


Reg.  64.— 1922  Edition. 

CAPITAL  STOCK  TAX  REGULATIONS. 


assets,  irrespective  of  the  amount  of  the  investment  of  the  stockholders. 
(See  art.  863,  Reg.  62  [If  1234].) 

3047  Art.  16.    Surplus  and  undivided  profits. — The  surplus  and  undivided 
profits  of  a  corporation  must  be  included  in  estimating  the  fair 

average  value  of  its  capital  stock.  If  the  fair  average  value  be  determined 
from  the  book  value,  the  surplus  and  undivided  profits  arc  included  in  the 
assets;  if  from  sales,  they  are  necessarily  a  factor  in  determining  the  market 
price;  and,  if  from  net  income,  they  are  reflected  to  a  greater  or  less  extent  in 
the  earnings. 

RETURNS. 

[![8000  and  f80Ol;] 

3048  Art.  17.  Return  by  domestic  corporation.— Every  domestic  corpo- 
3001      ration  must  make  a  return  on  Form  707  [page  6031  even  though  the 

law  may  indicate  that  it  is  exempt  from  the  tax.  The  question  of 
exemption  is  one  for  determination  by  the  commissioner.  Also  see  articles  31 
and  20. 

3049  Art.  18.    Return  by  affiliated  corporation.— Although  section  240 
[^[1074]  of  the  Revenue  Act  of  1921  requires  a  consolidated  return 

for  affiliated  corporations  for  the  purpose  of  income  tax,  for  the  purpose  of 
capital  stock  tax  each  corporation  must  render  a  separate  return  in  complete 
form.  So-called  subsidiary  corporations,  all  or  a  part  of  the  stock  of  which 
is  owned  by  another  corporation,  must  render  separate  returns,  the  same  as 
every  other  corporation.  No  deductions  from  the  assets  are  permitted  on 
account  of  intercompany  balances,  and  the  shareholdings  must  be  reported 
in  the  "Fair  value"  column  at  their  actual  worth  at  the  time  of  making  the 
return.  No  deduction  is  allowed  in  the  return  of  one  corporation  for  the  tax 
paid  by  another. 

3050  If  the  fair  value  is  determined  by  any  method  other  than  herein 
provided,  the  following  requirements  must  be  complied  with:  (a) 

The  parent  company  must  submit  with  its  return  a  list  of  all  subsidiaries 
and  the  districts  in  which  the  returns  were  filed;  (b)  the  return  of  the  sub- 
sidiary company  must  show  the  name  of  the  parent  company  and  the  district 
in  which  the  return  was  filed;  (c)  the  method  of  determining  the  fair  value, 
if  other  than  by  Exhibits  A,  B,  and  C,  must  be  fully  explained;  (d)  a  copy  of 
any  agreement  existing  between  parent  company  and  subsidiary  must  be 
furnished,  or  a  statement  made  that  none  exists;  and  (e)  a  combined  balance 
sheet  and  a  combined  net  income  statement  must  be  submitted  for  con- 
sideration in  connection  with  any  estimate  of  fair  value  made  on  behalf  of 
the  reporting  corporation. 

3051  Art.  19.    Verification  of  return. — The  return  and  any  separate  state- 
ment submitted  therewith  must  be  verified  in  the  form  printed  on 

page  3  of  the  return.  In  the  absence  of  the  president  or  treasurer,  or  both, 
other  responsible  officers  may  execute  the  jurat  to  avoid  delinquency.  How- 
ever, if  the  amount  of  the  tax  covered  thereby  is  not  in  excess  of  $10,  the 
return  may  be  signed  or  acknowledged  before  two  witnesses  instead  of  under 
oath.    (Sec.  1303  of  the  Act  [1[S009].) 

3052  Art.  20.    Time  for  making  return.    It  shall  be  the  duty  of  eveirj 
corporation  on  or  before  the  31st  day  of  July  in  each  year  to  make 

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CAPITAL  STOCK  TAX  REGULATIONS. 


a  return  to  the  collector  of  the  district  in  which  its  principal  place  of  business 
is  located.  If  an}'  corporation  fails  to  make  and  file  a  return  within  the  time 
prescribed  by  law  or  by  regulation  made  under  authority  of  law,  or  makes, 
willfully  or  otherwise,  a  false  or  fraudulent  return,  the  collector  or  deputy 
collector  shall  make  the  return  from  his  own  knowledge  and  from  such  in- 
formation as  he  can  obtain  through  testimony  or  otherwise.  In  any  such 
case  the  commissioner  may,  from  his  own  knowledge  and  from  such  infor- 
mation as  he  can  obtain  through  testimony,  or  otherwise,  make  a  return  or 
amend  any  return  made  by  a  collector  or  deputy  collector.  Any  return  so 
made  and  subscribed  by  the  commissioner,  or  by  a  collector  or  deputy  col- 
lector and  approved  by  the  commissioner,  shall  be  prima  facie  good  and  suf- 
ficient for  all  legal  purposes.  If  on  account  of  sickness  or  absence  of  the 
officer  of  the  corporation  charged  with  making  the  return,  it  is  impossible  to 
prepare  and  file  a  return  on  or  before  the  31st  day  of  July  (the  due  date), 
the  collector,  upon  application  in  writing,  may  allow  an  extension  of  time  not 
exceeding  30  days  from  July  31,  in  which  to  file  the  return.  //  extension  is 
granted,  the  letter  of  the  collector  should  be  attached  to  the  return,  (See  Sec. 
3176,  R.  S.  [1f8071].) 

3053  On  no  account  is  the  Commissioner  of  Internal  Revenue  or  the  col- 
lector authorized  to  grant  an  extension  of  time  in  which  to  file  capital 

stock  tax  returns  in  excess  of  30  days  from  July  31,  the  due  date.  If  for 
reasons,  other  than  absence  or  sickness,  beyond  the  control  of  the  officers 
making  the  return,  it  becomes  impossible  to  file  a  completed  return  within  the 
time  prescribed  by  law,  a  tentative  return  may  be  filed. 

3054  Art.  21.    Tentative  return. — The  filing  of  a  tentative  return  within 
the  prescribed  period  will  avoid  the  penalty  for  delinquent  filing,  but 

will  not  authorize  the  withholding  of  the  tax.  The  regulations  do  not  permit 
the  filing  of  a  tentative  return  to  stay  indefinitely  the  filing  of  a  completed 
return  and  the  collection  of  the  tax  due.  Therefore  if  a  tentative  return  is 
filed  it  should  be  clearly  marked  "Tentative  Return"  and  should  be  prepared 
in  as  complete  a  manner  as  possible,  including,  among  other  information,  a 
basis  of  the  computation  of  the  tax — that  is,  an  estimate  by  the  officers  of 
the  corporation  of  the  approximate  fair  value  of  the  capital  stock  in  order 
that  an  initial  assessment  may  be  made.  When  the  completed  return  is 
filed,  it  should  be  clearly  marked  "Completed  return,"  showing  that  a  ten- 
tative return  was  filed.  Such  action  will  prevent  duplicate  assessments  and 
ordinary  penalties.  In  every  case  a  statement  should  be  attached  to  the 
tentative  return,  indicating  the  approximate  date  the  completed  return  may 
be  expected.  Upon  receipt  of  the  completed  return  any  adjustment  necessary 
in  the  assessment  of  the  correct  tax  due  will  be  made. 

TAX  ON  FOREIGN  CORPORATIONS. 

3 CSS    Art.  22.  Basis  of  the  tax. — The  basis  of  the  tax  in  the  case  of  a  for- 
3002     eign  corporation  is  "carrying  on  or  doing  business  in  the  United 
States."   Foreign  insurance  companies  are  not  liable  to  capital  stock 
tax.    (See  art.  29.) 

3056    A  foreign  corporation  is  carrying  on  or  doing  business  in  the  United 
States  if  it  maintains  an  agent  or  an  office  or  warehouse  in  the  United 
States  or  in  any  other  way  enters  the  United  States  for  the  purpose  of  its 
business.   The  purchase  of  supplies  in  the  United  States  in  the  furtherance 

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CAPITAL  STOCK  TAX  REGULATIONS. 


of  continued  efforts  in  the  pursuit  of  profit  or  gain  is  carrying  on  or  doing 
business  in  the  United  States. 

jwi^ra  id  ,w*I  lo  yjirodnifi  i^bnu  oLnm  noilzlu%oi  xo  10  w&i  vd  bacfho^iq 

3057  Art.  23.   Capital  employed  in  the  United  States. — The  "capital  em- 
ployed in  the  transaction  of  its  business  in  the  United  States"  means 

the  portion  of  the  total  capital,  surplus,  and  undivided  profits,  of  the  foreign 
corporation,  utilized  for  the  purpose  of  doing  business  in  the  United  States. 
A  foreign  corporation  may  have  income  from  sources  within  the  United  States 
for  the  purpose  of  the  income  tax,  and  yet  not  have  capital  employed  in  the 
transaction  of  business  here  for  the  purpose  of  the  capital-stock  tax. 
Compare  articles  92-94  and  316-329  of  Regulations  62  [see  Income 
Tax  Service,  beginning  on  page  93].  A  foreign  corporation  not  actually 
doing  business  in  the  United  States  is  not  subject  to  tax,  and,  accordingly, 
the  investment  of  a  part  of  its  funds  in  United  States  stocks  and  securities 
will  not  constitute  capital  employed  in  its  business  in  the  United  States. 
For  the  definition  of  "doing  business"  see  article  11.  If  a  corporation  does 
business  in  this  country,  then,  although  the  mere  investment  of  funds  in 
United  States  securities  is  not  such  a  taxable  employment  of  capital,  such 
investment  will  constitute  capital  employed  in  the  transaction  of  business 
in  the  United  States  if  made  in  a  subsidiary  corporation  which  the  foreign 
corporation  uses  as  an  instrumentality  for  the  conduct  of  its  own  business 
in  the  United  States.  Thus  the  investment  of  the  funds  of  a  foreign  cor- 
poration in  the  purchase  of  facilities,  although  apparently  independent,  for 
the  purpose  of  its  business  here,  or  the  purchase  of  stock  and  securities  of  a 
subsidiary  corporation  for  the  same  purpose,  will  constitute  the  employment 
of  capital  in  the  transaction  or  business  in  the  United  States.  A  foreign 
corporation  may  not  escape  taxation  by  organizing  or  purchasing  the  stcck 
of  another  corporation  to  own  the  facilities  which  the  foreign  corporation 
needs  in  its  business.  See  article  352,  Regulations  62^  [If 743  ^Income  Tax 
Service]. 

3058  Art.  24.  Capital  employed  in  the  United  States  illustrated. — A  for- 
eign corporation  may  employ  capital  in  the  transaction  of  its  busi- 
ness in  the  United  States  in  various  ways.  For  example,  the  investment  of 
funds  in  property  in  the  United  States  used  in  its  business,  in  stocks  and 
securities  of  subsidiary  corporations  as  explained  in  article  23,  in  bills  and 
accounts  receivable  representing  business  done  in  the  United  States,  in  mer- 
chandise kept  here  for  sale,  in  materials  manufactured  here,  and  in  deposits 
in  United  States  banks  maintained  for  use  in  business  here.  Generally  speak- 
ing, approximately  such  proportion  of  the  entire  capital  of  a  foreign  corpora- 
tion will  presumably  be  employed  in  the  transaction  of  its  business  in  the 
United  States  as  the  gross  amount  of  its  business  in  the  United  States  bears 
to  its  total  gross  business,  but  this  will  not  always  be  conclusive,  since  a  cor- 
poration may  conceivably  transact  a  greater  or  less  volume  of  business  in 
one  country  than  in  another  on  the  same  amount  of  capital. 

3059  Art.  25.  Return  by  foreign  corporation. — Every  foreign  corporation 
carrying  on  or  doing  business  in  the  United  States  shall  make  return 

on  Form  708  [page  607],  irrespective  of  the  amount  of  capital  employed  in 
this  country  in  the  transaction  of  its  business.  The  capital  actually  em- 
ployed in  the  transaction  of  the  business  of  a  foreign  corporation  in  the 
United  States  and  the  tax  payable  thereon  shall  be  calculated  in  accordance 
with  the  instructions  on  the  form. 

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3060  Art.  26.   Computation  of  tax. — The  tax  is  at  the  rate  of  $1  for  each 
full  $1,000  of  the  capital  of  a  foreign  corporation  actually  employed 

in  the  transaction  of  its  business  in  the  United  States,  and  is  in  all  cases  to 
be  computed  on  the  basis  of  the  average  amount  of  capital  so  employed 
during  the  preceding  year  ending  June  30.  The  measure  of  the  tax  is  accord- 
ingly different  from  that  of  domestic  corporations  which  pay  a  tax  measured 
by  the  fair  average  value  of  their  capital  stock.  No  deduction  from  the  total 
fair  average  amount  of  capital  so  employed  is  allowed  in  computing  the  tax. 

3061  Art.  27.   Measure  of  tax. — The  measure  of  the  tax  is  the  average 
amount  of  capital  employed  in  the  transaction  of  business  in  the 

United  States  during  the  preceding  fiscal  year.  It  will  usually  be  sufficient 
to  determine  the  amount  of  capital  so  employed  at  the  beginning  of  each 
year  and  the  amount  so  employed  at  the  end  of  such  year,  and  to  divide  the 
sum  of  such  amounts  by  two.  Where,  however,  there  have  been  material 
changes  in  the  amount  of  capital,  the  average  amount  should  be  determined 
with  due  regard  to  the  times  at  which  such  changes  occurred.  A  foreign 
corporation  may,  if  it  so  desire,  compute  the  average  amount  of  capital 
employed  on  a  monthly  basis. 

EXEMPTION  FROM  TAX. 

3062  Art.  28.  Corporation  not  in  business  during  preceding  year. — The 

3003  tax  being  payable  in  advance  does  not  apply  to  any  corporation  which 
was  not  engaged  in  business  during  any  part  of  the  fiscal  year  pre- 
ceding the  year  for  which  the  tax  is  due,  but  if  it  was  in  business  even  one 
day  of  the  preceding  year  and  one  day  of  the  taxable  year  it  is  subject  to  the 
tax.  There  is  no  relation  between  the  amount  of  the  tax  payable  and  the 
length  of  time  the  corporation  was  in  business.  A  corporation  engaged  in 
business  during  a  part  of  the  preceding  year,  but  not  engaged  in  business 
at  the  beginning  of  the  taxable  year,  is  not  required  to  make  any  return  if  it 
is  dissolved  or  in  process  of  dissolution,  but  if  it  is  only  temporarily  inactive 
and  subsequently  during  the  year  re-engages  in  business  it  should  file  a  return 
in  the  month  in  which  it  recommences  business  and  pay  the  tax  due  from  the 
first  of  such  month  to  the  end  of  the  taxable  year.  A  corporation  organized 
and  beginning  corporate  activities  on  or  after  July  1  is  not  subject  to  tax 
for  the  remainder  of  the  taxable  period  in  which  the  company  was  organ- 
ized, unless,  as  of  July  1,  it  takes  over  the  business  of  an  organization  which 
was  subject  to  capital  stock  tax,  in  which  event  the  new  corporation  is  re- 
quired to  file  a  return  and  pay  the  tax.  Also  see  article  32  relative  to  election 
to  be  taxed  as  a  corporation.  In  the  case  of  foreign  corporations  "engaged 
in  business"  means  the  transaction  of  any  business  within  the  United  States. 

3063  Art.  29.    Organizations  and  insurance  companies  exempt. — The  tax 

does  not  apply  to  insurance  companies  (stock,  mutual,  domestic,  or 
foreign)  nor  to  corporations  the  fair  value  of  whose  capital  stock  for  the  pre- 
ceding year  does  not  exceed  $5,000  nor  to  any  of  the  following  classes  of  corpo- 
rations specified  in  section  231  of  the  act,  viz.: 

(1)  Labor,  agricultural,  or  horticultural  organizations.  [See  Art.  512, 
Reg.  62, 1fl020  Income  Tax  Service.] 

3064  (2)  Mutual  savings  banks  not  having  a  capital  stock  represented  bv 
shares.    [See  Art.  513,  Reg.  62,  1fl021  Income  Tax  Service.] 

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3065  (3)  Fraternal   beneficiary   societies,   orders,    or    associations,  (a) 
operating  under  the  lodge  system  or  for  the  exclusive  benefit  of  the 

members  of  a  fraternity  itself  operating  under  the  lodge  system;  and  (b) 
providing  for  the  payment  of  life,  sick,  accident,  or  other  benefits  to  the 
members  of  such  society,  order,  or  association  or  their  dependents.  [See 
Art.  514,  Rcr.  62,  1[1022  Income  Tax  Service.] 

3066  (4)  Domestic  building  and  loan  associations  substantially  all  the  bus- 
iness of  which  is  confined  to  making  loans  to  members;  and  co- 
operative banks  without  capital  stock  organized  and  operated  for  mutual 
purposes  and  without  profit.  [See  Art.  515,  Reg.  62,  ^1023  Income  Tax 
Service.] 

3067  (5)  Cemetery .  companies  owned  and  operated  exclusively  for  the 
benefit  of  their  members  or  which  are  not  operated  for  profit;  and 

any  corporation  chartered  solely  for  burial  purposes  as  a  cemetery  corpo- 
ration and  not  permitted  by.  its  charter  to  engage  in  any  business  not  nec- 
essarily incident  to  that  purpose,  no  part  of  the  net  earnings  of  which  inures 
to  the  benefit  of  any  private  stockholder  or  individual.  [See  Art.  516,  Reg. 
62,  T[1029  Income  Tax  Service.] 

3068  (6)  Corporations,  and  any  community  chest,  fund,  or  foundation, 
organized  and  operated  exclusively  for  religious,  charitable,  scientific, 

literary,  or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual.  [See  Art.  517  (1),  Reg.  62,  ^[1030  and 
^[1031,  Income  Tax  Service.] 

3069  A  corporation  organized  and  operated  exclusively  for  the  purpose  of 
maintaining  a  symphony  orchestra  and  giving  musical  concerts,  the 

programs  being  of  an  educational  character,  and  no  part  of  the  net  earnings 
inuring  to  the  benefit  of  any  private  stockholder  or  individual,  is  organized 
for  "educational  purposes."  [See  Art.  517  (2),  (3),  Reg.  62,  If  1032  and 
^1033  Income  Tax  Service.] 

3070  (7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  not 
organized  for  profit  and  no  part  of  the  net  earnings  of  which  inures  to 

the  benefit  of  any  private  stockholder  or  individual.  [See  Art.  518,  Reg.  62, 
^[1034  Income  Tax  Service.] 

3071  (8)  Civic  leagues  or  organizations  not  organized  for  profit  but 
operated  exclusively  for  the  promotion  of  social  welfare.    [See  Art. 

519,  Reg.  62,  U1035  Income  Tax  Service.] 

3072  (9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recreation, 
and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of 

which  inures  to  the  benefit  of  any  private  stockholder  or  member.    [See  Art. 

520,  Reg.  62,  1fl036  Income  Tax  Service.] 

3073  (10)  Farmers*  or  other  mutual  hail,  cyclone,  or  fire  insurance  com- 
panies, mutual  ditch  or  irrigation  companies,  mutual  or  co-operative 

telephone  companies,  or  like  organizations  of  a  purely  local  character,  the 
income  of  which  consists  solely  of  assessments,  dues,  and  fees  collected  from 
members  for  the  sole  purpose  of  meeting  expenses. 

3074  It  is  necessary  to  exemption  of  organizations  mentioned  in  the  fore- 
going subsection  (other  than  insurance  companies,  all  of  which  are 

exempt)  that  the  income  of  the  company  be  derived  solely  from  assessments, 
dues,  and  fees  collected  from  members.  [See  Art.  521,  Reg.  62,  ^  1037  Income 
Tax  Service.] 

3075  (11)  Farmers,  fruit  growers,  or  like  associations,  organized  and 
operated  as  sales  agents  for  the  purpose  of  marketing  the  products 

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of  members  and  tufning  back  to  them  the  proceeds  of  sales,  less  the  necessary 
selling  expenses,  on  the  basis  of  the  quantity  of  produce  furnished  by  them; 
or  organized  and  operated  as  purchasing  agents  for  the  purpose  of  purchasing 
supplies  and  equipment  for  the  use  of  members  and  turning  over  such  supplies 
and  equipment  to  such  members  at  actual  cost,  plus  necessarv  expenses. 
[See  Art.  522,  Reg.  62,  <[1038  Income  Tax  Service.] 

307©    (12)  Corporations  organized  for  the  exclusive  purpose  of  holding 
title  to  property,  collecting  income  therefrom,  and  turning  over  the 
entire  amount  thereof,  less  expenses,  to  an  organization  which  itself  is  exempt 
from  the  tax  imposed  by  this  title. 

3077  (13)  Federal  land  banks  and  national  farm-loan  associations  as 
provided  in  section  26  of  the  act  approved  July  17,  1916,  entitled 
"An  act  to  provide  capital  for  agricultural  development,  to  create  standard 
forms  of  investment  based  upon  farm  mortgage,  to  equalize  rates  of  interest 
upon  farm  loans,  to  furnish  a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for  the  United  States,  and  for 
other  purposes." 

3  078  Joint  stock  land  banks  created  under  the  Federal  farm  loan  act  of 
July  17,  1916,  are  not  exempt  under  this  section. 

3079  (14)  Personal  service  corporations.  This  subdivision  shall  not  be  in 
effect  after  December  31,  1921. 

3  080  Personal  service  corporations  so  classified  under  the  Revenue  Act  of 
1918  are  exempt  from  capital-stock  tax  for  the  taxable  period  July  1, 

1921,  to  June  30,  1922,  but  are  liable  to  capital-stock  tax  the  same  as  other 

corporations  effective  July  1,  1922,  under  the  Revenue  Act  of  1921. 

081  Art.  30.  Claims  for  exemption. — It  may  be  stated  generally  that  in 
all  claims  for  exemption  under  the  act,  it  is  necessary  that  the  claim- 
ant establish  to  the  satisfaction  of  the  commissioner  that  it  is  in  practice 
actually  operated  in  an  exempt  manner.  In  those  cases  falling  under  para- 
graphs of  the  statute  requiring  that  the  organization  be  "organized"  or 
"organized  and  operated"  in  the  manner  specified,  it  is  necessary  also  that  the 
claimant  establish  to  the  satisfaction  of  the  commissioner  that  it  is  so  organ- 
ized. The  term  "organized,"  as  thus  used,  refers  to  the  real  substance  and 
intent  of  the  organization  and  not  its  mere  form.  In  determining  the  real 
substance  and  intent  of  the  organization  the  provisions  of  the  charter  and 
by-laws  are  not  in  themselves  conclusive,  but  only  prima  facie  evidence  giving 
rise  to  presumptions  according  to  their  terms.  The  burden  is  upon  the 
claimant  to  overcome  these  presumptions  by  extraneous  evidence  to  the 
satisfaction  of  the  commissioner. 

3082  Art.  31.  Return  by  corporation  claiming  exemption. — As  corpora- 
tions are  generally  organized  to  do  business  every  existing  company 

is  presumed  to  be  subject  to  the  tax  unless  satisfactory  evidence  is  submitted 
showing  that  it  is  exempt.  Corporations  claiming  exemption  should  fill  out 
Form  707  but  instead  of  computing  the  tax  should  enter  in  the  space  pro- 
vided for  the  computation  the  notation  "Exemption  claimed."  In  all  such 
cases  the  return  so  filled  out  must  be  filed  with  the  collector,  together  with  a 
comprehensive  statement  of  the  reasons  for  claiming  exemption. 

3083  If  exemption  has  been  allowed  for  the  preceding  taxable  year  and 
there  has  been  no  change  in  the  status  or  conditions  of  the  company 

then  the  first  13  lines  of  Form  707  should  be  completed  and  a  state- 
ment attached  to  the  effect  that  exemption  is  claimed  for  the  same  reasons 

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as  for  the  previous  year  and  that  the  same  status  and  conditions  of  the  com- 
pany exist  for  the  taxable  period  in  question.  In  this  way  the  records  of 
the  collectors'  offices  will  be  complete  and  corporations  will  avoid  requests 
for  the  filing  of  returns  and  unnecessary  correspondence.  The  determina- 
tion of  liability  rests  with  the  Commissioner  of  Internal  Revenue  and  with- 
out complete  information  it  is  impossible  to  make  a  decision. 

ELECTION  TO  BE  TAXED  AS  CORPORATION. 

[If  1082.] 

3084  Art.  32.  Election  to  be  taxed  as  a  corporation. — In  the  event  a  busi- 
ness enterprise  qualifies  under  the  above  provisions  and  elects  to  b* 

taxed  under  Titles  II  and  III  as  a  corporation,  then  it  is  required  to  file 
capital  stock  tax  returns  and  pay  the  tax  for  the  six  months'  period,  Januarv 
1  to  June  30,  1921,  and  the  12  months'  period,  July  1,  1921,  to  June  30,  1922. 
The  valuations  for  the  first  ment'oned  period  will  be  reported  as  of  Decem- 
ber 31,  1920.  The  values  for  the  last  mentioned  period  will  be  reported  as  pi 
June  30,  1921. 

3085  The  clauses  of  section  1000  of  the  Revenue  Act  of  1918,  which  re- 
quire that  a  corporation  must  have  been  engaged  in  business  some 

part  of  the  year  preceding  the  taxable  period  in  order  to  be  liable  for  the 
tax,  are  not  applicable  to  corporations  filing  returns  under  the  provisions  of 
section  229,  of  the  Revenue  Act  of  1921. 

RETURNS  PUBLIC  RECORDS. 

3C86  Art.  33.  Inspection  of  returns. — The  returns  upon  which  the  tax 
has  been  determined  by  the  commissioner,  although  public  records, 
are  in  general  open  to  inspection  only  to  the  extent  authorized  by  the  Presi- 
dent. All  bona  fide  stockholders  of  record  owning  1  per  cent  or  more  of 
the  outstanding  stock  of  any  corporation  shall,  upon  making  request  of  the 
commissioner,  be  allowed  to  examine  the  annual  income  returns  of  such 
corporations  and  of  its  subsidiaries,  but  such  privilege  of  examination  is 
personal  and  can  not  by  power  of  attorney  be  delegated  by  the  stockholder 
to  another.  Only  such  officers  of  any  State  as  are  charged  with  the  enforce- 
ment of  a  State  income  tax  law  shall  have  access  to  the  returns  of  any  cor- 
pora'ion,  or  to  an  abstract  thereof  showing  the  name  and  income  of  the  cor- 
poration, at  such  times  and  in  such  manner  as  the  secretary  may  prescribe, 
and  then  only  in  case  the  information  is  to  be  used  by  them  in  connection 
with  such  enforcement.  Any  stockholder  who  is  allowed  to  examine  the 
return  of  any  corporation,  and  who  makes  known  in  any  manner  whatever 
not  provided  by  law  the  amount  or  source  of  income,  profits,  losses,  expendi- 
tures, or  any  particular  thereof,  set  forth  or  disclosed  in  any  such  return, 
shall  be  guilty  of  a  misdemeanor  and  be  punished  by  a  fine  not  exceeding 
$1,000  or  by  imprisonment  not  exceeding  one  year,  or  both.  See  Treasury 
Decisions  2961,  2962,  3273,  and  3277  for  full  particulars.  [See  Beginning  at 
1|2659  Income  Tax  Service.] 

3087  Art.  34.  No  authority  for  credit  of  excess  payment  of  capital  stock 
tax. — Section  252  of  the  Revenue  Act  of  1921  provides  for  a  credit 
against  additional  income  taxes  due  to  previous  overpayments  of  income 
or  excess-profits  taxes.  The  law  does  not  authorize  the  credit  of  an  excess 
payment  of  capital  stock  tax  for  a  given  period  against  an  assessment  of 

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the  same  or  other  tax  for  a  previous  or  subsequent  period.  A  claim  for  abate- 
ment or  refund  for  the  excess  assessment  should  be  filed  and  payment  made 
of  the  correct  tax  due  for  the  previous  or  subsequent  period. 

LAWS  MADE  APPLICABLE. 

[118000.] 

EXAMINATION  OF  BOOKS  AND  WITNESSES. 

[118002.] 

METHOD  OF  COLLECTING  TAX. 

[118012.] 

3088  Art.  35.  Time  for  payment  of  tax. — All  assessments  shall  be  made 
by  the  commissioner.  The  collector  shall  within  10  days  after  re- 
ceiving any  list  of  taxes  from  the  commissioner  give  notice  to  each  corpora- 
tion liable  to  pay  any  tax  stated  therein,  to  be  left  at  its  place  of  business 
or  to  be  sent  by  mail,  stating  the  amount  of  such  tax  and  demanding  payment 
thereof.  If  such  corporation  does  not  pay  the  tax  within  10  days  after  the 
service  or  the  sending  by  mail  of  such  notice,  it  shall  be  the  duty  of  the 
collector  to  collect  the  tax  with  a  penalty  of  5  per  cent  additional  upon  the 
amount  of  the  tax  and  interest  at  the  rate  of  one  per  cent  a  month.  See 
section  3184,  Revised  Statutes.  A  collector  has  no  authority  to  extend  the 
time  for  payment  of  the  tax,  and  any  extension  granted  by  him  will  be  at  his 
own  risk.  All  taxes  are  payable  direct  to  the  collector  of  internal  revenue 
of  the  district  in  which  return  is  filed.  The  collector  may  accept  payment 
of  the  tax  when  the  return  is  filed  as  an  "advance  collection,"  subject  to  any 
adjustment  later  found  necessary,  but  no  corporation  is  required  to  pay  the 
tax  until  after  notice  and  demand.  However,  the  collection  of  the  tax  is 
facilitated  where  a  corporation  transmits  with  the  return  a  check  for  the 
amount  of  tax  due.  Tax  due  from  a  corporation  which  has  liquidated  is 
legally  col'ectible  from  the  stockholders  or  others  who  have  received  its  assets. 

3089  Art.  36.  Abatement  and  refund  of  taxes. — Section  3220  of  the  Re- 
vised Statutes,  as  amended  by  section  1315  of  the  Revenue  Act  of 

1921,  provides  [see  H8023]. 

FRAUDULENT  RETURNS. 

3090  Section  3225  of  the  Revised  Statutes,  as  amended  by  section  1323 
of  the  Revenue  Act  of  1921,  provides  [see  If 8047]. 

MEDIUM  OF  PAYMENT  OF  TAX. 

— •n~iuT9*i  98iBi  toi  bfiB  rrr u$9H  ^?Ium     9Tjxii.B^  iqi  ??9iiij>ri3^[    I£  toA  gonr 

3091  Section  1325  of  the  act  reads  as  follows  [see  ^8020]. 

3  092  Art.  37.  Payment  of  tax  by  uncertified  checks. — Collectors  may  ac- 
cept uncertified  checks  in  payment  of  taxes,  provided  such  checks 
are  collectible  at  par — that  is,  for  their  full  amount,  without  any  deduction 
for  exchange  or  other  charges.  The  collector  will  stamp  on  the  face  of  each 
check  before  deposit  the  words,  "This  check  is  in  payment  of  an  obligation 
to  the  United  States  and  must  be  paid  at  par.  No  protest,"  with  his  name 
and  title.   The  day  on  which  the  collector  receives  the  check  will  be  consid- 

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ered  the  date  of  payment  so  far  as  the  taxpayer  is  concerned,  unless  the  check 
is  returned  dishonored.  If  one  check  is  remitted  to  cover  the  taxes  of  two 
or  more  corporations,  the  remittance  must  be  accompanied  by  a  letter  of 
transmittal  stating  (a)  the  name  of  the  drawer  of  the  check;  (b)  the  amount 
of  the  check;  (c)  the  amount  of  any  cash,  money  order,  or  other  instrument 
included  in  the  same  remittance;  (d)  the  name  of  each  corporation  whose 
tax  is  paid  by  the  remittance;  (e)  the  amount  of  the  payment  on  account 
of  each  corporation;  and  (f)  the  kind  of  tax  paid. 

3093  Art.  38.  Procedure  with  respect  to  dishonored  checks. — If  the  bank 
on  which  any  such  check  is  drawn  shall  refuse  to  pay  it  at  par,  the 

check  shall  be  returned  through  the  depositary  bank  and  be  treated  in  the 
same  manner  as  a  bad  check.  All  expenses  incident  to  the  attempt  to  collect 
such  a  check  and  the  return  of  it  through  the  depositary  bank  must  be  paid 
by  the  drawer  of  the  check  to  the  bank  on  which  it  is  drawn,  since  no  deduc- 
tion can  be  made  from  amounts  received  in  payment  of  taxes.  See  section 
3210  of  the  Revised  Statutes.  Any  taxpayer  whose  check  is  not  paid  by  the 
bank  on  which  drawn  becomes  liable,  under  the  terms  of  the  law,  for  pay- 
ment of  the  tax  and  for  all  legal  penalties  and  additions,  and  the  collector 
shall  proceed  to  collect  the  same  as  though  no  check  had  been  given.  A  tax- 
payer who  tenders  a  certified  check  in  payment  for  taxes  is  not  released  from 
his  obligation  until  the  check  has  been  paid.  (Act  of  March  2,  1911,  36 
Stat.  965.) 

PENALTIES. 

[117693;  1!8014-8016.J 

3094  Art.  39.  Doing  business  without  payment  of  tax.— Every  corpora- 
tion which  does  business  without  having  paid  the  tax  is  liable  to  a 

penalty  of  $1,000.  A  corporation  paying  the  capital  stock  tax  is  not  on  that 
account  exempt  from  any  occupational  tax. 

3095  Art.  40.  Penalty  for  nonpayment  of  tax. — (a)  Any  corporation 
which  fails  to  pay  the  tax  when  due  and  payable  is  liable  to  a  penalty 

of  $1,000.  If  it  willfully  refuses  to  pay  or  willfully  attempts  to  evade  the 
tax,  it  is  liable  also  to  a  fine  of  $10,000  and  costs  and  to  a  100  per  cent  penalty 
to  be  added  to  the  tax.  See  also  article  39.  (b)  Any  officer  or  employee  of 
a  corporation  who  in  the  course  of  his  duty  fails  to  pay  the  tax  when  due 
and  payable  is  liable  to  a  penalty  of  $1,000.  If  he  willfully  refuses  to  pay 
or  willfully  attempts  to  evade  the  tax,  he  is  liable  also  to  a  fine  of  $  10,000 
and  costs  and  to  imprisonment  for  a  year,  and  to  a  penalty  of  the  amount  of 
the  tax  unpaid  or  evaded. 

3096  Art.  41.  Penalties  for  failure  to  make  return  and  for  false  return. — 

Any  corporation  which  fails  to  make  a  return  within  the  required 
time  is  liable  to  a  penalty  of  $1,000.  If  it  willfully  refuses  to  make  a  return 
it  is  liable  also  to  a  fine  of  $10,000  and  costs. 

3097  Any  officer  or  employee  of  a  corporation  who  in  the  course  of  his 
duty  fails  to  make  a  return  within  the  required  time  is  liable  to  a 

penalty  of  $1,000.  If  he  willfully  refuses  to  make  a  return  he  is  liable  also 
to  a  fine  of  $10,000  and  costs  and  to  imprisonment  for  a  year. 

3098  In  case  of  failure  to  file  a  return  on  time,  a  penalty  of  £5  per  cent 
HBt-lBfof  the  amount  of  the  tax  is  added  to  it  unless  the  return  is  later 

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filed  and  failure  to  file  it  within  the  prescribed  time  is  satisfactorily  shown 
to  the  Commissioner  to  be  due  to  a  reasonable  cause  and  not  to  willful  neglect. 
This  penalty  is  imposed  by  section  3176  of  the  Revised  Statutes  as  amended. 
Two  classes  of  delinquents  are  liable  to  this  penalty:  (a)  Those  who  do  not 
file  returns  and  for  whom  returns  are  made  by  the  collector  or  commissioner; 
and  (b)  those  who  file  tardy  returns  and  are  unable  to  show  reasonable  cause 
for  the  delay.  A  taxpayer  who  files  a  tardy  return  and  wishes  to  avoid  the 
penalty  must  make  an  affirmative  showing  of  all  the  facts  alleged  as  a  reason- 
able cause  for  failure  to  file  the  return  on  time  in  the  form  of  an  affidavit, 
which  should  be  attached  to  the  return.  If  such  an  affidavit  is  furnished 
with  the  return  or  upon  the  collector's  demand,  the  collector,  unless  other- 
wise directed  by  the  commissioner,  will  forward  the  affidavit  with  the  re- 
turn, and  if  the  commissioner  determines  that  the  delinquency  was  due  to  a 
reasonable  cause  and  not  to  willful  neglect  the  25  per  cent  penalty  will  not 
be  assessed.  If  the  taxpayer  exercised  ordinary  business  care  and  prudence 
and  was  nevertheless  unable  to  file  the  return  in  the  prescribed  time,  then 
the  delay  is  due  to  "reasonable  cause." 

UNNECESSARY  EXAMINATIONS. 

[118006.] 

JURISDICTION  OF  COURTS. 

[^[8003-8005.] 

AMENDMENTS  TO  REVISED  STATUTES. 

[H8060.] 

COLLECTOR  TO  REPORT  WILLFUL  VIOLATIONS. 

[118061.] 

POWERS  OF  REVENUE  OFFICERS. 

[U8062.] 

PENALTIES  FOR  UNLAWFUL  DISCLOSURES. 

[1[8063.] 

CANVASS  FOR  TAXABLE  PERSONS  AND  OBJECTS. 

[118064.] 

RESPONSIBILITIES  OF  PERSONS  LIABLE  TO  TAX. 

[1[8065  to  1)8070.] 

DELINQUENT  RETURNS. 

[118071  to  H8074.] 

FINAL  DETERMINATIONS  AND  ASSESSMENTS. 

[1f8007.] 

ADMINISTRATIVE  REVIEW. 

[H8008.] 

RETROACTIVE  REGULATIONS. 

[IfSOll.] 


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CAPITAL  STOCK  TAX  REGULATIONS. 


TIME  FOR  REFUND  OF  CAPITAL  STOCK  TAX. 

3099  Section  3228  of  the  Revised  Statutes  is  amended  by  section  1316  of 
the  act  to  read  as  follows: 

All  claims  for  the  refunding  or  crediting  of  any  internal-revenue  tax  alleged 
to  have  been  erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty  alleged 
to  have  been  collected  without  authority,  or  of  any  sum  alleged  to  have  been 
excessive  or  in  any  manner  wrongfully  collected,  must  be  presented  to  the  Com- 
missioner of  Internal  Revenue  within  four  years  next  after  payment  of  such  tax, 
penalty,  or  sum. 

3100  This  section,  except  as  modified  by  section  252,  shall  apply  retro- 
actively to  claims  for  refund  under  the  Revenue  Act  of  1916,  the 

Revenue  Act  of  1917,  and  the  Revenue  Act  of  1918. 

3101  Art.  42.  Section  3228,  R.  S.  (refunds),  retroactive. — This  section  is 
retroactive  in  its  effect.  Any  claim  for  the  refund  of  taxes  or  pen- 
alties illegally  assessed  or  collected  under  the  Revenue  Acts  of  1916,  1917,  or 
1918,  regardless  of  whether  or  not  such  claim  was  barred  in  whole  or  in  part: 
at  the  time  of  the  passage  of  this  act  will  be  considered  on  its  merits  if  pre- 
sented within  the  four-year  period  specified  in  the  foregoing  section. 

LIMITATONS  UPON  SUITS  AND  PROSECUTIONS. 

[<U8048-(tf8055.] 

ASSESSMENTS. 

Sec.  1322.  That  all  internal  revenue  taxes,  except  as  provided  in  section  250 
of  this  Act,  shall,  notwithstanding  the  provisions  of  section  3182  of  the  Revised 
Statutes  or  any  other  provision  of  law,  be  assessed  within  four  years  after  such 
taxes  became  due,  but  in  the  case  of  fraud  with  intent  to  evade  tax  or  willful 
attempt  in  any  manner  to  defeat  or  evade  tax,  such  tax  may  be  assessed  at  any  time. 

31  02  Art.  43.  Section  1322  R.  S.  (assessments)  retroactive. — This  section 
is  retroactive  in  its  effect.  Under  its  terms  capital  stock  taxes  may 
be  assessed  at  any  time  within  a  period  of  four  years  after  such  taxes  became 
due,  notwithstanding  the  fact  that  assessment  may  have  been  barred  by  a 
prior  statute  at  the  time  of  passage  of  the  Revenue  Act  of  1921. 

3103  The  new  period  of  limitation  embodied  in  the  section  also  has  the 
effect  of  extending  for  the  same  period  the  time  within  which  the 

25  per  cent  and  50  per  cent  penalties  imposed  by  section  3176  of  the  Revised 
Statutes  may  be  assessed. 

INTEREST  ON  REFUNDS  AND  JUDGMENTS. 

[1I8G36-8037.] 

AUTHORITY  FOR  REGULATIONS. 

[H8009.] 

REPEALS. 

M[8076-8077.] 

3104  Art.  44.    Promulgation  of  regulations. — In  pursuance  of  the  statute 
the  foregoing  regulations  are  hereby  made  and  promulgated  and  all 

rulings  inconsistent  herewith  are  hereby  revoked. 

D.  H.  BLAIR, 

Commissioner  of  Internal  Revenue. 
Approved  June  15,  1922.    [Released  for  publication  June  22,  1922.] 
A.  W.  MELLON, 

Secretary  of  the  Treasury. 

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CAPITAL  STOCK  TAX  REGULATIONS. 


(T.  D.  3160.) 
Decision  of  the  United  States  Court  of  Claims. 

Act  of  September  8,  1916. 


Washington  Water  Power  Company  vs.  United  States. 
(February  14,  1921.) 

3105  1.  Validity  of  tax. — The  capital  stock  tax  is  an  excise  tax  imposed 
3000     upon  a  corporation  with  respect  to  the  carrying  on  or  doing  business 

by  the  corporation,  which  is  a  proper  subject  for  taxation  by  the 
Government,  and  within  its  constitutional  powers  of  taxation. 

3106  2.  Payment  in  advance. — The  capital  stock  imposed  by  the  Act 
of  September  8,  1916,  is  not  illegal  because  assessed  and  collected  in 

advance  under  regulations  of  the  Treasury  Department,  the  act,  by  Sections 
407  and  409,  contemplating  that  a  corporation  must  pay  a  tax  on  its  capital 
stock  for  the  preceding  year  in  order  to  do  business  for  the  coming  year. 
3106a  3.  Action  to  recover  tax  paid — Maintenance. — An  action  to  recover  a 
capital  stock  tax  paid  in  advance,  on  the  ground  that  advance  pay- 
ment was  unauthorized,  cannot  be  maintained  where  the  tax  became  due  and 
payable  under  the  taxpayer's  theory  before  suit  was  brought.  (T.  D.  3160, 
April  30,  1921.) 


2  107    t  ot  1|3107  see  page  631. 


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{Decision.) 
Revenue  Acts  of  1916  and  1918. 
June  6,  1922. 

Certain  trusts  of  the  Massachusetts  type  are  subject  to  capital  stock  tax. 

UNITED  STATES  CIRCUIT  COURT  OF  APPEALS  FOR  THE 

FIRST  CIRCUIT. 


No.  1551. 

John  F.  Malley,  formerly  Collector  of  Internal  Revenue, 
Defendant,  Plaintiff  in  Error, 
v. 

Arthur  L.  Howard  Et  Al.,  Trustees, 
Plaintiffs,  Defendants  in  Error. 


No.  1552. 

Andrew  J.  Casey,  acting  Collector  of  Internal  Revenue, 
Defendant,  Plaintiff  in  Error, 
v. 

Arthur  L.  Howard  Et  Al.,  Trustees, 
Plaintiffs,  Defendants  in  Error. 

No.  1553. 

John  F.  Malley,  formerly  Collector  of  Internal  Revenue, 
Defendant,  Plaintiff  in  Error, 
v. 

Alvah  Crocker  Et  Al.,  Trustees, 
Plaintiffs,  Defendants  in  Error. 


No.  1554, 

John  F.  Malley,  formerly  Collector  of  Internal  Revenue, 
Defendant,  Plaintiff  in  Error. 
v. 

Louis  Hecht,  Jr.,  Et  Al.,  Trustees, 
Plaintiffs,  Defendants  in  Error. 

Error  to  the  District  Court  of  the  United  States  for  the 
District  of  Massachusetts. 


3107  Anderson,  J.  These  cases  involve  the  validity  of  taxes  imposed 
3015     upon  business  organizations,  commonly  known  as  Massachusetts 

Trusts,  under  the  Revenue  Acts  of  1916  (39  Stat.  789)  and  1918 
(40  Stat.  1057).  Nos.  1551  and  1552  involve  the  Haymarket  Trust  and  we 
treat  them  as  one  case.  The  cases  were  argued  as  a  group  and  may  be  con- 
veniently dealt  with  in  one  opinion. 

3108  The  chief  business  of  the  Haymarket  and  Hecht  Trusts  is  that  of 
owning,  managing  and  leasing  real  estate,  and  distributing  the  net 

income  to  its  shareholders.  These  concerns  deny  that  they  are  associations 
within  the  meaning  of  the  statutes. 

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3109  The  Crocker  Trust  is  a  large  manufacturing  concern.    It  admits 
that  it  is  an  association  within  the  meaning  of  the  statutes,  but  it 

claims  immunity  from  the  tax  on  the  ground  that  it  has  no  capital  stock  within 
their  meaning. 

3110  The  court  below  sustained  the  plaintiff's  contentions  in  each  case, 
and  the  government  brought  the  cases  here  on  writs  of  error. 

3111  The  fundamental  question  is  whether  the  plaintiffs  are  associations 
having  a  capital  stock  represented  by  shares,  within  the  meaning  of 

these  provisions.  So  far  as  the  issues  in  these  cases  are  concerned,  the  pro- 
visions of  the  two  statutes  seem  to  us  to  be  equivalent,  for  there  is  now 
presented  no  controverted  question  as  to  the  amount  of  any  tax;  we  therefore 
need  not  consider  the  different  amounts  exempt  under  the  two  statutes  or 
the  retroactive  and  substitutional  effect  of  the  1918  statute. 

3112  The  Act  of  1916  levies  a  tax  on  associations  "now  or  hereafter  organized 
in  the  United  States  for  profit  and  having  a  capital  stock  represented 

by  shares  .  .  .  with  respect  to  the  carrying  on  or  doing  business  by  such 
association  .  .  .  equivalent  to  50  cents  for  each  $1,000  of  the 
fair  value  of  its  capital  stock,  and  in  estimating  the  value  of  capital  stock  the 
surplus  and  undivided  profits  shall  be  included.  .  .  .  The  amount  of 
such  annual  tax  shall  in  all  cases  be  computed  on  the  basis  of  the  fair  average 
value  of  the  capital  stock  for  the  preceding  year," — with  an  exemption  not 
now  material. 

3113  The  Act  of  1918,  section  1,  includes  associations  under  the  term 
"corporation";    and  in  section   1000  (a)  provides  for  an  annual 

"special  excise  tax  with  respect  to  carrying  on  or  doing  business  equivalent  to  $1 
for  each  $1,000  of  so  much  of  the  fair  average  value  of  its  capital  stock  for  the 
preceding  year"  etc.  "In  estimating  the  value  of  capital  stock  the  surplus  and 
undivided  profits  shall  be  included." 

3114  Both  acts  are  conceded  to  levy  an  excise  tax  with  respect  to  doing 
business,  the  amount  of  the  tax  being  measured  by  the  average  value 

of  the  capital  stock,  including  any  surplus  and  undivided  profits  as  a  part 
thereof.  All  the  plaintiffs  agree  that  they  are  doing  business  within  the  mean- 
ing of  these  acts. 

3115  While  we  recognize  that  in  applying  this  and  every  other  tax  statute 
reasonable  doubts  must  be  resolved  in  favor  of  the  taxpayer  (Gould 

v.  Gould,  245  U.  S.  151)  yet  revenue  acts  are  not  penal  statutes;  the  Govern- 
ment is  not  to  be  crippled  by  strained  and  unnatural  construction  of  tax 
statutes  fairly  plain. 

Cliquofs  Champagne,  3  Wall.  114,  145. 
United  States  v.  Hodson,  10  Wall.  395. 
Worth  Brothers  v.  Lederer,  251  U.  S.  507. 
31  16    Taxation  of  this  general  kind  began  with  the  passage  of  the  Act  of 

August  5,  1909  (36  Stat.  11,  112),  which  imposed  a  tax  "on  even 
corporation,  joint-stock  company  or  association  organized  for  profit  and 
having  a  capital  stock  represented  by  shares     .     .     .    now  or  Hereafter 
organized  under  the  laws  of  the  U nited  States  or  of  any  state  or  territory 
with  respect  to  the  carrying  on  or  doing  business  by  such  cor- 

poration, joint-stock  company  or  association     .     .     .     equivalent  to  one 
per  cent  upon  the  entire  net  income  over  and  above  $5,000,"  etc. 
3117    This  statute,  passed  before  we  had  the  16th  amendment,  was  attacked 

as  an  income  tax  and  therefore  unconstitutional.    But  the  Supreme 
Court  held  that  it  was  not  an  income  tax,  and  sustained  it  as  an  excise  tax. 

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Flint  v.  Stone  Tracy  Co.  (1911),  220  U.  S.  107.  It  was  measured  by  the 
income, — not  as  under  the  present  law,  on  the  capital  used. 

3118  In  Eliot  v.  Freeman,  220  U.  S.  178,  the  court  at  the  same  time  held 
the  Act  of  1909  not  to  cover  two  typical  Massachusetts  real  estate 

trusts,  on  the  ground  that,  "The  language  of  the  act,  'now  or  hereafter  or- 
ganized under  the  laws  of  the  United  States,3  etc.,  imports  an  organization 
deriving  power  from  statutory  enactment."  Organized  as  purely  non-statutory, 
they  were  exempt. 

3119  The  gist  of  the  present  case  is  whether  the  statutes  of  1916  and  1918 
are,  as  the  plaintiffs  contend,  to  be  given  the  same  interpretation  in 

favor  of  exempting  such  organizations  as  was  given  by  the  Supreme  Court  to 
the  Act  of  1909. 

3120  The  government,  on  the  other  hand,  contends  that  the  language 
of  the  acts  is  plainly  applicable  to  such  organizations ;  that  the  history 

of  the  legislation  shows  that  Congress  intended  to  avoid  the  result  reached  in 
Eliot  v.  Freeman,  supra,  and  that  there  are  no  applicable  decisions  of  the  courts 
supporting  the  plaintiffs'  position.  We  think  the  government  is  right,  and 
that  the  court  below  erred  in  holding  that  such  organizations  are  not  associa- 
tions within  the  meaning  of  these  Revenue  Acts. 

3121  The  language  of  the  statutes,  supra,  seems  so  plain  that  repetition  and 
paraphrasing  would  add  nothing. 

31  22  The  history  of  the  legislation  lends  emphasis  to  the  initial  impression 
of  its  import.  For  it  is  elementary,  that  when  language  used  in  an 
earlier  statute  has  in  application  received  judicial  construction,  change  in 
language  in  later  analogous  legislation  imports  legislative  purpose  to  attain  a 
different  result.  If  Congress  had  intended  the  acts  in  question  to  have  the 
restricted  application  given  by  the  Supreme  Court  to  the  Act  of  1909,  there 
was  no  conceivable  reason  for  changing  the  words  ''''organized  under  the 
laws  of  the  United  States  or  of  any  state  "  etc.,  etc.,  to  "organized  in  the  United 
States." 

3 1  23  We  think  it  plain  that  by  this  change  Congress  intended  in  the  later 
acts  to  include  non-statutory  organizations,  and  to  avoid  the  re- 
strictions found  by  the  Supreme  Court  in  the  words  of  the  1909  act.  We 
cannot  accord  with  the  learned  District  Judge  in  his  view  that  "it  is  hard  to 
discover  any  substantial  distinction  between  the  scope  of"  the  Act  of  1909 
and  the  Acts  of  1916  and  1918  "as  far  as  'associations'  are  concerned."  We 
think  there  is  a  vital  and  controlling  distinction. 

3124  Eliot  v.  Freeman  was  decided  in  1911.  In  1913  an  income  tax  act 
was  passed  (38  Stat.  114,  166),  imposing  such  tax  "on  every  corpo- 
ration, joint-stock  company,  or  association,  and  every  insurance  company 
organized  in  the  United  States,  no  matter  how  created  or  organized,  not 
including  partnerships."  The  original  case  of  Crocker  v.  Malley,  249  U.  S. 
223,  the  plaintiffs'  chief  reliance,  arose  under  this  statute.  Sitting  as  District 
Court,  Judge  Bingham,  in  July,  1917,  held  the  Wachusett  Realty  Company, 
the  predecessor  of  the  present  Crocker  Association,  a  trust,  according  in  that 
regard  with  Judge  Hale  in  a  decision  made  on  May  23,  1914,  in  the  case  of 
Crocker  v.  Crocker. 

3125  But  in  this  court  (250  Fed.  817)  the  organization  was  held  an  asso- 
ciation within  the  meaning  of  the  statute.    The  Supreme  Court 

reversed  this  court,  adopting  the  view  of  the  District  Court.  The  decisions, 
both  in  the  Supreme  and  District  Courts,  against  the  government,  turned 
upon  the  fact  that  the  shareholders  had  no  real  control  over  the  trust  estate; 

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so  that  it  therefore  fell  within  the  doctrine  of  Williams  v.  Milton,  215  Mass.  1 
from  the  opinion  in  which  Mr.  Justice  Holmes  quoted  (249  U.  S.  232)  as 
follows : 

"There  can  be  little  doubt  that  in  Massachusetts  this  arrangement  would 
be  held  to  create  a  trust  and  nothing  more.  'The  certificate  holders 
are  in  no  way  associated  together,  nor  is  there  any  provision  in  the  [instrument] 
for  any  meeting  to  be  held  by  them.  The  only  act  which  (under  the  [declar- 
ation of]  trust)  they  can  do  is  to  consent  to  an  alteration  ...  of  the 
trust'  and  to  the  other  matters  that  we  have  mentioned.  They  are  confined 
to  giving  or  withholding  assent,  and  the  giving  or  withholding  it  'is  not  to  be 
had  in  a  meeting,  but  is  to  be  given  by  them  individually.'  'The  sole  right 
of  the  cestuis  que  trust  is  to  have  the  property  administered  in  their  interest 
by  the  trustees,  who  are  the  masters,  to  receive  income  while  the  trust  lasts, 
and  their  share  of  the  corpus  when  the  trust  comes  to  an  end'." 

3126  The  trustees  of  the  Wachusett  concern  held  title,  subject  to  a  long 
lease,  to  eight  mills,  and  to  the  stock  of  the  corporation  operating 

these  mills,  and  distributed  the  net  income  to  the  eight  beneficiaries  of  the 
trust.  The  trustees  were  not  managing  the  mills;  the  organization  was  not  a 
business  enterprise  within  the  normal  use  of  that  term.  The  beneficiaries 
were  "admitted  not  to  be  partners  in  any  sense  .  .  .  have  no  joint 
action  or  interest  and  no  control  over  the  fund."  249  U.  S.  234.  The  court, 
in  referring  to  the  phrase  in  the  statute  "no  matter  how  created  or  organized," 
says: 

"The  trust  that  has  been  described  would  not  fall  under  any  familiar  con- 
ception of  a  joint-stock  association,  zahether  formed  under  a  statute  or  not."  ' 
Citing  Smith  v.  Anderson,  15  Ch.  Div.  247,  273,  277,  282. 

3127  Moreover,  the  tax  then  sought  to  be  sustained  was  levied,  at  least  in 
substantial  part,  in  respect  of  dividends  received  from  a  corporation 

that  itself  was  taxable  upon  its  net  income.  The  court  therefore  held  that 
"as  the  plaintiffs  undeniably  are  trustees,  if  they  are  subjected  to  a  double 
liability  the  language  of  the  statute  must  make  the  intention  clear.  Gould  v. 
Gould,  245  U.  S.  151,  153." 

3128  It  is  thus  apparent  that  the  Wachusett  Realty  Company  was  in 
organization  and  purpose  but  an  ordinary  inter  vivos  trust  for  eight 

beneficiaries;  also  that  the  tax  sought  to  be  imposed  would  have  resulted  in 
double  taxation,  never  easily  inferred.  It  was  in  nature,  and  in  relations  to  its 
shareholders  and  to  society  at  large,  radically  different  from  the  plaintiff's 
organizations,  described  below.  That  decision  lends  no  support  to  the 
plaintiffs'  contention. 

3129  Next  in  chronological  order  was  the  stamp  tax  provision  of  the 
Act  of  October  22,  1914  (38  Stat.  745,  775).    This  act  imposed  a 

stamp  tax  on  "each  original  issue  ...  of  certificates  of  stock  by  any 
association,  company  or  corporation."  This  court  in  Malley  v.  Bouditch, 
259  Fed.  809,  held  such  tax  applicable  on  the  original  issue  of  certificates  or 
shares  of  the  Pepperell  Manufacturing  Company  "a  manufacturing  company 
organized  in  the  form  of  a  trust  under  the  common  law,  and  deriving  none  of 
its  rights,  qualities  or  benefits  from  any  statute."  The  crucial  question  in  t  hat 
case,  as  in  the  case  at  bar,  was  whether  the  organization  was  an  association 
within  the  meaning  of  the  Federal  Tax  Act.  The  case  is,  in  essentials,  diffi- 
cult, if  not  impossible,  to  distinguish  from  the  cases  at  bar.  The  cogent 
opinion  of  Judge  Brown  is  applicable  to  most  aspects  of  the  present  problem. 
It  might  well  be  quoted  from  at  length. 

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3130  The  Revenue  Acts  of  1916  and  1918,  supra,  both  in  their  income 
and  excise  tax  provisions,  adopt  the  same  broad  phrasing  as  to 

joint  stock  companies  or  associations  "organized  in  the  United  States," 
thus  showing  a  continuing  legislative  purpose  to  avoid  the  limitation  found  by 
the  Supreme  Court  in  Eliot  v.  Freeman,  supra,  arising  out  of  the  language 
u  organized  under  the  laws  of  the  United  States  or  of  any  state"  etc. 

3131  Plainly,  there  is  nothing  in  this  history  of  legislative  and  judicial 
dealing  with  the  matter,  lending  support  to  plaintiffs'  contention  that 

Congress  intended  to  exempt  such  business  organizations  as  the  plaintiffs. 
Rather  does  the  history  support  the  natural  construction  of  the  acts  in 
question. 

3132  We  find  nothing  else  in  the  history  of  the  legislation  concerning 
this  and  analogous  forms  of  taxes,  nor  in  other  cases  cited,  tending 

to  uphold  the  plaintiffs'  contentions  or  otherwise  calling  for  analysis  and 
discussion. 

3133  A  brief  description  of  the  three  plaintiffs'  organizations  will  con- 
veniently precede  our  final  considerations.    We  take  first  the  Hecht 

case,  agreeing  with  learned  counsel  that  it  is  the  strongest  case  for  the  plain- 
tiff. 

3134  On  superficial  examination,  this  organization' looks  somewhat  like 
a  family  affair,  making  provision  for  members  of  the  Hecht  family, 

immature  or  otherwise  unfitted  for  business  responsibilities.  But,  on  analysis, 
we  find  the  organization  is  a  very  genuine  business  concern. 

3135  In  1899,  members  of  the  Hecht  family  holding  as  tenants  in  common 
real  estate  on  Federal  Street  and  Atlantic  Avenue,  Boston,  conveyed 

it  to  Jacob  Hecht,  who  declared  a  trust  for  twelve  beneficiaries  all  named 
Hecht,  who  received  certificates  transferable  likejordinary  corporation  shares, 
but  with  a  restriction  in  favor  of  lineal  descendants  of  Elias  Hecht,  and,  on 
certain  contingencies  not  now  important,  to  be  offered  to  the  trustee  before 
sold  to  an  outsider.  The  restriction  is  analogous  to  the  close-corporation 
provision  dealt  with  in  New  England  Trust  Co.  v.  Abbott,  162  Mass.  148. 
It  is  in  no  way  peculiar  to  a  trust  as  distinguished  from  a  corporation.  While 
the  Hecht  trustee  has  broad  general  powers  of  management,  including  power 
to  buy  and  sell,  the  seat  of  real  power  is  with  the  shareholders  and  not  with 
the  trustee;  for  three-fourths  of  the  shareholders  may  remove  the  trustee, 
three-fifths  may  terminate  the  trust  or  give  him  binding  instructions,  and  also, 
— what  is  of  vital  importance, — modify  the  instrument  in  any  particular. 
This  power  to  modify  covers,  potentially,  the  right  to  extend  or  change  the 
business  so  as  to  make  it  as  large  and  as  corporate  in  form  and  function  as  the 
Crocker  concern,  which  admits  that  it  has  evolved  into  an  association.  The 
Hecht  organization  is  not  a  trust  within  the  doctrine  of  the  Massachusetts 
decisions.  Williams  v.  Milton,  215  Mass.  1.  Compare  Crocker  v.  M alley, 
249  U.  S.  223;  In  re  Associated  Trust,  222  Fed.  1012.  The  Hecht  trustee  has 
made  annual  statements  showing  the  assets,  liabilities  and  net  income,  and 
kept  books,  containing  a  capital  account  and  surplus  account.  Its  stock- 
holders have,  sensibly  and  we  think  legally,  treated  their  dividends  like  cor- 
poration dividends,  in  their  income  tax  returns.  They  have  thus  by  conduct, 
presumably  under  the  advice  of  counsel,  denied  that  they  are  partners  taxable 
under  the  Act  of  1918,  sec.  218  (a). 

3136  Parenthetically,  we  note  that  counsel  do  not  contend  that  the  share- 
holders of  any  of  these  plaintiff  associations  are  partners.    There  is 

no  suggestion  that  any  of  the  shareholders  in  any  of  the  plaintiff  organizations 
have  made,  propose  to  make,  or  could  make,  tax  returns  as  partners  in  these 

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business  concerns.  Manifestly,  counsel  would  deprecate  such  result  as  im- 
posing burdens  probably  much  heavier, — certainly  difficult  if  not  impossible  of 
ascertainment, — upon  the  shareholders  in  such  organizations.  Their  quest 
is  tax  exemption,  not  tax  substitution.  Compare  Dana  v.  Treasurer,  227 
Mass.  562,  565;  Frost  v.  Thompson,  219  Mass.  360. 

3137    Plainly  the  Hecht  Trust  is  quasi-corporate  in  form  and  power.    It  is 

an  association  within  the  meaning  of  the  Revenue  Acts. 
3 1  38  The  Haymarket  Trust,  both  in  genesis  and  organization,  is  even  more 
like  a  corporation.  It  has  none  of  the  aspects  of  a  family  affair.  It 
started  by  securing  from  the  investing  public  $250,000  on  solicited  subscrip- 
tions, the  trustee  paying  a  commission  of  $2,500  to  the  promoter  for  thus 
raising  the  capital  for  doing  business.  The  declaration  of  trust  provides  for 
nearly  all  the  machinery  and  proceedings  of  an  ordinary  corporation.  We 
hold  it  also  to  be  quasi-corporate  and  an  association  within  the  meaning  of 
the  Revenue  Acts. 

3139  Learned  counsel  in  the  Croker  case  admit  that  it  is  an  association, 
but  claim  exemption  on  the  ground  that  the  concern  has  no  capital 

stock.  This  association  was  evolved  from  the  Wachusett  Realty  Trust, 
above  referred  to.  As  there  pointed  out,  the  shareholders  had  under  the 
Wachusett  declaration  no  power  to  amend  without  the  assent  of  the  trustees. 
But  in  June,  1917,  shareholders  and  trustees  both  agreeing,  the  organization 
was  radically  altered.  Its  name  was  changed  and  in  express  terms  it  agreed 
that  its  form  should  thereafter  be  "changed  to  that  of  an  association,"  with 
power  to  take  over  and  carry  on  the  extensive  manufacturing  business  pre- 
viously carried  on  by  the  corporation  whose  stock  it  had  held,  or  any  sub- 
stantially similar  business. 

3140  The  new  organization  conforms  closely  to  the  corporation  model, — 
in  powers,  in  official  personnel,  and  in  methods  of  doing  business.  It 

lias  issued  96,000  shares  of  no  par  value,  transferable  like  corporation  stock, 
but  with  a  restriction  somewhat  like  that  in  the  case  of  New  England  Trust 
Co.  v,  Abbott,  supra. 

3141  Conceding  that  it  is  an  association  with  transferable  shares,  this 
plaintiff  yet  seeks  exemption  on  the  ground  that  it  has  attached  no 

par  value  to  its  96,000  shares.  It  admits  that  if  it  had  attached  a  par  value  of, 
say,  $100  to  each  of  these  shares,  making  a  capital  account  of  $9,600,000,  a 
little  less  than  is  shown  on  its  balance  sheet  of  July  1,  1917,  where  the  interest 
of  the  shareholders  is  put  down  as  $9,877,105.16, — the  concern  would  have 
had  a  capital  stock  represented  by  shares,  and  thus  be  an  association  within 
the  meaning  of  the  Revenue  Acts  above. 

3142  We  cannot  adopt  this  scholastic  and   artificial  distinction.  Cf. 
Worth  Bros.  v.  Lederer,  251  U.  S.  507,  510.    It  is  for  present  purposes 

immaterial  whether  the  stock  of  a  corporation,  of  an  association,  or  a  joint* 
stock  company  has  or  has  not  par  value.  Compare  Gen.  Laws  of  Mass. 
chap.  156,  sees.  14,  15,  47.  Stockholders,  whether  a  definite  value  is  or  is 
not  attributed  to  their  shares,  severally  or  in  mass,  own  beneficially  the  net 
value  of  the  corporation's  assets, — that  is,  whatever  may  remain  after  dis- 
charging debts. 

See       Hood  Rubber  Co.  v.  Commonwealth,  238  Mass.  369,371. 

Cook — "Stock  Without  Par  Value,"  Am.  Bar  Ass'n  Journal, 
October,  1921. 

Hollcn  and  Tuthill  "Stock  Having  No  Par  Value,"  Aim.  Bar 
Ass'n  Journal,  November,  1921,  p.  578. 

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Colton  "Par  Value  v.  No  Par  Value  Stock,"  Am.  Bar  Ass'n 
Journal,  December,  1921,  p.  671. 
Compare  also  Eisner  v.  Macomber,  252  U.  S.  189,  209  et  seq. 

3143  Congress  intended  that  this  tax  should  be  measured  by  the  average 
amount  of  capital  used  during  the  tax  year  in  doing  the  business. 

The  phrase  in  the  statutes  as  to  "including  surplus  and  undivided  profit s" 
puts  beyond  doubt  the  question  of  the  Congressional  intent  to  measure  this 
tax  by  business  and  financial  realities,  not  by  book-keeping  forms  or  mere 
names.  "Fair  value"  and  "fair  average  value"  carry  the  same  notion.  Cf. 
Wright  v.  Georgia  R.  R.  et  aL,  216  U.  S.  420,  424. 

3144  The  Croker  Association  cannot  escape  taxation,  falling  on  its  com- 
petitors, by  adopting  the  modern  theory  of  no  par  value  for  its  stock. 

The  presumption  is  against  such  immunity;  it  savors  of  special  privilege. 
Compare  United  States  v.  Dickson,  15  Pet.  141,  165. 

3145  It  is  a  matter  of  common  knowledge  that,  for  most  business  and 
financial  purposes,  all  the  larger  organizations  of  this  sort  have  for 

years  been  indistinguishable  from  corporations.  One  might  almost  say  that 
they  are  a  device  under  which  parties  make  their  own  corporation  code. 
Business  concerns  so  organized  have  come  to  occupy  a  large  field  in  industry 
and  in  finance.  At  least  two  substantial  text-books  have  been  written  on  the 
law  concerning  such  organizations  and  dealing  with  their  advantages  for 
general  business  purposes.  See  Sears,  Trust  Estates  as  Business  Companies, 
1st  Ed.  1912,  2d  Ed.  1921.  Note  the  long  list  of  industries  so  organized 
referred  to  on  pages  VI  and  VII  of  the  preface  of  the  1921  edition.  Sec 
Wrightington  on  Unincorporated  Associations,  1916.  In  Dana  v.  Treasurer, 
227  Mass.  562,  565,  it  appears  that  the  Amoskeag  Manufacturing  Company, 
commonly  known  to  be  one  of  the  largest  enterprises  in  New  England,  is  so 
organized.  The  Pepperell  Manufacturing  Company,  before  this  court  in 
Malley  v.  Bowditch,  supra,  had  a  capitalization  of  over  $7,500,000;  the 
Crocker  Trust  operates  large  paper  manufacturing  mills,  employing  about 
1,000  men,  with  gross  assets  of  over  $10,000,000. 

3146  Such  concerns  have  long  been  recognized  as  quasi-corporate  in  form. 
In  1904,  Chief  Justice  Knowlton  in  the  Massachusetts  Supreme 

Court  said  of  a  typical  one  of  them,  in  Hussey  v.  Arnold,  185  Mass.  202: 

"The  agreement  creating  the  trust  has  peculiar  provisions.  The  object  of 
it,  apparently,  was  to  obtain  for  the  associates  most  of  the  advantages  belonging 
to  corporations,  without  the  authority  of  any  legislative  act,  and  with  freedom  from 
the  restrictions  and  regulations  imposed  by  law  upon  corporations ." 

3147  No  amplification  of  words  could  more  accurately  and  adequately  char- 
acterize this  sort  of  business  organization.  Other  cases  in  the  Mass- 
achusetts reports  concerning  them  abound  in  similar  observations  as  to  their 
resemblance  to  corporations.  Williams  v.  Milton,  215  Mass.  1,  and  cases 
cited.  See  Williams  v.  Boston,  208  Mass.  497;  Phillips  v.  Blatchford,  137 
Mass.  510,  515;   Tyrrell  v.  V/ashburn,  6  Allen,  466,  474. 

3148  But  the  prosposition  that  they  are  quasi-corporate  in  form  need  not 
rest  merely  on  our  own  analysis  or  on  observations  found  in  the 

decisions  of  the  Massachusetts  courts.  It  has  now  been  distinctly  recognized 
by  the  Massachusetts  legislature;  they  have  a  statutory  status  as  associations, 
not  as  trusts  or  as  partnerships. 

3149  In  the  decision  below,  these  organizations  have  been  treated  as 
having  no  status  not  arising  out  of  the  common  law;  so  also  in  the 

briefs  of  the  government  and  of  counsel  for  the  defendant.  It  seems  to  have 
been  overlooked  that  they  have  acquired  in  Massachusetts  a  distinct  statutory 

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basis.  This,  if  the  question  before  us  were  otherwise  doubtful,  would  seem 
to  us  of  much  significance.  See  General  Laws  of  Mass.  (1921),  c.  182, 
codifying  earlier  legislation  of  1909,  1913,  1914,  1915.  and  1916.  Compare 
also  Acts  of  1921,  c.  368.  The  title  of  this  chapter  is  "Voluntary  Asso- 
ciations." 

3150  In  section  1  of  this  act,  dealing  with  definitions,  it  is  provided: 
"  'Association,'  a  voluntary  association  under  a  written  instrument 

or  a  declaration  of  trust,  the  beneficial  interest  under  which  is  divided  into 
transferable  certificates  of  participation  or  shares."  This  definition  exactly 
fits  the  plaintiffs  at  bar. 

3151  In  section  2,  it  is  provided  that  the  written  instrument  or  declaration 
creating  the  association  shall  be  filed  with  the  Commissioner  of  Corpo- 
rations, and  with  the  clerk  of  every  town  where  such  association  has  a  usual 
place  of  business.  Section  5  requires  the  Commissioner  to  transmit  to  the 
Secretary  of  State  copies  of  such  instruments  or  of  any  amendments  filed 
during  the  previous  year,  to  be  printed  as  a  public  document.  The  in- 
struments creating  such  associations  are  thus  made  even  more  generally 
accessible  than  are  ordinary  corporation  charters. 

3152  Sections  3  and  4  and  7  to  11  deal  specially  with  associations  owning 
stock  of  public  utility  companies;  they  need  no  present  comment. 

3152    Section  6, — a  re-enactment  of  the  Act  of  1916,  c.  184,  passed  sub- 
sequent to  all  the  Massachusetts  decisions  cited  and  relied  upon  by 
the  plaintiffs, — has  probably  the  most  direct  bearing  on  our  present  problem; 
it  is  as  follows: 

"An  association  may  be  sued  in  an  action  at  law  for  debts  and  other 
obligations  or  liabilities  contracted  or  incurred  by  the  trustees,  or  by  the 
duly  authorized  agents  of  such  trustees,  or  by  any  duly  authorized  officer 
of  the  association,  in  performance  of  their  respective  duties  under  such 
written  instruments  or  declarations  of  trust,  and  for  any  damages  to  persons 
or  property  resulting  from  the  negligence  of  such  trustees,  agents  or  officers 
acting  in  the  performance  of  their  respective  duties,  and  its  property  shall 
be  subject  to  attachment  and  execution  in  like  manner  as  if  it  were  a  corporation, 
and  service  of  process  upon  one  of  the  trustees  shall  be  sufficient." 

3154  Here  is  a  distinct  enactment  that  such  associations  shall  be  suable 
in  like  manner  as  if  corporations.    An  organization  described  as  an 

association  and  made  generally  liable  "to  attachment  and  execution  in  like 
manner  as  if  it  were  a  corporation"  cannot  easily  be  held  a  partnership  or  a 
trust. 

3155  We  are  not  called  upon  to  deal  with  the  confusing  and  perhaps 
irreconcilable   decisions   in   the   Massachusetts   courts  concerning 

the  nature  and  legal  incidents  of  these  associations,  most  of  which  were  made 
before  the  passage  of  this  Act  of  1916,  or  with  the  effect  of  this  legislation 
upon  their  powers  and  liabilities, — except  so  far  as  pertains  to  our  single 
problem  of  determining  whether  these  associations  are  liable  to  Federal  tax- 
ation under  the  Revenue  Acts,  supra.  We  intimate  no  opinion  on  any  other 
question.  But  when  a  Massachusetts  statute  has  described  such  organiza- 
tions as  associations,  and  has  put  their  liability  to  ordinary  creditors  appar- 
ently on  the  same  basis  as  that  of  corporations,  we  have  no  hesitation  in 
reaching  the  conclusion  that  they  have  now  been  given  a  statutory  basis  as 
quasi-corporate,  and  that  they  are  associations  within  the  meaning  of  the 
Federal  Statutes,  as  well  as  under  the  Massachusetts  Statutes.  \\  c  cannot 
hold  Massachusetts  associations,  liable  under  Massachusetts  Statutes  to 
ordinary  creditors  as  though  corporations,  not  liable  under  Federal  Statutes 

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to  taxation  imposed  generally  on  corporations,  joint-stock  companies  and 
associations. 

3156  It  may  be  argued  that  these  statutes  are  distinguished  from  corpora- 
tion acts  in  that  their  chief  functions  are  to  regulate  or  restrict, 

whereas  corporation  acts  also  empower.  Technically,  that  may  be  so.  But 
the  powers  of  these  voluntary  associations  are  in  many  respects  greater,  and 
the  regulations  and  restrictions  less,  than  in  the  case  of  corporations.  Broadly 
speaking,  their  promoters  select  and  define  such  powers  and  provide  such 
limitations  of  liability,  as  they  desire.  Cf.  Hussey  v.  Arnold,  supra.  If 
and  in  so  far,  therefore,  as  the  tax  in  question  is  directed  at  "the  privilege" 
or  power  of  doing  business  through  large  organizations, — and  particularly 
at  the  power  to  obtain  money  from  the  outside  public  on  transferable  shares, 
— voluntary  association  offers  at  least  as  much  "privilege"  as  does  any  cor- 
poration form  of  organization.  Associations  are  resorted  to,  not  because 
thought  weaker,  but  because  thought  stronger,  than  corporations. 

3157  If,  in  construing  the  statutes,  we  may  look  at  the  policy  Congress 
probably  desired  to  adopt,    it  could  not  be  overlooked  that  the 

plaintiffs'  contention,  if  sustained,  would  amount  to  a  discriminatory  im- 
munity in  favor  of  a  kind  of  business  organization,  the  nature  and  activities  of 
which  have  hitherto  been  the  subject  of  much  question  and  investigation. 
See  the  Report  of  the  Tax  Commissioner  of  Massachusetts  on  Voluntary 
Associations,  under  Resolves  of  1911,  c.  55, — a  very  interesting  document, — 
in  which  Commissioner  Trefry  ably  reviewed  their  origin,  history  and  legal 
incidents,  both  in  England  and  in  this  country;  referring,  passim,  and  par- 
ticularly on  page  13,  to  many  other  documents  and  legislative  reports  con- 
cerning them.  See  also  a  report  of  the  Special  Commission  to  Investigate 
Voluntary  Associations,  January,  1914,  made  under  Mass.  Resolves  of  1912, 
c.  113.  In  the  Resolve  of  1911,  c.  55,  the  Commissioner  was  required  to 
make  an  investigation  "with  a  view  to  determine"  inter  alia,  "whether 
their  prohibition  is  advisable  in  the  public  interest.19 

3158  There  is,  we  think,  no  conceivable  reason  why  Congress  should  have 
desired  to  favor  organizations  of  this  questioned  sort  by  exempting 

them  from  taxation  to  which  their  competitors  in  corporate  form  are  subjected. 
The  presumption  is  plainly  the  other  way.  Modern  corporation  laws  furnish 
adequate  machinery  for  carrying  on  every  legitimate  form  of  business,  includ- 
ing now  that  of  dealing  in  real  estate.  See  Gen.  Laws  of  Mass.  chap.  156, 
passim;  sec.  7,  authorizing  real  estate  corporations.  There  is  no  present 
reason  for  resorting  to  this  form  of  organization,  except  on  the  theory  that 
more  "privileges  of  doing  business"  may  be  thus  acquired  than  by  conform- 
ing to  our  broad  and  elastic  corporation  laws.  To  hold  that  Congress  in- 
tended to  discriminate  in  their  favor  would  be  to  disregard^the  letter,  the 
spirit  and  the  reason  of  the  acts. 

3159  Our  views  accord  with  those  expressed  by  Judge  Page  in  Chicago 
Title  &  Trust  Co.  v.  Smietanka,  275  Fed.  60.    The  reasoning  of 

Judge  Morton  in  the  Associated  Trust  case,  222  Fed.  1012,  where  he  reached 
the  conclusion  that  such  an  association  was  an  "unincorporated  company" 
within  the  meaning  of  the  Bankruptcy  Act,  seems  to  us  to  sustain  our  con- 
clusions rather  than  those  reached  by  the  learned  Judge  in  the  instant 
cases. 

3160  We  summarize  our  conclusions  as  follows: 

(1)  The  natural  interpretation  of  the  language  used  in  the  Acts 
of  1916  and  1918  would  include  plaintiffs'  organizations  as  associations. 

(2)  The  contrast  between  the  language  used  in  the  Act  of  1909  "organized 

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under  the  laws  of  the  United  States  or  any  State";  etc.,  and  in  the  Act  of  1916 
and  1918  "organized  in  the  United  States,"  shows  that  Congress  intended 
to  avoid  the  result  reached  in  1911  by  the  Supreme  Court  in  Eliot  v.  Freeman. 

(3)  The  manifest  general  purpose  of  Congress  was  to  tax  business  deriving 
powers  and  making  profits  from  association,  particularly  business  done  by 
organizations  getting  all  or  a  substantial  part  of  their  capital  on  transferable 
shares,  such  as  are  commonly  sold  to  the  investing  public. 

(4)  Prior  to  the  passage  of  either  the  Revenue  Act  of  1916  or  1918,  the 
Massachusetts  Legislature  had  by  the  Acts  of  1909  and  1914  expressly 
recognized  such  organizations  as  associations.  Congress  used  the  word 
"association"  as  the  Massachusetts  Legislature  had  previously  defined  and 
used  it. 

(5)  By  the  Act  of  1916,  the  Massachusetts  Legislature  made  such  asso- 
ciations liable  to  creditors  in  like  manner  as  if  corporations;  by  analogy  they 
have  similar  liability  to  the  Federal  Government  for  taxes. 

(6)  The  case  of  M alley  v.  Crocker,  249  U.  S.  223,  makes,  on  analysis  of 
the  Wachusett  Trust  and  the  reasoning  of  the  court,  not  for  the  plaintiffs 
but  for  the  government.  One  ground  of  that  decision  was  to  avoid  unjust, 
discriminatory,  double  taxation;  whereas,  to  sustain  the  plaintiffs'  contention, 
would  create  discriminatory  immunity  for  a  large  class  of  business  organiza- 
tions, thus  giving  them  an  unfair  advantage  over  their  incorporated  com- 
petitors. 

(7)  The  conclusion  now  reached  accords  with  the  reasoning  and  decision 
of  this  court  in  M alley  v.  Bowditch,  259  Fed.  809. 

In  each  case  the  judgment  of  the  District  Court  is  reversed  and  the  case  is 
remanded  to  that  court  for  further  proceedings  not  inconsistent  with  this 
opinion]  the  plaintiff  in  error  recovers  costs  in  this  court. 


(Decision) 

Revenue  Act  of  1916.  Equally  applicable  to  1918  and  1921  Acts. 

May  25,  1922. 

As  the  measure  of  the  tax  the  fair  average  value  of  the  capital  stock  of  a 
corporation  is  the  equivalent  of  the  fair  average  value  of  the  enterprise  in 
its  entirety  as  a  going  concern. 

District  Court  of  the  United  States,  for  the 
Southern  District  of  New  York 

Central  Union  Trust  Company  of  New  York,  Plaintiff, 

vs. 

Wm.  H.  Edwards,  Collector  of  Internal  Revenue  for  thd    83  f  5 
Second  District  of  New  York,  Defendant. 

Memorandum  Opinion. 

3161     Grubb,  J. — -This  case  presents  for  decision  of  meaning  of  the  words 
3001     "capital  stock,"  used  in  Section  407  Title  1Y  Excise  lax  Act  of 
3034     September  8,  1916.    The  Plaintiff  contends  that  the  true  meaning 
of  the  words  is  the  paid  in  capital,  together  with  surplus  and  mi- 
divided  profits,  less  liabilities;  or  the  net  value  of  the  capital  assets  of  the 
corporation,  after  deducting  its  debts.    The  Collector  applied  a  different 

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method  of  reaching  the  value  of  the  "capital  stock"  of  the  plaintiff  corpora- 
tion, and  one  which  increased  the  amount  of  the  tax  due  over  that  which 
would  have  been  due  according  to  the  method  contended  for  by  the  Plaintiff. 
If  the  method  contended  for  by  the  Plaintiff  is  not  a  correct  one,  the  Plaintiff 
offers  no  criticism  of  that  actually  adopted  by  the  Collector;  so  that  the 
single  question  presented  is  whether  the  method,  for  which  the  Plaintiff 
contends  is  the  only  proper  one  under  the  statute. 

3162  The  method,  which  the  Plaintiff  says  should  have  been  adopted  by 
the  Collector  in  measuring  the  tax,  takes  into  consideration  only  the 
net  worth  of  the  tangible  assets  of  the  corporation,  and  does  not  take  into 
consideration  such  elements  as  franchises,  good-will,  existing  contracts,  and 
established  business.  The  tax  imposed  by  the  statute  is  not  a  property  tax. 
It  is  an  excise  tax  imposed  upon  the  privilege  of  doing  business  in  corporate 
form,  as  a  going  concern.  The  value  of  this  privilege  is  the  obvious  way  to 
measure  the  tax.  The  value  of  the  business  of  a  going  concern  depends  upon 
its  good-will,  favorable  contracts,  amount  of  business  done  and  its  profitable 
character;  as  well  as  upon  the  value  of  its  tangible  property  less  its  debts. 
It  would  seem  wrong  to  eliminate  these  factors  of  value,  if  the  tax  is  to  be 
measured  by  the  value  of  the  enterprise  as  a  going  concern.  They  enter 
into  the  market  value  of  the  share  stock,  and  are  represented  in  the  earning 
capacity  of  the  corporation.  It  would  therefore  seem  to  be  competent  for 
the  Collector  to  consider,  in  estimating  the  value  of  "capital  stock,"  in 
addition  to  the  net  worth  of  the  corporation,  as  shown  by  its  books,  such 
elements  of  intangible  value  as  good  will,  favorable  contracts,  amount  and 
character  as  to  profits  of  the  business  done,  and  also  past  earnings  and  the 
market  value  of  the  stock.  The  method  insisted  upon  by  the  Plaintiff  as 
being  the  only  correct  one,  would  eliminate  all  these  factors  from  the  com- 
putation, and  base  it  exclusively  upon  the  paid  in  capital,  together  with 
surplus  and  undivided  profits.  The  character  of  the  tax  and  the  subject 
matter  of  its  imposition  seem  to  me  to  forbid  such  an  exclusion  unless  it  is 
made  necessary  by  the  language  of  the  statute  itself. 

31  S3  If  the  words  "capital  stock"  had  but  one  meaning,  viz: — the  money 
paid  and  property  contributed  to  the  corporation  by  its  shareholders, 
the  Plaintiff's  contention  that  by  the  unambiguous  terms  of  the  statute,  only 
paid  in  capital  together  with  surplus  and  undivided  profits  could  be  con- 
sidered in  the  measurement  of  the  value  upon  which  the  tax  is  estimated, 
would  be  correct.  The  words  "capital  stock"  have  been  so  construed  by  some 
authorities,  when  employed  in  statutes  imposing  taxes.  It  is  also  true  that 
they  have  by  other  courts  been  construed  to  have  a  different  and  broader 
meaning,  when  used  in  acts  of  the  same  character.  The  conclusion  to  be 
drawn  from  the  authorities  would  seem  to  be  that  the  signification  to  be 
accorded  these  words  is  to  be  determined  in  each  such  act,  by  the  character 
of  the  particular  act  under  construction  and  by  the  language  used  and  by 
the  context.  They  may  mean  either  net  worth,  as  shown  by  the  books,  i.  e., 
the  value  of  the  tangible  corporate  assets,  less  liabilities;  or  they  may  mean 
the  value  of  the  entire  enterprise  as  a  going  concern,  including  franchises, 
good-will,  etc.,  as  represented  by  the  excess  value  of  the  market  price  of  the 
share  stock  over  and  above  its  book  value.  In  each  act,  the  meaning  of  the 
words  is  to  be  ascertained  by  reference  to  the  language  used  and  to  the  pur- 
pose of  the  act  containing  them. 

3 1  64    The  act  in  question  provides  for  the  annual  payment  of  "a  special  excise 
tax  with  respect  to  the  carrying  on  or  doing  business  by  such  corpora- 
tion, equivalent  to  fifty  cents  for  each  one  thousand  dollars  of  the  fair  value 

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of  its  capital  stock  and  in  estimating  the  value  of  its  capital  stock  the  surplus 
and  undivided  property  shall  be  included.  .  .  .  the  amount  of  such 
annual  tax  shall  in  all  cases  be  computed  on  the  basis  of  the  fair  average 
value  of  the  capital  stock  for  the  preceding  year."  The  words  employed  in- 
dicate rather  an  appraisal  of  the  value  of  the  "capital  stock"  arrived  at  by 
considering  various  factors  of  value,  by  the  exercise  of  judgment;  than  an 
auditor's  exact  determination  of  the  value  of  the  net  worth  of  tangible 
assets,  taken  from  the  corporate  books  of  account.  If  the  value  of  good-will 
and  franchises,  earnings  and  market  value  of  shares,  are  eliminated  as  factors 
of  value,  then  the  computation  of  value  would  in  no  sense  be  an  estimation; 
the  value  would  be  the  exact  value  rather  than  the  fair  value;  and  it  would 
have  been  made  determinable  as  of  the  end  of  a  fiscal  year,  rather  than  by 
"the  fair  average  value  of  the  capital  stock  for  the  preceding  year." 

3165  The  act  provides  that  "in  estimating  the  value  of  capital  stock  the 
surplus  and  undivided  profits  shall  be  included."    Plaintiff  contends 

that  these  words  restrict  the  computation  to  the  par  value  of  the  capital  stock, 
plus  surplus  and  undivided  profits.  I  think  the  purpose  of  the  insertion  of 
these  words  was  to  make  certain  that  these  two  factors  should  be  considered, 
but  not  to  eliminate  other  factors  equally  as  important.  If  the  purpose  was 
to  so  narrow  the  elements  to  be  considered,  there  was  apt  language  to  accom- 
plish this  purpose  in  previous  congressional  legislation.  Act  of  Congress, 
October  22,  1914 — Section  3. 

3166  The  language  and  context  seem  more  favorable  to  the  defendant's 
interpretation  than  to  that  of  the  Plaintiff,  since  they  imply  an 

estimation  to  be  based  on  judgment  exercised,  rather  than  the  mere  com- 
putation of  an  accountant. 

3167  The  legislative  discussion  of  the  Act  upon  the  floor  of  the  House  of 
Representatives  and  the  statements  of  the  Chairman  of  the  Com- 
mittee in  charge  of  the  Bill,  are  persuasive  that  the  Defendant's  construction, 
was  that  which  was  in  the  minds  of  the  legislators.  Congressional  Record- 
House  of  Representatives,  September  7,  1916,  64th  Congress — First  Session, 
Vol.  53,  part  13,  page  14,118. 

3168  After  the  Act  of  September  8,  1916,  had  received  from  the  Com- 
missioner of  Internal  Revenue,  the  construction  new  contended  for 

by  the  Defendant,  Congress  enacted  the  Revenue  Act  of  1918,  containing 
Section  1000-a,  in  the  same  language  as  of  Section  407  of  the  Act  of  September 
8,  1916,  except  that  the  rate  was  doubled  and  the  deduction  lowered.  The 
Senate  had  amended  the  House  bill,  so  as  to  make  the  basis  of  the  tax  the 
amount  of  the  net  assets  shown  on  the  books  as  of  the  close  of  the  preceding 
income  tax  year.  This  amendment  was  rejected  by  the  House,  and  the 
Senate  receded  from  it  in  conference.  This  is  persuasive  that  the  words 
"fair  average  value  of  the  capital  stock"  were  not  thought  by  that  Congress 
to  be  synonymous  with  the  net  worth  of  physical  assets  as  shown  by  the 
corporate  books. 

3169  For  the  reasons  stated,  I  do  not  think  the  construction  advanced  by 
the  Plaintiff  is  a  correct  one.    I  believe  the  Collector  was  confronted 

with  the  proposition  of  determining  the  value  of  the  corporation's  business 
and  property  as  an  entirety  and  as  a  going  concern,  and  in  doing  so  had  the 
right  to  look  to  the  net  worth  of  the  corporate  assets,  including  its  surplus 
and  undivided  profits,  as  shown  by  its  books;  also  to  the  franchises,  good-will, 
outstanding  contracts,  the  earning  capacity  of  the  corporation  and  the  market 
value  of  its  share  stock  over  the  preceding  year,  and,  after  having  done  so, 

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was  authorized  to  arrive  at  a  value  for  its  entire  capital  stock,  representing 
the  enterprise  as  a  going  concern,  according  to  his  best  judgment;  and  that 
the  value,  so  ascertained,  would  be  the  "fair  average  value  of  the  capital 
stock  for  the  preceding  year,"  by  which  the  tax  by  the  terms  of  the  statute 
is  to  be  measured.  This  the  Collector  did,  and  this  conclusion  requires  the 
direction  of  a  verdict  in  favor  of  the  Defendant,  and  it  is  so  ordered. 


(T.  I).  3359.) 

31  70    [  This  Treasury  Decision  consists  of  a  reprint  oi  the  opinion  in  Central 
3161     Union  Trust  Company  vs.  Edwards,  Collector,  which  is  reproduced 
in  full  beginning  at  ^[3161. — The  Corporation  Trust  Company.] 


(T.  D.  3361.) 

3171  [Regulations  64  (1922  Edition),  Capital  Stock  Tax,  are  further 
3005     designated  as  T.  D.  3361. --The  Corporation  Trust  Company.] 


fT.  D.  3368.) 

3  172    [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  fytalley 
3107      vs.  Howard,  etc.,  w  hich  is  reproduced  in  full  beginning  at  *  3107. 
The  Corporation  Trusl  Company.] 


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r 


7-18-22. 

CAPITAL  STOCK  TAX. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 

under  the 

Capital  Stock  Tax  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.                                                         Subject  Paragraph 
1921  Law  Provisions   3000 

Reg.  64  Regulations  under  1921  law  (1922  Edition.    Approved  June  15, 

1922.    See  exhaustive  Table  of  Contents  begin- 
ning on  page  609.)   3005 

Decision  Washington  VVater  Power  Co.  vs.  U.  S.  Court  of  Claims 

decision,  1916  Act.    Validity  of  Tax;  payment  in 
advance.    (February  14,  1921.)    3105 

Decision  Malley  vs.  Howard  et  al.,  Trustees.    C.  C.  of  A.,  First 

Circuit.    Certain   trusts   of  the  Massachusetts 
type  are  liable  to  tax.    (June  6,  1922.)   3107 

Decision  Central  Union  Trust  Co.  vs.  Edwards,  U.  S.  D.  C, 

Southern  District  of  New  York.  As  the  measure 
of  the  tax  the  fair  average  value  of  the  capital 
stock  of  a  corporation  is  the  equivalent  of  the  fair 
average  value  of  the  enterprise  in  its  entirety  as  a 
going  concern  (May  25,  1922)   3161 

3359  Treasury  Decision  designation  for  the  Central  Union 

Trust  Co.  vs.  Edwards  opinion,  ^"3 161  herein. 
(June  23,  1922.)   3170 

3361  Treasury   Decision   designation   for   Regulations  64 

(1922  Edition)  beginning  on  page  609   3171 

3368  Treasury  Decision  designation  for  the  Malley  vs. 

Howard,  etc.,  opinion,  ^[3 107  herein.    (July  12, 

1922)   3172 

The  matters  listed  above  are  indexed. 


Insert  this  sheet  immediately  before  the  blue  Capital  Stock  Tax  Index. 


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Capital  Stock  Tax  Supplementary  Pag«  I. 


1 


6-23-22. 


CAPITAL  STOCK  TAX  INDEX. 

The  references  are  to  paragraph  numbers. 

Abatement  of  tax.  .  3089 

Absence:  cause  for  extension  of  time.  .3052 

Affiliated  corporations.  .  3049 

Agent  of  foreign  corporations  in  U.  S..  .3056 

Agricultural  organizations.  .3063 

Alien  property  custodian;  corporations  whose  property  is  in  hands  of.  . 

Assessment  of  tax.  .3088 

Associations  as  corporations;  defined.  .3008 

Banks:  partnership  vs.  association.  .3011 

Boards  of  trade.  .3070 

Book  value  of  stock  does  not  control.  .  3039 
Building  and  loan  associations:  domestic.  .3066 
"Business"  defined.  .3015 

"Doing  business"  by  domestic  corporations,  illustrated.  .  3020 

"Doing  business"  by  foreign  corporations,  illustrated.  .3056 
Means  any  business  transacted  in  U.  S..  .3062 
Business  leagues.  .3070 
California  special  partnerships.  .3010 
Capital  employed  in  U.  S.  by  foreign  corporations.  .3057 

Averaging.  .  3061 

Illustrated.  .3058 
Capital  invested  outside  U.  S.  by  domestic  corporations.  .  3038 
Capital  not  employed  in  business.  .3038 
Capital  stock:  determining  fair  average  value.  .3039,  3161 

Outstanding  at  date  of  incidence  of  tax.  .  3037 
Capitalizing  earnings  to  determine  value  of  stock.  .3044,  3161 
Carrying  on  or  doing  business:  domestic  corporations.  .3015 

Illustrated.  .  3020 

Carrying  on  or  doing  business  in  U.  S.:  foreign  corporations.  .  3055.  3057 
Ceasing  business  after  July  1.  .3006 
Cemetery  companies.  .3067 

Central  Union  Trust  Co.  of  N.  Y,  vs.  Edwards  .  3161 

Chambers  of  commerce.  .  3070 

Charitable  organizations.  .3068 

Checks,  uncertified:  in  payment  of  tax.  .3092 

Civic  organizations.  .3071 

Claims  for  refund  or  abatement  of  tax  ;  3089,  3099 
Clubs.  .3072 

Collector  may  make  return.  .  3052 

List  of  collectors  of  Internal  Revenue  (see  page  1711) 
Commencing  business  after  July  1.  .3037,  3062 
Commissioner  may  make  return.  .3052 
Consolidated  returns  by  affiliated  corporations.  .  3049 
Construction  of  plant  constitutes  doing  business.  .3021 
Contracts;  making,  constitutes  doing  business.  .3021 
Cooperative  banks  without  capital  stock.  .  3066 
Corporation  defined.  .  3007 

Domestic.  .3013 

Exempt.  .  3063 

Foreign.  .3014 
Credit  for  former  tax.  .3087 
Deduction  of  $5,000.  .3036,  3048,  3063,  3082 

None  in  case  of  foreign  corporations.  .  3060 
Dishonored  checks:  procedure.  .3093 
Doing  business:  domestic  corporations.  .3015  • 

Penalty  for  doing  business  without  paying  tax.  .3094,  3095,  3096 
Doing  business  in  U.  S.:  foreign  corporations.  .3055 

Penalty  for  doing  business  without  paying  tax.  .  3094,  3095,  3096 
Domestic  building  and  loan  associations.  .3066 
Domestic  corporations:  basis  of  tax  on.  .3015 

Denned.  .3013 
iOL  Returns  by.  .  3048 


Copyright  LVIZ}  by  The  Corporation  Trust  Cvtnpany 
WAR  TAX  SERVICE 
Capital  Stock  Tax — Index  Page  1. 


6-23-22. 


CAPITAL  STOCK  TAX  INDEX. 


The  references  are  to  paragraph  numbers. 


Due  date  of  tax.  .3006  (see  3088) 
Educational  organizations.  .3068 
Election  to  be  taxed  as  corporation.  .  3084 

Employees  and  officers:  obligations  and  penalties.  .3095,  309o 

Exemption  from  tax.  .3062 

Claiming:  proof  to  be  submitted.  .3081 
Corporations  not  "carrying  on  or  doing  business".  .  3033 
Corporations  not  in  business  during  previous  year.  .3062 
Corporations  specifically  exempt.  .3063 

Corporations  whose  stock  values  not  to  exceed  $5,000.  .  3036,  304$,  3063,  3082 
Does  not  apply  to  foreign  corporations.  .3060 

Foreign  corporations  not  doing  business  in  U.  S..  .3057 

Insurance  companies.  .3055,  3063 
Extension  of  time  for  filing  return.  .3052 
Extension  of  time  for  payment  of  tax.  .3088 
Failure  to  file  return.  .3094,  3096 

Fair  average  value  vs.  market  or  book  value  of  stock.  .3039 
False  or  fraudulent  returns.  .3094,  3096 
Farmers'  associations.  .  3075 

Farmers'  mutual  insurance,  ditch,  irrigation,  telephone,  etc.,  companies.  .3073 
Federal  land  banks.  .3077 

Foreign  corporations:  basis  of  tax  on.  .3055,  3061 

Capital  employed  in  United  States.  ^3057 
Averaging.  .  3061 
Illustrated.  .3058 

Carrying  on  or  doing  business  in  United  States.  .3056,  3062 

Control  of  a  domestic  corporation.  .  3057 

Deduction  of  $5,000:  none.  .3060 

Defined.  .3014 

Measure  of  tax.  .3061 

Rate  of  tax.  .  3060 

Returns  by.  .3059        •  - 

Securities:  investment  of  funds  in.  .3057 

Subsidiaries.  .  3057 
Form  for  making  return:  domestic  corporations,  .page  603 

Use  of.  .  3040,  3048 
Form  for  making  return:  foreign  corporations,  -.page  607 

Use  of.  .3059 
Franchises,  etc..  .3046,  3161 

Fraternal  beneficiary  societies,, orders,. etc*.  .3065 
Fruit  growers'  associations.  .3075 
Goodwill,  etc..  .3046,  3161 
Holding  companies.  .3029,  3031,  3033 
Defined.  .3034 

For  exempt  organizations.  .  3076 
Horticultural  organizations.  .  3063 
Hotel;  contract  for  and  construction  of.  .3022 
Illinois  limited  partnership.  .3010 
Individual  electing  to  be  taxed  as  corporation.  .3084 
Inspection  of  returns.  .3086 
Insurance  companies  are  exempt.  .  3063 

Foreign.  .3055 
Interest  on  tax  on  delayed  payment.  .3088 
Joint  stock  companies  as  corporations:  defined.  .3003 
July  1:  general  due  date.  .3006  (see  3088) 
Ceasing  business  after  July  1.  .3006 
Commencing  business  after  July  1.  .3037,  3062 
July  31:  return  to  be  made  on  or  before.  .3052 


Law  provisions:  1921  Act.  .  3000  . 
Leasing  property,  etc..  .beginning  at  3024 


C  opyright  1922,  by  The  Corporation  Trust  Company. 
V/AR  TAX  SERVICE 
Capital  Stock  Tax— -Index  Page '2. 


6-23-22. 


CAPITAL  STOCK  TAX  INDEX. 


The  references  are  to  paragraph  numbers. 

Liability  to  tax  generally.  .3015,  3062 

Foreign  corporations.  .3055,  3062 

Insurance  companies  are  exempt.  .  3063 
Limited  partnerships.  .3009,  3010 

Liquidation  of  corporation:  tax  collectible  from  stockholders.  .3088 

Malley  vs.  Howard  et  al.  .3107 

Market  value  of  stock  does  not  control.  .  3039 

Massachusetts  trusts.  .3012,  3107 

Michigan  limited  partnerships.  .3010 

Michigan  partnership  associations.  .3009 

Mineral  lands:  buying,  selling,  holding,  operating,  .beginning  at  3024 
Mining.  .3027 

Mutual  companies:  farmers'  and  others  of  purely  local  character.  .3073 
Mutual  insurance  companies  are  exempt.  .3063 

Foreign.  .  3055 
Mutual  protective  associations.  .3065 
Mutual  savings  banks.  .3064 
National  farm  loan  associations.  .3077 
New  York  limited  partnerships.  .3010 
Notice  and  demand  for  tax.  .3088 

Occupational  taxes:  payment  of  capital  stock  tax  does  not  relieve  from  liability 

to.  .  3094 
Office  buildings:  managing.  .3024 
Office  of  foreign  corporation  in  United  States.  .3056 
Officers  and  employees:  obligations  and  penalties.  .3095,  3096 
Organization;  completing  of,  merely,  does  not  constitute  doing  business.  .3021 
Parent  and  subsidiary  corporations:  returns  by.  .3049 

Shareholdings  to  be  reported.  .  3049 

Tax  paid  by  one  not  deductible  by  other.  .3049 
Parent  financing  or  managing  subsidiaries.  .3030,  3031 
Partnership  banks.  .3011 

Partnership  electing  to  be  taxed  as  corporation.  .  3084 
Partnerships:  limited.  .3009,  3010 
Patents,  etc..  .3046,  3161 

Payment  of  tax  (see  "Tax  payable  annually  in  advance") 
Penalties.  .3094 

Delay  in  payment  of  tax.  .3088,  3094 

Doing  business  without  payment  of  tax.  .3094 

Failure  to  file  return.  .  3052,  3096 

False  or  fraudulent  return.  .3052,  3096 

Officers  and  employees.  .3097,  3098 

Willfully  refusing  to  file  return.  .  3096 

Willfully  refusing  to  pay  tax  or  attempting  to  evade.  .  3095 
Pennsylvania  limited  partnerships.  .3009 
Personal  service  corporations.  .3079 

Prevention  of  cruelty  to  animals  or  children:  organizations  for.  .3068 

Promulgation  of  regulations.  .3104 

Proof  of  exemption  to  be  submitted.  .3081 

Purchase  of  supplies  by  foreign  corporation  in  United  States.  .3056 
Rate  of  tax:  domestic  corporations.  .3036 

Foreign  corporations.  .  3060 
Real  estate  companies,  .beginning  at  3024 
Receivers:  corporations  whose  property  is  in  hands  of.  .3033 
Reengaging  in  business  after  period  of  inactivity.  .3062 
Refund  of  tax.  .  3089,  3099 

Refund  on  account  of  ceasing  business  during  year:  none.  .3006 
Regulations:  authority  for  and  promulgation  of.  .3104 
Religious  organizations.  .3068 
Rents:  collecting,  .beginning  at  3024 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Capital  Stock  Tax- — Index  Page  3. 


6-23-22. 


CAPITAL  STOCK  TAX  INDEX. 


The  references  are  to  paragraph  numbers. 

Returns.  .3085 

Affiliated  corporations:  consolidated  return  by.  .3049 

Capital  stock  valued  at  less  than  $5,000.  .3036,  3048,  3063,  3082 

Commissioner  or  collector  may  make.  .  3052 

Consolidated  by  affiliated  corporations.  .  3049 

Corporations  claiming  exemption.  .  3048,  3082 

Extension  of  time  for  filing.  .3052 

Failure  to  file  return.  .  3052,  3096 

False  or  fraudulent  returns.  .3052,  3096 

Form  707  (Domestic  Corporations),  .page  603 

Use  of.  .3040,  3048 
Form  708  (Foreign  Corporations),  .page  607 

Use  of.  .  3059 
Inspection  of.  .  3086 

Officers  or  employees:  obligations  and  penalties.  .3097 

Secrecy  of  returns.  .3086 

Subsidiaries:  returns  by.  .3049 

Tentative  returns.  .3053,  3054 

Verification  of.  .  3051 

When  to  be  filed.  .3052 

Where  to  be  filed.  .3052 

Willfully  refusing  to  file.  .  3095 
Revenue  Act,  Provisions  of.  .  3000 
Royalties:  collecting.  .3024 
Scientific  organizations.  .3068 
Secrecy  of  returns.  .3086 
Securities:  buying  and  selling.  .3028,  3035 
Securities:  investments  in  by  foreign  corporations.  .3057 
Sickness:  cause  for  extension  of  time.  .3052 
Stock  of  other  companies  held,  to  be  reported.  .  3049 

Stock  outstanding  at  date  of  incidence  of  tax:  tax  based  on  average  value  of.  .  3037 

How  to  value.  .3039,  3161 
Stockholders/' when  liable  for  tax  on  corporation.  .  3088 
Subsidiaries  financed  or  managed  by  parent.  .3030,  3031 
Subsidiaries  of  foreign  corporation.  .3057 
Subsidiaries  to  make  separate  returns.  .3049 

Intercompany  balances  and  shareholdings  to  be  reported.  .  3049 
''Substantially  retired  from  business".  .  301-8 
Surplus  and  undivided  profits.  .3047,  3161 

Foreign  corporations:  employed  in  United  States.  .3057 
Tax  paid  by  parent  or  subsidiary  not  deductible  by  the-  othefr.  ■  >04,:> 
Tax  payable  annually  in  advance.  .  3006,  3088 

10  days'  notice  and  demand.  .3088" 

Abatement  and  refund.  .3089,  3099 

Collectible  from  stockholders:  when.  .3088 

Credit  for  former  tax.  .3087 

Dishonored  checks:  procedure.  .3093 

Extension  of  time  for  payment.  .  3088 

Medium  for  payment.  .3091 

Officers  and  employees:  obligations  and  penalties.  .3097 
One  check  covering  payment  for  two  or  more  corporations.  .  3092 
Penalty  for  delay  in  payment.  .  3088,  3094 
Penalty  for  doing  business  without  having  paid  tax.  .  3094 
Penalty  for  willfully  refusing  to  pay  or  attempting  to  evade  tax.  .3095 
Uncertified  checks.  .  3092 
■Validity  of  tax.  .3105 
When  due  and  payable.  .  3006,  3088 

Day  of  receipt  of  remittance  bv  collector  governs.  .  3092 
Where  paid.  .3088 

Willfully  refusing  to  pay  or  attempting  to  evade.  .3095 
Tax  year.  .  3006 
Tentative  returns.  .3053,  3054 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Capital  Stock  Tax — Index  Page  4. 


6-23-22. 


CAPITAL  STOCK  TAX  INDEX. 


The  references  are  to  paragraph  number. 

Timber  lands:  buying,  selling,  holding,  operating,  etc..  .beginning  at  3024 
Trade-marks,  etc..  .3046,  3161 

Treasury  stock:  not  mentioned  specifically,  but  see  ^[3037 
Trusts  as  associations  or  corporations.  .3012,  3107 
Uncertified  checks  in  payment  of  taxes.  .  3092 

Understatements  or  undervaluations  to  be  corrected  by  commissioner.  .3052 
Undivided  profits.  .3047,  3161 

Foreign  corporations:  employed  in  United  States.  .3057 
Validity  of  tax.  .3105 
Valuing  capital  stock.  .3039,  3161 
Verification  of  returns.  .3051 
Virginia  limited  partnerships.  .3009 

Warehouse  of  foreign  corporation  in  United  States.  .3056 
Washington  Water  Power  Co.  vs.  U.  S..  .3105 
Wharves:  managing.  .  3020 
Year:  tax.  .  3006 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Capital  Stock  Tax — Index  Page  5. 


1 


STAMP  TAXES-1921  ACT 

BEING  TITLE  XI  OF  THE  REVENUE  ACT  OF  1921. 


TITLE  XI.— STAMP  TAXES. 

3500  Sec.  1100.  That  on  and  after  January  1,  1922,  there  shall  be  levied 
collected,  and  paid,  for  and  in  respect  of  the  several  bonds,  de- 
bentures, or  certificates  of  stock  and  of  indebtedness,  and  other  documents, 
instruments,  matters,  and  things  mentioned  and  described  in  Schedule  A 
of  this  title,  or  for  or  in  respect  of  the  vellum,  parchment,  or  paper  upon 
which  such  instruments,  matters,  or  things,  or  any  of  them,  are  written 
or  printed,  by  any  person  who  makes,  signs,  issues,  sells,  removes,  consigns, 
or  ships  the  same,  or  for  whose  use  or  benefit  the  same  are  made,  signed, 
issued,  sold,  removed,  consigned,  or  shipped,  the  several  taxes  specified  in 
such  schedule.  The  taxes  imposed  by  this  section  shall,  in  the  case  of  any 
article  upon  which  a  corresponding  stamp  tax  is  now  imposed  by  law,  be  in 
lieu  of  such  tax. 

[United  States,  State,  Municipal,  and  Foreign  Government 
Bonds,  and  other  Instruments  Exempt,] 

3501  Sec.  1101.   That  there  shall  not  be  taxed  under  this  title  any  bond, 
note,  or  other  instrument,  issued  by  the  United  States,  or  by  any 

foreign  Government,  or  by  any  State,  Territory,  or  the  District  of  Columbia, 
or  local  subdivision  thereof,  or  municipal  or  other  corporation  exercising  the 
taxing  power;  or  any  bond  of  indemnity  required  to  be  filed  by  any  person 
to  secure  payment  of  any  pension,  allowance,  allotment,  relief,  or  insurance 
by  the  United  States,  or  to  secure  a  duplicate  for,  or  the  payment  of,  any 
bond,  note,  certificate  of  indebtedness,  war-savings  certificate,  warrant  or 
check,  issued  by  the  United  States;  or  stocks  and  bonds  issued  by  cooperative 
building  and  loan  associations  which  are  organized  and  operated  exclusively 
for  the  benefit  of  their  members  and  make  loans  only  to  their  shareholders, 
or  by  mutual  ditch  or  irrigation  companies. 

[Penalty  for  Failure  to  Pay  Tax  and  for  Failure  to  Cancel  Stamps.] 

3502  Sec.  1102.    That  whoever— 

3503  (a)  Makes,  signs,  issues,  or  accepts,  or  causes  to  be  made,  signed, 
issued,  or  accepted,  any  instrument,  document,  or  paper  of  any  kind 

or  description  whatsoever  without  the  full  amount  of  tax  thereon  being  duly 
paid; 

3504  (b)  Manufactures  or  imports  and  sells,  or  offers  for  sale,  or  causes 
to  be  manufactured  or  imported  and  sold,  or  offered  for  sale,  any 

playing  cards,  package,  or  other  article  without  the  full  amount  of  tax  being 
duly  paid; 

3505  (c)  Makes  use  of  any  adhesive  stamp  to  denote  any  tax  imposed  by 
this  title  without  canceling  or  obliterating  such  stamp  as  prescribed 

in  section  1104; 

3506  Is  guilty  of  a  misdemeanor  and  upon  conviction  thereof  shall  pay  a 
fine  of  not  more  than  $100  for  each  offense. 

Copyright  1922,  by  The  Corporation  Trust  Company: 
WAR  TAX  701  SERVICE 


1-2-22. 


STAMP  TAXES  LAW. — 1921  ACT. 


[Penalty  for  Fraud  in  Connection  with  Stamps.] 

3507  Sec.  1103.   That  whoever— 

3508  (a)  Fraudulently  cuts,  tears,  or  removes  from  any  vellum,  parchment, 
paper,  instrument,  writing,  package,  or  article,  upon  which  any  tax 

is  imposed  by  this  title,  any  adhesive  stamp  or  the  impression  of  any  stamp, 
die,  plate,  or  other  article  provided,  made,  or  used  in  pursuance  of  this  title; 

3509  (b)  Fraudulently  uses,  joins,  fixes,  or  places  to.  with,  or  upon  any 
vellum,  parchment,  paper,  instrument,  writing,  package,  or  article, 

upon  which  any  tax  is  imposed  by  this  title,  (1)  any  adhesive  stamp,  or  the 
impression  of  any  stamp,  die,  plate,  or  other  article,  which  has  been  cut,  torn, 
or  removed  from  any  other  vellum,  parchment,  paper,  instrumentjwriting, 
package,  or  article,  upon  which  any  tax  is  imposed  by  this  title;  or  (2)  any 
adhesive  stamp  or  the  impression  of  any  stamp,  die,  plate,  or  other  article 
of  insufficient  value;  or  (3)  any  forged  or  counterfeited  stamp,  or  the  im- 
pression of  any  forged  or  counterfeited  stamp,  die,  plate,  or  other  article; 

3510  (c)  Willfully  removes,  or  alters  the  cancellation,  or  defacing  marks 
of,  or  otherwise  prepares,  any  adhesive  stamp,  with  intent  to  use,  or 

cause  the  same  to  be  used,  after  it  has  been  already  used,  or  knowingly  or 
willfully  buys,  sells,  offers  for  sale,  or  gives  away,  any  such  washed  or  re- 
stored stamp  to  any  person  for  use,  or  knowingly  uses  the  same; 

351 1  (d)  Knowingly  and  without  lawful  excuse  (the  burden  of  proof  of 
such  excuse  being  on  the  accused)  has  in  possession  any  washed, 

restored,  or  altered  stamp,  which  has  been  removed  from  any  vellum,  parch- 
ment, paper,  instrument,  writing,  package,  or  article; 

3512  Is  guilty  of  a  misdemeanor,  and  upon  conviction  shall  be  punished 
by  a  fine  of  not  more  than  $1,000,  or  by  imprisonment  for  not  more 

than  five  years,  or  both,  and  any  such  reused,  canceled,  or  counterfeit  stamp 
and  the  vellum,  parchment,  document,  paper,  package,  or  article  upon  which 
it  is  placed  or  impressed  shall  be  forfeited  to  the  United  States. 

[Cancellation  of  Stamps.] 

3513  Sec.  1104.    That  whenever  an  adhesive  stamp  is  used  for  denoting 
any  tax  imposed  by  this  title,  except  as  hereinafter  provided,  the 

person  using  or  affixing  the  same  shall  write  or  stamp  or  cause  to  be  written 

or  stamped  thereupon  the  initials  of  his  or  its  name  and  the  date  upon  which 

the  same  is  attached  or  used,  so  that  the  same  may  not  again  be  used: 

Provided,  That  the  Commissioner  may  prescribe  such  other  method  for  the 

cancellation  of  such  stamps  as  he  may  deem  expedient. 

U  :  ^.  'c>  ip  1/uiomi;  ilul  oiii  li/oilliw  afoiJts  ioHjg  TO  ,  ^fiviDfiq  <<tbi£z 

!  ,    [Preparation,  Distribution  and  Affixing  of  S tarn) s  ] 

p ' 

3514  ^  Sec.  1105.    (a)  That  the  Commissioner  shall  cause  to  be  pr  -pared 

and  distributed  for  the  payment  of  the  taxes  prescribed  in  this 
title  suitable  stamps  denoting  the  tax  on  the  document,  articles,  or  thing 
to  which  the  same  may  be  affixed,  and  shall  prescribe  such  method  for  the 
affixing  of  said  stamps  in  substitution  for  or  in  addition  to  the  meth  >4  pro- 
videdjn  this  title,  as  he  may  deem  expedient. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  702  SERVICE 


1-2-22. 


STAMP  TAXES  LAW. — 1921  ACT. 


3515  (b)  All  internal  revenue  laws  relating  to  the  assessment  and  collec- 
tion of  taxes  are  hereby  extended  to  and  made  a  part  of  this  title,  so 

far  as  applicable,  for  the  purpose  of  collecting  stamp  taxes  omitted  through 
mistake  or  fraud  from  any  instrument,  document  paper,  writing,  parcel, 
package,  or  article  named  herein. 

[Stamps  to  be  on  Sale  at  Post-Offices.] 

3516  Sec.  1106.    That  the  Commissioner  shall  furnish  to  the  Postmaster 
General  without  prepayment  a  suitable  quantity  of  adhesive  stamps 

to  be  distributed  to  and  kept  on  sale  by  the  various  postmasters  in  the  United 
States.  The  Postmaster  General  may  require  each  such  postmaster  to  give 
additional  or  increased  bond  as  postmaster  for  the  value  of  the  stamps  so 
furnished,  and  each  such  postmaster  shall  deposit  the  receipts'from  the  sale 
of  such  stamps  to  the  credit  of  and  render  accounts  to  the  Postmaster  General 
at  such  times  and  in  such  form  as  he  may  by  regulations  prescribe.  The 
Postmaster  General  shall  at  least  once  monthly  transfer  all  collections  from 
this  source  to  the  Treasury  as  internal-revenue  collections. 

[Stamps  to  be  on  Sale  at  Designated  Depositaries.] 

3517  Sec.  1107.    (a)  That  each  collector  shall  furnish,  without  prepay- 
ment, to  any  assistant  treasurer  or  designated  depositary  of  the 

United  States,  located  in  the  district  of  such  collector,  a  suitable  quantity 
of  adhesive  stamps  to  be  kept  on  sale  by  such  assistant  treasurer  or  designated 
depositary. 

3518  (b)  Each  collector  shall  furnish,  without  prepayment,  to  any  person 
who  is  (1)  located  in  the  district  of  such  collector,  (2)  duly  appointed 

and  acting  as  agent  of  any  State  for  the  sale  of  stock  transfer  stamps  of  such 
State,  and  (3)  designated  by  the  Commissioner  for  the  purpose,  a  suitable 
quantity  of  such  adhesive  stamps  as  are  required  by  subdivisions  2,  3,  and  4 
of  Schedule  A  of  this  title,  to  be  kept  on  sale  by  such  person. 

3519  (c)  In  such  cases  the  collector  may  require  a  bond,  with  sufficient 
sureties,  in  a  sum  to  be  fixed  by  the  Commissioner,  conditioned  for 

the  faithful  return,  whenever  so  required,  of  all  quantities  or  amounts  un- 
disposed of,  and  for  the  payment  monthly  of  all  quantities  or  amounts  sold 
or  not  remaining  on  hand.  The  Secretary  may  from  time  to  time  make 
such  regulations  as  he  may  find  necessary  to  insure  the  safekeeping  or  prevent 
the  illegal  use  of  all  such  adhesive  stamps. 

SCHEDULE  A.— STAMP  TAXES. 
[Bonds  of  Indebtedness.] 

3520  1.    Bonds  of  indebtedness:   On  all  bonds,  debentures,  or  certificates 
of  indebtedness  issued  by  any  person,  and  all  instruments,  however 

termed,  issued  by  any  corporation  with  interest  coupons  or  in  registered  form, 
known  generally  as  corporate  securities,  on  each  $100  of  face  value  or  fraction 
thereof,  5  cents:  Provided,  That  every  renewal  of  the  foregoing  shall  be  taxed 
as  a  new  issue:  Provided  further,  That  when  a  bond  conditioned  for  the  re- 
payment or  payment  of  money  is  given  in  a  penal  sum  greater  than  the  debt 
secured,  the  tax  shall  be  based  upon  the  amount  secured. 

Copyright  1922,  by  The  Corporation  Trust  Company: 
WAR  TAX         703  SERVICE 


1-2-22. 


STAMP  TAXES  LAW. — 1921  ACT. 


[Original  Issue  of  Stock.] 

3521  2.    Capital  stock,  issued:  On  each  original  issue,  whether  on  organ- 
ization or  reorganization,  of  certificates  of  stock,  or  of  profits,  or  of 

interest  in  property  or  accumulations,  by  any  corporation,  on  each  $100  of 
face  value  or  fraction  thereof,  5  cents:  Provided,  That  where  a  certificate  is 
issued  without  face  value,  the  tax  shall  be  5  cents  per  share,  unless  the  actual 
value  is  in  excess  of  $100  per  share,  in  which  case  the  tax  shall  be  5  cents  on 
each  $100  of  actual  value  or  fraction  thereof,  or  unless  the  actual  value  is 
less  than  $100  per  share,  in  which  case  the  tax  shall  be  1  cent  on  each  $20  of 
actual  value,  or  fraction  thereof. 

3522  The  stamps  representing  the  tax  imposed  byl  this  subdivision  shall 
be  attached  to  the  stock  books  and  not  to  the  certificates  issued. 

[Sales  or  Transfers  of  Stocks.] 

3523  3.    Capital  stock,  sales  or  transfers:   On  all  sales,  or  agreements  to 
sell,  or  memoranda  of  sales  or  deliveries  of,  or  transfers  of  legal  title 

to  shares  or  certificates  of  stock  or  of  profits  or  of  interest  in  property  or 
accumulations  in  any  corporation,  or  to  rights  to  subscribe  for  or  to  receive 
such  shares  or  certificates,  whether  made  upon  or  shown  by  the  books  of  the 
corporation,  or  by  any  assignment  in  blank,  or  by  any  delivery,  or  by  any 
paper  or  agreement  or  memorandum  or  other  evidence  of  transfer  or  sale, 
whether  entitling  the  holder  in  any  manner  to  the  benefit  of  such  stock,  in- 
terest, or  rights,  or  not,  on  each  $100  of  face  value  or  fraction  thereof,  2  cents, 
and  where  such  shares  are  without  par  or  face  value,  the  tax  shall  be  2  cents 
on  the  transfer  or  sale  or  agreement  to  sell  on  each  share: 

3524  Provided,  That  it  is  not  intended  by  this  title  to  impose  a  tax  upon 
an  agreement  evidencing  a  deposit  of  certificates  as  collateral  security 

for  money  loaned  thereon,  which  certificates  are  not  actually  sold,  nor  upon 
the  delivery  or  transfer  for  such  purpose  of  certificates  so  deposited,  nor 
upon  mere  loans  of  stock  nor  upon  the  return  of  stock  so  loaned: 

3525  Provided  further,  That  the  tax  shall  not  be  imposed  upon  deliveries 
or  transfers  to  a  broker  for  sale,  nor  upon  deliveries  or  transfers  by 

a  broker  to  a  customer  for  whom  and  upon  whose  order  he  has  purchased 
same,  but  such  deliveries  or  transfers  shall  be  accompanied  by  a  certificate 
setting  forth  the  facts: 

3526  Provided  further,  That  in  case  of  sale  where  the  evidence  of  transfer 
is  shown  only  by  the  books  of  the  corporation  the  stamp  shall  be 

placed  upon  such  books;  and  where  the  change  of  ownership  is  by  transfer 
of  the  certificate  the  stamp  shall  be  placed  upon  the  certificate;  and  in  cases 
of  an  agreement  to  sell  or  where  the  transfer  is  by  delivery  of  the  certificate 
assigned  in  blank  there  shall  be  made  and  delivered  by  the  seller  to  the 
buyer  a  bill  or  memorandum  of  such  sale,  to  which  the  stamp  shall  be  affixed; 
and  every  bill  or  memorandum  of  sale  or  agreement  to  sell  before  mentioned 
shall  show  the  date  thereof,  the  name  of  the  seller,  the  amount  of  the  sale, 
and  the  matter  or  thing  to  which  it  refers. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  704  SERVICE 


1-2-22. 


STAMP  TAXES  LAW. — 1921  ACT. 


3527  Any  person  liable  to  pay  the  tax  as  herein  provided,  or  anyone  who 
acts  in  the  matter  as  agent  or  broker  for  such  person,  who  makes 

any  such  sale,  or  who  in  pursuance  of  any  such  sale  delivers  any  certificate 
or  evidence  of  the  sale  of  any  stock,  interest  or  right,  or  bill  or  memorandum 
thereof,  as  herein  required,  without  having  the  proper  stamps  affixed  thereto 
with  intent  to  evade  the  foregoing  provisions,  shall  be  deemed  guilty  of  a 
misdemeanor,  and  upon  conviction  thereof  shall  pay  a  fine  of  not  exceeding 
$1,000,  or  be  imprisoned  not  more  than  six  months,  or  both. 

[Sales  of  Produce  at  or  Under  the  Rules  of  Exchanges.] 

3528  4.    Produce,  sales  of,  on  exchange:    Upon  each  sale,  agreement  of 
sale,  or  agreement  to  sell  (not  including  so-called  transferred  or 

scratch  sales),  any  products  or  merchandise  at,  or  under  the  rules  or  usages 
of,  any  exchange,  or  board  of  trade,  or  other  similar  place,  for  future  delivery, 
for  each  $100  in  value  of  the  merchandise  covered  by  said  sale  or  agreement 
of  sale  or  agreement  to  sell.  2  cents,  and  for  each  additional  $100  or  fractional 
part  thereof  in  excess  of  $100,  2  cents: 

3529  Provided,  That  on  every  sale  or  agreement  of  sale  or  agreement  to 
sell  as  aforesaid  there  shall  be  made  and  delivered  by  the  seller  to 

the  buyer  a  bill,  memorandum,  agreement,  or  other  evidence  of  such  sale, 
agreement  of  sale,  or  agreement  to  sell,  to  which  there  shall  be  affixed  a  law- 
ful stamp  or  stamps  in  value  equal  to  the  amount  of  the  tax  on  such  sale: 

3530  Provided  further,   That   sellers   of  commodities   described  herein, 
having  paid  the  tax  provided  by  this  subdivision,  may  transfer  such 

contracts  to  a  clearing-house  corporation  or  association,  and  such  transfer 
shall  not  be  deemed  to  be  a  sale,  or  agreement  of  sale,  or  an  agreement  to  sell 
within  the  provisions  of  this  Act,  provided  that  such  transfer  shall  not  vest 
any  beneficial  interest  in  such  clearing-house  association  but  shall  be  made 
for  the  sole  purpose  of  enabling  such  clearing-house  association  to  adjust  and 
balance  the  accounts  of  the  members  of  such  clearing-house  association  on 
their  several  contracts. 

3531  Every  such  bill,  memorandum,  or  other  evidence  of  sale  or  agreement 
to  sell  shall  show  the  date  thereof,  the  name  of  the  seller,  the  amount 

of  the  sale,  and  the  matter  or  thing  to  which  it  refers;  and  any  person  liable 
to  pay  the  tax  as  herein  provided,  or  anyone  who  acts  in  the  matter  as  agent 
or  broker  for  such  person,  who  makes  any  such  sale  or  agreement  of  sale,  or 
agreement  to  sell,  or  who,  in  pursuance  of  any  such  sale,  agreement  of  sale, 
or  agreement  to  sell,  delivers  any  such  products  or  merchandise  without  a 
bill,  memorandum,  or  other  evidence  thereof  as  herein  required,  or  who 
delivers  such  bill,  memorandum,  or  other  evidence  of  sale,  or  agreement  to 
sell,  without  having  the  proper  stamps  affixed  thereto,  with  intent  to  evade 
the  foregoing  provisions,  shall  be  deemed  guilty  of  a  misdemeanor,  and  upon 
conviction  thereof  shall  pay  a  fine  of  not  exceeding  $1,000  or  be  imprisoned 
not  more  than  six  months,  or  both. 

3532  No  bill,  memorandum,  agreement,  or  other  evidence  of  such  sale,  or 
agreement  of  sale,  or  agreement  to  sell,  in  case  of  cash  sales  of 

products  or  merchandise  for  immediate  or  prompt  delivery  which  in  good 
faith  are  actually  intended  to  be  delivered  shall  be  subject  to  this  tax. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  705  SERVICE 


1-2-22. 


STAMP  TAXES  LAW. — 1921  ACT. 


3533  This  subdivision  shall  not  affect  but  shall    be  in  addition  to  the 
provisions  of  the  "United  States  Cotton  Futures  Act/'  approved 

August  11,  1916,  as  amended,  and  "The  Future  Trading  Act,"  approved 
August  24,  1921. 

[Promissory  Notes  and  Drafts  or  Checks  Other  than  Sight  or  Demand.] 

3534  5.    Drafts  or  checks  (payable  otherwise  than  at  sight  or  on  demand) 
upon  their  acceptance  or  delivery  within  the  United  States  whichever 

is  prior,  promissory  notes,  except  bank  notes  issued  for  circulation,  and  for 
each  renewal  of  the  same,  for  a  sum  not  exceeding  $100,  2  cents;  and  for  each 
additional  $100,  or  fractional  part  thereof,  2  cents. 

3535  This  subdivision  shall  not  apply  to  a  promissory  note  secured  by  the 
pledge  of  bonds  or  obligations  of  the  United  States  issued  after 

April  24,  1917,  or  secured  by  the  pledge  of  a  promissory  note  which  itself  is 
secured  by  the  pledge  of  such  bonds  or  obligations:  Provided,  That  in  either 
case  the  par  value  of  such  bonds  or  obligations  shall  be  not  less  than  the 
amount  of  such  note. 

off  icsaranotf  to  sla*  lo  3mmo6>\$&  ib  olce  vrovo  no  jeHT  ^tot^  esse 

[Conveyances.] 

3536  6.    Conveyances:  Deed,  instrument,  or  writing,  whereby  any  lands, 
tenements,  or  other  realty  sold  shall  be  granted,  assigned,  transferred, 

or  otherwise  conveyed  to,  or  vested  in,  the  purchaser  or  purchasers,  or  any 
other  person  or  persons,  by  his,  her,  or  their  direction,  when  the  consideration 
or  value  of  the  interest  or  property  conveyed,  exclusive  of  the  value  of  any 
lien  or  encumbrance  remaining  thereon  at  the  time  of  sale,  exceeds  $100  and 
does  not  exceed  $500,  50  cents;  and  for  each  additional  $500  or  fractional 
part  thereof,  50  cents.  This  subdivision  shall  not  apply  to  any  instrument 
or  writing  given  to  secure  a  debt. 

[Customhouse  Entries.] 

3537  7.    Entry  of  any  goods,  wares,  or  merchandise  at  any  customhouse, 
either  for  consumption  or  warehousing,  not  exceeding  $100  in  value, 

25  cents;  exceeding  $100  and  not  exceeding  $500  in  value,  50  cents;  exceeding 
$500  in  value,  $1. 

[Customs  Bonded  Warehouse  Withdrawal  Entries.] 

3538  8.    Entry  for  the  withdrawal  of  any  goods  or  merchandise  from  cus- 
toms bonded  warehouse,  50  cents. 

[Passage  Tickets  for  Foreign  Ports  Other  than  Those  in  Canada  or  Mexico.] 

3539  9.    Passage  ticket,  one  way  or  round  trip,  for  each  passenger,  sold 
or  issued  in  the  United  States  for  passage  by  any  vessel  to  a  port 

or  place  not  in  the  United  States,  Canada,  or  Mexico,  if  costing  not  exceeding 
$30,  $1;  costing  more  than  $30  and  not  exceeding  $60,  $3;  costing  more  than 
$60,  $5.  This  subdivision  shall  not  apply  to  passage  tickets  costing  $10  or 
less. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  706  SERVICE 


7-21-82.    (2)  8-3-22. 

STAMP  TAXES  LAW. — 1921  ACT. 


[Proxies.] 

3540  10.    Proxy  for  voting  at  any  election  for  officers,  or  meeting  for 
the  transaction  of  business,  of  any  corporation,  except  religious, 

educational,  charitable,  fraternal,  or  literary  societies,  or  public  cemeteries, 
10  cents. 

[Powers  of  Attorney.] 

3541  11.    Power  of  attorney  granting  authority  to  do  or  perform  some 
act  for  or  in  behalf  of  the  grantor,  which  authority  is  not  otherwise 

vested  in  the  grantee,  25  cents.  This  subdivision  shall  not  apply  to  any 
papers  necessary  to  be  used  for  the  collection  of  claims  from  the  United 
States  or  from  any  State  for  pensions,  back  pay,  bounty,  or  for  property  lost 
in  the  military  or  naval  service,  nor  to  powers  of  attorney  required  in  bank- 
ruptcy cases  nor  to  powers  of  attorney  contained  in  the  application  of  those 
who  become  members  of  or  policy  holders  in  mutual  insurance  companies 
doing  business  on  the  inter-insurance  or  reciprocal  indemnity  plan  through 
an  attorney  in  fact. 

[Playing  Cards.] 

3542  12.    Playing  cards:   Upon  every  pack  of  playing  cards  containing 
not  more  than  fifty-four  cards,  manufactured  or  imported,  and  sold, 

or  removed  for  consumption  or  sale,  a  tax  of  8  cents  per  pack. 

[Casualty  Insurance  Policies  Written  by  Certain  Foreign 
Corporations  or  Partnerships  or  Nonresident  Aliens.] 

3543  13.    On  each  policy  of  insurance,  or  certificate,  binder,  covering  note, 
memorandum,  cablegram,  letter,  or  other  instrument  by  whatever 

name  called  whereby  insurance  is  made  or  renewed  upon  property  within 
the  United  States  (including  rents  and  profits)  against  peril  by  sea  or  on 
inland  waters  or  in  transit  on  land  (including  transshipments  and  storage  at 
termini  or  way  points)  or  by  fire,  lightning,  tornado,  wind-storm,  bombard- 
ment, invasion,  insurrection  or  riot,  issued  to  or  for  or  in  the  name  of  a 
domestic  corporation  or  partnership  or  an  individual  resident  of  the  United 
States  by  any  foreign  corporation  or  partnership  or  any  individual  not  a 
resident  of  the  United  States,  when  such  policy  or  other  instrument  is  not 
signed  or  countersigned  by  an  officer  or  agent  of  the  insurer  in  a  State, 
Territory,  or  District  of  the  United  States  within  which  such  insurer  is 
authorized  to  do  business,  a  tax  of  3  cents  on  each  dollar,  or  fractional  part 
thereof  of  the  premium  charged: 

3544  Provided,  That  policies  of  reinsurance  shall  be  exempt  from  the  tax 
imposed  by  this  subdivision. 

3545  Any  person  to  or  for  whom  or  in  whose  name  any  such  policy  or 
other  instrument  is  issued,  or  any  solicitor  or  broker  acting  for  or  on 

behalf  of  such  person  in  the  procurement  of  any  such  policy  or  other  instru- 
ment, shall  affix  the  proper  stamps  to  such  policy  or  other  instrument,  and 
for  failure  to  affix  such  stamps  with  intent  to  evade  the  tax  shall,  in  addition 
to  other  penalties  provided  therefor,  pay  a  fine  of  double  the  amount  of  the 
tax. 


[General  Administrative  Provisions  of  Law.] 
[Read  under  "Miscellaneous"  at  the  back  of  the  book.] 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX         707  SERVICE 


1-2-22.  (2)  7-5-22.      (3)  7-20-22.    (4)  7-21-22.      (5)  8-3-22. 

STAMP  TAXES  REGULATIONS.— 1918  AND  1921  ACTS. 


Regulations  40  (1922  Edition) :  Stamp  taxes  on  original  issue  and  transfers 
of  stock,  and  on  sales  oi  products  for  future  delivery. 


These  regulations  begin  on  page  709  opposite.  Differences  between  the 
old  and  new  regulations  are  shown  below.  * 

Changes  doing  no  more  than  to  reflect  the  changed  provisions  of  the  law 
bearing  on  stock  without  par  value  have  been  made  at  1[3549,  3552,  3592, 
and  Tf3594a;  and  bearing  on  loans  of  stock  at  TJ3623  (further,  old  (1)  of 
Art.  12  has  been  eliminated). 

1J3553. — Non-par  original  issue:  "stock"  (as  used  twice)  instead  of 
"certificate"  and  "of  each  share"  added. 

If3636.- — Return  to  be  made  to  Collector  rather  than  to  Commissioner. 

1J3741  (a),  (b),  and  (c). — Refunds  and  redemptions;  new,  here. 

Otherwise  no  material  change,  except  that  the  paragraph  defining  "calls" 
and  exempting  from  tax  the  transfer  of  the  certificate  of  stock  pursuant  to 
the  call,  is  eliminated  (former  (o)  of  Art.  13), 


Regulations  55  (1922  Edition) :  Stamp  Taxes  on  Documents. 

Beginning  on  page  737  are  reproduced  the  revised  regulations  (1922 
Edition)  relating  to  the  stamp  taxes  on  documents  imposed  by  Title  XI  of 
the  Revenue  Act  of  1921,  promulgated  June  12,  1922  (released  July  5,  1922). 

Other  than  inconsequential  verbal  changes,  such  as  "pay  the  tax"  from 
"pay  for  the  stamp,"  the  omission  of  Articles  relating  to  indemnity  and  surety 
bonds,  and  to  parcel  post  packages — not  taxable  under  the  1921  Act — ,  and 
the  necessary  change  in  the  numbering  of  the  Articles  because  of  such 
omission,  differences  between  the  old  and  the  new  regulations  are  few.  All 
such  other  changes  are  noted  below. 

Art.  8,  H3751. — Former  ruling  applying  to  "instruments  issued  by  corpo- 
rations in  numbers,  under  a  deed  of  indenture"  is  made  general  in  its  appli- 
cation (as  provided  by  the  law)  by  omitting  "by  corporations." 

Art.  11,  1f3754. — In  connection  with  business  property  investment  bonds 
the  former  reference  was  to  "certain  specified  real  property,"  rather  than, 
as  now,  to  "certain  specified  property"  merely. 

Art.  14  (b),  lf3758. — Referring  to  the  non-taxability  of  certain  conditional 
bills  of  sale,  the  qualification  "unless  in  the  form  of  promissory  notes"  is 
changed  to  "unless  containing  an  obligation  in  the  form,  etc." 

Art.  100,  1[3881. — In  connection  with  the  non -taxability  of  passage 
tickets  issued  to  certain  foreign  representatives,  exemption  is  extended  to  the 
families,  attaches,  secretaries,  and  servants  of  ambassadors  and  ministers. 

Tax  on  playing  cards,  1f39l9. — The  separate  regulations  covering  this 
subject  are  referred  to,  merely. 

*  Art.  160,  ^[3982. — Additional  cancellation  (three  parallel  incisions)  is  now 
required  in  the  case  of  stamps  of  the  value  of  50  cents  or  more,  only  (here- 
tofore, 10  cents  or  more).    Applies  to  stock,  etc.,  stamps  as  well.    See  \\373l. 

Arts.  165  and  166,  1f3986  a  and  b.— These  Articles,  referring  to  "Claims" 

and  "Refunds"  are  new. 

Arts.  169  to  171,  1[3989  to  H3991.— These  Articles,  under  "Duties  of 
officers"  (administrative)  have  been  changed  somewhat. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  708  SERVICE 


7-8-22. 


Reg.  40— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3546  REGULATIONS  40—1922  ACT 

[Promulgated  July  8,  1922.] 
(Supplemented.) 
Relating  to  the 

STAMP  TAX  ON  ISSUES,  SALES,  AND  TRANSFERS  OF  STOCK  AND  SALES  OF 
PRODUCTS  FOR  FUTURE  DELIVERY 

Under 

SUBDIVISIONS  2,  3,  AND  4  OF  SCHEDULE  A,  TITLE  XI,  OF  THE  REVENUE  ACT 

OF  1921. 

PART  I. 
ISSUES  OF  STOCK. 

Schedule  A  2.  Capital  stock,  issued  Paragraph 

Article   1.  When  tax  accrues   3547 

2.  Rate  of  taxation   3548 

3.  Computation  of  the  tax   3550 

4.  Issues  subject  to  tax   3554 

5.  Issues  not  subject  to  tax   3576 

6.  Stamp  tax  acts   3585 

7.  Documentary  stamps  used   3588 

8.  Stamps  to  be  attached  to  stock  book   3589 

PART  II. 

SALES  AND  TRANSFERS  OF  STOCK. 

Schedule  A  3.  Capital  Stock,  sales  and  transfers 

Article   9.  When  tax  accrues   3590 

10.  Rate  of  taxation   3591 

11.  Computation  of  the  tax   3593 

12.  Sales  and  transfeis  subject  to  tax   3595 

13.  Sales  and  transfers  not  subject  to  tax   3615 

14.  Inconsistent  by-laws,  rules  or  customs  of  exchanges   3630 

15.  Memoranda  of  sales   3631 

16.  Records  of  sales  or  transfers  of  stock   3632 

17.  Returns  by  persons  making  sales   3636 

18.  Returns  by  clearing  houses   3639 

19.  Stock  transfer  stamps   3645 

PART  Hf. 

SALES  OF  PRODUCTS  OR  MERCHANDISE  AT  OR  UNDER  THE  RULES  OR 
USAGES  OF  EXCHANGES  FOR  FUTURE  DELIVERY. 

Schedule  A  4.  Produce,  sales  of,  on  exchange 

Article  20.  When  tax  accrues   3647 

21.  Rate  of  taxation   3648 

22.  Transactions  subject  to  tax   3649 

23.  Transactions  not  subject  to  tax   3650 

24.  Inconsistent  by-laws,  rules  or  customs  of  exchanges   3653 

25.  Memoranda  of  sales   3654 

26.  Clearing  house  as  agent   3657 

27.  Records  to  be  kept  by  buyers  and  sellers   3664 

28.  Records  to  be  kept  by  clearing  houses   3671 

29.  Returns  of  transactions   3675 

30.  Returns  by  clearing  houses   3678 

31.  Stamps  may  be  affixed  to  returns   3680 

32.  Future  delivery  stamps   3683 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         709  SERVICE 


7-8-22.  Reg.  40—1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


PART  IV. 

DEFINITIONS  AND  GENERAL  PROVISIONS.  Paragraph 

Article  33.  Further  definitions   3684 

34.  Registration   3704 

35.  Record  of  registration  kept  by  collector   3718 

BROKERS. 

Article  36.  Brokers   3720 

AFFIXING  AND  CANCELLATION  OF  STAMPS 

Section  1104 
Section  1105  (a) 

Article  37.  Affixing  and  cancellation  of  stamps   3726 

PART  V. 
ADMINISTRATIVE. 

Sections  1105  (b),  1300,  1307,  1308,  1311 

Article  38.  Failure  to  make  returns;  substitute  returns   3732 

SALES  OF  STAMPS. 

Section  1107  (b) 

Article  39.  Sale  of  stamps   3734 

FINES  AND  PENALTIES. 

Sections  1102,  1103 
Schedule  A  4 

Article  40.  Sections  of  the  Revised  Statutes  applicable   3739 

DATE  EFFECTIVE. 

Section  1100. 

Article  41.  Date  effective  ,   3740 

REDEMPTION  OF  OR  ALLOWANCE  FOR  STAMPS. 

Article  42.  Stamps  rendered  useless,  affixed  in  error,  or  for  which  the  owner  has 

no  use   3741a 

43.  Claims   3741b 

REFUNDS. 

Article  44.  Refunds   3741c 

AUTHORITY  FOR  REGULATIONS. 
Article  42.  Promulgation  of  regulations   3742 


PART  I. 

ISSUES  OF  STOCK. 
3647    Art.  1.    When  tax  accrues. — Stock  is  deemed  to  be  issued  when 
3521     it  is  subscribed  for  and  the  subscription  is  accepted  by  the  corpora- 
tion, regardless  of  the  time  of  delivery  of  the  certificate 

3548  Art.  2.    Rate  of  taxation. — (a)  All  certificates  or  instruments,  of 
whatever  designation,  having  a  par  or  face  value,  representing  shares 

of  stock,  or  of  profits,  or  of  interest  in  property  or  accumulations,  issued 
by  any  corporation,  joint-stock  company  or  association,  are  subject  to  tax 
at  the  rate  of  5  cents  on  each  $100  of  the  face  value  or  fraction  thereof. 

3549  (b)  All  certificates  of  stock,  or  of  profits,  or  of  interest  in  property 
or  accumulations  issued  by  any  corporation,  without  par  or  face 

value,  are  subject  to  the  tax  of  5  cents  per  share,  unless  the  actual  value  is 
in  excess  of  $100  per  share,  in  which  case  the  tax  shall  be  5  cents  on  each 
$100  of  actual  value  or  fraction  thereof,  or  unless  the  actual  value  is  less 
than  $100  per  share,  in  which  case  the  tax  shall  be  1  cent  on  each  $20  of 
actual  value  or  fraction  thereof.    [See1f40l6  and  1)4019]. 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  710  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


3650  Art.  3.  Computation  of  the  tax. — (a)  The  tax  is  computed  upon 
the  par  or  face  value,  if  the  certificates  have  a  face  value,  of  the 
certificates  of  stock,  or  of  profits,  or  of  interest  in  property  or  accumula- 
tions, of  any  corporation,  joint-stock  co  -pany  or  association,  as  set  forth 
in  the  articles  of  incorporation,  or  agreement  of  association  or  of  partner- 
ship, whether  such  par  or  face  value  appears  on  the  face  of  the  certificate  or 
not. 

3551  (b)  Where  a  certificate  represents  more  than  one  share  of  stock 
(however  large  the  number  of  shares),  on  the  issue  of  such  certificate 

the  tax  is  reckoned  on  its  par  or  face  value  and  not  on  the  par  or  face  value 
of  each  separate  share  of  stock  which  it  represents. 

3552  (c)  The  tax  on  original  issue  is  measured  not  by  the  amount  paid 
in,  on,  or  for  the  stock,  but  by  the  par  or  face  value  in  the  case  of 

shares  having  a  face  value;  and  by  the  actual  value  in  the  case  of  shares 
without  face  value. 

3553  (d)  In  the  case  of  stock  without  par  or  face  value,  the  actual  value 
of  the  stock  is  to  be  determined  by  the  market  price  of  each  share. 

3554  Art.  4.    Issues  subject  to  tax. — (a)  The  issue  of  certificates  of  stock, 
or  of  profits,  or  of  interest  in  property  or  accumulations,  by  any  cor- 
poration, joint-stock  company  or  association,  is  subject  to  tax. 

3555  (b)  The  issue  to  the  beneficiary  of  certificates  covering  shares  in 
the  nature  of  shares  of  stock,  where  a  number  of  persons  pool  their 

individual  properties  and  appoint  trustees  having  a  definite  term  of  office 
for  the  purpose  of  managing  it  and  retain  certain  rights  of  control  over 
the  property  and  a  voice  in  the  selection  of  the  trustees  who  are  authorized 
to  issue  the  certificate,  is  subject  to  tax. 

3556  (c)  The  issue  by  a  corporation  of  business  property  investment 
bonds,  or  other  instruments  wherein  it  is  certified  that  the  holder 

thereof  is  the  owner  of  an  interest  in  specified  real  property,  the  legal  title 
to  which  has  been  previously  conveyed  to  a  trustee  and  whereby  the  corpor- 
ation issuing  the  same  agrees  to  manage  the  property  and  distribute  the 
proceeds  in  a  certain  manner,  is  subject  to  tax. 

3557  (d)  The  issue  by  a  corporation,  joint-stock  company  or  association, 
of  stock  in  exchange  for  property,  real  or  personal,  or  for  the  purpose 

of  purchasing  the  business  or  assets  of  another  concern,  is  subject  to  tax. 
3658    (e)  The  issue  of  certificates  of  stock  by  joint-stock  land  banks  is 
subject  to  tax. 

3559  (f)  The  issue  of  stock  dividend  and  fractional  scrip  certificates  is 
subject  to  tax.    [Read  1f3565  below.J 

3560  (g)  The  issue  of  temporary  or  interim  certificates  of  stock  is  subject 
to  tax. 

3561  (h)  The  issue  of  certificates  of  stock  upon  reorganization  [see  1(3687] 
of  a  corporation  not  expressly  provided  for  in  Art.  4(1)  is  subject 

to  tax  as  follows:  Preferred  stock  issued  in  place  of  common,  or  vice  versa, 
or  one  kind  of  preferred  stock  issued  in  place  of  another  kind  of  preferred 
stock,  or  one  kind  of  common  stock  issued  in  the  place  of  another  kind  of 
common  stock,  or  stock  without  par  value  issued  in  place  of  stock  with  par 
value,  or  vice  versa,  is  subject  to  tax  on  the  entire  issue. 

3562  (i)  The  issue  of  stock  by  a  consolidated  corporation  in  exchange 
for  stock  of  the  consolidating  corporations  is  subject  to  tax. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         711  SERVICE 


7-8-22.  Reg.  40.-1922  Edition. 

-  STAMP  TAX  REGULATIONS. — 1922. 

3563  (j)  The  issue  of  stock,  in  addition  to  its  already  existing  stock,  by 
the  continuing  corporation  in  case  of  a  merger  of  corporations,  is 

subject  to  tax. 

3564  (k)  The  issue  of  certificates  of  stock  outside  the  United  States  by  a 
domestic  corporation  is  subject  to  tax. 

3564a  (1)  The  issue  of  a  greater  number  of  shares  of  no  par  value  stock 

in  lieu  of  a  smaller  issue  of  such  shares,  previously  made,  or  the  issue 
of  a  greater  number  of  shares  of  par  value  stock  in  lieu  of  a  smaller  issue 
of  such  shares  of  the  same  kind,  previously  made,  whether  on  organization 
or  reorganization  of  the  issuing  corporation,  is  subject  to  stamp  tax  only 

on  the  additional  shares  so  issued. 

3665   Taxability  of  original  issue  of  scrip  certificates  for  fractional  shares. — 

Please  advise  if  the  issue  of  scrip  certificates  for  fractional  shares  of 
said  stock  having  par  value  of  one  hundred  dollars  is  subject  to  tax  at  rate 
of  five  cents  for  each  certificate  issued  or  at  rate  of  five  cents  for  each  full 
share  of  the  total  number  of  shares  represented  by  aggregate  amount  of 
scrip  certificates  issued.    Please  answer  collect. 

3566  (Answer.)    Stamp  tax  is  based  on  par  value  of  each  certificate  for 
fractional  share  issued.    (Telegram  of  inquiry  from  Kennedy  M. 

Thompson,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  J.  M.  Baker, 

and  dated  January  9,  1920.) 

3567  Stamp  tax  liability  on  account  of  original  issue  and  transfer  of  stock 
and  conveyance  of  real  property  incident  to  the  reorganization  of 

a  corporation  under  the  laws  of  another  State,  without  more. — Reference  is 
made  to  your  letter  of  February  5,  1920,  in  which  you  inquire  as  to  the  appli- 
cation of  stamp  tax  in  the  case  where  the  Co.  of  Illinois  has  been 

reorganized  into  the  [same  name]  Co.  under  the  laws  of  the  State 

of  Ohio.    [See  note  at  ^[3573  below.] 

3568  You  are  advised  that  where  a  company  gives  up  its  articles  of  incorpo- 
ration in  the  State  of  Illinois  and  is  incorporated  in  the  State  of  Ohio, 

the  application  of  stamp  tax  is  to  be  determined  by  the  method  followed. 

3569  In  any  event  stamp  tax  on  original  issue  applies  to  the  stock  to  be 
issued  by  the  new  corporation. 

3570  The  transfer  of  stock  among  the  assets  of  the  old  corporation  to  the 
new  corporation  is  subject  to  stamp  tax. 

3571  Conveyance  of  real  property  from  the  old  corporation  to  the  new  cor- 
poration in  consideration  of  the  issue  of  new  stock  to  the  old  corpora- 
tion or  to  its  stockholders  is  subject  to  stamp  tax  on  the  basis  of  the  value  of 
the  property. 

3572  If  the  new  stock  is  issued  to  the  old  corporation  the  transfer  of  that 
stock  from  the  old  corporation  to  its  stockholders  is  subject  to  stamp 

tax.  If  the  new  stock  is  issued  to  the  stockholders  of  the  old  corporation  the 
transfer  of  the  right  to  receive  that  stock  from  the  old  corporation  is  subject 
to  transfer  stamp  tax  additional  to  the  original  issue  stamp  tax.  If  the  old 
stock  is  surrendered  to  the  old  corporation  for  extinguishment  no  transfer 
stamp  tax  accrues.  If  the  old  stock  is  surrendered  to  the  new  corporation 
and  constitutes  it  a  corporate  stockholder  that  surrender  is  taxable.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Commissioner  Daniel  C. 
Roper,  and  dated  February  26,  1920.) 

3673    [Note. — The  facts  submitted  with  names  omitted,  on  which  the 
above  ruling  is  based,  are  as  follows: 
The    Co.  was   organized   many   years   ago  under  the  laws 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  712  SERVICE 


7-8-22. 


Reg.  40.-1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


of  Illinois.  A  new  corporation  of  the  same  name  has  been  organized  under 
the  laws  of  Ohio  and  will  acquire  the  property  and  continue  the  business  of 
the  Illinois  corporation. 

3674  The  Ohio  corporation  will  take  over  all  the  assets  (both  real  and  person- 
al) and  assume  all  liabilities  of  the  Illinois  corporation.  In  payment 
for  the  property,  the  Ohio  corporation  will  deliver  to  the  Illinois  corporation 
certificates  of  stock  issued  in  the  names  of  the  present  stockholders  and  for 
the  number  of  shares  owned  by  them,  respectively,  in  the  Illinois  corpora- 
tion. The  Illinois  corporation  will  receive  from  its  stockholders  its  own 
shares  of  stock,  in  exchange  for  a  like  number  of  shares  of  the  Ohio  corpo- 
ration, and  will  then  be  dissolved. 

3576    The  identical  property  will  remain  in  the  possession  of  the  identical 
stockholders  and  the  proportionate  interest  of  each  stockholder  will 
remain  unchanged,  the  sole  purpose  of  the  transaction  being  merely  to  domi- 
cile the  present  enterprise  in  Ohio  as  a  matter  of  convenience.] 

3576  Art.  5.   Issues  not  subject  to  tax. — (a)  The  issue  of  stock  by  co- 
operative building  and  loan  associations,  organized  and  operated 

exclusively  for  the  benefit  of  their  members  and  making  loans  only  to  share- 
holders, or  by  mutual  ditch  or  irrigating  companies,  is  not  subject  to  tax. 

3577  (b)  The  issue  of  certificates  of  stock  by  Federal  land  banks  is  not 
subject  to  tax. 

3578  (c)  The  issue  of  "rights"  to  subscribe  for  stock  by  any  corpora- 
tion, joint-stock  company  or  association  evidenced  by  warrants  is 

not  subject  to  tax. 

3579  (d)  The  issue  of  certificates  of  stock  in  a  new  name,  the  only  change 
in  the  corporation  being  in  the  name,  is  not  subject  to  tax. 

3580  (e)  The  issue  of  voting  trust  certificates  is  not  subject  to  tax. 

3581  (f)  The  issue,   upon  a  merger  of  corporations,  of  certificates  of 
stock  of  the  same  kind  in  substitution  for  the  old  certificates  of  stock 

is  not  subject  to  tax.    [See  ^[3994] 

3582  (g)  The  issue  of  certificates  of  stock  of  a  smaller  denomination  in 
exchange  for  outstanding  certificates,  where  there  is  no  change  in 

ownership  or  in  the  total  amount  of  stock  issued,  is  not  subject  to  tax. 

3583  (h)  The  issue  of  the  definitive  certificates  of  stock  in  exchange 
for  temporary  or  interim  certificates  upon  which  the  tax  has  been 

paid  is  not  subject  to  tax. 

3684  (i)  The  issue  by  a  corporation  of  certificates  of  preferred  stock  in 
lieu  of  outstanding  certificates  of  common  stock,  or  vice  versa,  or 
the  issue  of  certificates  of  preferred  stock  of  one  kind  in  lieu  of  certificates  of 
preferred  stock  of  another  kind,  pursuant  to  the  terms  of  the  original  charter 
of  the  corporation,  without  other  consideration  and  without  change  in  the 
amount  of  the  authorized  capital  stock  of  the  corporation,  is  not  subject 
to  tax. 

3585  Art.  6.  Stamp  tax  acts.— (a)  All  certificates  of  a  stock  issued 
between  December  1,  1914  and  September  8,  1916,  are  subject  to 
tax  under  the  Emergency  Revenue  Act  of  October  22,  1914;  those  issued 
between  December  1,  1917,  and  April  1,  1919,  are  subject  to  tax  under  the 
Revenue  Act  of  1917;  and  certificates  of  stock,  or  of  profits,  or  of  interest 
in  property  or  accumulations  issued  by  any  corporation,  joint-stock  com- 
pany, or  association  on  or  after  April  1,  1919,  are  subject  to  tax  under  the 
Revenue  Act  of  1918;  those  issued  on  or  after  January  1,  1922,  are  subject 
to  the  tax  under  the  Revenue  Act  of  1921. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  713  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3586  (b)  There  was  no  stamp  tax  upon  issues  of  certificates  of  stock 

3587  between  September  8,  1916,  and  December  1,  1917. 

3588  Art.  7.  Documentary  stamps  used.— Ordinary  documentary  stamps 
shall  be  used  in  payment  of  the  tax  imposed  upon  the  issue  of  stock. 

3589  Art.  8.   Stamps  to  be  attached  to  stock  book.— The  stamps  repre- 
senting the  tax  imposed  by  this  subdivision  must  be  attached  to  the 

stock  book  and  not  to  the  certificates  when  issued. 

PART  II.— SALES  AND  TRANSFERS  OF  STOCK. 

3590  Art.  9.  When  tax  accrues. — The  stamp  tax  on  sales  or  transfers 
3523     of  stock  accrues  at  the  time  of  making  the  sale  or  agreement  to  sell 

or  memorandum  of  sale,  or  delivery  of,  or  transfer  of  the  legal  title 
to  shares,  or  certificates  of  stock,  or  of  profits,  or  of  interest  in  property 
or  accumulations  in  any  corporation,  joint-stock  company,  or  association, 
or  of  the  right  to  subscribe  for  or  to  receive  such  shares  or  certificates,  regard- 
less of  the  time  or  manner  of  the  delivery  of  the  certificate  or  agreement 
or  memorandum  of  sale.    [Read  at  ^[3614.] 

3591  Art.  10.  Rate  of  taxation. — (a)  In  the  case  of  stock  having  a  par 
or  face  value,  the  amount  of  the  tax  is  2  cents  on  each  $100  or  frac- 
tion thereof  of  the  total  par  or  face  value  of  the  shares  or  certificates  in- 
volved in  the  sale  or  agreement  to  sell,  whether  such  aggregate  par  or  face 
value  is  greater  or  less  than  $100;  e.  g.,  where  the  total  par  or  face  of  the 
shares  involved  in  the  transaction  is  $100  or  less,  the  tax  is  2  cents;  where 
such  value  is  in  excess  of  $100,  the  tax  is  2  cents  on  each  $100  or  fraction 
thereof. 

3592  (b)  In  the  case  of  shares  of  stock  without  par  or  face  value,  the  tax  is 
2  cents  on  the  transfer  or  sale  of,  or  agreement  to  sell,  each  share. 

3593  Art.  11.   Computation  of  the  tax. — (a)  In  the  case  of  stock  having 
a  par  or  face  value,  the  amount  of  the  tax  is  computed  upon  the 

total  par  or  face  value  of  the  shares  and  not  upon  the  amount  that  may 
have  been  paid  in  on  such  stock;  e.  g.,  where  stock  of  the  par  value  of  $100 
is  sold,  for  which  only  $25  is  paid,  the  tax  is  reckoned  upon  the  par  value 
of  $100  and  not  upon  the  $25  paid. 

3594  (b)  Where  one  certificate  represents  several  shares  (however  large 
the  number  of  shares)  on  the  transfer  of  such  certificate  the  tax  is 

computed  upon  its  face  value  and  not  on  the  face  value  of  each  separate 
share  of  stock,  or  of  profits,  or  of  interest  in  property  or  accumulations; 
e.  g.,  on  the  transfer  of  one  certificate  representing  500  shares  par  value  $5, 
the  face  value  of  the  certificate  being  $2,500,  the  stamp  tax  is  50  cents. 
3594a  (c)  In  the  case  of  stock  without  par  or  face  value,  the  tax  is  com- 
puted on  each  share;  e.  g.,  the  tax  on  the  transfer  of  a  certificate  for 
20  shares  of  such  stock  is  40  cents. 

3695  Art.  12.  Sales  and  transfers  subject  to  tax. — (a)  The  sale,  or  trans- 
fer, or  change  of  ownership,  of  certificates  of  stock,  or  of  profits, 
or  of  interest  in  property  or  accumulations  in  corporations,  joint-stock 
companies,  or  associations,  is  subject  to  tax.  [For  transfer  from  partnership 
to  individual  members  thereof,  see  \ 4020.] 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  714  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3596  (b)  The  sale  or  transfer  of  shares  of  stock,  whether  or  not  repre- 
sented by  certificates,  is  subject  to  tax. 

3597  (c)  The  transfer  of  stock  to  or  by  trustees  is  subject  to  tax.  [See 
H4000  and  f4002.] 

3598  (d)  The  transfer  of  voting  trust  certificates  is  subject  to  tax. 

3599  (e)  The  sale  or  transfer  of  temporary  or  interim  certificates  of  stock 
is  subject  to  tax 

3600  (f)  The  sale  or  transfer  of  certificates  issued  by  trustees,  where  such 
trustees  are  appointed  for  a  definite  period  and  the  declaration  of 

trust  provides  that  the  beneficiaries  (termed  "shareholders")  shall  hold 
annual  meetings  for  the  election  of  new  trustees  to  fill  the  vacancies  thus 
occurring,  the  beneficiaries  thus  reserving  to  themselves  control  over  the 
persons  delegated  to  conduct  their  affairs  and  a  voice  in  the  business  is 
subject  to  tax. 

3601  (g)  The  transfer  of  the  interest  of  a  subscriber  for  stock,  however 
such  interest  may  be  evidenced  or  conditioned  upon  further  payments, 

is  subject  to  tax. 

3602  (h)  The  transfer  of  the  right  to  subscribe  for  stock  in  any  corpora- 
tion, joint-stock  company,  or  association,  whether  or  not  evidenced 

by  warrants,  is  subject  to  tax. 

3603  (i)  The  transfer  of  the  right  to  receive  a  stock  dividend  already 
declared  is  subject  to  tax. 

3604  (j)  The  transfer  or  surrender  of  stock  to  a  corporation,  for  the  pur- 
pose of  the  corporation,  whether  or  not  it  intends  eventually  to 

sell  such  stock,  is  subject  to  tax. 

3605  In  blank.  ' 

3606  (k)  The  sale  of  or  agreement  to  sell  shares  of  stocks  made  by  a  broker, 
directly  or  indirectly,  for  himself,  is  subject  to  tax. 

3607  (1)  The  sale  or  transfer  of  stock  by  a  broker  at  a  price  different 
from  that  at  which  he  accounts  to  his  selling  customer  is  subject  to 

tax. 

3603    (m)  The  transfer  of  stock  in  pursuance  of  a  gift,  bequest,  or  con- 
veyance by  trustees  is  subject  to  tax. 

3609  (n)  The  transfer  of  stock  from  parties  occupying  fiduciary  relations 
to  those  for  whom  they  hold  stock  is  subject  to  tax. 

3610  (o)  The  transfer  of  certificates  of  stock  by  an  administrator  or 
executor  to  the  legatee  or  distributee  is  subject  to  tax. 

361  1    (p)  The  transfer  of  stock  on  the  books  of  a  domestic  corporation, 
regardless  of  where  the  sale  is  made  or  the  stock  certificates  delivered, 
is  subject  to  tax. 

3612    (q)  The  sale,  transfer,  or  delivery,  within  the  territorial  jurisdic- 
tion of  the  United  States,  of  shares  of  stock  of  a  foreign  corporation 
is  subject  to  tax 

361  3    (r)  The  transfer  of  stock  of  a  corporation  to  be  merged  to  the  merg- 
ing corporation  prior  to  the  actual  merging  and  as  a  condition  prece- 
dent to  the  merger  is  subject  to  tax 

Stamp  tax  liability  on  account  of  transfer  of  stock  incident  to  the  reorgan- 
ization of  a  corporation  under  the  laws  of  another  state,  without  more. — 
Read  at  ^[3567 

3614    Delivery  of  stock  by  issuing  corporation  to  another  by  direction  of 
original  subscriber  involves  a  taxable  transfer. — Reference  is  made 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  715  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


to  your  letter  of  March  18,  1920,  requesting  a  ruling  as  to  whether  or  not 
federal  stamp  tax  applies  to  certain  issues  and  transfers  of  stock,  1fYou 
are  advised  that  the  tax  imposed  by  subdivision  3  of  Schedule  A,  Title  II, 
Revenue  Act  of  1918,  upon  the  original  issue  of  stock  applies  when  the 
stock  is  subscribed  for  and  the  subscription  is  accepted  regardless  of  the 
time  of  delivery  of  the  certificate.  The  direction  by  the  subscriber  to  deliver 
such  stock  to  other  parties  involves  the  transfer  of  the  right  to  receive  stock 
and  is  subject  to  stamp  tax  under  the  provisions  of  Schedule  A-4.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  James  M.  Baker,  Deputy 
Commissioner,  and  dated  March  25,  1920.)   [See  1f3998.] 

3615  Art.  13.    Sales  and  transfers  not  subject  to  tax. — (a)  The  transfer 
of  stock  pursuant  to  a  sale,  where  the  memorandum  of  sale  has  been 

duly  stamped,  is  not  subject  to  tax. 

3616  (b)  The  sale  or  transfer  of  enemy-owned  shares  of  stock  in  Amer- 
ican corporations  to  or  by  the  Alien  Property  Custodian  is  not  sub- 
ject to  tax. 

3617  (c)  The  surrender  of  certificates  in  exchange  for  other  certificates 
representing  the  same  or  new  stock,  provided  they  are  issued  to  the 

same  holders,  is  not  subject  to  tax.   [See  1f4002.] 

3618  (d)  The  surrender  of  the  stock  of  the  consolidating  corporation  in 
exchange  for  stock  in  the  consolidated  corporation,  in  the  case  of 

consolidation  of  two  or  more  corporations,  is  not  subject  to  tax. 

3619  (e)  The  transfer  of  the  stock  of  a  merged  corporation  in  exchange 
for  stock  of  the  merging  corporation  at  the  time  and  as  a  part  of  a 

statutory  merger  is  not  subject  to  tax,  nor  is  the  substitution  of  new  cer- 
tificates for  the  certificates  representing  the  old  stock  of  the  merging  cor- 
poration. 

3620  (f)  The  surrender  of  stock  for  extinguishment  or  in  exchange  for 
new  certificates  to  be  issued  without  change  of  ownership  is  not 

subject  to  tax. 

3621  (g)  The  transfer  of  certificates  of  stock  from  the  decedent  to  the 
administrator  or  executor  of  the  estate  is  not  subject  to  tax. 

3622  (h)  The  sale  or  transfer  of  certificates  issued  by  trustees,  where  such 
trustees  are  legally  appointed  for  the  entire  period  of  the  trust  and 

the  beneficiaries  retain  no  substantial  control  over  the  affairs  of  the  trust, 
but  delegate  their  proprietory  functions  to  others,  any  further  control  on 
their  part  depending  upon  contingencies,  their  rights  being  limited  to  filling 
vacancies  caused  by  death,  resignation,  or  disability,  is  not  subject  to  tax. 

3623  (i)  An  agreement  evidencing  a  deposit  of  certificates  as  collateral 
security  for  money  loaned  thereon,  which  certificates  are  not  actually 

sold,  is  not  subject  to  tax,  nor  is  the  delivery  or  transfer  for  such  purpose 
of  the  certificates  so  deposited,  nor  the  mere  loan  nor  return  of  stock  so  loaned 
subject  to  tax:  Provided,  That  in  each  case  the  person  making  a  transfer 
of  such  certificates  shall  make  and  sign  a  statement  of  the  facts  and  attach 
it  to  the  certificate. 

3624  (j)  The  transfer  or  delivery  of  certificates  to  a  clearing  house  for  the 
sole  purpose  of  clearing  or  adjusting  accounts,  where  no  beneficial 

interest  is  vested  in  such  clearing  house  and  there  has  been  no  change  of 
title  or  interest,  is  not  subject  to  tax. 

3626    (k)  The  transfer  of  a  certificate  of  stock  from  the  owner  thereof  tc 
a  broker,  solely  for  the  purpose  of  enabling  such  broker  to  make  a 
sale  thereof  for  the  owner,  is  not  subject  to  tax,  provided  the  broker  shall  in 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  716  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


every  case  at  the  time  of  such  transfer  to  him  make  and  sign  a  certificate 
stating  that  he  has  no  ownership  in  such  stock  and  that  the  transfer  to 
him  was  made  solely  to  enable  him  to  sell  the  stock  for  the  owner.  Such 
certificate  shall  in  every  case  be  attached  to  the  certificate  of  stock  and 
presented  to  the  transfer  agent  at  the  time  such  certificate  of  stock  is  sur- 
rendered for  transfer  and  shall  be  preserved,  together  with  the  old  certifi- 
cate, by  such  transfer  agent,  for  the  inspection  of  the  revenue  officer. 

3626  (1)  The  transfer  of  a  certificate  of  stock  by  a  broker  to  his  customer 
for  whom  and  upon  whose  order  he  has  purchased  such  stock,  where 

the  tax  has  been  paid  upon  the  transfer  of  the  stock  to  the  broker,  is  not 
subject  to  tax,  provided  that  the  broker  shall  in  every  case,  at  the  time  of 
such  transfer  from  him,  make  and  sign  a  certificate  stating  that  the  transfer 
from  the  broker  to  his  customer  is  made  solely  to  complete  the  purchase 
made  by  such  broker  for  such  customer.  Such  certificate  in  every  case  shall 
be  attached  to  the  certificate  of  stock  and  presented  to  the  transfer  agent 
at  the  time  such  certificate  of  stock  is  surrendered  for  transfer,  and  shall 
be  preserved,  together  with  the  old  certificate,  by  such  transfer  agent  for  the 
inspection  of  the  revenue  officer. 

3627  (m)  The  certificates  required  by  the  two  preceding  paragraphs  shall 
be  in  the  following  form:   [See  1f4003.] 

(1)  (In  the  case  of  a  transfer  to  a  broker) — 

We  hereby  certify  that  we  have  no  ownership  or  interest  in  *  *  *  shares 
of  the  stock  above  transferred,  the  transfer  by  the  owner  to  us  being  merely  for 
the  purpose  of  sale. 

(Broker  sign  here) 

(2)  (In  the  case  of  a  transfer  by  a  broker) — 

We  hereby  certify  that  the  transfer  of  *  *  *  of  the  within  shares  to  the 
names  indicated  by  the  star  is  made  solely  to  complete  the  purchase  made  by  us 
for  our  customer,  and  we  have  no  ownership  or  interest  therein. 

(Broker  sign  here) 

3628  (n)  No  broker  who  has  filed  a  certificate  on  the  form  given  in  para- 
graph (1)  shall  file  a  certificate  on  the  form  given  in  paragraph  (2) 

with  relation  to  the  same  transfer  of  shares  of  stock. 

3629  In  blank. 

3630  Art.  14.    Inconsistent  by-iaws,  rules,  or  customs  of  exchange. — 

No  provisions,  by-laws,  rules  or  customs  of  any  exchange  or  similar 
institution  inconsistent  with  any  requirement  or  provision  of  the  Revenue 
Act  of  1921  or  any  regulations  made  thereunder,  nor  any  collateral  additional 
agreement  or  understanding,  either  verbal  or  written,  respecting  the  subject 
matter  of  sales  or  transfers  of  certificates,  or  the  settlement  or  fulfillment 
thereof,  which  are  inconsistent  or  in  conflict  with  any  requirement  of  said 
act  or  regulations  shall  exempt  any  person  from  the  payment  of  the  tax 
imposed. 

3631  Art.  15.  Memoranda  for  sales. — Every  person  who  makes  an  agree- 
ment to  sell  or  transfer  title  to  shares  of  stock  by  delivery  of  certi- 
ficates assigned  in  blank,  shall  as  a  part  of  such  transaction  promptly  make 
and  deliver  to  the  buyer  a  bill  or  memorandum  of  such  sale  or  agreement 
to  sell,  duly  signed  by  the  seller  or  his  agent,  to  which  the  requisite  stamps 
shall  be  affixed  and  canceled,  which  bill  or  memorandum  shall  show  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         717  SERVICE 


7-8-22. 


Reg.  40—1922  Edition. 

STAMPATAX|REGULATIONS.— 1922. 


date  of  the  transaction,  the  names  of  the  seller  and  buyer  and  the  name 
and  number  of  shares  of  stock,  and  the  price  per  share  and  the  tax  paid 
thereon,  and  in  the  case  of  a  transaction  made  on  an  exchange  shall  bear 
a  number  upon  the  face  thereof  and  have  printed  and  written  in  ink  thereon 
the  words  "Subject  to  the  Revenue  Act  of  1921  and  regulations  made  in 
accordance  therewith. "  No  more  than  one  such  bill  or  memorandum  made 
by  the  seller  on  any  given  date  shall  bear  the  same  number:  Provided, 
however,  That  no  single  transaction  or  purchase  or  sale  that  is  made  upon 
an  exchange  by  one  member  to  another  member  shall  require  to  be  evidenced 
by  more  than  one  stamped  memorandum  of  sale  or  agreement  to  sell. 

3632  Art.  16.   Records  of  sales  or  transfers  of  stock. — (a)  All  persons 

who  are  wholly  or  partly  engaged  in  the  business  of  buying,  selling 
or  transferring  shaies  of  stock,  whether  at  public  or  private  sale,  or  whether 
or  not  they  are  members  of  an  exchange,  including  persons  engaged  in  trans- 
actions known  as  "matched,"  or  "on-order,"  or  "pass-outs,"  or  "give-ups," 
or  settled  directly  between  the  seller  and  buyer,  or  cleared  or  adjusted  through 
a  clearing  house  or  otherwise,  or  engaged  in  accepting  and  procuring  the 
transmission  of  orders  for  purchase  or  sale  of  shares  of  stock  shall  keep  a 
record  showing: 

(1)  Date  of  transaction. 

(2)  Line  number  (if  at  an  exchange). 

(3)  Name  of  broker  or  salesman  who  executed  the  order. 

(4)  Name  of  party  to  whom  sold,  or  from  whom  bought. 

(5)  Number  of  shares  dealt  in. 

(6)  Name  or  description  of  stock. 

(7)  Price  of  stock,  if  without  face  or  par  value. 

(8)  Amount  (or  total  market  value)  of  stock. 

(9)  Face  or  par  value  of  stock  per  share. 

(10)  Tax  paid  on  shares  having  face  or  par  value. 

(11)  Tax  paid  on  shares  without  face  or  par  value. 

(12)  State  tax  paid,  if  any.  (Optional.) 

(13)  Total  amount  to  ledger.  (Optional). 

(14)  Folio  number.  (Optional.) 

(15)  Name  of  customer  for  whom  sold  or  transferred,  or  for  whom  bought 

or  transferred. 

(16)  Method  of  settlement  or  adjustment. 

3633  (b)  Persons  keeping  such  records  may  incorporate  therein  additional 
columns  that  will  be  of  use  to  them,    such  columns  to  be  placed  so  as 

not  to  interfere  with  the  columns  and  headings  hereby  prescribed.  These 
records  must  be  in  book  form,  and  all  entries  therein  must  be  legibly  written 
in  ink  and  the  records  kept  for  a  period  of  at  least  two  years.  Such  record 
forms  will  not  be  supplied  by  the  department. 

3683    The  form  of  record  required  shall  be  substantially  as  follows:  [For 
a      the  form  see  page  719.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  718  SERVICE 


7-8-22. 


Reg.  40.-1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


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Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  719  SERVICE 


7-8-22.  Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3834  (c)  Provided,  however.  That  brokers  known  as  strictly  "floor  brokers," 
or  "two  dollar  men,"  or  "room  traders,"  in  lieu  of  the  foregoing 
record,  whether  their  transactions  are  settled  directly  between  seller  and 
buyer  or  by  "matched,"  "on-order,"  "pass-out,"  "or  scratch  sale,"  or  "give- 
up,"  or  any  other  kind  of  sale  or  purchase,  or  are  cleared  through  a  clearing 
house  or  otherwise,  shall  keep  a  record  showing: 

(1)  The  date  of  the  transaction. 

(2)  The  name  of  the  seller. 

(3)  The  name  of  the  purchaser. 

(4)  The  name  of  the  stock. 

(5)  The  number  of  shares. 

(6)  The  par  or  face  value  of  the  shares. 

(7)  The  price,  if  the  stock  has  no  par  value. 

(8)  Whether  the  transaction  is  "matched,"  "on-order,"  "pass-out,"  "scratch 

sale,"  or  "give-up." 

(9)  Name  of  person  to  whom  "given-up." 

3635  (d)  Provided  further,  That  persons  engaged  in  accepting  and  pro- 
curing the  transmission  of  orders  for  the  purchase  or  sale  of  shares 

of  stock  to  be  executed  at  a  brokerage  office  or  an  exchange,  board  of  trade, 
or  similar  place,  shall  keep  a  record  showing: 

(1)  Date  of  acceptance  and  transmission  of  order. 

(2)  Name  of  person  from  whom  accepted. 

(3)  Name  and  address  of  person  to  whom  transmitted. 

(4)  Name  of  stock. 

(5)  Par  value  of  stock. 

(6)  Number  of  shares. 

(7)  Whether  purchase  or  sale. 

(8)  Price. 

(9)  Whether  order  was  executed  at  an  exchange;  and,  if  so,  what  exchange 
(10)  Date  of  execution  of  order. 

3636  Art.  17.  Returns  by  persons  making  sales.— (a)  All  persons  who  are 
wholly  or  partly  engaged  in  the  business  of  buying,  selling  or  trans- 
ferring shares  of  stock,  whether  such  sales,  purchases,  or  transfers  shall  be 
made,  cleared,  settled,  or  adjusted  through  a  clearing  house,  or  otherwise, 
shall  on  or  before  the  fifteenth  day  of  each  month,  and  at  any  other  time 
designated  by  the  Commissioner,  render  under  oath  a  true  return  of  all  such 
sales  and  transfers  for  the  preceding  month  or  for  any  other  period  desig- 
nated by  the  Commissioner.  This  return  should  be  made  to  the  collector 
of  internal  revenue  for  the  district  in  which  such  person  or  persons  are 
located,  and  should  contain  in  detail  the  following  data  and  information: 

(1)  The  month  for  which  the  return  is  made 

(2)  The  name  and  address  of  the  person,  partnership,  corporation, 
or  association  making  the  return. 

(3)  The  number  of  shares  sold,  loaned,  and  borrowed  returned,  and  tax 
paid  as  follows: 

(a)  Par  value  shares  through  clearing  house. 

(b)  Par  value  shares  ex-clearing,  curb,  over  the  counter. 

(c)  No  par  value  shares,  market  value  $100.00  or  leas  through 
clearing  house. 

(d)  No  par  value  shares,  market  value  $100.00  or  less  ex-clearing 
house,  curb,  over  the  counter. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  720  SERVICE 


7-8-22. 


W:  Reg.  40.-1922  Edition. 

STAMP  TAX  REGULATIONS . — 1 922 . 


(e)  No  par  value  shares,  market  value  over  $100.00  through  clearing 
house. 

(f)  Market  value  no  par  value  shares,  market  value  over  $100 .00 

through  clearing  house. 

(g)  No  par  value  shares,  market  value  over  $100.00  ex-clearing 
house,  curb,  over  the  counter. 

(h)  Market  value  no  par  value  shares,  market  value  over  $100.00 
ex-clearing  house,  curb,  over  the  counter. 

(i)  Transfers,  calls,  rights,  when  as  and  if  issued,  contracts,  and 

miscellaneous. 

(4)  Number  of  shares  cross  trades. 

(5)  The  amount  of  tax  paid 

(6)  The  amount  of  stamps  on  hand  on  the  first  day  of  the  month,  or 
other  period. 

(7)  The  amount  of  stamps  purchased  during  the  month,  or  other 
period. 

(8)  The  amount  of  stamps  on  hand  on  the  last  day  of  the  month  for 
which  return  is  being  made. 

3637  (b)  Provided  that  brokers  known  strictly  as  "floor  brokers,"  or 
"two-dollar  men"  or  "traders"  in  lieu  of  the  foregoing  return  shall  render 
a  return  only  as  to  such  sales  as  were  not  "given  up"  to  or  cleared  through 
some  other  broker  including  direct  settlements,  "pass-outs,"  or  "scratched 
sales." 

3638  (c)  Provided  further  that  in  the  event  any  broker  who  has  not 
closed  business  shall  make  no  sales  of  stock  during  any  one  month 

he  shall  file  with  the  Commissioner  a  statement  to  that  effect  in  lieu 
of  a  return. 

3639  Art.  18.    Returns  by  clearing  houses. — (a)  If  any  person,  who 
negotiates  sales  or  transfers  of  stock  on  a  stock  exchange,  shall 

appoint  in  writing  the  clearing  house  for  the  exchange  upon  which  such 
sales  or  transfers  are  made  his  agent  for  the  purposes  hereinafter  indicated, 
and  shall  make  to  such  clearing  house  a  written  return,  statement,  or  sheet, 
on  each  business  day,  containing  a  full  disclosure  of  all  such  transactions, 
both  clearable  and  non-clearable,  of  the  preceding  day,  in  shares  of  stock 
that  are  listed  or  permitted  to  be  dealt  in  by  such  member  on  such  exchange, 
and  also  showing  which,  if  any,  of  such  stocks  are  loaned  or  borrowed  or 
returned,  then  in  that  event  such  return,  statement,  or  sheet,  delivered 
to  the  clearing  house,  shall  be  deemed  to  be  the  bill,  or  memorandum  of  sale, 
or  agreement  to  sell,  required  under  subdivision  3,  Schedule  A,  Revenue 
Act  of  1921,  and  such  clearing  house  is  hereby  authorized  to  affix  to  such 
return,  statement,  or  sheet  the  amount  of  stamps  required  for  each  sale  or 
agreement  to  sell  or  memorandum  of  sale  or  delivery  or  transfer  of  the  stock 
indicated  thereon,  and  to  cancel  the  stamp  so  affixed. 

3640  (b)  The  affixing  and  cancellation  of  such  stamps  by  the  clearing 
house  shall  be  held  to  be  the  act  of  the  person  making  such  sale  or 

agreement  to  sell,  or  memorandum  of  sale,  or  delivery  or  transfer  of  such 
stock;  or  if  such  person  and  clearing  house  so  elect,  such  person  shall  affix 
and  cancel  such  stamps  before  delivering  such  clearing  house  sheets  or 
memoranda  of  sales  to  the  clearing  house,  but  such  clearing  house  shall 
not  accept  such  clearing  house  sheet  or  memoranda  unless  stamps  for  all 
transfer  tax  required  to  be  affixed  are  attached  thereto  and  properly  cancelled. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR*  TAX         721  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3641     (c)  The  returns,  statements  or  sheets  made  to  the  clearing  house 

shall  in  respect  of  each  sale  show  the  date  thereof,  the  name  of 
the  seller,  the  name  of  the  buyer,  the  amount  of  the  sale,  and  the  name  of 
the  stock,  or  certificates,  or  other  things  traded  in,  but  a  return  for  more  than 
one  sale  may  be  made  upon  the  same  return,  statement,  or  sheet;  and  m 
settlement  of  differences  or  other  dealings  between  members  shall  be  per 
mitted  that  will  interfere  with  the  full  disclosure  of  the  whole  transaction. 
3842    (d)  Said  clearing  house  shall  preserve  the  returns,  statements,  or 

sheets  so  made  and  stamped  for  at  least  two  years. 

3643  (e)  Such  return,  statement,  or  sheet  to  the  clearing  house  shall 
not  relieve  the  seller  from  making  and  delivering  to  the  buyer  the 

bill  or  memorandum  required  by  article  15  of  these  regulations. 

3644  (f)  Wherever  any  clearing  house  carries  upon  its  sheets  or  records 
information  or  reports  of  transactions  showing  the  transfer  by  one 

of  its  members  of  an  account  of  a  customer  without  change  of  ownership  of 
the  securities  of  the  customer,  there  shall  be  kept  by  the  members  of  such 
clearing  house  or  body  concerned  in  such  transaction  a  record  showing 
the  particulars  of  such  transaction. 

3645  Art.  19-  Stock  transfer  stamps. — (a)  Ordinary  documentary  stamps 
with  the  words  "Stock  transfer"  overprinted  thereon,  known  as 

"Stock  transfer  stamps/'  shall  be  affixed  to  all  sales  or  agreements  to  sell, 
or  memoranda  of  sales,  or  deliveries  of  or  transfers  of  legal  title  to  shares 
or  certificates  of  stock  or  of  profits,  or  of  interest  in  property  or  accumulation* 
of  a  corporation,  joint-stock  company,  or  association,  and  all  "warrants/' 
rights,  and  other  securities,  made  at  exchanges  or  similar  places. 

3646  (b)  Ordinary  documentary  stamps  may  be  affixed  to  sales,  agree 
ments  to  sell,  or  memoranda  of  sales  not  made  at  exchanges  or 

similar  places. 

PART  III. 

SALE  OF  PRODUCTS  OR  MERCHANDISE  AT  OR  UNDER  THE  RULES 
OR  USAGES  OF  EXCHANGES  FOR  FUTURE  DELIVERY. 

3647  Art.  20.  When  tax  accrues. — The  stamp  tax  on  sales  of  products 
3528     or  merchandise  for  future  delivery  accrues  immediately  upon  the 

making  of  a  sale,  agreement  of  sale,  or  agreement  to  sell,  and  is  in 
no  wise  dependent  upon  the  manner  of  delivery  of  the  product. 

3648  Art.  21.    Rate  of  taxation. — The  rate  of  taxation  is  2  cents  on  each 
$100  or  fraction  thereof  of  the  value  of  the  products  or  merchandise 

involved  in  the  sale,  agreement  of  sale,  or  agreement  to  sell. 

3649  Art.  22.  Transactions  subject  to  tax. — All  sales  or  agreements 
to  sell  (except  as  herein  otherwise  provided)  of  products  or  mer- 
chandise at  or  under  the  rules  and  usages  of  an  exchange  for  future  delivery 
are  subject  to  the  payment  of  tax,  and  every  sale  or  agreement  not  evidenced 
by  a  memorandum  or  contract  expressly  requiring  immediate  or  prompt 
delivery  shall  be  deemed  to  be  for  future  delivery.  In  cases  in  which  the 
commissioner  is  not  satisfied  from  the  evidence  that  the  transaction  is  in 
good  faith  intended  to  be  followed  by  immediate  or  prompt  delivery,  the 
seller  is  required  to  pay  the  tax  as  on  a  sale  for  future  delivery. 

3660    Art.  23.    Transactions  not  subject  to  tax. — (a)  So-called  "transfer 
or  scratch  sales"  or  "pass-outs"  are  not  subject  to  the  tax:  Provided, 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  722  SERVICE 


7-8-22.  Reg.  40. — 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


That  the  purchase  and  sale  are  made  at  the  same  exchange  on  the  same  day, 
at  the  same  price,  and  for  the  account  of  the  same  person. 
3661  (b)  Cash  sales  of  products  or  merchandise  for  immediate  or  prompt 
delivery,  which  are  in  good  faith  actually  intended  for  "immediate 
or  prompt  delivery,,?  as  denned  in  article  33  (3)  (d)  of  these  regulations, 
ire  not  subject  to  tax 

3652  (c)  Transfers  of  sales,  agreements  of  sale,  or  agreements  to  sell, 
to  a  clearing  house  by  a  person  selling  products  or  merchandise 

on  exchange  for  future  delivery  who  have  paid  the  tax  provided  by  law, 
are  not  subject  to  tax,  provided  such  transfers  do  not  vest  any  beneficial 
interest  in  the  clearing  house  and  are  made  for  the  sole  purpose  of  enabling 
the  clearing  house  to  adjust  and  balance  the  accounts  of  members  of  the 
exchange  and  of  such  clearing  house  on  their  contracts. 

3653  Art.  24.   Inconsistent  by-laws,  rules,  or  customs  of  exchanges. — 

No  provisions,  by-laws,  rules,  or  customs  of  any  exchange,  board  of 
trade,  or  similar  institution  or  place  of  business  which  are  inconsistent  or 
in  conflict  with  any  requirement  or  provision  of  the  Revenue  Act  of  1921, 
or  any  regulations  made  thereunder,  nor  any  collateral,  or  additional  agree- 
ment, verbal  or  written,  respecting  the  subject  matter  of  such  contract  or 
the  settlement  or  fulfillment  thereof  which  is  inconsistent  or  in  conflict  with 
any  requirement  of  said  act  or  regulations,  shall  exempt  any  person  from  the 
payment  of  tax  imposed  by  subdivision  4  of  said  act. 

3654  Art.  25.    Memoranda  of  sales. — (a)  Every  person  who  makes 
sales,  or  agreements  of  sale,  or  agreements  to  sell,  any  products  or 

merchandise  at  or  under  the  rules  or  usages  of  any  exchange,  board  of  trade, 
or  similar  place,  for  future  delivery,  shall  deliver  to  the  buyer  bill,  memor- 
andum, or  other  evidence  of  such  sale,  agreement  of  sale,  or  agreement  to  sell, 
to  which  there  shall  be  affixed  a  lawful  stamp  in  value  equal  to  the  amount 
of  the  tax  on  such  sale. 

3655  (b)  Such  bill,  memorandum,  or  other  evidence  duly  stamped  shall 
be  kept  by  the  buyer  for  two  years,  unless  otherwise  prescribed 

in  these  regulations. 

3656  (c)  No  single  sale  or  agreement  of  sale,  or  agreement  to  sell,  made 

upon  an  exchange  by  one  member  for  another  need  be  evidenced 
by  more  than  one  stamped  bill,  memorandum,  or  agreement. 

3657  Art.  26.    Clearing  house  as  agent. — (a)  If  any  person  who  makea 
sales,  agreements  of  sale,  or  agreements  to  sell  any  products  or 

merchandise  at  or  under  the  rules  or  usages  of  any  exchange,  board  of  trade, 
or  similar  place,  for  future  delivery,  shall  in  writing  appoint  the  clearing 
house  for  the  exchange  upon  which  such  sales  are  made,  his  agent  for  the 
purpose  hereinafter  named,  such  clearing  house  being  approved  by  the 
commissioner,  and  shall  make  a  written  return  or  sheet  of  each  such  sale 
o  such  clearing  house  in  accordance  with  these  regulations,  such  return  or 
3heet  shall  be  deemed  to  be  the  bill,  memorandum,  or  other  evidence  required 
by  these  regulations  to  be  delivered  by  the  seller  to  the  buyer  and  the  clear- 
ing house  is  hereby  authorized  to  affix  to  such  return  or  sheet  the  amount 
of  the  stamps  required  for  each  sale,  agreement  of  sale,  or  agreement  to  sell 
as  indicated  thereon  and  to  cancel  the  stamps  so  affixed. 

3658  (b)  The  affixing  and  canceling  of  such  stamps  by  the  clearing  house 
^Joid  shall  be  held  to  be  the  act  of  the  person  making  such  contract  of  sale. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  723  SERVICE 


7-8-22. 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3659  (c)  If  the  person  making  such  sale  and  the  clearing  house  so  elect, 
the  seller  may  affix  the  stamps  to  the  clearing  house  return  or  sheet 

snd  cancel  the  same  before  or  at  the  time  of  delivery  to  the  clearing  house. 
1  he  clearing  house  shall  in  no  event  accept  such  bill,  memorandum  of  sale 
or  clearing  house  return  or  sheet  unless  stamps  for  all  the  tax  required  to  be 
paid  thereon  are  attached  and  properly  canceled. 

3660  (d)  The  returns  or  sheets  of  sales  so  made  to  the  clearing  house 
shall  in  respect  of  each  sale,  set  forth  the  date,  the  name  of  the 

seller,  the  name  of  the  purchaser,  the  amount  of  the  sale,  the  matter  or 
things  to  which  it  refers,  and  the  tax  paid  thereon,  but  a  return  for  more  than 
one  sale  may  be  made  on  the  same  paper  or  sheet. 

3661  (e)  The  clearing  house  shall  preserve  for  a  period  of  not  less  than 
two  years,  each  bill,  memorandum  or  return,  or  sheet  made  to  it 

by  such  person. 

3662  (f)  Every  clearing  house  shall  include  in  its  monthly  return  to  the 
commissioner  a  statement  of  the  amount  of  stamps  so  affixed  and 

canceled  on  the  returns  or  sheets  of  each  person. 

3663  (g)  The  making  of  such  return  by  the  clearing  house  shall  not  relieve 
the  person  making  such  sale,  or  agreement  of  sale,  or  agreement 

to  sell,  from  making  the  monthly  return  of  his  transactions  required  by 
Art.  29  of  these  regulations. 

3664  Art.  27.  Records  to  be  kept  by  buyers  and  sellers. — (a)  All  persons 

who  make  sales  or  agreements  of  sale  of,  or  agreements  to  sell  (in- 
cluding so-called  "transferred  or  scratch"  sales,  "pass  outs,"  "pair  offs>" 
"matched  trades,"  or  "give  ups")  any  products  or  merchandise  at,  or  under 
the  rules  or  usages  of,  any  exchange  for  future  delivery,  or  are  engaged  in  the 
business  of  accepting  and  transmitting  orders  for  the  purchase  of  such  pro- 
ducts or  merchandise  to  be  executed  at,  or  under  the  rules  or  usages  of  any 
exchange  for  future  delivery,  shall  keep  a  record  showing: 

(1)  Date  of  contract. 

(2)  Name  of  person  executing  contract  (floor  broker). 

(3)  To  whom  sold  or  from  whom  bought  (name  and  address). 

(4)  Whether  transaction  is  a  purchase  or  sale. 

(5)  Quantity  of  product  or  merchandise  involved,  whether  in  tons,  pounds, 

bales,  bushels,  bags,  mats,  barrels,  gallons,  or  whatever  other  unit 
of  weight  or  measure  is  used. 

(6)  Name  of  products  or  merchandise,  including  (if  not  a  basis  grade) 

grade,  type,  sample,  or  description 

(7)  Whether  contract  is  a  "basis-grade,"  "deferred-acceptance,"  or  what- 

ever kind  of  contract. 

(8)  Price  specified  per  ton,  pound,  bale,  bushel,  bag,  mat,  barrel,  gallon, 

or  whatever"other  unit  of  weight  or  measure  is  used. 

(9)  Tax  paid. 

(10)  Customer  (name  and  address). 

(11)  Origin  of  order  (whether  domestic  or  foreign). 

(12)  Month  or  time  specified  in  contract  for  delivery. 

(13)  Date  of  settlement. 

(14)  Method  of  settlement  or  adjustment. 

3665  (b)  Provided,  That  "floor  brokers,"  or  "two-dollar  men,"  or  "room 
traders",  in  lieu  of  the  foregoing  record,  shall  keep  a  record  showing: 

(1)  Date  of  transaction. 

(2)  Name  of  person  who'executed  the  order,  if  other  than  the  floor  broker. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  724  SERVICE 


'1.7-8-22. 


Reg.  40.— 1922JEdition. 

STAMP  TAX  REGULATIONS. — 1922. 


(3)  Name  of  seller. 

(4)  Name  of  buyer. 

(5)  Quantity  of  product  or  merchandise  involved  in  the  transaction. 

(6)  Name  of  product  or  merchandise,  including  (if  not  a  basis-grade  con- 

tract) grade,  type,  sample,  or  description. 

(7)  Whether  the  contract  is  a  basis-grade  contract. 

(8)  Price. 

(9)  Time  specified  in  contract  for  delivery. 

(10)  Name  of  persons  to  whom  "given  up,"  "paired  off,"  "transferred 
or  scratched,"  or  "passed  out." 

3666  (c)  Any  other  transactions  than  those  specified  in  this  proviso 
made  by  "floor  brokers,"  "two-dollar  men,"  or  "room  traders," 

shall  be  kept  on  the  first  form  prescribed  in  this  article. 

3667  (d)  Persons  who  use  either  of  such  forms  may  incorporate  addi- 
tional columns  which  may  be  of  use  to  them,  such  columns  to  be 

so  placed  as  not  to  interfere  with  the  columns  and  headings  herein  pre- 
scribed. 

3868    (e)  Such  record  forms  will  not  be  supplied  by  the  department. 

3669  (f)  The  foregoing  records  shall  be  legibly  written  in  ink,  and  con- 
tracts of  sale  for  future  delivery  of  two  or  more  distinct  products 

or  merchandise  shall  be  kept  separate.  Each  person  who  executes  or  makes 
such  contracts  of  sale  shall  preserve  the  books,  bills,  memoranda,  "sales 
tickets,"  or  trading  cards  of  all  transactions,  and  the  purchaser  shall  pre- 
serve the  bill,  memorandum,  agreement,  or  evidence  of  sale  to  which  the 
stamps  are  affixed  for  the  period  of  two  years,  that  they  may  be  readily 
inspected  by  the  revenue  officer. 

3670  (g)  The  form  of  record  required  by  these  regulations  shall  be  sub- 
stantially as  follows: 


[For  copy  of  form  see  page  726.] 


Copyright  1922,  by  1  he  Corporation  Trust  Company. 
WAR  TAX         725  SERVICE 


&  7-8-22. 


STAMP  TAX  REGULATIONS.— 1922. 


Reg.  40.— 1922  Edition. 


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STAMP  TAX  REGULATIONS. — 1922. 


3671  Art.  28.   Records  to  be  kept  by  clearing  houses. — (a)  All  persons 

who  act  in  the  capacity  of  a  clearing  house  shall  keep  a  record  showing: 

(1)  Name  of  person  for  whom  each  contract  is  cleared. 

(2)  Date  when  contract  was  made. 

(3)  Whether  the  transaction  is  a  purchase  or  sale. 

(4)  Quantity  of  product,  or  merchandise,  involved,  whether  in  tons,  pounds, 

bales,  bushels,  bags,  mats,  barrels,  gallons,  or  other  unit  of  weight 
or  measure,  as  the  case  may  be. 

(5)  Name  of  product,  or  merchandise,  including  (if  not  a  "basis-grade" 

contract)  grade,  type,  sample,  or  description. 

(6)  Whether  the  contract  is  a  "basis-grade"  contract. 

(7)  Time  specified  in  contract  for  delivery. 

(8)  Date  of  settlement. 

(9)  Method  of  actual  settlement. 

3672  (b)  Records  of  sales  for  future  delivery  of  two  or  more  distinct 
products  or  merchandise  must  be  kept  separate 

3673  (c)  The  clearing  house  shall  preserve  such  records  for  the  term  of 
two  years. 

3674  (d)  Such  record  forms  will  not  be  supplied  by  the  department 


3675  Art.  29.    Returns  of  transactions. — (a)  All  persons  who  make 
contracts  of  sale  or  purchase  of  any  product  or  merchandise,  at 

or  under  the  rules  or  usages  of  any  exchange,  board  of  trade,  or  other  similar 
place  of  business,  for  future  delivery,  whether  such  contracts  shall  be  cleared 
and  adjusted  through  a  clearing  house,  or  directly  between  the  seller  and 
buyer,  or  otherwise,  shall  on  or  before  the  fifteenth  day  of  each  month, 
or  at  any  other  time  required  by  the  Commissioner,  make  a  return  in  writing 
to  the  Commissioner,  for  the  preceding  month  or  any  other  period,  verified 
before  some  officer  authorized  to  administer  oaths,  showing: 

(1)  The  number  of  contracts  of  sale  and  purchase  of  each  product  or  mer- 

chandise brought  forward  from  the  preceding  month  or  period. 

(2)  The  number  of  contracts  of  sale  and  purchase  of  each  product  or  mer- 

chandise on  each  day  during  the  current  month  or  period. 

(3)  The  month  in  which  the  products  or  merchandise  are  to  be  delivered. 

(4)  The  method  of  settlement  of  each  contract,  i.  e.,  whether  by  "actual 

delivery,"  "notice,"  "ring,"  "direct,"  "transfer,"  "scratch  sale," 
"pass  out,"  "matched,"  "pair  off,"  "set-off,"  "give  up,"  through  a 
clearing  house  or  otherwise. 

(5)  The  tax  paid  thereon. 

(6)  The  number  of  contracts  both  of  purchase  and  sale  carried  forward 

at  the  end  of  the  month  or  period. 

(7)  The  amount  of  stamps  on  hand  at  beginning  of  month  or  period. 

(8)  The  amount  of  stamps  purchased  during  month  or  period. 

(9)  The  amount  of  stamps  used  during  month  or  period. 

(10)  Balance  of  stamps  on  hand  at  end  of  month  or  period. 

(11)  The  origin  of  the  order  or  the  contracts,  whether  domestic  or  foreign. 

3676  (b)  Provided^  That  "floor  brokers,"  or  "two-dollar  men,"  or  "room 
traders"  may  omit  from  their  returns  information  called  for  under 

paragraphs  marked  (1),  (6),  and  (11).  But  in  the  event  such  "floor  brokers," 
"two-dollar  men,"  or  "room  traders"  shall  make  or  settle  transactions  in  any 
other  way  than  by  "transferred  or  scratch  sales,"  "give  ups,"  or  "pass  outs," 
they  shall  make  the  full  returns  prescribed  in  this  article. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  727  SERVICE 


7-8-22. 


Reg.  40. — 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3677  (c)  Such  returns  shall  be  made  upon  forms  to  be  furnished,  upon 
application,  by  the  collector  of  internal  revenue,  of  the  district  in 

which  the  exchange,  board  of  trade,  or  other  similar  place  is  located. 

3678  Art.  30.    Returns  by  clearing  houses. — (a)  Every  clearing  house 
shall  on  or  before  the  fifteenth  day  of  each  month,  and  at  such 

other  times  as  required  by  the  Commissioner,  make  return  in  writing,  under 
oath,  to  the  Commissioner,  for  the  preceding  month  or  other  period,  showing: 

(1)  The  number  of  open  contracts  "long"  and  "short"  brought  forward 

for  each  member  from  the  preceding  month 

(2)  The  number  of  contracts  bought  and  sold  by  each  member  of  the 

association. 

(3)  The  number  of  tons,  pounds,  bales,  bushels,  bags,  mats,  barrels,  or 

gallons,  or  other  units  of  weight  or  measure  involved  in  such  con- 
tracts, as  the  case  may  be. 

(4)  The  month  in  which  such  product,  merchandise,  or  commodity  is  to  be 

delivered. 

(5)  The  method  of  settlement  of  said  contracts,  i.  e.,  whether  by  "set 

off,"  "notice,"  or  "delivery,"  or  by  what  method. 

(6)  Total  tax  paid  by  each  member  of  the  exchange. 

(7)  The  number  of  open  contracts  "long"  and  "short"  carried  forward 

for  each  member  to  the  following  month. 

3679  (b)  Such  returns  shall  be  made  upon  forms  to  be  furnished,  upon 
application,  by  the  collector  of  internal  revenue  of  the  district  in 

which  the  clearing  house  is  situated. 

.rbnorn  donb  \o  vcb  rtanaaJirt  ^rb  siotad  io  no  iUrfa  {^^iwl^^i^o  io  ti3^nd 

3680  Art.  31.    Stamps  may  be  affixed  to  returns. — (a)  If  any  exchange 
shall  by  proper  resolution  request  the  Commissioner  to  permit 

the  members  of  such  exchange  to  affix  the  requisite  amount  of  stamps  on 
the  returns  made  by  such  members  to  the  Commissioner  of  all  transactions 
made  by  such  member  at  such  exchange  and  cancel  such  stamps,  and  shall  file 
with  the  Commissioner  a  copy  of  the  charter  and  by-laws  of  such  exchange 
accompanied  with  a  list  of  the  names  and  addresses  of  the  officers  and  members 
of  such  exchange,  designating  those  of  such  members  who  are  active  and  those 
who  are  inactive  on  the  exchange,  then  upon  approval  of  such  resolution 
by  the  Commissioner,  instead  of  affixing  the  stamps  to  the  bill  or  memorandum 
of  sale  as  now  required,  it  shall  be  lawful  for  the  members  of  such  exchange 
to  affix  the  amount  of  stamps  on  such  returns  as  shall  represent  the  aggregate 
amount  of  tax  due  on  all  sales,  agreements  of  sale,  or  agreements  to  sell, 
made  by  such  member  during  the  preceding  month  or  other  period  designated 
by  the  Commissioner  and  such  stamps  shall  be  canceled  by  such  member  in 
the  manner  prescribed  in  these  regulations. 

3681  (b)  Such  returns,  duly  stamped,  shall  be  filed  and  preserved  for 
two  years. 

3682  (c)  The  stamping  and  filing  of  such  returns  shall  not  in  any  way 
relieve  the  members  of  such  exchange  from  making  and  delivering 

to  the  buyer  the  memorandum  or  bill  of  sale  prescribed  by  law  and  these 
regulations,  nor  the  buyer  from  the  necessity  of  preserving  the  same  for 
the  term  of  two  years. 

3683  Art.  32.   Future  delivery  stamps. — The  stamps  to  be  used  on  sales, 
agreements  of  sale,  or  agreements  to  sell  products  or  merchandise 

at  or  under  the  rules  or  usages  of  any  exchange,  or  board  of  trade,  or  other 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  728  SERVICE 


7-8-22. 


Reg.  40.-1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


similar  place,  for  future  delivery  shall  be  the  ordinary  documentary  stamps 
with  the  words  "Future  delivery"  overprinted  thereon,  and  they  shall  be 
known  as  "Future  delivery  stamps." 

PART  IV. 

DEFINITIONS  AND  GENERAL  PROVISIONS. 

3684  Art.  33.   Further  definitions. — (1)  When  used  in  these  regulations: 
8084 

3685  (a)  The  term  "person"  includes  the  plural  as  well  as  the  singular, 
also  individuals,  partnerships,  joint-stock  companies,  associations, 

and  corporations,  except  when  from  the  context  it  is  plain  that  a  different 
meaning  is  intended; 

3686  (b)  The  term  "issue"  includes  not  only  actual  delivery  of,  but 
also  acceptance  of  subscriptions  to  shares  or  certificates  of  stock, 

or  of  profits  or  of  interest  in  property  or  accumulations  in  any  corporation, 
joint-stock  company,  or  association; 

3687  (c)  The  term  "reorganization"  includes  those  business  arrangements 
whereby  the  stock  and  bonds  of  a  corporation  are  readjusted  as  to 

amount,  income,  or  priority,  or  the  property  is  sold  to  a  new  corporation  for 
new  stock  and  bonds,  or  is  sold  by  the  foreclosure  of  a  mortgage  upon  it  to 
a  purchaser  who  buys  for  himself  and  his  associates,  and  the  various  proceed- 
ings and  transactions  by  which  succession  of  corporations  is  brought  about, 
and  also  the  proceedings  by  which  existing  corporations  are  continued  under 
a  different  organization  without  the  creation  of  a  new  corporation; 

3688  (d)  The  term  "broker"  includes  not  only  those  persons  defined  as 
brokers  in  the  Revenue  Act  of  1916,  but  also  persons  defined  as 

commission  merchants  and  commercial  brokers  under  the  Revenue  Act 
of  1914,  except  those  persons  classed  as  commercial  brokers  under  the  Revenue 
Act  of  1914  whose  business  it  is  to  negotiate  freight  and  other  business  for  the 
owners  of  vessels  or  for  shippers  or  consignors  or  consignees  of  freight  carried 
by  vessels,  who,  in  the  Revenue  Act  of  1918,  are  classed  as  ship  brokers; 

3689  (e)  The  act,  omission,  or  failure  of  any  official,  agent  or  other  person 
or  corporation,  employed  by  any  person,  partnership,  company 

association,  or  corporation,  within  the  scope  of  his  employment  or  office, 
shall  in  every  case  be  deemed  also  the  act,  omission,  or  failure  of  such  person, 
partnership,  company,  association,  or  corporation. 

3690  (2)  As  used  in  Parts  I  and  II  of  these  regulations: 

3691  (a)  The  term  "sale"  or  "transfer"  includes  sales,  agreements  to 
sell,  memoranda  of  sales,  or  deliveries  or  transfers  of  legal  title  to 

shares  or  certificates  of  stock,  except  as  otherwise  specifically  provided 
in  these  regulations; 

3692  (b)  The  term  "agreement  to  sell"  includes  options,  calls  in  "puts 
and  calls,"  offers,  indemnities  and  privileges,  and  contracts,  either 

in  writing  or  by  parol,  to  sell  on  the  deferred  or  partial  payment  plan; 

3693  (c)  The  term  "share  of  stock"  includes  shares  and  certificates  for 
shares  of  stock  representing  interest  in  corporations,  joint-stock 

companies  or  associations,  or  interest  in  profits  or  in  property  or  in  accumu- 
lations in  a  corporation,  and  certificates  for  shares  or  interest  in  shares 
"if,  as  and  when  issued,"  and  rights  to  subscribe  for  stock  or  interest  in 
profits  or  in  property  or  in  accumulations,  in  any  corporation; 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  729  SERVICE 


7-8-22.  Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3694  (d)  The  term  "exchange"  includes  each  and  every  agency,  office, 
room,  or  other  place  of  assembly  whether  under  shelter  or  in  the 

open,  at  which  stock,  rights,  warrants,  interests  in  property,  or  in  profits, 
or  in  accumulations,  by  corporations,  are  publicly  bought,  sold,  bid  for, 
offered  or  exchanged  between  persons  there  assembled,  in  behalf  of  them- 
selves or  others; 

3695  (e)  The  term  "clearing  house"  includes  every  corporation  or  associa- 
tion,  whether   incorporated   or   not,   of   individuals,  partnerships 

or  corporations  wholly  or  partly  engaged  in  the  business  of  clearing,  settling, 
,  or  adjusting  transactions  in  the  purchase,  sale,  receipt,  or  delivery  of  shares 
of  stock,  whether  or  not  the  same  be  a  part  or  department  of  an  exchange 
or  an  independent  body. 

3696  (3)  As  used  in  Part  III  of  these  regulations: 

3697  (a)  The  term  "sale"  or  "contract  of  sale"  includes  all  sales,  or 
agreements  of  sale,  or  agreements  to  sell,  including  so-called  trans- 
fers or  "scratch  sales"; 

3698  (b)  The  term  "agreement  of  sale"  or  "agreement  to  sell,"  includes 
options,  calls  in  "puts  and  calls,"  offers,  indemnities,  and  privileges; 

3699  (c)  The  term  "transferred  or  scratch  sale"  includes  "pass-outs" 
or  those  transactions  in  which  a  person  buys  from  another  a  certain 

quantity  of  any  product,  at  a  certain  price,  and  at  the  same  session  of  an 
exchange,  sells  to  a  third  person  the  same  quantity  of  the  same  product 
at  the  same  price,  and  eliminates  himself  by  instructing  the  person  from 
whom  he  brought  to  deliver  such  product  to  the  person  to  whom  he  sold; 
but  no  transaction  in  which  a  broker  or  a  commission  member  of  an  exchange 
receives  a  commission  greater  than  that  charged  to  a  person  who  executes 
his  own  contracts  shall  be  deemed  to  be  a  "transfer"  or  a  "scratch  sale"; 

3700  (d)  The  term  "'immediate  or  prompt  delivery"  means  delivery 
at  once  or  as  soon  as  practical,  and  in  any  event  within  twenty 

days  of  the  date  of  the  sale,  or  agreement  of  sale,  or  agreement  to  sell; 

3701  (e)  The  term  "exchange,"  except  where  it  is  plain  from  the  con- 
text that  a  different  meaning  is  intended,  includes  each  and  every 

agency,  board  of  trade,  bourse,  auction  place,  or  other  meeting  place,  whether 
under  shelter  or  in  the  open,  at  which  products  or  merchandise  are  publicly 
bought,  sold,  bid  for,  offered,  or  exchanged,  for  future  delivery,  or  con- 
tracts for  such  future  delivery  are  made,  either  between  members  of  such 
exchange,  or  between  members  and  nonmembers,  patrons,  and  the  public; 
and  includes  places  at  which  there  is  only  one  manager  or  firm,  who  controls 
all  the  sales  and  purchases  at  that  particular  place  or  where  no  actual  delivery 
of  the  products  or  merchandise  is  contemplated,  and  all  incorporated  and  un- 
incorporated associations  of  individuals,  partnerships,  and  corporations 
engaged  in  the  business  of  publicly  selling,  buying,  or  exchanging  products 
or  merchandise  for  future  delivery; 

3702  (f)  The  term  "at  an  exchange"  means  near  to  or  in  close  proximity 
to  or  in  the  immediate  vicinity  of  an  exchange,  as  well  as  on  the 

floor  of  an  exchange; 

3703  (g)  The  term  "clearing  house"  includes  each  and  every  person, 
corporation,  association,  or  committee  engaged  in  the  business  o? 

clearing,  settling,  and  adjusting  transactions  in  the  purchase,  sale  or  de- 
livery of  products  or  merchandise,  whether  such  clearing  house  be  a  part  or 
department  of  an  exchange  or  an  independent  body. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  730  SERVICE 


Reg.  40.— 1922  Edition. 

STAMP  TAX  REGULATIONS.-  1922. 


3  704    Art.  34.    Registration.—  (a)  Every  person  engaged,  in  whole  or 
in  part,  in  any  of  the  following  businesses  or  activities  shall  file 
£  .statement  for  registration  with  the  collector  of  internal  revenue  of  the 
district  in  which  his  principal  office  or  place  of  business  is  located: 

3705  (1)  Persons  engaged  in  negotiating,  making,  or  recording  sales, 
agreements  to  sell,  deliveries  or  transfers  of  shares  or  certificates 

of  stock,  or  rights,  or  warrants,  or  certificates  of  beneficial  interest  in  profits, 
property,  or  accumulations  of  a  corporation. 

3706  (2)  Persons  conducting  or  transacting  a  stock  brokerage  business. 

3707  (3)  Persons  accepting  or  procuring  the  transmission  of  orders  for 
the  purchase  or  sale  or  transfer  of  stocks,  rights,  warrants,  certi- 
ficates of  beneficial  interest  or  interests  in  property,  profits,  or  dividends, 
to  be  executed  at  a  stock  brokerage  office  or  an  exchange  or  similar  place. 

3708  (4)  Persons  engaged  in  the  business  of  transferring  stock  other 
than  their  own. 

3709  (5)  Persons  engaged  in  making  sales  or  agreements  of  sale  of,  or 
agreements  to  sell,  any  products  or  merchandise  at,  or  under  the  rules 

or  usages  of,  any  exchange,  for  future  delivery;  or  engaged  in  the  business  of 
accepting  or  procuring  the  transmission  of  orders  for  such  contracts  of 
sale  to  be  executed  at  an  exchange,  or  under  the  rules  or  usages  of  an  ex- 
change, for  future  delivery. 

37 1 0  (6)  Persons  engaged  in  conducting  an  exchange  or  clearing  house 
or  clearing  association  for  the  clearing,  adjusting,  and  settling  trans- 
actions, made  on  exchanges  or  similar  places:  Provided,  That  in  case  the 
person  conducting  such  an  exchange  has  a  department  connected  therewith 
engaged  in  clearing,  adjusting,  and  settling  transactions  made  on  such 
exchange,  he  shall  so  state  and  shall  give  the  names  and  addresses  of  the 
superintendent  and  secretary  of  such  clearing  house  division  or  committee. 

3711  (b)  If  the  person  required  to  file  a  statement  for  registration  is 
also  a  member  of  an  exchange,  a  seat  on  which  is  worth  $2,000  or 

more,  he  shall  state  the  average  value  of  such  seat  for  the  year  ending  June 
30  immediately  preceding  his  registration. 

3712  (c)  In  the  case  of  a  partnership  of  which  two  or  more  members 
are  members  of  exchanges,  the  names  of  such  members  and  of  each 

exchange  in  which  memberships  are  held  shall  be  stated,  together  with  the 
price  of  a  seat  on  each  exchange. 

3713  (d)  The  statement  above  required  shall  be  verified  on  oath  by  the 
person  required  to  make  such  statement,  or  by  the  president  or 

secretary  of  a  corporation,  association,  or  clearing  house,  and  shall  set  forth 
specifically  the  character  of  the  business  to  be  conducted  and  the  full  name  and 
address  of  each  person  or  member  of  a  partnership  engaged  in  such  business: 
Provided,  That,  in  the  case  of  a  corporation  or  association,  the  statement 
for  registration  shall  set  forth  the  date  and  place  of  incorporation  and  the 
principal  office  or  place  of  business  both  within  and  without  the  State  where 
incorporated,  with  the  names  and  addresses  of  the  chief  officer  and  secretary 
of  such  corporation,  and  be  accompanied  with  a  list  of  the  members  and 
their  addresses. 

3714  (e)  Each  exchange  or  clearing  house  shall  also  file  with  such  col- 
lector a  copy  of  its  constitution,  charter,  or  agreement  of  associa- 
tion and  by-laws,  rules  and  regulations,  and  all  amendments  thereto  as 
the  same  may  from  time  to  time  be  adopted,  and  the  names  and  addresses 
of  new  members  as  from  time  to  time  admitted  to  membership. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  731  SERVICE 


7-8-22. 


Rog.  40.   -1922  KHition. 

STAMP  TAX  REGULATIONS. — 1922. 


3716    (f)  If  the  person  or  corporation  required  to  file  such  statement 
has  been  licensed  under  the  laws  of  any  State  or  under  any  other 
provision  of  Federal  law  the  date  and  place  at  which  such  license  was  issued 
•hall  be  stated. 

37 IS  (g)  In  case  a  person  registered  as  required  by  these  regulation* 
shall  suspend  or  close  his  business  before  the  end  of  the  year  for 
which  he  is  registered,  he  shall  file  in  the  office  of  the  collector  of  internal 
revenue  in  which  he  is  registered  a  certificate  to  that  effect,  giving  the  date 
on  which  he  suspended  or  closed  his  business. 

37 1  7    (h)  Such  statement  for  registration  shall  be  made  on  a  form  to  be 
furnished  upon  application  to  the  collector  of  internal  revenue 

37  18  Art.  35.  Record  of  registration  kept  by  collector. — (a)  Every 
collector  shall  file  and  preserve  each  statement  for  registration  filed 
with  him  in  accordance  with  these  regulations,  and  shall  issue  to  each  person, 
partnership,  exchange,  clearing  house,  or  corporation  a  certificate  of  regis- 
tration, showing  the  date  of  issue,  the  name  of  the  person,  or  exchange, 
clearing  house,  or  corporation,  conducting  the  business,  the  nature  of  the 
business  for  which  the  license  is  granted,  and  the  date  of  expiration  of  said 
registry,  which  certificate  of  registration  shall  be  signed  by  the  collector, 
and  shall  be  posted  in  some  prominent  place  in  the  office  of  said  person, 
partnership,  exchange,  clearing  house,  or  corporation  during  the  period  for 
which  it  is  issued. 

3719  (b)  If  such  business  is  conducted  at  more  than  one  place,  a  cer- 
tificate shall  be  so  posted  in  each  such  place  of  business. 

BROKERS. 

3720  Art.  36.  Brokers.— (a)  The  special  tax  paid  by  a  firm  or  corpora  - 
7502     tion  as  broker,  covers  individual  members  of  the  firm  or  corporation, 

as  long  as  such  members  are  trading  solely  for  the  benefit  of  the 
firm  or  corporation. 

372 1  (b)  A  broker  who  owns  a  single  seat  only  in  one  exchange  is  required 
to  pay  the  special  tax  of  $50  per  year  and  in  addition  a  tax  at  the 

rate  of  $100  or  $150  per  year,  according  to  the  value  of  the  seat  in  the  exchange 
or  organization  of  which  he  is  a  member. 

3722  (c)  If  a  broker  owns  a  seat  in  more  than  one  exchange,  the  addi- 
tional tax  which  he  is  required  to  pay  is  the  sum  of  the  taxes  upon 

all  the  seats  owned  by  him. 

3723  (d)  If  a  broker  owns  more  than  one  seat  in  the  same  exchange, 
he  is  subject  to  the  additional  tax  onlv  uoon  the  value  of  a  single 

seat. 

3724  (e)  If  a  partnership  or  corporation  owns  a  number  of  seats  in  the 
name  exchange,  but  holds  such  seats  in  the  name  of  the  individual 

members  of  the  partnership  or  corporation  who  transact  business  solely 
for  the  benefit  of  the  partnership  or  corporation,  the  tax  on  the  ownership 
of  such  seats  or  memberships  in  such  exchange  shall  not  apply  to  each 
individual  in  the  partnership  or  corporation,  but  only  to  one  seat  or  one 
membership. 

3726    (f)  Where  the  possession  of  shares  of  stock  is  a  prerequisite  to 
membership  in  an  exchange,  the  lessee  of  a  share  of  stock  in  such 
exchange  is  liable  for  the  additional  tax  imposed  bv  subdivision  1  of  section 
1001  [1(7502]. 

CoPyriglU  1922,  by  The  Corporation  Irast  Company. 
WAR  TAX  732  SERVICE 


7-8-22.   (2)  8-3-22. 


Reg.  40.-1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


AFFIXING  AND  CANCELLATION  OF  STAMPS. 

3726  Art.  37.  Affixing  and  cancellation  of  stamps. — (a)  In  the  case  of 
3514  the  issue  of  shares  of  stock,  whether  on  organization  or  reorganiza- 
3522     tion,  the  stamps  representing  the  tax  shall  be  affixed  to  the  stock 

books  and  not  to  the  certificates  issued. 

3727  (b)  In  the  case  of  a  sale  before  certificates  are  issued,  where  the 
evidence  of  transfer  is  shown  only  by  the  books  of  the  corporation, 

the  stamps  shall  be  placed  on  such  books. 

3728  (c)  In  case  the  change  of  ownership  is  effected  by  transferor  de- 
livery of  the  certificate,  i.  e.,  where  the  name  of  the  transferee  is 

inserted  in  the  indorsement  or  power  of  attorney  on  the  back  of  the  certi- 
ficate, the  stamp  shall  be  affixed  to  such  certificate  and  canceled  by  the 
person  making  the  sale. 

3729  (d)  In  case  of  agreement  to  sell,  or  where  the  transfer  is'by  delivery 
of  the  certificate  assigned  in  blank,  the  stamp  shall  be  affixed  to  the 

bill,  memorandum,  or  agreement  to  sell,  and  canceled  by  the  seller. 

3730  (e)  In  no  event  shall  any  transfer  agent  or  corporation  accept  or 
transfer  any  shares  of  stock  or  certificates  unless  stamps  for  all 

transfer  tax  required  thereon  have  been  properly  affixed  either  to  the  certi- 
ficates of  stock  or  memoranda  of  sale,  as  the  case  may  be,  and  duly  canceled. 

3731  (f)  The  person  using  or  affixing  the  stamp  shall  write  or  stamp 
3513     thereon,  in  ink,  his  initials  and  the  day,  month,  and  year  on  which 

the  same  shall  be  affixed,  or  shall,  by  cutting  or  canceling  with  a 
machine  or  punch,  affix  his  initials  and  the  date  as  aforesaid,  and  so  deface 
such  stamp  as  to  render  it  unfit  for  reuse.  In  addition  to  the  foregoing,  stamps 
of  the  value  of  50  cents  or  more  shall  have  three  parallel  incisions  made 
with  some  sharp  instrument  lengthwise  through  the  stamp  after  the  same 
has  been  attached  to  the  certificate  or  bill,  or  memorandum,  or  other 
evidence  of  sale  or  transfer:  Provided,  That  this  shall  not  be  required  where 
stamps  are  canceled  by  perforation:  And  provided  further,  That  the  cancella- 
tion by  either  method  shall  not  so  deface  the  stamp  as  to  prevent  its  denom- 
ination and  genuineness  from  being  readily  determined. 


PART  V. 
ADMINISTRATIVE. 
[T3515,  1(8000-2,  H8064,  and  ^807 1-2] 

3732  Art.  38.    Failure  to  make  returns;    substitute  returns. — (a)  If 

any  person  or  clearing  house  required  to  make  returns  by  this  Act 
or  the  regulations  thereunder  shall  fail  or  refuse  to  make  any  such  return 
within  the  time  prescribed  by  these  regulations  or  designated  by  the  Com* 
missioner,  then  the  same  shall  be  made  by  an  internal-revenue  officer  upon 
the  inspection  of  the  books  of  the  person  or  clearing  house  so  required, 
but  the  making  of  such  return  by  an  internal  revenue  officer  shall  not  relieve 
the  person  or  clearing  house  from  any  default  or  penalty  incurred  by  reason 
of  failure  to  make  such  return. 

3733  (b)  Any  officer  designated  by  the  Commissioner  shall  have  authority 
to  examine  the  books,  papers,  and  records  kept  pursuant  to  these 

regulations,  and  may  require  the  production  of  any  books,  records,  papers 
or  statements  of  account  necessary  to  determine  any  liability  to  the  tax 
imposed  by  this  Act  or  the  observance  of  the  provisions  of  the  regulations 
made  in  accordance  therewith. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  733  SERVICE 


7-8-22.     (5)  8-3-22.  Reg.  40  —1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


SALE  OF  STAMPS. 

3  734  Art.  39.  Sale  of  Stamps. — (a)  No  person  other  than  a  collector 
3517  of  internal  revenue  or  duly  authorized  deputy  collector  of  internal 
revenue,  assistant  treasurer,  or  designated  United  States  depositary 
shall  sell  or  expose  for  sale,  give  away,  traffic  in,  trade,  barter,  lend,  borrow,  or 
exchange  any  stamps  issued  pursuant  to  these  regulations:  Provided,  That 
iny  person  or  corporation  which  has  been  duly  appointed  and  constituted 
and  is  acting  agent  of  any  state  for  the  sale  of  stock  transfer  stamps  of  such 
tate.  may  upon  approval  by  the  Commissioner  and  upon  giving  a  bond 
satisfactory  to  the  collector,  sell  United  States  stamps  issued  pursuant  to 
'hese  regulations;  Provided  further.  That  a  bond  shall  not  be  required  when 
such  person  or  corporation  uniformly  purchases  such  stamps  from  the  collect- 
>r  for  cash.  As  used  in  this  article,  the  term  "stamps  issued  pursuant  to 
rhese  regulations"  or  "stamps  to  be  used  under  these  regulations"  shall 
mean  "stock  transfer  stamps"  and  "future  delivery  stamps." 
3736  (b)  No  person  shall  buy,  receive,  or  have  in  his  possession,  or  under 
his  control,  any  stamps  issued  pursuant  to  these  regulations,  unless 
•uch  stamps  have  been  purchased  directly  from  the  collector  of  internal 
revenue,  or  duly  authorized  deputy  collector  of  internal  revenue,  assistant 
treasurer,  United  States  designated  depositary,  or  a  designated  agent  for 
the  sale  of  State  stock  transfer  stamps,  authorized  by  the  Commissioner, 
in  the  district  in  which  the  stamps  are  to  be  used. 

3736  (c)  All  requisitions  for  stamps  to  be  used  under  these  regulations 
shall  be  made  in  writing,  on  a  form  prescribed  by  the  Commissioner, 

to  the  collector  of  internal  revenue  or  duly  authorized  deputy  collector  of 
internal  revenue,  assistant  treasurer,  or  designated  United  States  depositary, 
or  State  agent  authorized  by  the  Commissioner,  in  the  internal-revenue 
district  in  which  the  stamps  are  to  be  used,  giving  the  date  thereof,  the 
number  and  denomination  of  stamps  applied  for,  and  the  name  and  address 
of  the  purchaser,  and  shall  be  signed  in  ink  by  the  person  receiving  such 
itampi. 

3737  (d)  If  the  requisition  for  such  stamps  shall  be  made  to  any  assis- 
tant treasurer  or  United  States  designated  depositary  or  duly  author 

ized  state  agent  for  sale  of  state  stock  transfer  stamps,  such  assistant  treas- 
urer, or  United  States  designated  depositary,  or  duly  authorized  state  agent 
shall  keep  a  record  thereof,  and  on  or  before  the  fifteenth  day  of  each  month 
shall  file  with  the  collector  of  internal  revenue  of  the  district  a  statement, 
for  the  preceding  month,  setting  forth  the  number,  denomination,  and 
amount  of  all  stamps  on  hand  at  the  beginning  of  the  month,  the  number, 
denomination,  and  amount  sold  during  the  month,  and  the  number,  de- 
nomination and  amount  on  hand  at  the  end  of  the  month,  accompanied  with 
the  requisition  filed  by  each  purchaser,  and  on  or  before  the  fifteenth  day  of 
each  month  shall  pay  over  to  such  collector  of  internal  revenue  all  money 
received  from  sales  of  such  stamps  for  the  preceding  month,  taking  his  re- 
ceipt therefor:  Provided,  that  any  assistant  treasurer  or  United  States 
designated  depositary  or  duly  authorized  state  agent  for  the  sale  of  state 
stock  transfer  stamps  who  uniformly  purchases  such  stamps  for  cash  shall 
not  be  required  to  keep  the  record  or  make  the  return  above  prescribed,  but 
the  stamps  shall  be  resold  only  upon  requisition  as  prescribed  in  paragraph 
(c),  and  all  requisitions  shall  be  filed  with  the  collector  on  or  before  the 
fifteenth  day  of  each  month  for  the  preceding  month 


Copyright  1922.  by  The  Corporation  Trust  Company. 
WAR  TAX  734  SERVICE 


7-8-22. 


Reg.  40.— 1922  Editioa. 

STAMP  TAX  REGULATIONS. — 1922. 


3738  (e)  The  collector  of  internal  revenue  shall  keep  the  requisitions  for 
stamps  sold  by  him  and  those  sold  by  such  assistant  treasurer, 

designated  United  States  depositary,  or  authorized  State  agent,  separate 
■and  apart  from  all  other  requisitions  for  stamps,  and  shall  preserve  them 
in  his  office  for  a  period  of  t  wo  years. 

FINES  AND  PENALTIES. 

[flS&O^fe]  1j3507-12,  and  ^353L(! 

3739  Art.  40.    Sections  of  the  Revised  Statutes  applicable.  -The  pro 
visions  of  the  internal-revenue  laws  of  the  United  States,  so  far 

as  applicable,  including  sections  3173,  3174,  3175,  and  3176  of  the  Revised 
Statutes  as  amended,  are  applicable  to  the  Revenue  Act  of  1918.    [Sec  ^4016.] 

DATE  EFFECTIVE. 

3740  Art.  41.  Date  effective.— (a)  Issues,  sales,  or  transfers  on  or  after 
3500     December  I,  1917,  and  prior  to  April  1,  1919,  are  subject  to  tax  under 

the  Revenue  Act  of  1917. 
3740a  (b)  Issues,  sales,  or  transfers  on  or  after  April  1,  1919,  and  prior  to 
January  1,  1922,  are  subject  to  tax  under  the  Revenue  Act  of  1918. 

3741  (c)  Issues,  sales,  or  transfers  on  or  after  January  P,  1922,  are  sub- 
ject to  tax  kinder  the  Revenue  Act  of  1921. 

REDEMPTION  OF  OR  ALLOWANCE  FOR  STAMPS. 

3741  a  Art.  42.  Stamps  rendered  useless,  affixed  in  error,  or  for  which  the 
owner  has  no  use.— Where  documentary  stamps  are  rendered  useless 
by  gumming  or  sticking  together  in  transit  or  otherwise  without  fault  of  the 
purchaser,  they  may  be  exchanged  by  a  collector  for  other  stamps  of  exactly 
the  same  quantity  and  denomination.  Amounts  paid  for  stamps  used  in 
excess,  or  on  instruments  not  actually  effective  and  for  which  a  substitute  is 
prepared  and  stamped,  or  on  instruments  not  subject  to  tax  or  for  which  the 
owner  has  no  use,  may  be  refunded,  upon  claim  properly  presented  to  the 
collector. 

3741b  Art.  43.  Claims. — All  claims  for  the  redemption  of  or  allowance  for 
stamps  must  be  presented  within  two  years  after  the  purchase  of 
said  stamps  from  the  Government.  The  provisions  of  sections  3220  to  3228 
Revised  Statutes  do  not  apply  to  the  redemption  of  or  allowance  for  internal 
revenue  stamps,  and  the  authority  for  such  redemption  or  allowance  is  the 
act  of  May  12,  1900  (3 1  Stats.  177),  as  amended  by  the  act  of  June  30,  1902 
(32  Stats.  506),  set  forth  below  [i.  e.,  as  set  forth  beginning  at  *T8Q24l . 

REFUNDS. 

[ft8023,  ^8056-8058.] 

3741  c  Art.  44.  Refunds. — Where  taxes  are  paid  pursuant  to  an  assessment 
and  not  by  the  affixing  of  stamps,  claims  for  the  refund  of  amounts 
so  paid  are  governed  by  Sections  3220-3228  R.  S.  [beginning  at  ^[8023  herein], 
as  amended,  and  must  be  presented  within  four  years  next  after  payment  of 
such  taxes,  as  provided  in  Section  1316  of  the  Revenue  Act  of  1921  fr  8056|. 


Cop-yri#ht  by  The  Corf-oration  Trust  Company. 

*r£$  tax      i$$  titivitt 


7-8-22.  Ht-R.  40.     1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 

AUTHORITY  FOR  REGULATIONS. 

3742    Art.  45,   Promulgation  of  regulations.— In  pursuance  of  the  statut* 
the  foregoing  regulations  are  hereby  made  and  promulgated  and  a!! 
rulings  inconsistent  therewith  are  hereby  revoked 

C.  P.  Smith, 
Acting  Commissioner  of  Internal  Revenue. 
Approved  July  8,  1922.    [Released  for  publication  July  20,  1922,1 

A,  W.  Mellon,  Secretary  of  the  Treasury. 


Copyright  1922.  by  Tkq  C«r/va**o."  Trust  Comp*m$, 
WA1  TA*         7$%  ttftTOCl 


6-12-22. 


Reg.  55. — 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


REGULATIONS  No.  55—1922  EDITION. 
(Promulgated  June  12, 1922.) 

Fully  indexed  on  the  blue  pages  at  the  end  of  this  "Stamp  Taxes"  division . 

STAMP  TAXES  ON  DOCUMENTS. 

(Except  on  issue,  sales  and  transfers  of  certificates  of  stock  and  sales  of 
products  for  future  delivery  [for  which  see  page  709]  ) 

Imposed  by 

Title  XI  of  the  Revenue  Act  of  1921. 

REGULATIONS— STAMP  TAXES. 

3743  Title  XI,  Revenue  Act  of  1921,  imposing  stamp  taxes  is  effective 
3500     on  and  after  January  1,  1922.    See  section  1100  [1j3500]. 

BONDS,  DEBENTURES,  AND  CERTIFICATES  OF  INDEBTEDNESS. 

3744  Article  1.  Delivery  essential  to  issue. — Delivery  is  essential  to 
3520     constitute  an  issue  of  bonds. 

3745  Art.  2.    "Fcregoing"  defined.— The  word  "foregoing"  in  Schedule 
Al  is   held  to  apply  to  the  class  of  instruments  listed  therein,  re- 
gardless of  whether  issued  prior  to  or  after  January  1,  1922,  and  not  merely 
to  instruments  issued  on  or  after  January  1,  1922. 

3746  Art.  3.    Bonds  accompanying  real  estate  mortgages. — Bonds 
accompanying  real  estate  mortgages  are  taxable  as  bonds  of  in- 
debtedness upon  the  amount  secured. 

3747  Art.  4.   Bonds  renewed  by  agreement  extending  mortgage. — An 

agreement  extending  a  mortgage  upon  maturity,  where  a  bond  is 
secured  by  the  mortgage  and  such  agreement  operates  to  renew  the  bond, 
subjects  the  latter  to  stamp  tax  as  a  renewal. 

3748  Art.  5.    Agreement  extending  maturity  of  mortgage  bond;  ad- 
ditional bond, —  An  agreement  between  the  holder  of  a  bond  and  the 

present  owner  of  a  parcel  of  real  estate,  extending  maturity  of  a  mortgage 
bond  executed  by  a  former  owner,  operates  as  a  renewal  and  such  renewal 
is  subject  to  tax.  If  in  addition  a  new  bond  is  given  for  the  same  in- 
debtedness, it  also  is  subject  to  tax. 

3749  Art.  6.    Stamps  may  be  affixed  to  bonds  or  indenture;  bonds  to 
bear  legend. — The  necessary  revenue  stamps  may  be  affixed  either 

to  the  bonds  or  to  the  indenture  under  which  the  bonds  are  issued.  If  the 
stamps  are  affixed  to  the  indenture  the  bonds  must  bear  a  legend  showing 
that  the  proper  revenue  stamps  have  been  affixed  to  the  indenture  and  duly 
canceled.  If  the  indenture  provides  for  the  issue  of  bonds  over  a  period  of 
years,  the  necessary  stamps  may  be  affixed  at  the  time  of  each  issue. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  737  SERVICE 


6-12-22. 


Reg.  55. — 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3750  Art.  7.  Interim  certificates  and  temporary  bonds. — Interim  certifi- 
cates or  temporary  bonds  issued  in  lieu  of  definitive  bonds  are  tax- 
able, but  no  additional  tax  is  required  upon  the  issue  of  the  permanent  or 
definitive  bonds,  which,  however,  should  bear  notation  of  the  fact  that 
stamps  in  the  proper  amount  were  duly  attached  to  the  interim  certificates. 

3751  Art.  8.  Instruments  issued  in  numbers,  under  a  trust  indenture, 
are  bonds. — Instruments  containing  the  essential  features  of  a  prom- 
issory note,  but  issued  in  series,  secured  by  a  trust  indenture,  either  in  reg- 
istered form  or  with  coupons  attached,  embodying  provisions  for  acceleration 
of  maturity  in  the  event  of  any  default  by  the  obligor,  for  optional  registration 
in  the  case  of  bearer  bonds,  for  authentication  by  the  trustee,  and  in  some 
instances  for  redemption  before  maturity,  or  similar  provisions,  are  bonds 
within  the  meaning  of  the  statute,  whether  called  bonds,  debentures,  or  notes. 

3752  Art.  9.    Scrip-dividend  certificates  or  warrants. — Scrip-dividend 
certificates  or  warrants  are  taxable  as  certificates  of  indebtedness. 

3753  Art.  10.    Instrument  styled  a  bond  and  under  seal  a  bond,  unless.— 

An  instrument  which  is  styled  a  "bond"  and  which  is  under  seal 
should  be  held  subject  to  tax  as  a  bond  unless  it  is  shown  affirmatively  that 
it  is  not  a  bond. 

3754  Art.  11.    Business  property  investment  bond. — A  business  property 

investment  bond  wherein  it  is  certified  that  the  holder  thereof  is 
the  owner  of  an  interest  in  certain  specified  property,  legal  title  to  which 
has  previously  been  conveyed  to  a  trustee,  and  whereby  the  corporation 
issuing  the  same  agrees  to  manage  the  property  and  distribute  the  proceeds 
in  a  certain  manner,  is  not  subject  to  tax  as  a  bond,  debenture,  or  certificate 
of  indebtedness,  but  is  subject  to  tax  as  a  certificate  of  interest  in  property 
issued  by  a  corporation. 

3755  Art.  12.    Instrument  assigning  interest  in  bond. — An  instrum^rt 
which  merely  represents  an  assignment  of  interest  in  a  bond  accom- 
panying a  mortgage  is  not  taxable. 

3756  Art.  13.    Certificates  of  deposit;  Morris-plan  banks. — Any 

strument  which  is  actually  a  certificate  of  deposit  issued  by  a  bank 
is  exempt  from  stamp  tax,  regardless  of  whether  it  is  negotiable  or  non- 
negotiable  or  whether  it  is  payable  on  demand  or  at  some  specified  time. 
Certificates  of  deposit  issued  by  banks  or  organizations  operating  upon  the 
Morris  plan  are  not  subject  to  stamp  tax. 

©1  abnod  ; a luJiiabn!  10  abnod  o)  bsxift*  ed  ^bcq  2qaiat3    .d  .fik  .  e*TE 

3757  Art.  14.    Certificates  of  indebtedness. — (a)  The  term  '^certificates 
of  indebtedness"  includes  only  instruments  having  the  general  char- 
acter of  investment  securities  as  distinguished  from  instruments  evidencing 
debts  arising  in  ordinary  transactions  between  individuals.    [See  *4010.] 

3758  (b)  Conditional  bills  of  sale  used  in  the  sale  of  merchandise  on  the 
installment   plan   are   not   certificates   of   indebtedness  within  the 

meaning  of  Schedule  Al  and  are  not  subject  to  stamp  tax  unless  containing 
an  obligation  in  the  form  of  a  promissory  note. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  738  SERVICE 


6-12-22. 


Reg.  55. — 1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


3759  Art.  15.    Certificates  of  indebtedness  issued  by  receivers, — A 

certificate  of  indebtedness  issued  under  order  of  a  Federal  court  by 
a  receiver  is  subject  to  tax. 

3760  Art.  16.    Bonds  of  indebtedness  executed  and  delivered  as  security. 

— The  tax  applies  to  bonds  of  indebtedness  executed  by  the  obligor 
and  delivered  to  a  bank  or  trust  company  as  security  for  the  payment  of  an 
obligation. 

3761  Art.  17.    Bonds  executed  in  Canada  and  delivered  in  the  United 
States. — Bonds  executed  in  Canada  by  a  Canadian  corporation, 

certified  to  by  a  trustee  in  the  United  States,  given  for  part  of  the  purchase 
price  of  timber  located  in  Canada,  and  delivered  in  the  United  States  arc 
subject  to  tax. 

3762  Art.  18.    Bonds  issued  in  satisfaction  of  insurance  policies. — Bonds 
issued  by  life  insurance  companies  in  satisfaction  of  insurance 

policies  are  subject  to  tax. 

3763  Art.  19.    Bonds  issued  by  school  districts. — Bonds  issued  by  school 
districts  for  school  purposes  are  exempt  from  tax. 

3764  to  3779  Blank.    [No  tax  on  indemnity  and  surety  bonds  under  the 

Revenue  Act  of  1921.] 


Copyright  1922,  by.  The  Corporation  Trust  Company. 
WAR  TAX  739  SERVICE 


6-12-22. 


Reg.  55.— 1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


CAPITAL  STOCK,  ISSUE. 

3780  Schedule  A  2.    CSee  Regulations  No.  40,  1922  Edition,  covering 
this  subject  [113547 — Complete  table  of  contents,  page  709].*) 

SALES  AND  TRANSFERS  OF  CERTIFICATES  OF  STOCK. 

3781  Schedule  A  3.    (See  Regulations  No.  40,  1922  Edition,  covering 
this  subject  [^[3590 — Complete  table  of  contents,  page  709].*) 

SALES  OF  PRODUCTS  FOR  FUTURE  DELIVERY. 

3782  Schedule  A  4.    (See  Regulations  No.  40,  1922  Edition,  covering 
this  subject  [^3647 — Complete  table  of  contents,  page  709].*) 

*Pending  the  release  of  Reg.  40,  1922  Edition,  the  reference  is  to  the  regulations  under 
the  1918  Act.— C.  T.  Co.,  June  12,  1922. 

DRAFTS,  CHECKS,  AND  PROMISSORY  NOTES. 

3783  Art.  20.    Drafts  and  checks  payable  otherwise  than  at  sight  or  on 
3534     demand. — Drafts  and  checks  payable  otherwise  than  at  sight  or  on 

demand  become  subject  to  stamp  tax  if  delivered  or  accepted 
within  the  United  States.   [See  1J4004  and  1(4009.] 

3784  Art.2 1 .    Time  draft  or  check  taxable  on  acceptance  or  delivery. — A 

time  draft  or  check  becomes  subject  to  tax  concurrently  with  its 
acceptance  or  delivery,  whichever  is  prior,  within  the  territorial  juris- 
diction of  the  United  States,  which  includes  the  States,  District  of  Columbia, 
Hawaii,  and  Alaska.  Time  drafts  drawn  and  delivered  outside  of  the 
United  States  are  subject  to  the  tax  upon  their  acceptance  within  the 
United  States. 

3785  Art.  22.    Drawee,  payee,  or  indorsee  to  see  that  tax  is  paid. — Thr 

drawee,  payee,  or  indorsee  should  see  that  the  tax  is  paid  before  or  a: 

the  time  of  acceptance  or  delivery.  The  question  of  who  shall  pay  the  tax 
is  a  matter  for  adjustment  between  the  parties. 

3786  Art.  23.    Draft  drawn  abroad  on  foreign  drawee  with  foreign  payee. 

— If  a  draft  drawn  abroad  on  a  foreign  drawee  with  a  foreign  payee 
passes  through  a  bank  here  in  the  course  of  collection,  no  tax  is  payable 
unless  it  should  be  delivered  by  an  agent  of  the  drawer  to  an  agent  of  the 
payee  within  the  United  States. 

3787  Art.  24.    Liability  to  tax  determined  by  form  or  face  of  check  or 
draft. — The  liability  of  drafts  or  checks  to  stamp  tax  as  well  as  the 

amount  of  such  tax  is  determined  by  their  form  and  face  and  can  not  be 
affected  by  proof  of  facts  or  instructions  outside  of  the  drafts  or  checks.  A 
draft  expressed  to  be  payable  at  sight  on  "arrival  of  car,"  or  embodying  a 
memorandum  tc  hold  until  arrival  of  car,  is  taxable.  A  sight  draft  ac- 
companied by  instructions  outside  the  instrument  deferring  time  of  pay- 
ment is  not  taxable. 

3788  Art.  25.    Draft  accepted  for  payment  at  future  date. — A  draft 
stating  no  time  for  payment  which  is  accepted  for  payment  at  a 

certain  future  date  is  taxable  upon  such  acceptance  as  a  time  draft. 

3789  Art.  26.    Trade  acceptances. — So-called  "trade  acceptances''  .un- 
taxable in  the  same  manner  as  ordinary  time  drafts.   [See  *|4005.] 

Copyright  1922,  by  The  Corporation  Trust  Comf  nny. 
WAR  TAX  740  SERVICE 


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STAMP  TAX  REGULATIONS. — 1922. 


3790  Art.  27.  Drafts  against  actual  shipment. — Drafts  directly  against 
an  actual  shipment  are  taxable  in  the  same  manner  as  other  domestic 

time  drafts. 

3791  Art.  28.  Time  draft  covering  exports  to  foreign  country.— A  time 
draft  directly  covering  exports  to  a  foreign  country  and  which  con- 
stitutes an  inherent,  necessary,  and  bona  fide  part  of  the  actual  process  of 
exportation  is  exempt  from  stamp  tax.  This  exemption  does  not  depend 
on  whether  or  not  the  time  which  the  draft  has  to  run  will  expire  before  or 
after  the  ocean  shipment.  Time  drafts  drawn  against  the  proceeds  of  the 
foregoing  draft  are  subject  to  stamp  tax.    [See  ^[4005  and  ^j4009.] 

3792  Taxable  and  nontaxable  drafts  directly  and  indirectly  involved 
with  exports. — Further  reference  is  made  to  your  letter  of  August  24, 
1920,  wherein  you  request,  for  the  information  of  the  Equitable 

Trust  Company  of  New  York,  a  ruling  as  to  the  application  of  stamp  tax 
upon  transactions  connected  with  the  exportation  of  merchandise  in  foreign 
commerce.    [See  1(4005.] 

3793  The  transactions  mentioned  by  you  are  as  follows: 

"Q}?  The.  exporter  draws  a  time  draft  upon  the  buyer  abroad  for 
the  sale  price  of  the  merchandise  and  presents  this  draft,  accompanied  by 
the  shipping  documents,  to  his  bank  for  discount.  It  is  clear  that  such 
a  draft  is  not  subject  to  the  stamp  tax  and  it  has  been  so  ruled  by  the 
Internal  Revenue  Department. 

3794  "(2).  It  sometimes  happens  that  the  exporter  is  unable  to  negotiate 
a  draft  drawn  by  him  in  the  manner  above  set  forth  so  that  he  may 

receive  the  full  value  for  the  same,  but  he  may  be  able  to  obtain  a  loan 
or  advance  in  some  form  from  his  bank,  which  will  take  the  draft  in 
question  for  collection.  In  such  case  the  exporter  may  give  a  note  to  the 
bank  secured  by  the  draft;  or,  instead  of  borrowing  money  from  the 
bank  and  giving  his  note  therefor,  the  exporter  may  draw  a  second  draft 
payable  at  a  future  date  upon  his  bank,  payment  for  which  second  draft 
is  to  be  liquidated  by  the  payment  of  the  draft  drawn  upon  the  foreign 
buyer.  The  question  is  whether  the  note  or  draft  given  to  or  drawn  upon 
the  bank  in  the  foregoing  circumstances  is  subject  to  stamp  tax. 

3795  In  the  event  that  the  note  or  draft  given  to  or  drawn  upon  the 
bank,  as  stated  in  paragraph  (2),  is  not  subject  to  stamp  tax,  the 

question  is  whether  any  renewal  of  such  note  or  drafts  given  because  of 
the  fact  that  the  original  draft  drawn  upon  the  foreign  buyer  has  not 
been  collected  during  the  period  of  the  original  financing  is  subject  to 
stamp  tax. 

3796  "(4).  Methods  of  financing  similar  to  those  outlined  in  paragraph 
(2)  are  used  in  connection  with  exportations  of  merchandise  where 

the  original  documents  forwarded  abroad  are  not  accompanied  by  drafts 
upon  the  buyers  but  are  either  forwarded  against  sales  previously  made 
or  on  consignment,  to  be  sold  either  on  arrival  or  perhaps  to  await  better 
market  conditions.  The  exporter  either  borrows  money  from  his -bank 
and  gives  his  note  or  draws  his  draft  upon  his  bank  payable  at  a  future 
date,  with  the  understanding  that  the  proceeds  of  the  sale  of  the  mer- 
chandise are  paid  in  to  the  collecting  bank  abroad  for  the  account  of  the 
bank  making  the  loan  or  discounting  the  draft  of  the  exporter  in  the 
United  States;  such  proceeds  from  time  to  time  to  be  used  in  liquidating 
such  loan  or  advance.  The  question  is  whether  the  note  or  draft  given 
in  connection  with  such  a  transaction  would  be  subject  to  stamp  tax. 

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STAMP  TAX  REGULATIONS. — 1922. 


3797  "(5).  The  same  question  as  outlined  in  paragraph  (3)  arises  in 
connection  with  renewals  of  the  note  or  draft  given  in  connection 

with  the  transaction  referred  to  in  paragraph  (4)." 

3798  In  reply  your  attention  is  called  to  Article  [28,^1379 1]  of  Regulation? 
55,  a  copy  of  which  is  inclosed.    The  exemption  extended  by  that 

article  applies  only  to  time  drafts  directly  covering  exports  to  a  foreign 
country  and  which  constitute  an  inherent,  necessary  and  bona  fide  part  of 
the  actual  process  of  exportation.  This  exemption  does  not  apply  to  time 
drafts  drawn  against  the  proceeds  of  other  drafts  which  are  exempted  or 
upon  time  drafts  made  against  sales  previously  made  or  on  consignments, 
to  be  sold  either  on  arrival  or  perhaps  to  await  better  market  conditions. 

3799  The  typical  draft  which  is  exempt  from  the  tax  as  a  part  of  the  process 
of  exportation  is  the  one  attached  to  the  bill  of  lading  and  drawn 

upon  the  foreign  buyer,  which  may  be  discounted  and  negotiated  in  this 
country.  The  exemption  from  tax  has  been  held  to  extend  to  equivalent 
drafts  drawn  upon  funds  or  agencies  established  in  this  count! y  by  foreign 
governments  or  buyers  to  facilitate  exchange.  Exemption  does  not  extend 
to  drafts  which  represent  the  preliminary  or  subsequent  adjustment  or  use 
of  accounts  or  funds  involved  in  exportation 

3800  It  is,  therefore,  held  by  this  office  that  the  draft  covered  by  paragraph 
(1)  of  your  inquiry  is  not  subject  to  stamp  tax. 

3801  However,  the  drafts  and  notes,  and  this  includes  renewals,  covered 
by  the  remaining  paragraphs  of  your  letter,  cited  above,  do  not 

directly  cover  exports  to  a  foreign  country  and  do  not  constitute  an  inherent, 
necessary  and  bona-fide  part  of  the  actual  process  of  exportation  and  do  not 
come  within  the  exemption  extended  by  Article  [28],  and  are,  therefore,  subject 
to  stamp  tax.  (Letter  to  Murray,  Prentice  and  Rowland,  New  York,  N.  Y.. 
signed  by  Commissioner  Wm.  IV1.  Williams,  and  dated  September  21,  1920.) 

3802  Art.  29.    Time  draft  to  secure  purchase  money. — A  time  draft 
drawn  on  a  domestic  bank  for  the  purpose  of  securing  money  to 

purchase  goods  to  be  exported  is  subject  to  tax  regardless  of  the  fact  that  a 
contract  for  the  sale  of  the  goods  existed  at  the  time  the  draft  is  drawn. 

3803  Art.  30.    Time  drafts  on  domestic  banks  covering  exports. — A  time 
draft  directly  covering  a  sale  for  export  to  a  foreign  buyer  and  drawn 

on  a  domestic  bank  as  the  authorized  acceptor  of  the  foreign  buyer  is  exempt 
from  stamp  tax.  A  time  draft  drawn  by  or  on  an  exporter  or  on  his  bank  in 
payment  for  export  shipments  made  by  the  manufacturer  on  the  exporter's 
order  is  subject  to  stamp  tax. 

3804  Art.  31 .    Time  drafts  payable  in  foreign  countries. — Time  drafts  not 
covering  exports  drawn  and  delivered  or  accepted  in  the  United 

States  and  payable  in  foreign  countries  are  taxable. 

3805  Art.  32.    Time  drafts  covering  shipments  to  Canal  Zone. — Stamp 
tax  attaches  to  time  drafts  covering  articles  shipped  from  the  United 

States,  Hawaii,  and  Alaska  to  Canal  Zone,  if  the  drafts  are  delivered  within 
the  United  States,  Hawaii,  or  Alaska. 

3806  Art.  33.    Time  drafts  covering  shipments  to  Virgin  Islands,  Philip- 
pines, and  Porto  Rico. — Stamp  tax  does  not  attach  to  time  drafts 

covering  shipments  to  the  Virgin  Islands,  Philippines,  and  Porto  Rico, 
because  of  express  legislation  exempting  shipments  to  these  dependencies. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  742  SERVICE 


6-12-22. 


Reg.  55—1922  Edition. 

STAMP  TAX  REGULATIONS . — 1 922 . 


3807  Art.  34.    Time  drafts  covering  shipments  from  Virgin  Islands, 
Philippines,  and  Porto  Rico.— Time  drafts  drawn  against  shipments 

from  the  Virgin  Islands,  the  Philippines,  and  Porto  Rico,  into  the  United 
States,  are  subject  to  stamp  tax  if  delivery  or  acceptance  of  said  drafts  first 
takes  place  within  the  United  States,  Alaska,  or  Hawaii. 

3808  Art.  35.    "Promissory  notes." — (a)  A  promissory  note  is  an  un- 
conditional promise  in  writing  made  by  one  person  to  another,  signed 

by  the  maker,  engaging  to  pay  on  demand  or  at  a  fixed  or  determinable 
future  time  a  sum  certain  in  money  to  such  other  person,  or  to  order  or  to 
bearer,  free  from  restrictions  as  to  registration  or  transfer,  and  usually  with- 
out coupons. 

3809  (b)  The  stamp  tax  on  a  promissory  note  is  measured  by  the  amount 
of  the  principal  obligation  without  regard  to  the  form  in  which  the 

obligation  to  pay  interest  is  expressed. 

3810  Art.  36.    Notes  payable  on  demand  promissory  notes. — The  term 
"promissory  notes,"  as  used  in  this  Schedule,  includes  those  payable 

on  demand. 

3811  Art.  37.    Promissory  notes  given  as  security. — Promissory  notes 
given  for  security  only  are  subject  to  tax. 

3812  Art.  38.    Renewal  of  promissory  note  taxable. — Each  renewal  of  a 
promissory  note  is  taxable.    Any  writing  or  instrument  however 

designated  which  operates  as  a  renewal  of  a  promissory  note  is  taxable. 
[See  14008.] 

3813  Art.  39.  Extension  or  renewal  of  promissory  note  by  extension  of 
mortgage  by  which  secured. — Where  a  contract  or  agreement  ex- 
tending either  a  chattel  or  real  estate  mortgage  operates  to  extend  or  renew 
a  promissory  note  secured  by  the  mortgage  the  renewal  of  such  note  is 
taxable.    [See  f*008.] 

3814  Art.  40.    Promissory  notes  given  to  Federal  land  banks  and  joint- 
stock  land  banks. — (a)  Promissory  notes  given  to  Federal  land 

banks  and  joint-stock  land  banks  when  secured  by  first  mortgages  are  exempt 
from  stamp  tax. 

3815  (b)  Promissory  notes  issued  by  Federal  land  banks  are  exempt 
from  stamp  tax. 

3816  (c)  Promissory  notes  issued  by  joint-stock  land  banks  are  subject 
to  stamp  tax. 

3817  Art.  41.    Promissory  notes  issued  by  foreign  governments.-— 

Promissory  notes  issued  directly  by  foreign  governments  and  placed 
in  this  country  for  sale  are  exempt  from  stamp  tax. 

3818  Art.  42.    Promissory  notes  secured  by  obligations  of  the  United 
3535     States. — Promissory  notes  secured  by  United  States   bonds  and 

obligations  issued  after  April  24,  1917,  of  a  par  value  of  not  less 
than  the  amount  of  such  notes  are  exempt  from  tax. 

"  m  I 

3819  Food  Administration  Grain  Corporation  Notes.— Promissory  notes 
issued  by  Food  Administration  Grain  Corporation   are  subject  to 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  743  SERVICE 


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STAMP  TAX  REGULATIONS.— 1922. 


stamp  tax.  (Telegram  to  The  Corporation  Trust  Company,  signed  by 
Commissioner  Daniel  C.  Roper,  and  dated  April  10,  1919.) 

3820  Art.  43.    Promissory  notes  secured  by  certificates  of  indebtedness 
issued  by  Director  General  of  Railroads  or  by  bonds  of  the  War 

Finance  Corporation. — Promissory  notes  secured  by  certificates  of  indebted- 
ness issued  by  the  Director  General  of  Railroads  are  exempt  from  stamp  tax. 
Promissory  notes  secured  by  bonds  of  the  War  Finance  Corporation  are 
subject  to  tax. 

382 1  Art.  44.    Suspension  of  payment  or  forbearance. — Mere  suspension 
of  payment  or  forbearance  is  not  taxable. 

3822  Art.   45.    Coupons  and  interest   notes. — (a)   Coupons  attached 
to  bonds,  debentures,  or  certificates  of  indebtedness  issued  by  any 

individual,  partnership,  or  corporation,  or  to  instruments,  however  termed, 
issued  by  a  corporation  and  known  generally  as  corporate  securities  (all  of 
which  are  subject  to  tax  as  bonds  of  indebtedness  under  Schedule  A  1), 
are  not  subject  to  tax  if  they  impose  no  obligation  not  imposed  by  the 
principal  instrument. 

3823  (b)  Interest  coupons  attached  to  promissory  notes  taxable  under 
Schedule  A  5,  as  distinguished  from  the  securities  enumerated  in 

paragraph  (a),  if  they  are  themselves  promissory  notes,  separable  from  the 
principal  obligation  and  negotiable  independently  of  it,  are  subject  to  tax, 
■even  though  they  impose  no  obligation  not  imposed  by  the  principal  in- 
strument. 

3824  Art.  46.    Payment  of  interest  on  demand  note  not  a  renewal.— 
The  mere  payment  of  interest  on  a  demand  note  without  any  agree- 
ment in  writing  extending  the  note,  is  not  a  renewal  within  the  meaning  of 
this  act. 

3825  Art.  47.    Payment  of  interest  in  advance  after  maturity  of  promis- 
sory note  a  renewal. — Where  after   maturity  of    a  promissory 

note,  interest  is  paid  in  advance,  and  as  evidence  of  such  payment  an  indorse- 
ment in  substance  as  follows:  "19 — .    Received  six  months'  interest  to  , 

19_^  $  "  is  made  on  the  note,  the  indorsement  operates  as  a  renewal, 

and  the  renewal  is  subject  to  tax. 

**?e    Art  *8     Policy  loan  and  premium  extension  agreements.— Policy 
loaned  premium  extension  agreements  which  contain  an  nu- 
llified oromise  to  pay  a  specified  sum  of  money  at  a  certain  date  are 
?ub&  as  promissory  notes.   Where  the  sole.remedy  of  payee 

in  case  of  nonpayment  of  the  premiums  or  loans  is  to  reduce  or  cancel  the 
rights  of  the  insured,  tax  does  not  accrue. 

3827  Art.  49.    Certificates  of  deposit. — A  certificate  of  deposit  is  not 
subject  to  tax  as  a  promissory  note. 

3828  A-t  51     Post-dated  checks.— Post-dated  checks  are  not  subject  to 
tax*  unless  expressly  payable  after  their  date. 

aa>9    Art   54,    Promissory  note  executed  and  mailed  in  Canada.-A 

promissory  note  executed  and  mailed  in  Canada  to  a  payee  within 
the  United  States  is  not  subject  to  tax. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  744  SERVICE 


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STAMP  TAX  REGULATIONS. — 1922. 


3830  Art.  52.    Promissory  note  executed  and  mailed  to  payee  in  Canada. 
— A  promissory  note  executed  and  mailed  in  the  United  States  to  a 

payee  in  Canada  is  subject  to  tax. 

DEEDS  OF  CONVEYANCE. 

383 1  Art.  53.  Who  shall  affix  stamps. — The  law  requires  that  the  person 
3536     who  makes,  signs,  or  issues  any  instrument  taxable  thereunder  shall 

affix  and  cancel  the  revenue  stamps.  it  also  prohibits  any  person 
from  accepting  such  instruments  unless  they  are  properly  stamped.  The 
grantee  in  a  deed  is  liable  for  the  tax  as  we'll  as  the  grantor. 

3832  Art.  54.  Actual  value  at  time  of  conveyance  the  measure  of  the 
tax. — Where  the  consideration  for  a  conveyance  of  lands,  tene- 
ments, or  other  real  property,  is  left  open,  to  be  fixed  by  future  contingencies, 
the  actual  value  at  the  time  of  conveyance  is  the  measure  of  the  tax  upon 
the  deed,  instrument,  or  writing  whereby  the  conveyance  is  made. 

3833  Art.  55.    Tax,  how  computed. — In  calculating  the  amount  of 
stamps  which  must  be  affixed  to  a  deed  of  conveyance,  the  tax  is 

computed  upon  the  full  consideration  for  the  transfer  less  all  encumbrances 
which  rest  on  the  property  before  the  sale  and  which  are  not  removed  by  the 
sale.  Encumbrances  placed  on  the  property  in  connection  with  and  as  a 
result  of  the  sale  or  transfer,  as  well  as  notes  for  deferred  payments,  can  not 
be  deducted  in  determining  the  amount  upon  which  tax  is  calculated, 

3834  Art.  56.  Tax  on  deed  executed  by  sheriff,  referee,  or  commissioner, 
how  computed.. — The  stamp  tax  on  a  deed  of  real  property  executed 

by  a  sheriff,  referee,  or  commissioner  to  mortgagee,  who  bids  in  the  property 
at  foreclosure  sale  to  satisfy  a  mortgage  lien,  should  be  computed  upon  the 
amount  bid  for  the  property  plus  the  cost,  if  paid  by  the  purchaser. 

3835  Art.  57.    "Sold"  defined. — The  term  "sold"  imports  the  transfer  of 
the  absolute  or  general  title  for  a  valuable  consideration  or  price. 

383 Q    Art.  58.    Deeds  executed  and  delivered  on  or  after  Jan.  1,  1922. — 

Deeds  executed  and  delivered  on  or  after  January  1,  1922,  conveying 
property  in  pursuance  of  a  contract  made  prior  to  that  time  are  taxable. 
The  same  rule  applies  to  similar  deeds  delivered  prior  to  January  1,  1922,  and 
taxable  under  the  act  of  1918  approved  February  24,  1919. 

3837  Art.  59.    Deed  dated  prior  to  Jan.  1,  1922,  but  acknowledged  and 
delivered  after  that  date. — A  deed  dated  prior  to  January  1,  1922,  but 

delivered  subsequent  to  that  date,  is  taxable  under  the  Revenue  Act  of  1921. 
If  delivered  between  December  1,  1917,  and  April  1,  1919,  it  is  taxable  under 
the  act  of  October  3,  1917.  If  delivered  subsequent  to  April  1,  1919,  and 
prior  to  January  1,  1922,  it  is  taxable  under  the  act  of  1918,  approved  Feb- 
ruary 24,  1919. 

3838  Art.  60.    Deeds  in  escrow. — Deeds  in  escrow  become  subject  to 
stamp  tax  upon  delivery  to  the  grantee.    If  delivered  between 

December  1,  1917,  and  April  1,  1919,  they  are  taxable  under  the  act  of 
October  3,  1917;  if  delivered  on  or  after  April  1,  1919,  they  are  taxab!e  under 
the  act  of  February  24,  1919;  if  delivered  on  or  after  January  1,  1922,  they 
are  taxable  under  the  Act  of  1921. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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STAMP  TAX  REGULATIONS. — 1922. 


3839  Art.  61.    Deeds  conveying  property  sold  under  foreclosure  or 
execution;  tax,  how  paid. — Deeds  executed  by  masters  in  chancery, 

sheriffs,  clerks  of  courts,  etc.,  to  cover  transfers  of  property  sold  under  a 
foreclosure  or  execution  are  subject  to  tax.  The  grantee  or  vendee  may  be 
required  to  pay  the  tax  or  the  cost  of  revenue  stamps  may  be  included  in 
the  expenses  of  foreclosure  sale. 

3840  Art.  62.    Deeds  on  exchange  of  properties. — In  the  case  of  an 
exchange  of  two  properties,  the  deeds  transferring  title  to  each  are 

subject  to  tax,  which  should  in  each  case  be  computed  on  the  basis  of  the 
actual  value  of  the  interest  or  property  conveyed,  the  amount  of  any  pre- 
existing lien  or  encumbrance  which  is  not  removed  by  the  sale  being  de- 
ductible. 

3841  Art.  63.    What  constitutes  real  property  determinable  by  law  of 
State  where  located. — (a)  What  constitutes   "lands,  tenement?, 

or  other  realty"  is  determinable  by  the  lav/  of  the  State  in  which  the  property 
is  situated.  Standing  timber  is  ordinarily  held  to  be  real  estate,  and  where 
so  held  the  deed  transferring  it  is  subject  to  the  tax. 

3842  (b)  In  States  where  common-law  dower  still  exists  an  instrument 
purporting  to  convey  the  inchoate  right  of  dower  of  a  wife  or  the  con- 
summate right  of  dower  of  a  widow,  prior  to  assignment  of  dower,  is  not 
subject  to  stamp  tax;  but  an  instrument  conveying  the  estate  acquired  by  a 
widow  upon  assignment  of  dower  is  subject  to  tax.  Where  by  statute  dower 
has  been  abolished  and  a  different  interest  in  the  husband's  real  property 
conferred  upon  the  wife  in  lieu  thereof,  the  taxability  of  an  instrument  pur- 
porting to  convey  such  an  interest  prior  to  its  assignment  will  be  determined 
by  the  nature  of  the  wife's  interest,  and  the  statutes  and  decisions  of  the  par- 
ticular State  in  which  the  real  estate  is  located  must  be  consulted. 

3843  Art.  64.    Deeds  conveying  mines. — Deeds  conveying  mines  are 
taxable. 

3844  Art.  65.  Conveyance  of  property  subject  to  equity  of  redemption.— 

A  conveyance  of  property  subject  to  an  equity  of  redemption  is 
taxable  when  made,  not  when  the  time  for  the  equity  of  redemption  ha§ 
expired. 

3845  Art.  66.    Conveyance  of  land  in  consideration  of  maintenance. — A 

conveyance  of  land  in  consideration  of  life  maintenance  is  taxable, 
the  tax  to  be  measured  by  the  value  of  the  property  or  interest  conveyed. 

3846  Art.  67.  Deeds  of  building  and  loan  associations. — Deeds  of  build- 
ing and  loan  associations  conveying  realty  are  taxable. 

3847  Art.  68.    Stock  in  corporation  a  valuable  consideration. — Stock  in  a 
corporation  is  a  valuable  consideration  for  the  transfer  of  real  prop- 
erty. 

3848  Art.  69.    Quit-claim  deeds. — A  quit-claim  deed  given  for  no  con- 
sideration, or  merely  the  nominal  consideration  of  $\ ,  foi  the  purpose 

of  correcting  a  flaw  in  title  is  not  subject  to  tax. 

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STAMP  TAX  REGULATIONS.  —1922. 


3849  Art.  70.  Options  and  contracts  for  real  estate. — No  tax  is  imposed 
upon  an  option  for  the  purchase  of  real  property  or  upon  a  contract 

for  the  sale  of  real  estate. 

38 50  Art.  71.  Deeds  of  release  and  deeds  of  trust. — Deeds  of  release 
and  deeds  of  trust  are  exempt  from  tax  under  the  provisions  of  this 

law. 

3851  Art.  72.  Deeds  by  State,  county,  or  municipal  officers. — Deeds 
executed  by  State,  county,  or  municipal  officers  conveying  realty 

sold  for  nonpayment  of  taxes  are  not  subject  to  stamp  tax. 

3852  Art.  73.  Deeds  to  a  State. — Deeds  conveying  to  a  State  real  estate 
purchased  by  it  are  not  subject  to  tax. 

3853  Art.  74.  Deeds  to  burial  sites. — Deeds  to  burial  sites  which  do  noc 
convey  title  to  land,  but  only  a  right  to  sepulture,  to  erect  monu- 
ments, etc.,  are  not  subject  to  stamp  tax. 

3854  Art.  75.  Deed  to  cover  gift. — A  deed  issued  to  cover  a  pure  and 
bona  fide  gift  of  property  from  husband  to  wife,  or  from  parent  to 

child,  or  from  an  individual  to  a  municipality  or  other  political  subdivision, 
or  to  the  United  States,  wherein  the  consideration  named  is  "natural  love 
and  affection  and  $1,"  "desire  to  promote  public  welfare  and  $1,"  or  "$1 
and  other  valuable  considerations"  is  not  taxable. 

3855  Art.  76.  Deed  to  trustee  for  benefit  of  creditor. — A  deed  executed 
by  a  debtor  covering  an  assignment  of  property  to  a  trustee  to  be 

held  for  the  benefit  of  a  creditor  is  not  subject  to  tax.  When,  however,  the 
trustee  sells  or  conveys  such  property  either  to  the  creditor  or  any  other 
person,  the  deed  executed  by  him  is  taxable. 

3856  Art.  77.  Deed  to  building  and  loan  association. — A  deed  transfer- 
ring title  to  property  to  a  building  and  loan  association  for  the  pur- 
pose of  securing  a  loan  on  the  property  so  conveyed,  which  property  is 
immediately  reconveyed  to  its  owner,  is  not  subject  to  tax,  the  deed  of  re- 
conveyance being  likewise  exempt. 

3857  Art.  78.  Deed  by  husband  and  wife  to  "straw  man." — A  deed  given 
by  a  husband  and  wife  to  a  "straw  man"  who  immediately  executes 

a  deed  reconveying  the  property  to  the  wife  is  not  subject  to  tax  if  given  for 
no  valuable  consideration,  or  merely  the  nominal  consideration  of  $1,  and, 
likewise,  the  deed  of  reconveyance  is  exempt. 

3858  Art.  79.  Deeds  from  agent  to  principal. — Deeds  from  an  agent  to  his 
principal  conveying  real  estate  purchased  for  and  with  funds  of  the 

principal  are  not  taxable. 

3859  Art.  80.    Reconveyances  of  partnership  property  by  receivers. — 

Conveyances  of  property  of  a  copartnership,  in  the  hands  of  re- 
ceivers, back  to  the  owners  after  administration  of  the  estate  are  not  taxable. 

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3860    Art.  81.    Partition  deeds. — Partition  deeds  are  not  subject  to  tax 

unless  a  consideration  passes  between  the  parties  by  reason  of  one  or 
more  of  them  taking  under  the  division  a  share  of  real  estate  of  greater 
value  than  his  undivided  interest,  in  which  event  stamp  tax  attaches  to  the 
deeds  conveying  such  greater  shares,  calculated  upon  the  value  of  such 

consideration. 

38GT    Art.  82.    Conveyances  without  consideration. — Conveyances  of 
realty,  not  in  connection  with  a  sale,  to  trustees  or  other  persons 
without  consideration  are  not  taxable 

3862  Art.  83.    Conveyances  of  real  estate  in  foreign  country. — A  deed 
conveying  real  estate  in  a  foreign  country  is  not  subject  to  tax. 

3863  Art.  84.   Deeds  confirming  title. — Deeds  that  are  simply  confirm- 
atory and  do  not  vest  title  not  already  vested  are  exempt  from  tax. 

3164    Art.  85.  Contracts  for  sale  of  real  property. — Contracts  for  the  sale 
of  real  property  are  not  taxable  unless  they  vest  title. 

3865  Art.  86.    Abstracts  of  title. — Abstracts  of  title  are  not  taxable. 

3866  Art.  87.  Leases  of  real  property. — Leases  of  real  property  are  not 
subject  to  the  tax. 

3867  Art.  88.    Conveyance  by  coowners  in  consideration  of  capital 
stock. — A  conveyance  of  real  estate  by  coowners  to  a  corporation 

organized  for  convenience  in  handling  the  property,  made  in  consideration 
of  the  issue  to  them  of  the  corporation's  capital  stock,  is  subject  to  tax. 

38S8    Art.  89.   Deeds  by  executor. — Deeds  by  an  executor  to  devisees, 

conveying  specific  parcels  of  real  estate,  devised  to  them  in  com- 
mon, are  not  subject  to  tax  unless  a  consideration  passes  between  the  devisees 
by  reason  of  some  of  them  taking  a  greater  share  in  the  real  estate  than  that 
to  which  entitled  under  the  will,  in  which  event  tax  attaches  to  the  deeds 
conveying  such  greater  shares,  and  is  calculated  upon  the  amount  of  value 
of  such  consideration. 

3869  Art.  90.    Conveyance  by  corporation  to  owner  of  all  the  capital 
stock. — A  conveyance  of  real  estate  by  a  corporation  without  valu- 
able consideration  to  an  owner  of  all  its  capital  stock  in  consequence  of  ite 
dissolution  is  not  subject  to  tax. 

3870  Art.  91.   Conveyance  by  mortgagor  to  mortgagee. — A  conveyance 
by  defaulting  mortgagor  to  mortgagee  in  consideration  of  the  can- 
cellation of  mortgage  debt  is  subject  to  tax  calculated  on  the  amount  of 
the  mortgage  debt  plus  unpaid  accrued  interest. 

3871  Art.  92.    Conveyances  to  trustee,  or  from  trustee  to  cestui  qui 
trust,  without  consideration. — Conveyances  to  a  trustee  without 

valuable  consideration  or  from  a  trustee  to  a  cestui  qui  trust  without  valu- 
able consideration  are  not  subject  to  tax. 

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3872  Art.  93.    Conveyance  to  United  States. — A  conveyance  of  reai 
estate  sold  to  the  United  States  Government  is  subject  to  tax. 

3873  Art.  94.    Deed  from  one  corporation  to  another  owning  capital 
stock  of  former  in  consideration  of  payment  of  debts. — A  deed  from 

a  corporation,  the  entire  capital  stock  of  which  is  owned  by  another  cor- 
poration, conveying  real  estate  to  the  latter  in  consideration  of  the  payment 
by  the  grantee  of  all  obligations  of  the  grantor  is  subject  to  tax. 

[Conveyance  incident  to  the  reorganization  of  a  corporation  under  the 
laws  of  another  state,  without  mere.— Read  at  1(3567.] 

3874  Art.  95.   Judgment  or  decree  of  State  court  transferring  title  to 
real  estate. — Judgment  or  decree  of  a  State  court  operating  to 

transfer  title  to  real  estate  is  not  taxable  as  a  conveyance. 

3875  Art.  96.    Taxes  and  assessments,  when  deductible. — Taxes  and 
assessments  which  have  become  a  lien  on  real  estate  by  operation  of 

statute  and  which  are  not  paid  at  time  of  sale  are  deductible  from  the  con- 
sideration in  computing  the  stamp  tax. 

3876  Art.  97.   Conveyance  by  corporation  to  an  officer  through  third 
party. — Where  an  officer  of  a  corporation  purchases  reai  estate  from 

the  corporation,  conveyance  being  first  made  to  a  third  party  and  as  part 
of  the  same  transaction,  the  property  is  conveyed  by  the  third  party  to  the 
officer,  the  conveyance  to  the  third  party  is  subject  to  tax,  while  the  con- 
veyance from  the  third  party  is  not  subject  to  tax, 

3877  Validity  of  unstamped  instruments  and  admission  as  evidence :  Deeds 
in  particular. — As  to  the  absence  of  revenue  stamps,  it  is  true  that 

the  deeds  showing  title  in  some  of  the  plaintiffs — they  were  produced  in 
evidence  over  the  defendant's  objection — were  without  the  stamps  required 
by  the  act  of  October  22,  1914,  c.  331,  §22,  Schedule  A,  38  Stat.  762.  But 
this  neither  invalidated  the  deeds  nor  made  them  inadmissible  as  evidence. 
The  relevant  provisions  of  that  act,  while  otherwise  following  the  language 
of  earlier  acts,  do  not  contain  the  words  of  those  acts  which  made  such  an 
instrument  invalid  and  inadmissible  as  evidence  while  not  properly  stamped. 
Those  words  were  carefully  omitted,  as  will  be  seen  by  contrasting  §§6,  11, 
12  and  13  of  the  act  of  1914  with  §§7,  13,  14  and  15  of  the  act  of  1898,  c.  448, 
30  Stat.  454.  From  this  and  a  comparison  of  the  acts  in  other  particulars  it 
is  apparent  that  Congress  in  the  later  act  departed  from  its  prior  practice 
of  making  such  instruments  invalid  or  inadmissible  as  evidence  while  re- 
maining unstamped  and  elected  to  rely  upon  other  means  of  enforcing  this 
stamp  provision,  such  as  the  imposition  of  money  penalties,  fines  and  im- 
prisonment. The  decisions  upon  which  the  defendant  relies  arose  under 
the  earlier  ads  and  were  based  upon  the  presence  in  them  of  what  studiously 
was  omitted  from  the  later  one.  (From  Cole  et  al.,  vs.  Ralph,  252  U  S.  286.) 


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CUSTOMHOUSE  ENTRIES  FOR  CONSUMPTION 

OR  WAREHOUSING. 

3878  Art.  98.   Customhouse  entries  by  United  States  officials  and  rep- 

3537  resentatives  of  foreign  countries. — Customhouse  entries  made  by 
United  States  officials  traveling  as  such  on  Government  funds  are 

net  taxable.  Likewise  entries  made  by  all  representatives  of  foreign  coun- 
tries in  their  official  capacity  are  by  comity  exempt. 

WITHDRAWAL  ENTRIES  FROM  CUSTOMS  BONDED 
WAREHOUSES. 

3879  Art.  99.    Entries  tor  withdrawal  of  goods  or  merchandise.— 

3538  Entries  for  withdrawal  of  any  goods  or  merchandise  from  customs 
bonded  warehouses  are  subject  to  stamp  tax. 

PASSAGE  TICKETS. 

3880  Art.  100.    Passage  tickets  issued  to  Federal  and  State  officials, 

3539  military  and  naval  forces,  and  certain  foreign  representatives.— 

Passage  tickets  issued  to  United  States  Government  officials, 
employees,  military  and  naval  forces,  as  well  as  officials  of  States  and  their 
political  subdivisions,  traveling  in  the  course  of  their  duty  as  such  on  vesseli 
operated  by  private  parties  or  by  any  government  are  not  taxable  when  the 
Amount  of  the  passage  is  paid  for  by  the  United  States  Government,  State 
or  political  subdivision  thereof. 

3881  Ambassadors,  ministers,  and  properly  accredited  diplomatic  rep- 
resentatives of  any  foreign  government  to  the  United  States  are 

exempt  from  the  payment  of  taxes  on  such  passage  tickets.  As  under  inter- 
national law  the  privileges  and  immunities  of  ambassadors  and  ministers  of 
foreign  countries  extend  to  the  members  of  their  family  and  to  the  members 
of  their  household,  including  attaches,  secretaries,  and  servants,  they  are 
likewise  exempt  from  the  payment  of  taxes  on  such  passage  tickets.  All  other 
foreign  agencies  not  specifically  mentioned  above  are  subject  to  the  tax  as 
levied  under  this  schedule. 

88S2    Art.  101.   Passage  tickets  issued  to  private  individuals.— Passage 

tickets  issued  to  private  individuals  traveling  on  vessels  operated 
privately  or  by  any  government  are  taxable. 

3883  Art.  102.   Passage  tickets  to  Porto  Rico  and  Philippine  Islands.— 

Passage  tickets  to  Porto  Rico  or  Philippine  Islands  are  taxable. 

3884  Art.  103.    Passage  tickets  to  Hawaii  and  Alaska. — Passage  tickets 
issued  to  Hawaii  and  Alaska  arc  not  taxable. 

5885  Art.  104.    Prepaid  orders  for  passage  tickets. — Prepaid  orders  for 
passage  tickets  are  not  subject  ro  tax. 

5886  Art.  105.   Passage  tickets  issued  on  exchange  orders  purchased  in 
Canada  or  Mexico. — Passage  tickets  issued  in  the  United  States  to 

ports  not  in  the  United  States.  Canada,  or  Mexico,  on  exchange  orders  pur- 
chased in  Canada  or  Mexico,  in  connection  with  through  transportation 
from  points  in  Canada  or  Mexico,  are  subject  to  tax. 

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STAMP  TAX  REGULATIONS.— 1922. 


8887    Art.  106.  Passage  tickets  to  ports  not  in  United  States,  Canada,  or 

Mexico. — (a)  Passage  tickets  issued  in  the  United  States  to  ports  not 
within  the  United  States,  Canada,  or  Mexico,  on  exchange  orders  pur- 
chased other  than  in  the  United  States,  Canada,  or  Mexico  are  subject  to 
tax. 

3888  (b)  Passage  tickets  sold  or  issued  in  the  United  States  for  passage 
by  any  vessel  to  a  port  or  place  in  Newfoundland  are  subject  to  tax. 

3889  Art.  107.   Passage  tickets  sold  in  United  States  from  ports  not  in 
United  States,  Canada,  or  Mexico,  to  ports  not  in  said  countries, 

not  subject  to  tax,  unless. — Passage  tickets  sold  in  the  United  States 
from  ports  not  within  the  United  States,  Canada,  or  Mexico,  to  a  port 

not  in  the  United  States,  Canada,  or  Mexico,  are  not  subject  to  tax  unless 
sold  as  part  of  a  round  trip  or  through  ticket  from  a  port  in  the  United 
States,  Canada,  or  Mexico. 

PROXIES. 

3800    Art.  108.  Tax  on  proxies  attaches  to  the  instrument. — The  stamp 
3540     tax  on  proxies  attaches  to  the  instrument  and  is  not  measured  by 
the  number  of  grantors  and  grantees. 

389!    Art.  109.   Stamp  may  be  affixed  and  canceled  by  either  party  to 
proxy. — The  stamp  may  be  affixed  and  canceled  either  by  the  party 
who  executes  the  proxy  or  by  the  party  to  whom  the  proxy  is  given. 

3882    Art.  110.    Directors  of  corporations  officers, —  Directors  of  a  cor- 
poration arc  officers  within  the  meaning  of  the  clause  imposing  & 
tax  on  proxies  for  voting  at  the  election  for  officers  of  an  incorporated  com- 
pany. 

3893  Art.  111.  Proxies  to  vote  stock  of  building  and  loan  associations. — 

Proxies  for  the  purpose  of  voting  the  stock  of  building  and  loan 
associations  are  taxable. 

3894  Art.  112.    Proxies  executed  and  accepted  before  Jan.  1,  1922. — 

Proxies  executed  and  accepted  before  January  L  1922,  are  taxable, 
under  the  revenue  act  approved  February  24,  1919. 

38S5    Art.  113.    Proxy  to  vote  for  officers  and  for  other  purposes. —A 

proxy  for  voting  at  any  election  for  officers  of  a  corporation  and 
authorizing  the  proxy  to  act  in  such  capacity  upon  all  questions  or  matters 
presented  at  a  stockholders'  meeting,  is  subject  to  tax  of  10  cents  only. 

3886    Art.  114=    "Corporation"  defined. — The  term  "corporation"  in- 
cludes associations,  joint  stock  companies,  and  insurance  com- 
panies. 

38S7  Art.  115.  Proxies  sent  out  by  corporations  may  be  stamped  after 
execution  and  delivery. — Where  proxies  are  sent  out  by  a  corpora- 
tion to  be  executed  and  returned  to  the  corporation  or  to  the  person  named 
in  the  proxy,  such  proxies  may  be  stamped  after  execution  and  delivery 
by  the  person  receiving  same  as  the  a^ent  of  the  person  executing  the  proxy. 

[See  •[4029.] 

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POWERS  OF  ATTORNEY.  B8I 

3898    Art.  1 16.  Tax  on  power  of  attorney,  when  due.— The  tax  or  a  power 
3541     of  attorney  is  due  when  the  instrument  is  executed  and  delivered. 

Delivery  includes  depositing  instrument  in  the  maii?. 
38S9    Art.  117.   Tax  attaches  to  the  instrument. — Tax  is  imposed  on  the 

instrument  itself,  and  is  not  measured  by  the  number  of  persons 
joining  therein. 

3800  Art.  118.  Resolution  of  board  of  directors  authorizing  an  officer 
of  the  corporation  to  sell,  etc.,  stock  or  bonds,  not  taxed  as  power 
of  attorney;  otherwise  in  case  of  person  not  an  officer. — Where  a 
corporation,  by  resolution  of  its  board  of  directors,  has  empowered  an 
officer  thereof  to  sell,  assign,  or  transfer  stock  or  bonds  standing  in  the  name 
of  the  corporation,  or  to  perform  any  act  in  the  name  of  the  corporation, 
such  authority  is  not  taxable  as  a  power  of  attorney  for  the  reason  that  it 
is  necessary  for  a  corporation  to  perform  its  corporate  acts  through  one  of 
its  officers.  If,  however,  a  person  other  than  an  officer  of  the  corporation 
acting  in  his  official  capacity  is  given  this  authority,  the  power  of  attorney  so 
granted  is  subject  to  stamp  tax. 

3901  Art.  119.  Revenue  stamp  required  on  each  instrument  executed 
under  general  power  of  attorney  granted  to  person  not  an  officer 
of  the  corporation. — A  general  power  of  attorney  granted  by  a  board  of 
directors  to  a  person,  other  than  an  officer  of  a  corporation  acting  in  hia 
official  capacity  for  the  purpose  of  transacting  business  of  the  corporation, 
including  making  conveyances  of  land  and  acknowledging  deeds,  is  con- 
sidered specific  authority  for  each  such  transaction,  and  a  revenue  stamp  i* 
required  on  each  instrument  executed  under  the  power  of  attorney. 

390?    Art.  120.    Power  of  sale  embodied  in  mortgage  not  taxable. — A 

power  of  sale  embodied  in  a  mortgage,  authorizing  and  empowering 
a  mortgagee  himself,  upon  default,  to  make  public  sale  of  the  property 
affected  and  to  convey  the  title  to  the  purchaser  at  such  sale  free  from  all 
rights  or  equity  of  redemption,  thus  avoiding  the  necessity  of  resorting  to 
the  courts  for  foreclosure,  is  not  taxable. 

3903  Art.  121.  Powers  of  attorney  contained  in  assignments  of  insurance 

policies. — Powers  of  attorney  contained  in  assignments,  absolute 
or  as  collateral  security,  of  insurance  policies  are  not  subject  to  tax. 

3904  Art.  122.  Powers  of  attorney  from  corporations  to  resident  agents. 

— Powers  of  attorney  executed  by  corporations  to  resident  agents 
authorizing  the  latter  to  accept  service  of  process  are  taxable. 

3905  Art.  123.  Power  of  attorney  to  sell  or  transfer  Government  bonds. — 

A  power  of  attorney  to  sell  or  transfer  Government  bonds  is  taxable. 

3906  Art.  124.  Powers  of  attorney  contained  in  assignments,  for  valuable 
consideration,  conferring  no  authority  upon  assignee  not  implied 

by  the  assignment,  not  taxable. — An  assignment,  for  a  valuable  considera- 
tion, of  debts,  wages,  mortgages,  bonds,  etc.,  ordinarily  transfers  to  the 
assignee  all  the  rights  of  the  assignor  and  the  remedies  necessary  for  their 
enforcement,  and  the  assignee  acquires  no  further  rights  by  the  means  of  a 

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STAMP  TAX  REGULATIONS. — 1922. 


power  of  attorney  clause  in  the  assignment  than  are  conveyed  by  the  instru- 
ment itself,  and  such  pro  forma  power  of  attorney  is  therefore  not  taxable 

3907  Art.  125.  Authority  to  secretary  of  corporation  to  transfer  stock  on 
the  books  not  taxable. — An  instrument  authorizing  the  secretary  to 
transfer  stock  on  the  books  of  a  corporation  is  not  taxable  as  a  power  pf 
attorney,  but  an  instrument  appointing  an  attorney  in  fact  to  transfer 
stock  en  the  books  of  a  corporation  is  taxable. 

39 cc?  Art.  126.  Pro  forma  power  of  attorney  to  transfer  bonds  or  stocks  on 
books  of  corporation,  printed  on  bond  or  stock  certificate,  not 
taxable.— The  pro  forma  power  of  attorney  to  transfer  bonds  or  stocks  on  the 
books  of  a  corporation,  embodied  in  the  assignment  printed  on  the  back  of 
the  bond  or  stock  certificate,  is  not  subject  to  tax. 

3909  Art.  127.   A  warrant  of  attorney  in  a  judgment  note  or  promissory 
note  authorizing  confession  of  judgment. — The  clause  in  a  judg- 
ment note  or  a  promissory  note  authorizing  confession  of  judgment  is  not 
taxable  as  a  power  of  attorney. 

3910  Art.  128,    Warrant  of  attorney  in  a  lease. — A  warrant  of  attorney 
embodied  in  a  lease  is  not  taxable. 

3sn    Art.  129.    Power  of  attorney  mailed  in  United  States  to  point 
abroad;  power  of  attorney  mailed  abroad  to  party  in  United  States. — 

A  power  of  attorney  executed  and  mailed  within  the  United  States  to  a 
foreign  point  is  subject  to  tax,  but  a  power  executed  in  a  foreign  country 
and  mailed  there  to  an  agent  in  the  United  States  is  not  subject  to  tax, 

3912  Art.  130.    Power  of  attorney  to  sell,  etc.,  shares  of  capital  stock, 
taxable,  unless. — A  power  of  attorney  to  sell,  assign,  and  transfer 

shares  of  capital  stock  is  subject  to  tax  unless  it  is  given  in  connection  with 
a  deposit  of  the  stock  as  security  for  a  loan. 

391 3  Art.  131.  Power  of  attorney  authorizing  vendee  of  shares  of  stock 
to  transfer  same. — A  power  of  attorney  by  which  a  person  executing 

the  instrument  sells,  assigns,  and  transfers  shares  of  stock  and  appoints 
the  vendee  agent  for  the  transfer  is  not  subject  to  tax. 

3914  Art.  132.   Copy  of  power  of  attorney,  printed  on  form  provided  by- 
Government  and  filed  in  executive  department. — Where  the  original 

power  of  attorney  has  been  properly  stamped  and  a  copy  of  it  is  printed  on 
a  card  (Form  272)  provided  by  the  Government,  and  the  card  is  filed  in  the 
executive  departments  of  the  Government  or  with  a  collector  of  internal 
revenue,  such  copy  is  not  subject  to  tax. 

3916    Art.  133.   Power  of  attorney  authorizing  deputy  to  have  access  to 
safe. — A  power  of  attorney  authorizing  a  deputy  to  have  access  only 
to  a  safe  or  safety  deposit  box  is  not  subject  to  tax,  but  a  power  of  attorney 
to  have  access  and  control  over  its  contents  is  subject  to  tax. 


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STAMP  TAX  REGULATIONS.— 1922. 


3916  Art.  134.    Power  of  attorney  authorizing  Federal  officer  to  assign 
United  States  bonds  deposited  as  security. — (a)  A  power  of  attorney 

executed  by  a  bank  authorizing  a  designated  officer  of  a  Federal  reserve 
bank  to  assign  United  States  bonds  deposited  with  the  Federal  reserve 
bank  and  designed  to  protect  it  in  event  of  default  in  payment  of  a  loan 
is  not  taxable. 

3917  (b)  Powers  of  attorney  given  by  persons  who  deposit  United  States 
Liberty  bonds  or  other  bonds  of  the  United  States  as  security  in 

lieu  of  surety  or  sureties  on  penal  bonds  under  the  provisions  of  Section 
1329  of  the  Revenue  A,ct  of  1921  authorizing  the  official  having  authority 
to  approve  such  penal  bonds  to  collect  or  sell  such  United  States  bonds  so 
deposited  in  case  of  any  default  in  the  performance  of  any  of  the  conditions  or 
stipulations  of  such  penal  bonds,  are  not  subject  to  the  stamp  tax. 

3918  Art.  135.    Powers  of  attorney  executed  and  delivered  before  Jan.  1, 

1922. — Powers  of  attorney  executed  and  delivered  before  January  1", 
1922,  are  not  taxable,  even  though  used  subsequent  to  that  date,  except 
such  as  are  taxable  under  the  act  approved  February  24,  1919. 


PLAYING  CARDS. 

3919  (See  separate  regulations  covering  this  subject.) 
3542 

3920  to  3845  Blank. 


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FOREIGN  INSURANCE  POLICIES. 

3946  Art.  136.  Definitions. — When  used  in  the  Regulations  under  this 
3545  subdivision—- 

3947  (a)  The  term  "insurer"  includes  any  person,  copartnership,  associa- 
tion, or  corporation  transacting  the  business  of  insurance,  and  also 

any  agent  or  broker,  wherever  applicable. 

3948  (b)  The  term  "insurance"  includes  every  manner    of  providing 
indemnity  against  risks  upon  property  of  any  description  (including 

rents  and  profits)  from  peril  by  sea  or  inland  waters  or  in  transit  on  land 
(including  transshipments  and  storage  at  termini  or  way  points)  or  by  fire} 
lightning,  tornado,  windstorm,  bombardment,  invasion,  insurrection,  or  riot. 

3949  (c)  The  term  "policy  of  insurance"  includes  any  instrument  by  what- 
ever name  the  same  is  called  whereby  insurance  is  made  or  renewed 

by  the  insurer,  as  policies,  binders,  certificates,  open  policies,  covering  notes, 
memoranda,  cablegrams  or  letters. 

3960  (d)  The  term  "other  instrument"  includes  any  instrument  by  which 
insurance  is  made  or  renewed,  i.  e.,  by  which  the  relationship  of 
insurer  and  insured  is  created  or  evidenced,  whether  it  be  a  letter  of  accep- 
tance, cablegram,  or  other  instrument  by  whatever  name  called. 
3951  (e)  The  expression  "whereby  insurance  is  made  or  renewed"  includes 
any  evidence  or  confirmation  of  a  binding  contract  of  insurance 
whereby  a  risk  is  assumed  by  the  insurer. 

3962    (f)  The  term  "issue"  means  the  act  whereby  insurance  is  made  or 
renewed  or  in  any  manner  becomes  a  binding  contract  effective  for 
insurance. 

3953  (g)  The  term"premium  charged"  means  the  total  premium  payable 
during  the  life  of  a  contract  of  insurance  and  shall  include  any  addi- 
tional assessment  or  charge  in  the  nature  of  a  premium  which  may  be  assessed 
or  charged  during  the  life  of  a  contract  of  insurance,  whether  payable  in  one 
sum  or  in  installments  and  however  paid  (and  though  never  paid  if  the  con- 
tract of  insurance  be  delivered  and  accepted  or  otherwise  becomes  binding 
upon  the  insurer). 

3954  (h)  The  term  "premium"  means  the  agreed  price  for  assuming  and 
carrying  the  risk.    It  includes  all  that  is  received  by  the  underwriter 

therefor  and  is  in  fact  the  total  consideration  receivable  for  underwriting  the 
risk,  whether  in  one  sum  or  in  installments,  during  the  life  of  the  policy. 

3956  (i)  The  term  "United  States"  includes  the  States  of  the  United  States, 
the  Territories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia. 

3958  Art.  137.  Effective  date.— Policies  of  insurance  which  are  issued  and 
accepted  on  and  after  April  1,  1919,  regardless  of  when  the  insurance 
thereunder  becomes  effective,  are  subject  to  tax,  but  policies  which  were 
issued  and  accepted  prior  to  April  1,  1919,  if  issued  in  the  usual  course  of 
business  and  according  to  general  custom  and  not  for  the  purpose  of  evading 
the  tax,  are  not  subject  to  tax. 

3957  Art.  133.  Persons  iiable, — The  insurer,  the  agent,  or  broker,  effecting, 
accepting,  placing,  or  soliciting  the  insurance,  and  also  the  insurec 

are  each  liable  for  the  tax. 

S958  Art.  139.  What  instruments  must  bear  a  stamp,— (a)  The  stamp 
must  be  affixed  to  the  first  instrument  by  which  the  insurance  is 
made  or  renewed,  i.  e.,  by  which  the  relationship  of  insurer  and  insured  is 
created  or  evidenced,  whether  it  be  a  letter  of  acceptance,  cablegram  or 
other  instrument  by  whatever  name  called. 

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3959  (b)  In  the  case  of  so-called  "open  policies"  or  "open  cargo  covers," 
where  the  amount  of  the  premium  is  not  definitely  determined  ai 

t'me  of  issuance,  the  stamps  may  be  affixed  to  the  receipts  for  monthly  or 
orher  payments  if  proper  notation  be  made  upon  such  receipts  identifying  the 
original  instruments  to  which  they  apply. 

3960  (c)  In  the  case  of  a  binder  or  other  instrument  whereby  insurance  is 
made  or  renewed,  issued  without  agreement  as  to  the  premium  to  be 

charged,  stamps  must  be  affixed  when  the  amount  of  the  premium  is  deter- 
mined. 

386?    Art.  140.  Insured  to  retain  policy  for  two  years. — The  person  having 
control  or  possession  of  a  policy  of  insurance  or  other  instrument  to 
vhich  documentary  stamps  shall  be  affixed  according  to  law  shall  retain  such 
instrument  for  the  period  of  two  years  from  the  date  of  insurance  [sic]  thereof 

for  the  purpose  of  enabling  internal  revenue  officers  to  verify  the  fact  that 
payment  of  the  full  amount  of  tax  due  thereon  has  been  made. 

39S2  Art.  141.  Subsequent  instruments  shall  indicate  prior  document  to 
which  stamps  are  affixed. — Any  policy  of  insurance  or  other  instru- 
ment which  is  subsequent  to  or  which  confirms  a  contract  of  insurance  that  is 
created  or  evidenced  by  any  prior  instrument  by  which  insurance  was  origi- 
aaily  made  or  renewed  shall  bear  a  notation  designating  such  prior  instru- 
ment (hereinafter  referred  to  as  the  original  instrument)  and  showing  that 
the  proper  stamps  have  been  affixed  thereto  and  canceled.  By  this  is  meant 
that  if  a  letter,  cablegram,  or  other  instrument  is  so  worded  that  it  establishes 
or  evidences  a  contractual  relation  between  the  insurer  and  the  insured, 
executed  or  executory,  by  which  insurance  is  made  or  renewed,  or  by  "which 
the  relationship  of  insurer  and  insured  is  created  or  evidenced,  such  instru- 
ment shall  be  construed  as  the  original  instrument  and  must  have  stamps-  of 
the  proper  amount  affixed  to  it,  and  any  policy  or  other  instrument  which 
subsequent  to  or  which  confirms  such  original  instrument  must  bear  thereon 
the  notation  above  indicated. 

3963  Art.  142.  Subsequent  instruments  that  must  be  stamped. — In  case  an 
instrument  subsequent  to  the  original  instrument  provides  for  the 

payment  of  a  premium  greater  than  the  premium  provided  for  in  the  original 
instrument,  such  subsequent  instrument  must  have  affixed  thereto  stamps 
equal  to  the  tax  imposed  upon  the  additional  premium  charged  therein : 
also  such  subsequent  instrument  must  bear  notation  of  the  stamps  affixed  tc 
the  original  instrument.  (See  Art.  141.)  The  same  rules  apply  to  any 
riders,  indorsements,  or  other  forms  attached  to  or  foirning  a  part  of  any 
original  or  subsequent  instrument  where  such  rider,  indorsement,  or  other 
form  provides  for  the  payment  of  a  premium  greater  t  ban  theretofore  charged; 

3964  Art.  143.   Unstamped  instruments  and  those  bearing  no  notation  of 
stamping. — Failure  (a)  to  stamp  the  original  instrument  by  which 

.nsurance  is  made  or  renewed,  whether  it  be  a  letter  of  acceptance,  cablegram, 
2T  other  instrument  by  whatever  name  called,  or  (b)  to  indicate  that  such 
original  instrument  was  properly  stamped  on  any  policy  or  other  instrument 
which  is  subsequent  to  or  which  confirms  the  contract  of  insurance  that 
is  created  or  evidenced  by  any  prior  instrument  by  which  insurance  was 
aaade  or  renewed,  will  be  held  to  raise  a  presumption  ot  an  intent  to  evade 
the  payment  of  tax  under  the  provisions  of  the  Act. 


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STAMP  TAX  REGULATIONS. — 1922. 


3966  Art.  144.  Measure  of  tax. — The  tax  is  measured  by  total  premium 
paid,  including  any  additional  assessment  or  charge  in  the  nature 
of  a  premium  on  each  policy  of  insurance  or  other  instrument  by  which 
insurance  is  made  or  renewed,  and  is  at  the  rate  of  3  cents  on  each  dollar 
or  fractional  part  thereof  of  such  premium;  for  example,  upon  a  premium 
charge  of  $10.10  the  tax  imposed  is  33  cents,  being  3  cents  for  each  dollar 
and  3  cents  for  the  fractional  part  of  a  dollar. 

3966  Art.  145.    Insurance  on  commodities  exported. — (a)  No  tax  is 

imposed  upon  the  premium  charged  for  insurance  issued  to  cover 
commodities  which  are  in  the  actual  process  of  exportation  and  which  have 
begun  their  voyage  or  preparation  for  the  voyage  from  the  United  States. 

3967  (b)  If  a  policy  or  other  instrument  is  issued  covering  both  export  and 
non-export  property,  the  tax  will  be  computed  upon  the  full  amount 

of  the  premium  charged,  unless  such  instrument  clearly  indicates  the  property 
for  export  and  the  premium  charged  for  the  insurance  thereon. 

3968  Art.  146.    Movable  property. — Movable  property,  such  as  rolling 
stock  of  railroads,  ships,  vessels,  barges,  and  other  similar  movable 

property,  shall  be  held  to  be  property  within  the  United  States  if  the  prin- 
cipal place  of  business  of  the  corporation  or  partnership  owning  and  controlling 
the  same  is  located  within  the  United  States,  or,  in  the  case  of  an  individual, 
if  he  resides  in  the  United  States,  unless  such  property  is  permanently  located 
without  the  United  States  for  the  purpose  of  ordinary  use.  The  nation  of 
registry  of  a  vessel  shall  have  no  bearing  upon  the  location  of  the  property 
in  the  same. 

3969  Art.  147.  Credits  and  refunds. — In  case  a  policy  of  insurance  or  other 
instrument  is  issued  and  accepted  by  the  insured,  and  afterwards,  for 

any  reason,  such  insurance  does  not  become  effective,  the  value  of  the  stamps 
affixed  thereto  will  be  refunded  upon  a  proper  claim  presented  to  the  collector 
of  internal  revenue. 

3970  Art.  148.    Penalties. — In  addition  to  the  penalties  provided  by 
Sec.  1102  of  the  Revenue  Act  of  1921,  subdivision  13  of  Schedule  A 

imposes  a  penalty  of  double  the  amount  of  the  tax  upon  (a)  any  person  to  or 
for  whom  or  in  whose  name  any  such  policy  or  other  instrument  is  issued, 
•  or  (b)  any  solicitor,  agent,  or  broker  acting  for  or  on  behalf  of  such  person 
in  the  procurement  of  any  such  policy  or  other  instrument,  who  fails  to 
affix  the  proper  stamps  to  such  policy  or  other  instrument,  with  intent  to 
evade  the  tax. 

3971  Art.  149.   Returns. — No  monthly  return  or  monthly  statement  show- 
ing a  list  of  policies  or  other  instruments  by  which  insurance  was 

made  or  renewed  upon  property  located  in  the  United  States  by  a  foreign 
corporation  or  partnership  or  nonresident  individual  will  at  this  time  be 
required  from  any  person  to  or  for  whom  or  in  whose  name  such  policy  or  other 
instrument  is  issued,  or  from  the  solicitor  or  broker  acting  directly  or  in- 
directly for  or  on  behalf  of  such  person,  but  each  person,  solicitor,  or  broker 
accepting,  placing,  or  soliciting  such  policy  or  other  instrument  shall  keep  a 
record  of  each  policy  or  other  instrument  subject  ro  the  tax  imposed  by  this 
subdivision  by  which  he  has  directly  or  indirectly  made,  placed,  solicited,  or 
.assisted  in  the  making,  or  renewal  of,  such  insurance,  or  for  which  he  has 

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paid  or  received  compensation,  and  shall  be  prepared  to  furnish  full  infor- 
mation to  the  Commissioner  at  any  time  upon  demand. 


MISCELLANEOUS. 

3972  Art.  150.  Stamp  affixed  and  canceled  can  not  lawfully  be  removed 

3500     and  affixed  to  another  instrument. — A  stamp  affixed  to  an  instrument 
and  cancelled  can  not  lawfully  be  removed  therefrom  and  affixed  to 
another  instrument  requiring  a  stamp.    [For  refund  see  beginning  at  €[3986.] 

3973  Art.  151.  Both  parties  to  taxable  instrument  liable. — Both  parties 
3502     to  a  taxable  instrument  are  responsible  to  the  Government  for 

affixing  and  canceling  stamps  in  the  required  amount.  The  law  does 
not  prohibit  parties  in  interest  from  entering  into  an  agreement  as  to  which 
of  them  shall  actually  pay  same. 

3974  Art.  152.  Stamp  taxes  under  revenue  act  of  1917;  present  regulations 

3547     generally  applicable. — As  documentary  stamp  taxes  under  the  revenue 
act  approved  February  24,  1919,  were  very  similar  to  those  imposed 
under  the  revenue  act  of  1921,  these  regulations  are  generally  applicable 
to  all  taxable  documents  issued  and  delivered  on  and  after  April  1,  1919. 

3976    Art.  153.  Schedule  A  of  revenue  act  of  1921  an  extension  of  sched- 
ule A  of  the  revenue  act  of  1918. — The  revenue  act  of  1921  simply 

supersedes  and  extends  Schedule  A,  Title  XI,  of  the  act  approved  February 
24,  1919,  except  in  a  few  instances  where  the  language  of  the  present  act 
slightly  modifies  or  amends  that  of  the  former  act.  These  slight  changes 
will  be  readily  noticeable  by  a  comparison  of  the  two  acts.   Schedule  A  2 

and  14  of  the  revenue  act  of  1918,  however,  are  eliminated. 

3S76  Art.  154.  Former  stamp-tax  acts. — For  still  older  acts  of  Congress 
requiring  stamps  to  be  affixed  to  certain  written  instruments,  see  act 
of  July  1,  1862,  schedule  B  following  section  110  (12  Stat.,  479);  act  of 
March  3,  1863,  section  6  (12  Stat. ,720);  act  of  June  30,  1864,  section  151 
(13  Stat.,  291);  act  of  March  3,  1865,  section  1  (13  Stat.,  469);  act  of  July 
13,  1866  (14  Stat.,  141);  act  of  June  23,  1874,  section  1  (18  Stat.,  pt.  3, 
250).  The  act  of  June  6,  1872,  section  36  (17  stat.,  256),  provided  for  the 
repeal,  on  and  after  October  1,  1872,  of  stamp  taxes  on  instruments,  except 
the  tax  of  2  cents  on  bank  checks,  drafts,  and  orders,  which  was  repealed 
by  the  act  of  March  3,  1883  (22  Stat.,  488).  Taxes  were  imposed  by  the 
act  of  June  13,  1898,  on  instruments  and  documents,  under  schedule  A 
thereof,  and  were  repealed  in  part  by  the  act  of  March  2,  1901,  and  wholly 
repealed  by  the  war-revenue  repeal  act  (act  of  Apr.  12,  1902)  (32  Stat.,  96), 
taking  effect  July  1,  1902.  Taxes  were  imposed  by  Schedule  A  of  the  act  of 
October  22,  1914,  upon  certain  instruments  and  documents,  from  December 
1,  1914,  to  December  31,  1915.  These  taxes  were  continued  in  force  by  the 
joint  resolution  of  December  17,  1915,  until  December  31,  1916,  but  were 
repealed  by  the  act  of  September  8,  1916,  as  of  that  date.  The  revenue  act 
of  1917  was  in  force  from  December  1,  1917,  until  March  31,  1919,  and  the 
revenue  act  of  1918  was  in  force  from  April  1,  1919,  until.December  31,  1921. 

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6-12-22. 


Reg.  55.-1922  Edition. 

STAMP  TAX  REGULATIONS. — 1922. 


DENOMINATIONS  OF  DOCUMENTARY  STAMPS. 
3977    Art.  155.   Documentary  stamps  issued  .—Under  authority  conferred 

3154     upon  the  Commissioner  of  Internal  Revenue  in  section  1105  (a)  of  the 
Act,  the  following  adhesive  stamps  have  been  prepared: 
Documentary  stamps,  Schedule  A:  One  cent,  2  cents,  3  cents,  4  cents, 
5  cents,  8  cents,  10  cents,  25  cents,  40  cents,  50  cents,  80  cents,  $1,  $2, 
$3,  $5,  $10,  $30,  $60,  $100,  $500,  $1,000. 

PURCHASE  OF  STAMPS. 
3878    Art.  156.    Stamps,  where  purchased.— The  above  stamps  may  be 
3514     purchased  from  collectors  and  stamp  deputy  collectors  of  internal 
revenue. 

3979  Art.  157.  Assistant  Treasurers  of  the  United  States,  designated  de- 

3516  positaries,  and  postmasters  to  be  furnished  stamps;  bond  required. 

3517  — In  addition,  provision  has  been  made  in  the  Act  for  the  delivery 
of  stamps  by  collectors  without  prepayment  to  any  Assistant  Trea- 
surer of  the  United  States,  designated  depositary  of  the  United  States,  or 
postmaster,  who  may  be  required  to  give  bond  for  the  value  of  stamps  so 
deposited.  It  is  not  mandatory  upon  the  persons  named  to  secure  and  keep 
the  stamps  on  sale. 

3980  Art.  158.  Stamps  on  articles  manufactured  in  foreign  countries.— 

Stamps  to  be  affixed  to  articles  manufactured  in  a  foreign  country 
and  imported  into  the  United  States  may  be  purchased  and  forwarded  to 
the  place  of  manufacture  and  there  affixed  to  the  articles  before  the  same  are 
packed  for  importation. 

CANCELLATION  OF  DOCUMENTARY  STAMPS. 
398!  Art.  159.  Cancellation  of  stamps. — In  any  and  all  cases  where  an 
3514  adhesive  stamp  shall  be  used  for  denoting  any  tax  imposed  by 
Schedule  A  of  the  revenue  act  of  1921,  the  person  using  or  affixing 
the  same  shall  write  or  stamp  thereon,  or  cause  to  be  written  or  stamped 
thereon,  with  ink,  the  initials  of  his  name  and  the  date  (year,  month, 
and  day)  in  which  the  same  shall  be  attached  or  used;  or  shall,  by  cutting 
and  canceling  said  stamp  with  a  machine  or  punch,  which  will  affix  the 
initials  and  date  as  aforesaid,  so  deface  the  stamp  as  to  render  it  unfit  for 
reuse.  The  cancellation  by  either  method  should  not  so  deface  the  stamp  as 
to  prevent  its  denomination  and  genuineness  from  being  readily  determined, 

3982  Art.  160.    Additional  cancellation  required  in  case  of  stamps  of 

3513  value  of  50  cents  or  more. — In  addition  to  the  foregoing,  stamps  of 
the  value  of  50  cents  or  more  shall  have  three  parallel  incisions  made 

by  some  sharp  instrument  lengthwise  through  the  stamp  after  the  stamp 
has  been  attached  to  the  document;  provided,  this  will  not  be  required  where 
stamps  are  canceled  by  perforation. 

STAMPS  UNDER  FORMER  ACTS;  POSTAGE  STAMPS. 

3983  Art.  161.    Documentary  stamps  only  to  be  used. — Documentary 

3514  stamps  only  must  be  used  upon  papers,  documents,  and  instru- 
ments subject  to  tax  as  provided  in  Schedule  A,  except  as  provided 

in  Regulations  40,  1922  Edition,  relating  to  stamp  taxes  on  issue  and  trans- 
fers of  stock  and  sales  of  products  for  future  delivery. 

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6-12-22. 


Reg.  55  —1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 


3984  Art.  162.    Documentary  stamps  issued  under  acts  of  October  22, 

1914,  October  3,  1917,  and  February  24,  1919.— Docu- 
mentary revenue  stamps  issued  under  acts  of  October  22,  1914,  October  3, 
1917,  and  February  24,  1919,  may  be  used  to  pay  stamp  taxes  required  by  the 
revenue  act  of  1921. 

3985  Art.  163.    Ordinary  postage  stamps  not  to  be  used  for  internal- 
revenue  taxes. — Ordinary  postage  stamps  can  not  be  used  for  the 

payment  of  any  internal-revenue  taxes. 

REDEMPTION  OF  OR  ALLOWANCE  FOR  STAMPS. 

3986  Art.  164.  Stamps  rendered  useless,  affixed  in  error,  or  for  which  the 
8024     owner  has  no  use. — Where  documentary  stamps  are  rendered  useless 

by  gumming  or  sticking  together  in  transit  or  otherwise  without 
fault  of  the  purchaser,  they  may  be  exchanged  by  a  collector  for  other  stamps 
of  exactly  the  same  quantity  and  denomination.  Amounts  paid  for  stamps 
used  in  excess,  or  on  instruments  not  actually  effective  and  for  which  a  sub- 
stitute is  prepared  and  stamped,  or  on  instruments  not  subject  to  tax  or  for 
which  the  owner  has  no  use,  may  be  refunded,  upon  claim  properly  presented 
to  the  collector. 

3986a  Art.  165.  Claims. — All  claims  for  the  redemption  of  or  allowance 
for  stamps  must  be  presented  within  two  years  after  the  purchase 
of  said  stamps  from  the  Government.  The  provisions  of  sections  3220  to 
3228  Revised  Statutes  do  not  apply  to  the  redemption  of  or  allowance  for 
internal  revenue  stamps,  and  the  authority  for  such  redemption  or  allowance 
is  the  act  of  May  12,  1900  (31  Stats.  177),  as  amended  by  the  act  of  June  30, 
1902  (32  Stats.  506),  set  forth  on  page  30  of  these  regulations  [1[8024  herein]. 

REFUNDS. 

3986b  Art.  166.  Refunds. — Where  taxes  are  paid  pursuant  to  an  assess- 
ment and  not  by  the  affixing  of  stamps,  claims  for  the  refund  of 
amounts  so  paid  are  governed  by  Sections  3220-3228  R.  S.,  as  amended 
[beginning  at  ^[8023],  and  must  be  presented  within  four  years  next  after 
payment  of  such  taxes,  as  provided  in  Section  1316  of  the  Revenue  Act  of 
1921  [1f8056  herein]. 

AFFIXING  STAMPS. 

3987  Art.  167.  Two  or  more  stamps  may  be  used,  when. — Where  a 
3515     stamp  of  the  proper  denomination  to  pay  the  tax  due  on  an  article 

or  document  can  not  be  procured,  two  or  more  stamps  may  be 
used.  In  such  case  as  few  stamps  as  possible  should  be  attached  and  each 
stamp  used  should  be  canceled  in  the  manner  provided  by  regulation. 

DUTIES  OF  OFFICERS. 

3988  Art.  168.  Revenue  officers  to  make  investigations. — It  isthedury 
8000     of  revenue  officers  in  canvassing  for  taxes  due  to  investigate  as  to 

violations  of  Title  VIII  of  the  act  of  October  3,  1917,  and  Title  XI 

of  the  acts  of  February  24,  1919,  and  November  23,  1921,  and  for  this  purpose 
they  should  visit  all  State,  countv,  and  municipal  offices,  also  banks  and  trust 

.'fi'j'jiish  ynitiii  lor  iJouDOKj  to  iMii  bfls  to  8t5t 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  760  SERVICE 


6-12-22.    (2)  7-27-22".  Reg.  55.— 1922  Edition. 

STAMP  TAX  REGULATIONS.— 1922. 

companies,  having  to  do  with  the  issuance,  handling,  or  recording  of  doc- 
uments taxable  under  these  Titles,  as  well  as  customs  houses  and  customs 
bonded  warehouses  and  steamboat  offices  and  agencies  for  such  information 
as  will  lead  to  the  detection  of  violators  of  said  Titles. 

3989  Art.  169.    Revenue  agents  to  report. — Revenue  agents  will  report  to 
this  office  all  such  violations,  separate  letter  reports  being  made  in 

each  case  marked  "Miscellaneous  Division."  In  each  instance  the  report 
should  show  the  full  amount  of  delinquent  tax  discovered. 

3990  Art.  170.    Collectors'  and  deputy  collectors'  reports  of  delinquency  or 
additional  tax  due. — Form  807  (revised  July,  1921)  will  be  used  by 

field  deputies  in  reporting  to  collectors  additional  and  delinquent  miscel- 
laneous taxes  discovered,  and  should  be  accompanied  by  returns,  offers  in 
compromise,  and  remittances.  In  those  cases  where  the  tax,  penalties,  and 
interest  do  not  accompany  the  report  of  the  field  deputy  submitted  on  Form 
807,  the  collector  will  prepare  and  forward  to  the  commissioner  a  report  on 
Form  807-A  (revised  July,  1921). 

399 1  Art.  171 .    Stamp  tax  to  be  reported  for  assessment  in  certain  cases. — 

Only  in  cases  where  instruments  are  no  longer  in  existence  or  can  not 
possibly  be  stamped  or  where  a  taxpayer,  after  being  advised  of  his  liability, 
refuses  to  affix  stamps,  will  tax  be  reported  for  assessment.  When  assess- 
ment is  paid  a  receipt  on  Form  1  will  be  issued.  In  those  instances  where 
stamps  are  purchased  and  affixed  to  the  instrument  receipt  on  Form  I  will 
not  be  issued. 

3992  Art.  172.  Regulations  covering  tax  on  issue,  sales,  and  transfers  of 

stock  and  sales  of  products. — See  separate  regulations  (No.  40) 
[page  710]  relative  to  collection  of  tax  on  issue,  sales,  and  transfers  of  stock 
.and  on  sales  of  products  for  future  delivery. 


3  IO  010091 


AUTHORITY  FOR  REGULATIONS. 

3993  Art.  173.  Promulgation  of  Regulations. — In  pursuance  of  the 
statute  the  foregoing  Regulations  are  hereby  made  and  promulgated^ 
and  all  rulings  inconsistent  herewith  are  hereby  revoked. 

D.  H.  BLAIR, 
Commissioner  of  Internal  Revenue. 
fbumesni  3ud  t&uz$i  airfj-no  x*J  on  ad  bluo/Ia  oisrti  Jjsn>      oj  fnsoa  bluow  J I 

Approved  June  12,  1922  [Released  July  5,  1922]. 
A.  W.  MELLON, 

Secretary  of  the  Treasury. 

on  io  83i£fi8  gxV  io  sl/eai  aai  o*  x&i  qmsJa  5>m  to  flod&oilqqs  wiJ  o)  3£  gniiin 
jjulsv  ifiq  aril  k>  vlpoJg  flOiii.:;o->  lo  .M£i'a  rhr.o  io!  9§n£rbx3  ni  Aoolz  auffiv  ifiq 
}naom£  arlj  m  X£J  qm-£J«  odi  oJ  ioo[6ua  &i  doolz  eirfa  k>  anaai  sdT  .001$  \o 
X£J  sdl  bns  31/831  rbns  xioqu  bbji/qnroo  X£j  srii  noovrtod  sonoiMb  odi  \o 
.Si  M  moil  yiiupnt  lo  irtSoJ)  *.830fiiq3i  t\  doidw  ai/sai  3rh  noqu  bafiiqmcD 
,oiHO  .bxififevaD  ,ynBQxrroO  i?mT  bnfitev^D  3/iT  .}n£*Iu3noO  zbT  .vsioiG 


.vnjiqrpoD  JeuiT  noiifiio 
Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  761  SERVICE 


1-2-22.     (2)  6-12-22.     (3)  7-27-22. 

STAMP  TAX  REGULATIONS. — 1922. 


3994  Taxable  and  tax-free  issues  upon  a  merger  of  corporations.— It 

3562  appears  that  paragraph  (f)  of  article  5,  which  is  somewhat  uncertain, 

3563  requires  construction  in  order  to  be  reconciled  with  paragraph  (j) 
3581     of  article  4.    The  distinction  with  respect  thereto  is  clearly  drawn 

in  Law  Opinion  440  and  Solicitor's  Opinion  4,  Income  Tax  Bulletin  % 
22-20.  In  case  of  a  consolidation  of  corporations  all  stock  issued  by  the 
consolidated  or  newly  created  corporation  is  subject  to  tax  under  paragraph  (i) 
of  article  4,  and  no  other  provision  in  the  Regulations  tends  to  relieve  of  the 
tax  by  reason  of  substitution  or  exchange  for  the  stock  of  the  consolidating 
corporations. 

3995  It  was  held  in  Law  Opinion  440,  under  a  provision  of  the  Revenue 
Act  of  1917,  substantially  the  same  as  the  pertinent  provision  in  the 

Revenue  Act  of  1918,  that  stock  issued  by  the  merging  corporation  (continuing 
corporation)  in  exchange  for  stock  of  the  merged  corporation  is  subject  to 
tax  as  an  original  issue,  saying:  "It  is  an  original  issue  of  stock  that  was 
never  issued  before.  It  is  immaterial  that  part  of  the  new  stock  of  one 
corporation  is  issued  in  exchange  for  old  stock  of  the  other  corporation." 
Such  rule  is  considered  sound.  It  is  strengthened  by  the  direct  language  in 
paragraph  (j)  of  article  4,  supra,  and  by  the  result  reached  in  case  of  consolida- 
tion of  corporations  and  issue  of  stock,  whether  or  not  in  exchange,  mentioned 
supra.  Paragraph  (f)  of  article  5,  supra,  is  not  necessarily  inconsistent 
therewith. 

3996  It  is  accordingly  concluded  that  paragraph  (f)  of  article  5  of  Regula- 
tions  40    (revised)    exempts    stock   of   the   merging  corporation 

(continuing  corporation)  from  the  original  issue  tax  when  exchanged  for  the 
old  certificates  of  stock  of  such  corporation,  but  not  when  exchanged  for  the 
old  certificates  of  stock  of  the  merged  corporation  or  corporations.  (Office 
Decision  No.  83:    Ruling  No.  198,  March,  1921.) 

3997  Exchange  of  non-par  for  par  value  stock  on  reorganization.* — A 
3561     company  is  issuing       shares  of  no  par  value  stock  to  each  stockholder 

of  record  of  one  share  of  common  stock  $100  par  value.  Through 

the  reorganization  of  the  company,  I  am  informed  that  there  is  no  change 
in  the  amount  of  the  authorized  working  capital.  Inasmuch  as  Subdiv- 
ision (i)  of  Article  5,  Regulations  40,  has  been  amended,  is  this  issue  by 
the  corporation  of  certificates  of  no  par  value  stock  in  lieu  of  outstanding 
certificates  of  common  stock  without  other  consideration  subject  to  tax? 
The  new  amendment  under  T.  D.  3118  seems  to  eliminate  from  those  subject 
and  not  subject  to  tax  issues  of  certificates  of  preferred  stock  or  of  no  par 
value  stock  in  lieu  of  outstanding  certificates  of  common  stock  or  vice  versa. 
It  would  seem  to  me  that  there  should  be  no  tax  on  this  issue,  but  inasmuch 
as  I  have  been  asked  to  obtain  a  ruling  immediately,  I  would  be  greatly 
obliged  if  you  would  send  me  a  wire  at  once  collect.  (Answer.)  Reference 
letter  M.  R.  Dickey,  Tax  Consultant,  dated  February  14,  1921,  requesting 
ruling  as  to  the  application  of  the  stamp  tax  to  the  issue  of  l}/2  shares  of  no 
par  value  stock  in  exchange  for  each  share  of  common  stock  of  the  par  value 
of  $100.  The  issue  of  this  stock  is  subject  to  the  stamp  tax  in  the  amount 
of  the  difference  between  the  tax  computed  upon  such  issue  and  the  tax 
computed  upon  the  issue  which  it  replaces.*  (Letter  of  inquiry  from  N.  R. 
Dickey,  Tax  Consultant,  The  Cleveland  Trust  Company,  Cleveland,  Ohio, 
and  the  telegram  of  reply  thereto  signed  by  Deputy  Commissioner  Baker, 
and  dated  February  21,  1921.) 

•By  subsequent  T.  D.  3289  (H4026)  and  Regulations  40,  1922  Edition,  it  is  otherwise 
provided. — The  Corporation  Trust  Company. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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1-2-22      (2)  6-12-22 

STAMP  TAX  REGULATIONS. — 1922. 


(T.  D.  3219.) 

(273  Fed.  197.) 

{Revenue  Act  of  1918.) 

A  taxable  transfer  of  stock  is  involved  when  stock  is  issued  in  considera- 
tion of  the  transfer  of  property  and  the  vendor  corporation  authorizes  the 
vendee  corporation  to  issue  the  new  stock  direct  to  the  vendors  stockholders. 

3998  1.  Transfer  of  right  to  receive  shares  or  certificates  of  stock.— 
3524  Where  one  corporation  sold  to  another  corporation  certain  property 
3614     in  consideration  of  the  issuance  to  it  of  a  fixed  number  of  shares  of 

the  capital  stock  of  the  purchasing  corporation,  and  thereafter,  prior 
to  the  actual  issuance  of  the  stock  certificates,  the  vendor  corporation  author- 
ized the  vendee  corporation  to  issue  the  shares  direct  to  the  stockholders 
of  the  vendor  corporation,  the  resolution  of  the  board  of  directors  of  the 
vendor  corporation  conveying  the  authority  is  a  transfer  of  the  right  to 
receive  such  shares,  and  the  transaction  is  subject  to  the  stamp  tax  imposed 
by  Subdivision  4,  Schedule  A,  of  the  Revenue  Act  of  1918. 

3999  2.    Corporations — disregard  of  corporate  entity. — The  substantial 
difference  between  a  corporation  and  its  stockholders  may  not  be 

disregarded. 

(The  decision  [syllabus  only,  as  shown  above]  of  the  United  States  Dis- 
trict Court,  District  of  New  Jersey,  rendered  May  31,  1921,  in  the  case  of 
Marconi  Wireless  Telegraph  Company  of  America  v.  Charles  V.  Duffy, 
Collector  [273  Fed.  197],  is  published  not  as  a  ruling  of  the  Treasury  Depart- 
ment, but  for  the  information  of  Internal  Revenue  officers  and  others  con- 
cerned.) 


4000  Transfer  of  stock  from  trustee  to  substituted  trustee,  when  such 
3597  transfer  results  wholly  from  operation  of  law. — Reference  is  made 
to  your  letter  of  February  3,  1921,  wherein  you  request  to  be  advised 
"whether  when  one  trustee  is  substituted  for  another,  the  beneficiaries  remain- 
ing the  same,  and  a  certificate  of  stock  is  transferred  from  the  name  of  one 
trustee  to  that  of  the  substituted  trustee  the  transfer  is  subject  to  tax." 
fin  reply,  you  are  advised  that  this  office  holds  that  the  transfer  of  stock 
from  one  group  of  trustees  to  another  group,  although  one  or  more  of  the 
trustees  remains  the  same,  is  subject  to  stamp  tax  under  subdivision  (4), 
Schedule  A,  Title  XI  of  the  Revenue  Act  of  1918,  and  that  the  tax  is  measured 
by  the  face  or  par  value  of  all  the  stock  covered  by  the  transfer.  However, 
if  transfer  of  title  results  wholly  from  operation  of  law,  such  transfer  is  net 
subject  to  stamp  tax.  (Letter  to  a  subscriber,  signed  by  Assistant  Commis- 
sioner Paul  Myer,  and  dated  February,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
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1-2-22.     (2)  6-12-22. 

STAMP  TAX  REGULATIONS. — 1922. 


4001  Transfer  of  stock  to  substituted  trustee  under  the  Massachusetts 
3597     law. — Reference  is  made  to  your  letter  of  April  22,  1921,  with  respect 

to  the  transfer  of  stock  to  the  names  of  succeeding  trustees  appointed 
under  the  Massachusetts  statute.  Ifln  reply  you  are  advised  that  it  is  the 
opinion  of  this  office  that  where  new  trustees  are  appointed  under  the  provis- 
ions of  Chapter  147,  Section  6,*  Revised  Laws  of  Massachusetts,  the  newly 
appointed  trustees  acquire  title  to  the  trust  estate  by  virtue  of  their  appoint- 
ment and  without  any  formal  conveyance.  Therefore,  the  transfer  of  the 
stock  from  the  names  of  the  retiring  trustees  to  the  succeeding  trustees  is 
not  subject  to  stamp  tax.  (Letter  to  Robert  H.  Gardiner,  Jr.,  Boston,  Mass., 
signed  by  Acting  Deputy  Commissioner  A.  C.  Holden,  and  dated  May  4, 
1921.) 

*Section  5.  If  a  trustee  under  a  written  instrument  declines,  resigns,  dies  or  is  removed 
before  the  objects  of  the  trust  are  accomplished  and  such  instrument  makes  no  adequate 
provision  for  supplying  the  vacancy,  the  supreme  judicial  court,  the  superior  court  or  the 
probate  court  shall,  after  notice  to  all  persons  interested,  appoint  a  new  trustee  to  act  solely 
or  jointly  with  the  others  as  the  case  may  be. 

Section  6.  A  new  trustee  appointed  under  the  provisions  of  the  preceding  section,  or 
appointed  in  the  place  of  a  former  trustee  in  conformity  with  a  written  instrument  creating 
a  trust,  shall,  upon  giving  such  bond  as  may  be  required,  have  the  same  powers,  rights  and 
duties  and  the  same  title  to  the  estate,  whether  as  a  sole  or  a  joint  trustee,  as  if  he  had  been 
originally  appointed;  and  the  court  may  order  any  conveyances  to  be  made  by  the  former 
trustee  or  his  representatives  or  by  the  other  remaining  trustees  which  it  may  find  proper 
or  convenient  to  vest  the  trust  estate  in  the  new  trustee  either  solely  or  jointly  with  the 
others. 

4002  Nominal  transfer  of  title  to  stock  on  death  of  trustee  to  surviving 

3597  trustee  or  trustees. — Reference  is  made  to  your  letter  of  March  5, 
3617  1921,  requesting  a  ruling  as  to  the  application  of  the  stamp  tax  to  the 
transfer  of  shares  of  stock  to  the  surviving  trustee  upon  the  death  of 
one  of  the  trustees.  ^fln  reply  you  are  advised  that  when  stock  stands 
in  the  name  of  two  or  more  trustees,  the  nominal  transfer  of  such  stock  to  the 
surviving  trustee  or  trustees  upon  the  death  of  one  of  the  trustees  is  not 
subject  to  the  stamp  tax.  (Letter  to  The  Corporation  Trust  Company, 
signed  by  Acting;  Deputy  Commissioner  A.  C.  Holden,  and  dated  March  15, 
1921.) 

4003  Use  of  rubber  stamps  on  certificates  in  case  of  transfers  of  stock  to 
3627     broker  for  sale  and  from  broker  to  purchasing  customer. — Reference 

letter  AM-CW-636,  dated  April  15.  Permission  is  granted  brokers 
to  use  rubber  stamp  with  the  name  of  firm  and  address  in  issuing  certificates 
required  by  Article  13,  paragraphs  (k)  H! 3625],  (1)  IT3626]  and  (m)  [*[3627] 
of  Regulations  40  Revised.  (Telegram  to  the  Collector  of  Internal  Revenue, 
New  York,  N.  Y.,  signed  by  Acting  Deputy  Commissioner  A.  C.  Holden, 
and  dated  April  19,  1921.) 

4004  Drafts  payable  in  terms  of  foreign  currency,  accepted  or  delivered 
3783     within  the  U.  S. — Reference  is  made  to  your  letter  of  September  7, 

1921,  requesting  a  ruling  as  to  the  application  of  the  stamp  tax  to 
certain  drafts  drawn  outside  of  the  United  States  where  acceptance  or  delivery 
is  made  within  the  United  States  but  payable  in  terms  of  foreign  currency; 
as  for  example,  payable  in  French  francs  in  New  York.  %\n  reply  you  are 
advised  that  the  stamp  tax  accrues  upon  delivery  or  acceptance  within  the 
United  States,  whichever  is  prior.  This  stamp  tax  should  be  computed 
on  the  rate  of  exchange  at  the  time  and  place  of  such  delivery  or  acceptance. 
(Letter  to  the  Equitable  Trust  Company  of  New  York,  New  York,  N.  V., 
attention  Franklin  Carter,  Jr.,  signed  by  Acting  Commissioner  C.  P.  Smith, 
and  dated  Sept.  20,  1921.) 

<--'/' yiigi't  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  764  SERVICE 


1-2-22.      (2)  6-12-22. 

STAMP  TAX  REGULATIONS.— 1S22. 


4005  Trade  acceptance  given  in  settlement  of  balance  due  on  open  export 
3789     account  is  not  exempt,  as  it  is  not  incident  to  the  process  of  ex- 

3791  portation. — Reference  is  made  to  your  letter  of  October  14,  1921, 

3792  where  you  state  as  follows:    "A  customer  of  ours  has  sold  and 
shipped  goods  to  a  Cuban  firm  in  Cuba  on  open  account.    The  Cuban 

firm,  after  making  a  small  cash  payment,  has  offered  to  give  its  acceptance 
for  the  balance  due  on  account  of  goods  shipped. "  You  request  to  be  ad- 
vised whether  this  draft  is  an  inherent  part  of  the  export  transaction,  even 
though  it  is  not  accompanied  by  shipping  documents,  and  therefore  exempt 
from  the  stamp  tax. 

4006  Article  41  of  Regulations  55,  Revised,  provides  that  "A  time  draft 
directly  covering  exports  to  a  foreign  country  and  which  constitutes 

an  inherent,  necessary  and  bona  fide  part  of  the  actual  process  of  exportation 
is  exempt  from  stamp  tax."  This  language  is  not  intended  to  convey  the 
idea  that  every  draft  used  in  payment  for  exports  is  exempt  from  tax  by  reason 
of  the  constitutional  prohibition  against  tax  on  exports.  The  drafts  which  are 
thus  exempt  from  stamp  tax  are  only  those  which  through  long  established 
custom  have  come  to  be  a  necessary  part  of  the  process  of  exportation,  of 
which  the  draft  drawn  by  an  exporter  upon  a  foreign  purchaser  for  the  price 
of  the  goods  and  which  is  accompanied  by  the  bill-of-lading  is  typical,  if  not 
the  sole  example. 

4007  The  acceptance  in  question  is  given  in  settlement  of  a  balance  due 
upon  an  open  account.    It  is  not  believed  that  this  instrument  is  an 

inherent  and  necessary  part  of  the  actual  process  of  exportation,  and,  there- 
fore, no  exemption  can  be  allowed  on  the  ground  that  it  constitutes  an 
inherent  and  necessary  part  of  the  process  of  exportation.  (Letter  to  the 
National  Bank  of  Commerce  in  New  York,  New  York,  N.  Y.,  signed  by 
Deputy  Commissioner  F.  G.  Matson,  and  dated  Nov.  4,  1921.) 

40 OS    Extension  or  renewal  of  promissory  note  by  extension  of  mortgage 

3812  by  which  secured, — Reference  is  made  to  your  letter  of  March  23, 

3813  1921,  wherein  you  state  that  you  have  been  advised  by  the  office  of 
the  Collector  of  Internal  Revenue  at  Boston,  Mass.,  that  "where  a 

mortgage  is  extended  by  the  usual  form  of  extension,  operating  to  renew  the 
note  also,  the  revenue  stamps  to  be  used  in  that  connection  should  be  affixed 
to  such  extension  agreement  rather  than  to  the  original  note  already  stamped 
in  accordance  with  its  entire  principal  amount,"  and  request  to  be  advised 
whether  the  foregoing  is  correct.  %ln  reply  you  are  advised  that  the  ruling 
referred  to  above  and  which  you  state  was  given  to  you  by  the  Collector  of 
Internal  Revenue  at  Boston,  Mass.,  is  correct.  (Letter  to  Holmes  &  Worthen, 
Boston,  Mass.,  signed  by  Acting  Deputy  Commissioner  A.  C.  Holden,  and 
dated  March  31,  1921.) 

4009    Drafts  covering  bunker  coal  supplied  in  this  country  to  foreign 
3783     steamship  company. — Reference  is  made  to  your  letter  of  April  5, 
3791      1921,  requesting  a  ruling  as  to  the  application  of  the  stamp  tax  to  a 
draft  drawn  against  a  foreign  steamship  company  covering  a  bill  for 
bunker  coal  furnished  in  this  country.    The  sale  of  bunker  coal  in  this  coun- 
try to  a  foreign  steamship  company  is  held  to  be  a  domestic  sale  and  not  an 
export.    In  view  of  this  fact,  a  draft  drawn  on  the  foreign  buyer  in  payment 
of  such  bunker  coal  is  subject  to  the  stamp  tax  under  Schedule  A-6,  Title 
XI  of  the  Revenue  Act  of  1918.    (Letter  to  a  subscriber,  signed  by  Acting 
Commissioner  M.  F.  West,  and  dated  April  13,  1921.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  765  SERVICE 


1-2-22.    (2)  6-12-22. 

STAMP  TAX  REGULATIONS.— 1922. 


(Decision.) 
276  Fed.  51. 
Revenue  Act  of  1918. 
(T.  D.  3233.) 

Trust  Certificates  issued  under  the  Pennsylvania  Plan  held  to  be  taxable 
as  "Certificates  of  Indebtedness." 

IN  THE  DISTRICT  COURT  OF  THE  UNITED  STATES  FOR  THE 
EASTERN  DISTRICT  OF  PENNSYLVANIA. 

Fidelity  Trust  Company  )       December  Sessions  1920 

vs.  y  No.  8118 

Ephraim  Lederer,  Collector.  )  Assumpsit. 

Sur  rule  for  judgment. 

4010    Dickinson,  J. — This  case  is  in  effect  a  case  stated,  in  the  determination 
3520     of  which  we  are  asked  to  decide  a  question  of  law.    The  question 
3757     broadly  stated  is  whether  the  "certificates"  held  by  the  plaintiff 
as  trustee  are  taxable.    We,  in  consequence,  limit  our  attention  to 

this. 

401  1  The  taxing  authorities  give  the  impression  of  their  attitude  as  first 
one  of  uncertainty  and  then  one  of  doubt.  We  have  given  the  subject 
of  the  tax  the  name  of  "certificates"  in  order  to  get  a  word  as  colorless  as 
possible,  because  any  word  or  words  definitely  descriptive  of  what  the  thing 
sought  to  be  taxed  really  is,  anticipates  the  ruling  to  be  made  inasmuch  as 
what  the  thing  is  determines  whether  or  not  it  is  taxable.  It  is  conceded  that 
Congress  might  have  taxed  these  "certificates"  had  they  been  known  or 
thought  of  and  had  Congress  so  willed.  The  whole  question  is  has  it  taxed 
them?  It  has  if  they  fall  within  the  verbiage  [sic]  of  the  Acts  of  Congress, 
otherwise  they  remain  untaxed.  It  is  doubtless  the  fact  that  the  draught  of 
the  tax  laws  had  the  purpose  in  mind  to  tax  everything  from  which  income 
was  expected  to  be  derived  by  granting  to  one  person  the  use  of  the  money 
of  another.  In  the  effort  to  make  sure  of  the  accomplishment  of  this  purpose 
resort  was  had  to  enumeration  and  description.  The  descent  from  the  general 
to  the  particular  and  specific,  however  careful  the  attempt  to  make  the  list 
of  the  latter  full  and  all  embracing,  always  has  the  result  of  at  least  rendering 
doubtful  the  inclusion  of  what  is  not  by  name  listed.  All  forms  of  so  called 
securities  or  investments  issuei  by  corporations,  whether  expressive  of  in- 
debtedness or  shares  in  anything  the  corporation  possesses,  are  without 
doubt  taxed,  as  are  also  all  forms  of  instruments  expressive  of  the  indebted- 
ness of  any  person  to  the  holder. 

4012  We  were  strongly  impressed  by  the  argument  at  bar  that  these  two 
general  lines  of  thought  marked  the  limits  of  what  had  been  taxes. 
The  question  before  us  then  resolved  itself  into  an  inquiry  into  what  these 
"Certificates"  are.  They  are  in  strictness  neither  evidences  of  debt  nor  of 
shares  in  corporate  assets.  This  is  because  of  their  peculiar  form  and  of  the 
plan  under  which  created.  A  dealer  (n  so  called  investments  or  securities 
would  without  doubt  or  hesitation  list  them  under  the  name  or  designation 
of  "Car  Trust  Certificates,"  for  such  they  are.  There  are  many  such  "on 
the  market."    They  all  have  the  same  general  purpose  and  character.  They 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  766  SERVICE 


1-2-22.      (2)  6-12-22.    (3)  12-30-22. 

STAMP  TAX  REGULATIONS. 


are  called  for  because  some  railroad  or  other  transportation  company  is  in 
need  of  rolling  stock  or  other  equipment  and  is  without  funds  or  credit  with 
which  to  supply  itself,  and  there  is  a  legal  or  other  difficulty  in  the  way  of  a 
direct  pledge  of  the  property.  They  are  issued  under  a  number  of  different 
plans.  The  one  with  which  we  are  concerned  is  known  as  the  Philadelphia 
plan.  Those  willing  to  share  in  the  venture  are  invited  to  place  their  contribu- 
tions in  the  hands  of  an  acceptable  trustee.  The  rolling  stock,  or  other 
property  is  then  purchased  in  the  name  of  this  trustee  as  owner.  The  trustee 
then  enters  into  a  form  of  bailment  or  conditional  sale  agreement  with  the 
carrier,  the  periodical  and  final  payments  upon  which  are  sufficient  to  pay  the 
interest  on  the  investment  and  the  principal  at  maturity.  The  contributors 
in  the  meantime  hold  the  certificates  or  acknowledgment  of  the  trustee  of  their 
respective  shares  in  the  venture. 

4013  It  will  thus  be  seen  that  in  strictness  the  only  obligation  in  the 
nature  of  a  debt  or  promise  to  pay  money  is  the  obligation  and  agree- 
ment of  the  carrier  to  pay  the  agreed  price  for  the  hire  and  use  of  the  property 
or  the  rentals  as  they  are  commonly  termed.  The  trustee  is  a  mere  purse, 
and  only  in  a  secondary  sense  can  be  said  to  owe  anything  to  any  one  other 
than  faithfulness  to  its  trust  obligations,  and  is  not  a  debtor  even  in  this 
secondary  sense  unless  and  until  and  as  the  moneys  which  belong  to  the 
contributors  come  into  its  hands.  The  certificate  is  not  within  the  literal 
verbiage  [sic]  of  the  Act  of  Congress  not  being  "a  certificate  of  indebtedness 
issued  by  any  person"  nor  "an  instrument  issued  by  any  corporation."  If 
the  taxing  hand  has  been  laid  only  upon  these  specific  forms  of  what  are 
generally  known  as  securities,  it  must  be  withdrawn  from  the  "trust  certi- 
ficates" now  under  view.  This  would  mean  that  they  are  the  exceptions 
among  this  general  class  of  securities  and  are  exempt  because  of  the  very  effort 
made  in  the  framing  of  the  law  to  include  all  forms  of  securities  of  this  general 
character  has,  in  verbal  nicety,  excluded  them.  The  Act  of  Congress,  however, 
includes  more  than  the  two  kinds  of  securities  mentioned  above,  because  we 
think  it  includes  everything  "known  generally  as  corporate  securities." 
That  these  trust  certificates  are  so  known  would  not  be  denied.  The  denial 
would  be  of  the  correctness  of  this  construction  of  the  Act  of  Congress. 
There  are  two  obstacles  to  be  surmounted  before  reading  this  construction. 
One  is  that  the  rule  of  the  nearest  antecedent  makes  the  quoted  phrase  relate 
to  and  serve  as  a  definition  of  the  described  kinds  of  "instruments  issued 
by  corporations,"  and  the  other  is  that  the  finding  of  a  meaning  to  tax  all 
instruments  "commonly  known  as  corporate  securities"  involves  presence 
of  a  grammatical  error  in  the  Act  of  Congress.  Neither  of  these  obstacles 
are  however  insurmountable,  if  this  was  the  meaning  of  Congress,  and  we 
so  find.  Nor  do  we  see  any  conflict  between  a  ruling  that  these  certificates 
are  taxable  and  the  doctrine  of  the  cases  to  which  we  have  been  referred 
that  there  is  no  such  thing  as  a  doubtful  tax.  U.  S.  vs.  Isham,  84  U.  S.,  496. 

4014  The  question  now  presented  is  admittedly  a  close  one,  but  this 
does  not  necessarily  make  for  the  taxpayer.    The  true  doctrine  is 

that  neither  the  Executive  nor  the  Judicial  Departments  nor  both  can  levy 
a  tax.  This  can  only  be  done  by  Congress.  When,  however,  Congress  has 
acted  and  the  tax  questioned  is  found  to  have  been  levied,  the  mere  fact 
that  in  the  light  of  the  particular  case  in  which  the  question  is  raised  the 
meaning  of  Congress  might  have  been  more  clearly  expressed,  does  not 
justify  refusal  to  give  that  meaning  effect.  The  real  truth  back  of  the  whole 
discussion  is  that  if  these  certificates  are  not  taxable,  it  is  because  of  the 
accidental  circumstance  of  a  wholly  nominal  separation  of  the  security  held 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         767  SERVICE 


1-2-22.J    (2)  6-12-22.    (3)  12-30-22. 

STAMP  TAX  REGULATIONS. 


by  the  taxpayer  from  the  obligation  of  debt  entered  into  by  the  carrier 
corporation.  The  real  security  is  the  promise  not  of  one  corporation  but  of 
two  to  pay  to  the  certificate  holders  the  sums  due  them.  The  real  trans- 
action is  the  request  of  the  carrier  company  made  to  the  certificate  holders 
to  advance  the  money  required  for  equipment,  in  consideration  of  which  the 
carrier  agrees  to  pay  back  the  sum  advanced,  with  interest.  This  it  is  true 
was  not  the  form  of  the  promise,  but  such  it  was  in  substance  because  it  was 
a  promise  to  pay  a  sum  which  was  the  exact  (and  not  accidental  but  prefixed) 
equivalent  of  the  advances,  with  interest.  It  is,  however,  and  none  the  less 
true,  that  if  for  any  reason  Congress  has  not  included  these  certificates,  no 
tax  can  be  imposed.  The  impression  to  this  effect  made  by  the  argument  at 
bar  has  been  removed  by  what  seems  to  us  to  be  the  sufficiently  expressed 
will  of  Congress  to  tax  them. 

4015    We  have  disposed  of  the  case  as  if  on  trial  hearing  with  all  the  facts 
which  enter  into  the  discussion  established,  understanding  such  to 
be  the  wish  of  all  parties,  it  being  conceded  that  all  these  facts  are  in  the 
record.* 

Rule  for  judgment  discharged. 

*Sur  trial  by  the  court  sitting  without  a  jury.  After  trial  Judge  Dickin- 
son says:  "This  case,  although  in  form  assumpsit,  raises  the  sole  question  of 
the  legality  of  a  tax  levy.  The  very  question  now  raised  was  raised  and  dis- 
posed of  on  a  rule  for  judgment.  Judgment  was  refused  [If 40 10].  This 
necessitated  a  trial  hearing,  but  the  question  to  be  determined  has  in  no  wise 
changed."  And  in  conclusion:  "Our  conclusion  is  on  the  trial  what  is  was 
in  the  rule  for  judgment,  that  these  car-trust  certificates  are  subject  to  the 
tax  imposed  by  this  act  of  Congress."  (Fidelity  Trust  Co.  vs.  Lederer, 
U.  S.  D.  C,  E.  D.  of  Penn.  Not  yet  reported.— T.  D.  3417:  Bull  I  ('22)-52, 
p.  15.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         768  SERVICE 


(1)2-6-22.  (2)2-17-22. 

STAMP  TAX  REGULATIONS. — 1922. 


4016  Reliance  by  original-issue  agents,  for  stamp  tax  purposes,  on  state- 
3503    ment  of  officials  of  corporation  as  to  "actual  value"  of  its  non-par 

value  stock. — Reference  is  made  to  your  letters  of  January  3  and 
6,  1922,  concerning  the  application  of  the  stamp  tax  to  the  issue  of  stock 
of  no  par  or  face  value  where  such  stock  is  worth  less  than  $20  per  share. 

4017  It  is  noted  that  rulings  are  requested  as  follows:   "May  we  regard 
as  sufficient  authority  for  tax  determination  purposes  a  resolution 

or  instructions  from  the-  Board  of  Directors  or  the  officers  of  the  issuing 
corporation  to  the  effect  that  the  issued  stock  is  of  a  certain  'actual  value* 
for  stamp  tax  purposes  ?" 

4018  In  your  letter  of  January  6,  1922,  you  state  "we  are  the  original 
issue  and  transfer  agents  for  many  corporations  and  affix  revenue 

stamps  for  them  in  the  case  of  original  issue  of  stock.''  In  the  absence  of 
further  definite  information  it  is  assumed  for  the  purposes  of  this  reply 
that  the  status  of  principal  and  agent  correctly  describes  the  legal  relation- 
ship between  you  and  the  corporation  for  which  you  act.  The  responsibility 
for  the  correct  determination  of  the  actual  value  of  no-par-value  stock  is 
upon  the  taxpayer.  Although  as  a  general  rule  your  principal  (i.  e.,  the 
corporation  issuing  the  stock)  would  be  liable  for  additional  taxes  and 
penalties  resulting  from  an  incorrect  determination  of  such  value,  it  is 
absolutely  impossible  for  this  office  to  advise  you  that  in  all  cases  the  issue 
or  transfer  agent  would  be  free  to  accept  with  absolute  impunity  the  resolu- 
tion or  instructions  of  the  proper  corporate  officials  as  to  the  actual  value 
of  the  stock. 

401 9  Original  issue  tax  liability  on  certificate  representing  more  than  one 
3521    share  having  actual  value  of  less  than  $100. — "We  ask  also  that  you 

advise  us  as  to  your  interpretation  of  the  no-par-value  stock-issue 
tax  provided  for  by  Schedule  A  (2).  Where  the  actual  value  'is  less  than 
$100  per  share'  is  the  tax  of  1  cent  'on  each  $20  of  actual  value  or  fraction 
thereof  on  a  per  share  basis,  or  is  it  based  on  the  actual  value  of  the  cer- 
tificate which  may  represent  a  number  of  shares?"  (Answer.)  The  stamp 
tax  should  be  computed  on  the  value  of  each  share.  Where  the  actual  value 
of  a  share  of  no  par  value  stock  is  $5  the  tax  on  ten  shares  of  such  stock 
will  be  10  cents.  (Letter  to  The  Corporation  Trust  Company,  signed  by 
Deputy  Commissioner  F.  G.  Matson,  and  dated  January  26,  1922.) 


4030  Transfer  of  stock  registered  in  name  of  a  partnership  to  the  individual 
3595  members  thereof. — Reference  is  made  to  your  letter  of  January  14, 
1922,  wherein  you  state  that  a  partnership  *  *  *  has  presented 
for  transfer  a  certificate  of  stock  for  100  shares  of  *  *  *  Railway,  regis- 
tered in  the  name  of  the  partnership,  to  be  split  up  in  the  names  of  the  two 
parties  [the  two  members  of  the  partnership]  50  shares  to  each,  and  request 
to  be  advised  whether  said  transfer  is  subject  to  stamp  tax.  (Answer)  In 
reply  you  are  advised  that  this  office  holds  that  the  transfer  of  this  stock 
from  a  partnership  to  the  members  of  the  partnership  individually  is  subject 
to  stamp  tax.  (Letter  to  The  Equitable  Trust  Company,  New  York,  N.  Y., 
attention  Franklin  Carter,  Jr.,  signed  by  Deputy  Commissioner  F.  G. 
Matson,  and  dated  February  3,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         769  SERVICE 


2-17-22. 


STAMP  TAX  REGULATIONS. — 1922. 


(T.  D.  3286.) 

4021  Issuance  and  renewal  of  indemnity  and  surety  bonds  before  Jan- 
3764     uary  I,  1922  and  after  December  31,  1921.— Section  1400  (a)  under 

Title  XIV  of  the  Revenue  Act  of  1921  repeals  the  stamp  taxes  im- 
posed by  subdivision  2,  Schedule  A,  of  the  Revenue  Act  of  1918,  to  take 
eff-ct  on  January  1,  1922,  subject  to  the  limitations  regarding  the  assessment 
and  collection  of  taxes  accrued  prior  to  such  date  prescribed  in  subdivision  (b) 
of  said  Section  1400.  Section  1100  and  Schedule  A-2  of  the  Revenue  Act  of 
1918  provided: 

"Sec.  1100.  That  on  and  after  April  1,  1919,  there  shall  be  levied,  collected,  and 
paid,  for  and  in  respect  of  the  several  bonds,  debentures,  or  certificates  of  stock  and 
of  indebtedness,  and  other  documents,  instruments,  matters,  and  things  mentioned  and 
described  in  Schedule  A  of  this  title,  or  for  or  in  respect  of  the  vellum,  parchment,  or 
paper  upon  which  such  instruments,  matters,  or  things,  or  any  of  them,  are  written 
or  printed,  by  any  person  who  makes,  signs,  issues,  sells,  removes,  consigns,  or  ships 
the  same,  or  for  whose  use  or  benefit  the  same  are  made,  signed,  issued,  sold,  removed, 
consigned,  or  shipped,  the  several  taxes  specified  in  such  schedule.  The  taxes  im- 
posed by  this  section  shall,  in  the  case  of  any  article  upon  which  a  corresponding  stamp 
tax  is  now  imposed  by  law,  be  in  lieu  of  such  tax." 

"2.  Bonds,  indemnity  and  surety:  On  all  bonds  executed  for  indemnifying  any 
person  who  shall  have  become  bound  or  engaged  as  surety,  and  on  all  bonds  executed 
for  the  due  execution  or  performance  of  any  contract,  obligation,  or  requirement,  or 
the  duties  of  any  office  or  position,  and  to  account  for  money  received  by  virtue  thereof, 
and  on  all  policies  of  guaranty  and  fidelity  insurance,  including  policies  guaranteeing 
titles  to  real  estate  and  mortgage  guarantee  policies,  and  on  all  other  bonds  of  any 
description,  made,  issued,  or  executed,  not  otherwise  provided  for  in  this  schedule, 
except  such  as  may  be  required  in  legal  proceedings,  50  cents:  Provided,  That  where 
a  premium  is  charged  for  the  issuance,  execution,  renewal  or  continuance  of  such  bond 
the  tax  shall  be  1  cent  on  each  dollar  or  fractional  part  thereof  of  the  premium  charged: 
Provided  further,  That  policies  of  reinsurance  shall  be  exempt  from  the  tax  imposed  by 
this  subdivision." 

4022  The  tax  imposed  by  the  foregoing  statutory  provisions  was  upon  the 
issuance,  execution,  renewal  or  continuance  in  force  of  the  bonds 

described  therein.  Therefore,  any  such  instrument  issued  or  executed  after 
March  31.  1919,  but  prior  to  January  1,  1922,  is  subject  to  the  stamp  tax 
whether  taking  effect  immediately  or  subsequent  to  the  repeal  of  said  tax. 
But  any  such  instrument  issued  or  executed  after  December  31,  1921,  is  not 
subject  to  stamp  tax  although  effective  as  of  a  date  prior  to  January  1,  1922. 

4023  Where  a  premium  is  charged  prior  to  January  1,  1922,  for  the  issuance 
or  execution  (regardless  of  the  effective  date),  or  the  renewal  or  con- 
tinuance in  force,  of  any  bond  or  other  instrument  designated  in  Schedule 
A-2  of  the  Revenue  Act  of  1918,  the  same  is  subject  to  stamp  tax  upon  the 
entire  amount  of  the  premium  so  charged.  But  where  a  premium  is  charged 
subsequent  to  December  31,  1921,  for  the  issuance  or  execution  after  said 
date,  or  for  the  renewal  or  continuance  in  force,  of  any  such  bond  or  in- 
strument, no  stamp  tax  is  due  upon  the  premium  charged. 

4024  However,  where  a  premium  is  charged  upon  the  issuance,  execution, 
renewal  or  continuance  in  force,  subsequent  to  December  31,  1921, 

of  any  indemnity  or  surety  bond  given  to  the  Federal  Government,  or  of  any 
policy  of  guaranty  and  fidelity  insurance  in  favor  of  the  United  States,  a 
statement  must  be  made  on  the  face  of  such  bond  or  policy  showing  the  rate 
and  amount  of  the  premium  charged.  (T.  D.  3286,  signed  bv  Commissioner 
D.  H.  Blair,  and  dated  February  15,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  770  SERVICE 


2-24-22.    (2)  6-9-22.    (3)  7-18-22.    (4)  7-21-22. 

STAMP  TAX  REGULATIONS— 1922. 


nr.  D.  3289  ) 

4025  Issues  of  stock :  Article  4(h),  Article  4(1)  and  Article  5(i)  (T.  D.  31 18), 
of  Regulations  40  (Revised),  amended. — Article  4(h),  Article  4(1) 

and  Article  5(i)  (T.  D.  3118),  of  Regulations  40  (Revised),  are  hereby  amended 
to  read  as  follows: 

4026  Art.  4(h). — The  issue  of  certificates  of  stock  upon  reorganization  of  a 
3561     corporation  not  expressly  provided  for  in  Art.  4(1)  is  subject  to  tax 

as  follows:  Preferred  stock  issued  in  place  of  common,  or  vice  versa, 
or  one  kind  of  preferred  stock  issued  in  place  of  another  kind  of  preferred 
stock,  or  one  kind  of  common  stock  issued  in  place  of  another  kind  of  com- 
mon stock,  or  stock  without  par  value  issued  in  place  of  stock  with  par 
value,  or  vice  versa,  is  subject  to  tax  on  the  entire  issue. 

4027  Art.  4(1). — The  issue  of  a  greater  number  of  shares  of  no  par  value 
3564a    stock  in  lieu  of  a  smaller  issue  of  such  shares,  previously  made,  or 

the  issue  of  a  greater  number  of  shares  of  par  value  stock  in  lieu  of  a 
smaller  issue  of  such  shares  of  the  same  kind,  previously  made,  whether  on 
organization  or  reorganization  of  the  issuing  corporation,  is  subject  to  stamp 
tax  only  on  the  additional  shares  so  issued. 

4C28  Art.  5(i). — The  issue  by  a  corporation  of  certificates  of  preferred 
3584  stock  in  lieu  of  outstanding  certificates  of  common  stock,  or  vice 
versa,  or  the  issue  of  certificates  of  preferred  stock  of  one  kind  in 
lieu  of  certificates  of  preferred  stock  of  another  kind,  pursuant  to  the  terms 
of  the  original  charter  of  the  corporation,  without  other  consideration  and 
without  change  in  the  amount  of  the  authorized  capital  stock  of  the  corpora- 
tion, is  not  subject  to  tax.  (T.  D.  3289,  signed  by  Commissioner  D.  H.  Blair, 
and  dated  February  21,  1922.) 


4029  Stamps  of  large  denominations  in  proper  aggregate  amount  may  be 
3890     affixed  to  permanent  corporation  record  accompanying  proxies  in 

lieu  of  separate  stamps  to  the  respective  proxies. — Reference  is 
made  to  your  letter  of  May  2,  1922,  in  reply  to  the  letter  from  this  office 
dated  April  26,  in  regard  to  the  affixing  of  documentary  stamps  of  large 
denominations  covering  the  amount  of  stamp  tax  incurred  under  the  pro- 
visions of  section  10,  Title  XI,  of  the  Revenue  Act  of  1921. 

4030  In  reply  you  are  advised  that  where  the  number  of  proxies  required 
in  voting  at  a  stockholders'  meeting  is  sufficiently  large  to  warrant 

the  purchase  of  stamps  of  large  denominations  in  payment  of  the  stamp 
tax  on  such  proxies,  the  stamps  may  be  affixed  to  a  permanent  record  of  the 
corporation  and  signed  by  the  secretary  of  such  corporation,  provided  the 
corporate  seal  is  affixed -thereto.  This  permanent  record  should  accompany 
the  proxies  for  which  the  stamps  were  canceled. 

4031  In  the  event  that  the  special  certificate  of  election  mentioned  in  your 
letter  remains  with  the  proxies  in  question,  such  certificate  should 

bear  the  documentary  stamps  properly  canceled  and  be  retained  in  the 
office  of  the  corporation  for  inspection  by  the  officers  of  the  Bureau  of  Internal 
Revenue.  (Letter  to  The  Corporation  Trust  Company,  signed  by  Deputy 
Commissioner  F.  G.  Matson,  and  dated  May  27,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  771  SERVICE 


6-9-22.     (2)  7-18-22.    (3)  7-21-22. 

STAMP  TAX  REGULATIONS. — 1922. 


4032  Transfer  of  stock  standing  in  name  of  brokerage  firm,  and  held  by 
3595     it  for  account  of  its  clients,  to  and  into  name  of  successor  firm  is 

taxable. — Reference  is  made  to  your  letter  of  October  19,  1921, 
wherein  you  state  that  certain  shares  of  Southern  Pacific  Company's  stock 
stand  in  the  name  of  Berg,  Roesler  and  Kerr;  that  said  firm  has  dissolved 
and  a  new  firm  formed  under  the  name  of  Berg,  Eyre  and  Kerr,  and  that 
the  new  firm  desires  to  transfer  to  its  name  the  shares  standing  in  the  name 
of  the  old  firm.  In  connection  with  this  transfer  you  enclose  a  copy  of  a  com- 
munication received  by  you  and  which  reads  as  follows: 

"Southern  Pacific  Railway  Company, 
165  Broadway, 

New  York,  N.  Y. 

Dear  Sirs: 

We  hereby  guarantee  that  the  firm  of  Berg,  Roesler  and  Kerr  have 
no  ownership  in  any  securities  presented  for  transfer  registered  in 
their  name  and  that  said  securities  were  held  by  the  firm  of  Berg, 
Roesler  &  Kerr  for  the  accounts  of  their  clients  and  transferred  to 
Berg,  Eyre  &  Kerr  under  the  same  conditions  as  existed  with  Berg, 
Roesler  &  Kerr. 

Yours  very  truly, 

(Signed)  Berg,  Roesler  &  Kerr. 
(Signed)  Berg,  Eyre  &  Kerr." 

4033  You  are  advised  that  the  transfer  of  the  stock  under  the  circum- 
stances related  is  held  not  to  come  within  the  proviso  of  Sub-division 

4,  Schedule  A,  Title  XI  of  the  Revenue  Act  of  1918,  which  exempts  from 
stamp  tax  deliveries  or  transfers  to  a  broker  for  sale,  this  provision  being 
construed  by  the  Bureau  to  apply  only  to  the  transfer  of  certificates  of  stock 
from  the  owner  thereof  to  the  broker  solely  for  the  purpose  of  enabling  such 
broker  to  make  a  sale  thereof  for  the  owner.  (See  Article  13(k)  of  Regula- 
tions 40,  Revised  [1(3625.]).  The  transfer  in  question  is,  therefore,  held  to 
be  subject  to  stamp  tax.  (Letter  to  the  Southern  Pacific  Company,  New 
York,  N.  Y.,  signed  by  Deputy  Commissioner  F.  G.  Matson,  and  dated 
Nov,  4,  1921.) 


(T.  D.  3364.) 

4034  [Regulations  55  (1922  Edition)  are  further  designated  as  T.  D.  3364. — 
3743     The  Corporation  Trust  Company.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  772  SERVICK 


8-24-22. 


STAMP  TAX  REGULATIONS. — 1922. 


(T.  D.  3380.) 

4035  [Regulations  40  (1922  Edition)  are  further  designated  as  T.  D. 
3546     3380. — The  Corporation  Trust  Company.] 


4036    Transfer  of  stock  from  banking  institution  to  its  nominee  is  taxable. — 

[3595  Reference  is  made  to  your  letter  of  August  4,  1922,  relative  to  the 
application  of  stamp  tax  to  a  transfer  of  stock  from  a  banking  in- 
stitution to  its  nominee,  accompanied  by  a  certificate  that  there  is  no  change 
in  the  ownership  of  the  stock.  Ifln  reply  you  are  advised  that  the  transfer 
tax  is  not  measured  by  the  transfer  of  ownership  of  stock  but  by  the  transfer 
of  legal  title  to  stock.  The  term  "legal  title"  as  used  in  the  act  signifies  the 
appearance  of  title.  See  Bonbright  v.  State  of  New  York,  165  App.  Div. 
640,  151  N.  Y.  Supp.  35,  which  case  is  followed  by  the  Department.  You 
are  accordingly  advised  that  the  transfer  of  the  stock  to  the  nominee  of  the 
bank  as  referred  to  by  you  is  subject  to  stamp  tax.  (Letter  to  the  Empire 
Trust  Company,  New  York,  N.  Y.,  signed  by  Deputy  Commissioner  F.  G. 
Matson,  and  dated  August  16,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  773  SERVICE 


d  iud  iioote  to  qrnai^nwo  'io  loiafifn:?  adt  v^d  bsujafisn 
>£  sri}  fii  basu  as  "oLrh  legal"  miol  yfiT    .^aoja  oJ  3 


(.££QI  ,dl  jstrsi/A  balfib  bi 


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.O  .1  wnomi 


8*24-22. 

STAMP  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 
Stamp  Tax  Law 

Giving  Treasury  Decision  Number   or  other  designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference, 


T  D. 

Reg.  40 

Reg.  55 

0.  D.  83 

Soecial 

Decision 

Special 

Special 
Speeial 
Social 

Special 
Special 

Special 
Special 

Decision 


Subject 


Paragraph 


Law  Provisions   3500 

Regulations  under  1921  law  (issue  of  July  8,  1922)  relating  to  stamp 
tax  on  issues,  sales  and  transfers  of  stock  and  sales 
of  products  for  future  delivery.    (See  exhaustive 

Table  of  Contents  beginning  on'page  709.)   3547 

Regulations  under  1921  law  (1922  Edition:  June  12,  1922)  relating 
to  stamp  taxes  on  documents,  fully  indexed  on 
the  blue-page  index  at  the  back  of  this  Stamp 
Taxes  division   3743 

Taxable  and  tax-free  issues  upon  a  merger  of  corpora- 
tions.   (March,  1921.)   3994 

Exchange  of  non-par  for  par  value  stock  on  reorganiza- 
tion.   (February  21,  1921.)    3997 

Marconi  Wireless  Telegraph  Co.  vs.  Duffy.  District 
Court  decision,  1918  Act.  Transfer  of  right  to 
receive  stock.    (May  31,  1921.)   3998 

Transfer  of  stock  from  trustee  to  substituted  trustee, 
when  such  transfer  results  wholly  from  operation 
of  law.    (February,  1921.)   4000 

Transfer  of  stock  to  substituted  trustee  under  the 

Massachusetts  law.    (May  4,  1921.)   4001 

Nominal  transfer  of  title  to  stock  on  death  of  trustee 

to  surviving  trustee  or  trustees.   (March  15,  1921,)  4002 

Use  of  rubber  stamps  on  certificates  in  case  of  transfers 
of  stock  to  broker  for  tale  and  from  broker  to  pur- 
chasing customer.    (April  19,  1921.)  .  . .  4003 

Draft*  payable  in  terms  of  foreign  currency,  accepted 

or  delivered  within  U.  S.   (September  20,  1921.),  4004 

Trade  acceptance  given  in  settlement  of  balance  due 
on  open  export  account  is  not  exempt,  as  it  is  not 
incident  to  the  process  of  export.  (November  4, 
1921.)   4005 

Extension  or  renewal  of  promissory  note  by  extension 

of  mortgage  by  which  secured.  >  (March31,  1921.)  4008 

Drafts  covering  bunker  coal  supplied  in  this  country 

to  foreign  steamship  company.    (April  13,  1921..  4009 

Fidelity  Trust  Co.  vs.  Lederer.  District  Court  de- 
cision, 1918  Act.  Trust  certificates  issued  under 
Pennsylvania  plan  held  to  be  taxable  as  "Certifi- 
cates of  Indebtedness."    (July  14,  1921.)   4010 


The  matters  listed  above  are  indexed. 

Special  Reliance  of  original-issue  agents  on   statement  of 

officials  of  corporation  as  to  "actual  value"  of 
its  non-par  value  stock  (Jan.  26,  1922)   4016 

Special  Original  issue  tax  liability  on#  certificate  representing 

more  than  one  share  having  actual  value  of  less 
than  $100  (Tan.  26,  1922)  . . . .  4019 

Special  Transfer  of  stock  owned  by  a  partnership  to  the  indi- 
vidual members  thereof  (Feb.  3,  1922)   4020 

Special  Indemnity  and  surety  bonds  under  the  1918  Act  (Feb' 

ruary  15,  1922)  4021 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Taxes  Supplementary  Page  1. 


8-24-22. 

STAMP  TAXES.— RUNNING  TABLE  OF  CONTENTS. — Continued. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 
Stamp  Tax  Law. — Continued. 

T.  D.  Subject  Paragraph 

3289    i  Arts.  4(h),  4(1),  and  5(i),  Reg.  40  (191 8  Act)  amended.— 

Issues  of  stock  subject  to  tax  (February  21,  1922)  4025 

Special  Stamps  of  large  denominations  in  proper  aggregate 

amount  may  be  affixed  to  permanent  corporation 
record  accompanying  proxies  in  lieu  of  separate 
stamps  to  the  respective  proxies  (May  27,  1922).  .  4029 

Special  Transfer  of  stock  standing  in  name  of  brokerage  firm, 

to  and  into  name  of  successor  firm,  is  taxable 
(Nov.  4,  1921)  ..  ..   4032 

3364  Treasury  Decision   designation  for   Regulations  55 

(1922  Edition)  beginning  on  page  737   4034 

3380  Treasury  Decision  designation  for  Regulations  40  (1922 

Edition)  beginning  on  page  709   4035 

Special  Transfer  of  stock  from  banking  institution  to  its  nom- 
inee is  taxable  (August  16,  1922)   4036 


Insert  this  page  immediately  before  the  blue  Stamp  Tax  Index. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Taies  Supplementary  Page  2. 


1-12*22. 

STAMP  TAX  INDEX. 

[The  references  are  to  paragraph  numbers.} 

Abstracts  of  title.  .3865 

Acceleration  of  maturity,  provision  for,  in  instrument,  effect  of.  .3751 
Acceptance,  for  payment  at  future  date.  .3788 

Of  deed  without  proper  stamps  prohibited.  .3831 

Or  delivery  in  the  United  States  of  time  draft  payable  in  foreign  country.  .3804 

Or  delivery  in  United  States,  Alaska,  or  Hawaii,  of  time  draft  against  shipment 
from  Virgin  Islands,  Philippines,  and  Porto  Rico.  .3807 

Time  draft  or  check,  taxable  on,  in  United  States.  .3884 
Act  of  October  22,  1914,  documentary  stamps  issued  under.  .3984 
Act  of  October  3,  1917,  documentary  stamps  issued  under.  .3984 

Present  regulations  generally  applicable  to  stamp  taxes  under.  .3974 
Actual  value,  basis  of  tax  on  exchange  of  properties.  .3840 

Measure  of  the  tax  where  consideration  for  deed  is  left  open.  .3832 
Additional  bond,  secured  by  mortgage,  subject  to  tax.  .3748 
Additional  cancellation,  when  required.  .3982 
Adhesive  stamps,  cancellation  of.  .3981 
Affixing  stamps.  .3987 
Agent,  deed  to  principal  by.  .3858 

Agreement,  as  to  who  pays  for  stamps,  not  prohibited.  ,3785,  3973 

Extending  maturity  of  mortgage  bond.  .3748 

Extending  mortgage,  subjects  bond  to  tax.  .3748 
Alaska: 

Passage  tickets  to.  .3884 

Time  drafts  covering  shipments  from,  to  Canal  Zone.  .3805 
Ambassadors,  passage  tickets  issued  to.  .3880 
Articles  manufactured  in  foreign  countries,  stamps  on.  .3980 
Assessment,  stamp  tax  to  be  reported  for,  when.  .3991 
Assessments  and  taxes,  when  deductible.  .3875 
Assignee,  power  of  attorney  to.  .3906 

Assignment,  of  insurance  policy,  power  of  attorney  contained  in.  .3903 
Of  interest  in  bond.  .3755 

Of  stock,  power  of  attorney  in  connection  with.  .3912 

Power  of  attorney  contained  in.  .3906 
Assistant  treasurers,  stamps  to  be  delivered  to.  .3979 
Attorney  in  fact,  to  transfer  stock,  appointment  of.  .3908 
Authentication  by  trustee,  provision  for,  in  instrument,  effect  of.  .3751 
Authority  for  regulations,  section  1309.  .8009 
Bills  of  sale,  conditional.  .3758 

Board  of  directors,  resolution  of,  authorizing  an  officer  of  the  corporation  to  sell,  etc..  .3900 
Resolution  of,  authorizing  person  not  an  officer  to  sell,  etc..  .3900 

Bond,  accompanying  real  estate  mortgage.  .3746 
Additional.  .3748 

Business  property  investment.  .3754 
Delivery  essential  to  issue.  .3744 

Executed  in  Canada  and  delivered  in  the  United  States.  .3761 

For  value  of  stamps,  may  be  required.  .3979 

Indemnity  or  fidelity.  .(No  tax  on  such  under  1921  Act.) 

Instrument  assigning  interest  in.  .3755 

Instrument  styled  a  bond  and  under  seal.  .3753 

Instruments  issued  by  corporations  in  numbers,  under  a  trust  indenture.  .3751 

Issued  by  school  district.  .3763 

Issued  in  satisfaction  of  insurance  policies.  .3762 

Mortgage,  agreement  extending  maturity  of.  .3748 

New,  given  for  same  indebtedness,  subject  to  tax.  .3748 

Notation  on.  .3765 

Not  mandatory  to  give.  .3979 

Of  indebtedness,  Schedule  Al .  .3520,  3744,  4010 

Of  War  Finance  Corporation.  .3820 

Or  stocks,  pro  forma  power  of  attorney  in  printed  assignment  on.  .3908 

Renewed  by  agreement  extending  mortgage  accompanied  by  bond.  .3747 

Resolution  of  board  of  directors  authorizing  officer  to  sell,  etc. .  .  3900 

Resolution  of  board  of  directors  authorizing  person  not  an  officer  to  sell,  etc.  .3900 

Stamps  to  be  affixed  to.  .3749 

Temporary,  stamps  to  be  affixed  to.  .3750 

To  bear  legend.  .3749 

Copyright  1922,  by  The  Corporation  Trust  Compmny. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  1. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Building  and  loan  associations,  deeds  of.  .3846 

Deeds  to.  .3856 

Proxies  to  vote  stock  of.  .3893 
Bunker  coal,  drafts  covering.  .4009 
Burial  site,  deed  to.  .3853 

Canada,  bonds  executed  in,  and  delivered  in  United  States.  .3761 

Passage  tickets  issued  in  United  States,  on  orders  purchased  in.  .3886 

Passage  tickets  sold  in  United  States  from  ports  not  in.  .3889 

Passage  tickets  to  ports  not  in.  .3887 

Promissory  note  executed  and  mailed  in.  .3829 

Promissory  note  executed  and  mailed  to  payee  in.  .3830 
Canal  Zone,  time  drafts  covering  shipments  to.  .3805 
Cancellation  of  stamps.  .3981 

Additional.  .3982 
Capital  stock,  conveyance  by  coowners  in  consideration  of.  .3867 

Conveyance  by  corporation  to  owner  of.  .3869 

Conveyance  from  old  to  new  corporation  on  reorganization.  .3567 

Deed  from  one  corporation  to  another  owning.  .3873 

Power  of  attorney  to  sell,  etc.,  taxable,  unless.  .3912 
Certificates,  interim.  .3750 

Stamps  affixed  to.  .3750 
Certificates  of  deposit.  .3756 

Of  indebtedness,  Schedule  Al .  .3520,  3744,  4010 
Certificates,  of  indebtedness,  issued  by  receivers.  .3759 

Of  interest,  business  property  investment  bond  taxed  as.  .3754 

Of  Morris  plan  banks.  .3756 

Scrip  dividend.  .3752 
Certificates  of  indebtedness  defined.  .3757,  4010 

Business  property  investment  bond  not  taxable  as.  .3754 

Conditional  bills  of  sale  not.  .3758 

Issued  by  Director  General  of  Railroads,  promissory  notes  secured  by.  .3820 
Issued  by  receivers.  .3759 

Scrip  dividend  certificates  or  warrants  taxable  as.  .3752 

Trust  certificates.  .4010 
Cestui  qui  trust,  conveyance  to,  from  trustee,  without  consideration.  .3871 
Checks,  and  drafts  payable  otherwise  than  at  sight  or  on  demand.  .3783,  4004,  400  ; 

Drafts,  and  promissory  notes,  Schedule  A5 .  .3534,  3783,  4004,  4009 

Liability  to  tax  determined  by  form  or  face  of.  .3787 

Post-dated.  .3828 
Claim  for  refund  to  be  presented  to  collector.  .3972 
Clerk  of  court,  deed  by.  .3839 

Collector,  claim  for  refund  to  be  presented  to.  .3972 
Copy  of  power  of  attorney  filed  with.  .3914 
Delivery  of  stamps  by.  .3979 
Reports  of.  .3989 
Stamps  for  sale  by.  .3978 

Stamps  rendered  useless,  may  be  exchanged  by.  .3986 

And  revenue  agent  to  report.  .3889 
Collectors  and  revenue  agents.  .3989 

List  of  Collectors,  .page  1711 
Commissioner,  deed  executed  by;  tax  on.  .3834 

Computation  of  tax  on  deed  executed  by  sheriff,  referee,  or  commissioner.  .3834 
Conditional  bills  of  sale.  .3758 

Confession  of  judgment,  warrant  of  attorney  authorizing.  .3909 
Consideration,  conveyances  without.  .3861 

Lor  deed  left  open,  measure  of  the  tax.  .3832 

Value  of,  basis  of  tax.  .3832 
Contracts,  and  options  for  purchase  of  real  estate.  .3849 

Lor  sale  of  real  property.  .3864 
Conveyance,  actual  value  at  time  of;  measure  of  tax.  .3832 

By  coowners  in  consideration  of  capital  stock.  .3867 

By  corporation  to  an  officer  through  third  party.  .3876 

By  corporation  to  owner  of  all  the  capital  stock.  .3869 

By  mortgagor  to  mortgagee,  measure  of  tax.  .3870 

By  old  corporation  to  new  corporation  on  reorganization.  .3567 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Stamp  Tax — Index  Page  2. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Conveyance: — concluded. 

In  consideration  of  payment  of  obligations.  .3873 
Of  land  in  consideration  of  maintenance.  .3845 
Of  property  subject  to  equity  of  redemption.  .3844 
Of  real  estate  in  foreign  country.  .3862 
Through  third  party.  .3876 

To  trustee,  or  from  trustee  to  cestui  qui  trust,  without  consideration.  .3871 
To  United  States.  .3872 

Transfer  of  title  to  real  estate  by  judgment  or  decree  not  taxable  as.  .3874 
Validity  of  unstamped  deeds.  .3877 
Without  consideration.  .3861,  3869,  3871 
Conveyances,  Schedule  A6.  .3536,  3831 

Coowners,  conveyance  by,  in  consideration  of  capital  stock.  .3867 
Copartnership,  see  partnership. 

Copy  of  power  of  attorney,  filed  in  executive  department.  .3914 

Filed  with  collector  of  internal  revenue.  .3914 
Corporation,  authority  to  secretary  of,  to  transfer  stock  on  the  books.  .3907 

Conveyance  of  realty  by  old  to  new  corporation  on  reorganization.  .3567 

Conveyance  by,  to  an  officer  through  a  third  party.  .3876 

Conveyance  by,  to  owner  of  all  the  capital  stock.  .3869 

Coupons  attached  to  obligation  of.  .3822 

Deed  from  one,  to  another.  .3873 

Defined.  .3896 

Directors  of,  officers.  .3892 

Instruments  issued  by,  in  numbers,  etc..  .3751 
Powers  of  attorney  by,  to  resident  agents.  .3904 

Proxies  sent  out  by,  may  be  stamped  after  execution  and  delivery.  .3897 

Proxiestto  vote  for  officers  of,  and  for  other  purposes.  .3895 

Resolution  of  board  of  directors  authorizing  officer  to  sell,  etc..  .3900 

Resoluuion  of  board  of  directors  authorizing  person  not  an  officer  to  sell,  etc..  .3900 

Revenue  stamp  required  on  each  instrument  executed  under  general  power  of  attorney 

granted  to  person  not  an  officer.  .3901 
Stock  in,  a  valuable  consideration.  .3847 

County  officer,  deeds  by.  .3851  ■ 

Coupons,  or  notes,  covering  interest.  .3822 
Not  subject  to  tax.  .3822 

Creditor,  deed  to  trustee  for  benefit  of.  .3855 

Customhouse  entries  for  consumption  or  warehousing,  Schedule  A7..3537,  3878 
Customhouse  entries  by  United  States  officials  and  representatives  of  foreign  countries. .  3878 
Customs  bonded  warehouses,  withdrawal  entries  from,  Schedule  A8 .  .3538,  3879 

Withdrawals  of  goods  from.  .3879 
Debenture,  business  property  investment  bond  not  taxable  as.  .3754 
Debentures,  Schedule  Al.  .3520,  3744 
Debtor,  deed  by,  for  benefit  of  creditor.  .3855 
Decree  of  State  court,  transferring  title  to  real  estate.  .3874 
Deductions,  taxes  and  assessments,  when.  .3875 
Deed,  by  executor.  .3868 

By  husband  and  wife  to  "straw  man".  .3857 

By  State,  county,  or  municipal  officer.  .3851 

Confirming  title.  .3863 

Conveying  mine.  .3843 

Conveying  property  sold  under  foreclosure  or  execution.  .3839 

Conveying  real  estate  in  foreign  country.  .3862 

Dated  prior  to  April  1,  1919,  but  delivered  after  that  date.  .3837 

Delivered  between  December  1,  1917,  and  April  1,  1919,  taxable  under  Act  of  October 

3,  1917. .3837 
Delivered  prior  to  April  1,  1919.  .3836 
Executed  and  delivered  on  or  after  April  1,  1919.  .3836 
Executed  by  sheriff,  referee,  or  commissioner,  tax  on.  .3834 
From  agent  to  principal.  .3852 
From  one  corporation  to  another.  .3567,  3873 
In  consideration  of  payment  of  obligations.  .3873 
In  escrow.  .3838 

Of  building  and  loan  association.  .3846 
Of  release.  .3850 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  3. 


1-12-22. 

STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 

Deed : — concluded. 
Of  trust.  .3850 

On  exchange  of  properties.  .3840 

Partition.  .3860 

Quit-claim.  .3848 

To  a  burial  site.  .3853 

To  a  State.  .3852 

To  building  and  loan  association.  .3856 
To  cover  gift.  .3854 
To  trustee  for  benefit  of  creditor.  .3855 
Validity  of  unstamped  deeds.  .3877 
When  exempt  from  tax.  .3854 
Deeds  in  escrow.  .3838 

Definitions,  "certificates  of  indebtedness".  .3757,  4010 
"Corporations" .  3896 
"Foregoing".  .3745 
"Insurance". .3948 
"Insurer".  .3947 
"Issue".  .3952 
"Other  instrument".  .3950 
"Policy  of  insurance".  .3949 
"Premium".  .3954 
"Premium  charged".  .3953 
"Promissory  note".  .3808 
"Sold".  .3835 
"United  States".  .3955 

"Whereby  insurance  is  made  or  renewed".  .3951 
Definitive  bonds.  .3750 
Dalivery,  includes  mailing.  .3898 

Of  bonds,  essential  to  issue.  .3744 

Of  draft  in  United  States.  .3786 

Of  power  of  attorney.  .3898 

Of  stamps  by  collector  to  Assistant  Treasurer  of  the  United  States,  etc..  .3979 
Or  acceptance  in  United  States,  Alaska,  or  Hawaii,  of  time  draft  against  shipment  from 
Virgin  Islands,  Philippines,  and  Porto  Rico.  .3807 
Or  acceptance  in  the  United  States  of  time  draft  payable  in  foreign  country.  .3804 
Time  draft  or  check  taxable  on,  in  United  States.  .3784 
and  draft,  accepted  for  payment  at  future  date.  .3788 
and  note,  payment  of  interest  on.  .3824 
Denomminations  of  documentary  stamps.  .3977 
Deposit'  certificate  of.  .3827 

Deposit  of  stock  as  security,  power  of  attorney  given  in  connection  with.  .3912 

Depositaries,  stamps  to  be  delivered  to  designated.  .3979 

Deputy,  power  of  attorney  authorizing,  to  have  access  to  safe.  .3915 

Power  of  attorney  authorizing,  to  have  access  to  and  control  of  contents  of  safe.  .3915 
Diplomatic  representatives,  passage  tickets  issued  to.  .3880 

Director  General  of  Railroads,  promissory  notes  secured  by  certificates  of  indebtedness 

issued  by.  .3820 
Directors,  of  corporation  officers.  .3892 

Documentary  stamps,  additional  cancellation  required.  .3982 
Cancellation  of.  .3981 
Issued. .3977 

■Issued  under  act  of  October  22,  1914.  .3984 

Issued  under  act  of  October  3,  1917.  .3984 

Only  to  be  used.  .3983 

Rendered  useless.  .3986 
Documentary  stamp  taxes,  applicability  of  regulations.  .3974 
Dower,  conveyance  of  right  of.  .3842 
Draft,  accepted  for  payment  at  future  date.  .3788 

Against  actual  shipment.  .3790 

Drawn  abroad  on  foreign  payee,  and  foreign  drawee.  .37S6 
Exports.  .3792,  4005 

Liability  to  tax  determined  by  form  or  face  of.  .3787 
Payable  "on  arrival  of  car".  .3787 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  4. 
/ 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Drafts,  and  checks  payable  otherwise  than  at  sight  or  on  demand.  .3783,  4004,  4009 

Checks  and  promissory  notes,  Schedule  A  5.  .3534,  3789,  4004,  4009 
Drawee,  foreign,  draft  drawn  abroad  on.  .3786 

Payee  or  endorsee  to  see  that  tax  is  paid.  .3785 
Duties  of  officers .  . 3988,  3992 
Effective  date.  .3743,  3956 

Encumbrances,  placed  on  property  in  connection  with  sale  not  deductible.  .3833 

Resting  on  real  estate  before  sale  only  to  be  deducted.  .3833 
Endorsee,  drawee,  or  payee  to  see  that  tax  is  paid.  .3785 

Entries,  for  withdrawal  of  goods  or  merchandise  from  customs  bonded  warehouses.  .3879 

Customhouse,  for  consumption  or  warehousing,  Schedule  A  7.  .3537,  3878 
Equity  of  redemption,  conveyance  of  property  subject  to.  .3844 
Escrow,  deeds  in.  .3838 
Evasion  of  tax.  .3970 

Exchange  of  real  properties,  tax  on  deeds.  .3840 
Exchange  of  stamps  rendered  useless.  .3986 
Exchange  orders,  passage  issued  on.  .3886 

Execution,  deeds  to  cover  transfers  of  property  sold  under.  .3839 

Executive  department,  copy  of  power  of  attorney  filed  in.  .3914 

Executor,  deeds  by.  .3868 

Export  bonds,  insurance  covering.  .3966 

Exports  to  foreign  country,  time  draft  covering.  .3791,  4005 

Drafts  directly  and  indirectly  involved  with.  .3792,  4005 
Extension  of  promissory  note,  by  extension  of  mortgage.  .3813,  4008 

Extension  of  stamp  tax,  Schedule  A  of  revenue  act  of  1918  an  extension  of  Schedule  A  of 

revenue  act  of  1917. .3975 
Failure  to  affix  stamps.  .3970 
Federal  land  banks.  .3814 
Federal  officials,  passage  tickets  to.  .3880 

Federal  reserve  bank  officer,  power  of  attorney  authorizing  to  assign  United  States  bonds.  . 

3916 

Fidelity  Trust  Co.  vs.  Lederer.  .4010 

Food  administration  grain  corporation;  promissory  notes.  .3819 
Forbearance,  suspension  of  payment  or.  .3821 

Foreclosure,  deeds  to  cover  transfers  of  property  sold  under  a.  .3839 
Foreclosure  sale,  tax  on  deed.  .3834 
"Foregoing"  defined.  .3745 

Foreign  country,  conveyance  of  real  estate  in.  .3862 

Stamps  on  articles  manufactured  in.  .3980 

Time  draft  payable  in.  .3804 
Foreign  draft,  delivered  in  United  States.  .3786 
Foreign  drawee,  draft  drawn  abroad  on.  .3786 
Foreign  governments,  promissory  notes  issued  by,  .3817 
Foreign  insurance  policies,  Schedule  A  13.  .3543,  3946 
Foreign  payee,  draft  drawn  abroad  with.  .3786 
Foreign  representatives,  customhouse  entries  by.  .3878 

Passage  tickets  issued  to.  .3880 
Form  1,  not  to  be  used  in  reporting  tax  paid  for  stamps.  .3991 
Form  8,  quarterly  reports  on.  .3990 
Forms,  table  of.  .page  1703 
Former  stamp  tax  acts.  .3585,  3976 

General  power  of  attorney,  granted  by  corporation  to  person  not  an  officer.  .3901 
Gift,  deed  to  cover.  .3854 

Government,  copy  of  power  of  attorney  filed  in  executive  department  of.  .3914 
Government  bonds,  power  of  attorney  to  sell  or  transfer.  .3905 
Grantee,  in  deed  liable  for  tax.  .3831 

Or  vendee  to  pay  the  tax.  .3839 
Grantor,  in  deed  liable  for  tax.  .3831 
Hawaii,  passage  tickets  to.  .3884 

Time  drafts  covering  shipments  to  Canal  Zone.  .3805 
Husband  and  wife,  deed  by,  to  "straw  man".  .3857 
Incumbrance,  see  encumbrances. 

Indebtedness,  certificates  of,  issued  by  receivers.  .3759 
Indemnity  and  fidelity  bonds.  .(No  tax  on  such  under  1921  Act.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  SERVICE 

Stamp  Tax — Index  Page  5. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Indenture,  stamps  may  be  affixed  to.  .3749 
Indorsement,  of  payment  of  interest  in  advance.  .3825 
Initials  and  date,  to  be  written  or  stamped  on  stamps.  .3981 
"Insurance"  defined.  .3948 

Insurance  policies,  bonds  issued  in  satisfaction  of.  .3762 

Powers  of  attorney  contained  in  assignments  of.  .3903 
"Insurer"  defined.  .3947 
Interest,  notes  or  coupons  covering.  .3822 

Payment  of,  in  advance  after  maturity  of  promissory  note.  .3825 

Payment  of,  on  demand  note.  .3824 
Interest  notes,  separated  from  or  in  form  to  be  separated  from  principal  obligation.  .3822 

Subject  to  tax.  .3822 
Interim  certificates.  .3750 

Stamps  affixed  to.  .3750 
Internal-revenue  taxes,  postage  stamps  not  to  be  used  for.  .3985 
Investment  bond,  business  property.  .3754 
"Issue"  defined.  .3952 

Issue,  of  bonds  over  period  of  years;  stamps  to  be  affixed  to  indenture,  when.  .3749 

Of  stock,  regulations  covering  tax  on.  .3992 
Joint-stock  land  bank  mortgage,  promissory  notes  secured  by.  .3814 
Judgment  note,  warrant  of  attorney  in,  authorizing  confession  of  judgment.  .3909 
Judgment,  or  decree  of  State  court  transferring  title  to  real  estate.  .3874 
Lands,  tenements  or  other  realty,  what  constitute.  .3841 
Lease,  of  real  property.  .3866 

Warrant  of  attorney  in.  .3910 
Legend,  to  be  borne  by  bonds  where  stamps  are  affixed  to  the  indenture.  .3749 
Liability  of  parties,  both  parties  to  taxable  instrument  liable  for  stamps.  .3973 
Liability  to  tax,  determined  by  form  or  face  of  check  or  draft.  .3787 
Life  maintenance,  conveyance  of  land  in  consideration  of.  .3845 
Mailing,  constitutes  delivery.  .3898 

Maintenance,  conveyance  of  land  in  consideration  of.  =  3845 

Marconi  Wireless  Telegraph  Co.  of  America  vs.  Duffy  (273  Fed.  197) .  .3998 

Master  in  chancery,  deed  by.  .3839 

Measure  of  tax,  "conveyances".  .3832 

"Foreign  insurance  policies".  .3965 

"Promissory  notes".  .3808 
Mexico,  passage  tickets  issued  in  United  States,  on  orders  purchased  in.  .3886 

Passage  tickets  sold  in  United  States  from  ports  not  in.  .3889 

Passage  tickets  to  ports  not  in.  .3887 
Military  forces,  passage  tickets  issued  to.  .3880 
Mines,  deeds  conveying.  .3843 

Ministers,  foreign,  passage  tickets  issued  to.  .3880 

Morris-plan  banks,  certificates  of.  .3756 

Mortgage,  bond  renewed  by  agreement  extending.  .3747 

Joint-stock  land  bank,  promissory  note  secured  by.  .3814 

Power  of  sale  embodied  in,  not  taxable.  .3902 

Securing  promissory  note,  effect  of  extension.  .3813,  4008 
Mortgagee,  conveyance  by  mortgagor  to.  .3870 

Power  of  sale  to,  in  mortgage.  .3902 
Mortgagor,  conveyance  by,  to  mortgagee.  .3870 
Movable  property,  insurance  on.  .3968 
Municipal  officer,  deeds  by.  .3851 
Naval  forces,  passage  tickets  issued  to.  .3880 
Newfoundland,  passage  tickets  issued  to.  .3888 

New  bond,  given  for  same  mortgage  indebtedness,  subject  to  tax.  .3748 
New  stamps,  required  on  packages  of  playing  cards,  when.  .3919 
Nonpayment  of  taxes,  deeds  conveying  property  sold  for.  .3851 
Notation,  on  bonds.  .3749,  3750 

Notes,  for  deferred  payments,  amount  if  not  deductible.  .3833 
Extension.  .3811,  3812,  4008 
Given  as  security.  .3811 
Or  coupons  covering  interest.  .3822 
Payable  on  demand  promissory  notes.  .3S10 
Renewal.  .3811,  3812,  4008 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  6. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Offer  in  compromise,  report  of.  .3990 
Officers,  directors  of  corporations  are.  .3892 

To  make  investigations.  .3988 
Open  policies.  .3959 

Optional  registration,  provision  for  instrument,  effect  of.  .3751 
Options,  and  contracts  for  purchase  of  real  estate.  .3849 
"Other  instrument"  defined.  .3950 
Packages,  see  parcel-post  packages. 

Parcel-post  packages,  Schedule.  .(No  tax  on  such  under  1921  act.) 
Partnership  property,  reconveyance  of,  by  receivers.  .3859 
Partition  deeds,  when  subject  to  tax.  .3860 
Passage  tickets,  Schedule  A9.  .3539 
Issued  on  exchange  orders.  .3887 

Issued  on  exchange  orders  purchased  in  Canada  or  Mexico.  .3886 

Issued  to  certain  foreign  representatives.  .3880 

Issued  to  Federal  and  State  officials.  .3880 

Issued  to  military  and  naval  forces.  .3880 

Issued  to  private  individuals.  .3882 

Prepaid  orders  for.  .3885 

Sold  in  United  States  from  ports  not  in  United  States,  Canada,  or  Mexico.  .3889 
To  Hawaii  and  Alaska.  .3884 
To  Newfoundland.  .3888 
To  Porto  Rico  and  Philippine  Islands.  .3883 
To  ports  not  in  United  States,  Canada,  or  Mexico.  .3887 
Payee,  foreign,  draft  drawn  abroad  with.  .3786 

Drawee  or  indorsee  to  see  that  tax  is  paid.  .3785 

In  Canada,  promissory  note  executed  and  mailed  to,  in  the  United  States.  .3830 
In  United  States,  promissory  note  executed  and  mailed  to,  in  Canada.  .3829 

Payment,  suspension  of,  or  forbearance.  .3821 

Penalties.  .3970 

Pennsylvania  plan  trust  certificates.  .4010. 
Philippines,  passage  tickets  to.  .3883 

Time  drafts  covering  shipments  from.  .3807 

Time  drafts  covering  shipments  to.  .3806 
Place  of  manufacture,  stamps  may  be  affixed  at.  .3980 
Playing  cards,  Schedule  A  12.  .3542,  3919 

Person  receiving  packages  of,  for  sale,  on  which  stamps  are  broken.  .3919 
Policies  executed  before  April  1,  1919,  premiums  on.  .3956 
"Policy  of  insurance"  defined.  .3949 
Policy  loan  agreements.  .3826 

Policy  loan  and  premium  extension  agreements,  when  not  taxable.  .3826 
Policy  to  be  retained  two  years.  .3961 
Porto  Rico: 

Passage  tickets  to.  .3883 

Time  draft  covering  shipments  from.  .3807 

Time  drafts  covering  shipments  to.  .3806 
Postage  stamps,  not  to  be  used  for  internal-revenue  taxes'.  .3985 
Post-dated  checks.  .3828 

Postmaster,  stamps  to  be  delivered  to.  .3979 

Post  stamping,  separate  report  not  required  in  each  instance.  .3990 
Power  of  attorney,  authorizing  deputy  to  have  access  to  safe.  .3915 

Authorizing  deputy  to  have  access  to  and  control  of  contents  of  sale.  .3915 

Authorizing  officer  of  Federal  reserve  bank  to  assign  United  States  bonds  deposited 
as  security.  .3916 

Authorizing  vendee  of  shares  of  stock  to  transfer  same.  .3913 

Contained  in  assignment,  for  valuable  consideration.  .3906 

Contained  in  assignment  of  insurance  policy.  .3903 

Copy  of,  printed  on  form  provided  by  Government  and  filed  in  executive  depart- 
ment. .3914 

Executed  and  delivered  before  April  1,  1919.  .3918 
From  corporation  to  resident  agent.  .3904 

General,  to  person  not  an  officer;  revenue  stamp  required  on  each  instrument  executed 
under.  .3901 

Including  sale,  assignment,  or  transfer  of  stock.  .3913 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  7. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Power  of  attorney, — concluded. 

Pro  forma,  in  printed  assignment  on  bonds  or  stocks.  .3908 

Instrument  appointing  attorney  in  fact  to  transfer  stock  on  books  of  corporation.  .3907 

Instrument  authorizing  secretary  of  corporation  to  transfer  stock  on  books  of  corpo- 
ration not  taxable  as.  .3907 

Mailed  abroad  to  party  in  United  States.  .3911 

Mailed  in  United  States  to  point  abroad.  .3911 

Resolution  of  board  of  directors,  when  not  taxable  as.  .3900 

Tax  on,  when  due.  .3898 

To  sell  or  transfer  Government  bonds.  .3905 

To  sell,  etc.,  shares  of  capital  stock,  taxable,  unless.  .3912 
Power  of  sale,  embodied  in  mortgage  not  taxable.  .3902 
Powers  of  attorney,  Schedule  All.  .3541,  3898 
"Premium"  and  "premium  charged,"  defined.  .3953,  3954 
Premium,  not  definitely  determined.  .3948 
Premium  extension  agreements.  .3826 
Prepaid  orders,  for  passage  tickets.  .3885 
Presumption  as  to  evasion  of  tax.  .3964 
Principal,  deed  by  agent  to.  .3858 
Private  individuals,  passage  tickets  issued  to.  .3882 

Proceeds  of  draft  covering  exports  to  a  foreign  country,  draft  drawn  against.  .3791,  4005 
Products  for  future  delivery,  sale  of:  regulations  in  regard  to.  .3647 
Pro  forma  power  of  attorney,  in  assignment.  .3906 

In  printed  assignment  on  stock  or  bonds.  .3908 
Promissory  note,  certificate  of  deposit  not  taxable  as.  .3827 

Conditional  bills  of  sale  in  form  of.  .3757 

Coupon  covering  interest  not  a.  .3822 

Defined. .3808 

Executed  and  mailed  in  Canada.  .3829 

Executed  and  mailed  to  payee  in  Canada.  .3830 

Extension  or  renewal  of,  by  extension  of  mortgage.  .3813,  4008 

Food  Administration  Grain  Corporation  notes.  .3819 

Given  as  security.  .3811 

Given  to  Federal  land  banks  and  joint-stock  land  banks.  .3814 

Instrument  containing  essential  features  of,  issued  by  corporation  in  numbers,  under 

trust  indenture,  a  bond.  .3751 
Issued  by  foreign  government.  .3817 
Measure  of  tax.  .3809 
Note  payable  on  demand  is.  .3810 

Payment  of  interest  in  advance  after  maturity  of.  .3825 

Policy  loan  and  premium  extension  agreement  taxable  as,  when.  .3826 

Renewal  of.  .3812,  4008 

Secured  by  certificate  of  indebtedness  issued  by  Director  General  of  Railroads.  .3820 
Secured  by  joint-stock  land-bank  mortgage.  .3814 
Secured  by  obligations  of  United  States.  .3818 
Secured  by  United  States  bonds.  .3818 

Warrant  of  attorney  in,  authorizing  confession  of  judgment.  .3909 
Promissory  notes,  drafts,  and  checks,  Schedule  A  5.  .3534,  3783,  4004,  4009 
Promulgation  of  regulations.  .3993 

Prosecution  recommended,  separate  report  required.  .3990 
Proxies,  Schedule  A  10.  .3540,  3890 

Executed  and  accepted  before  April  1,  1919.  .3894 

Sent  out  by  corporations,  may  be  stamped  after  executed  and  delivery.  .3897 

Stamp  may  be  affixed  and  canceled  by  either  party.  .3891 

Tax  on,  attaches  to  instrument.  .3890 

To  vote  for  officers  and  for  other  purposes.  .3895 

To  vote  stock  of  building  and  loan  associations.  .3893 
Purchase  money,  time  draft  to  secure.  .3802 
Purchase  of  stamps.  .3978 
Quarterly  reports.  .3990 
Quit-claim  deeds.  .3848 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Stamp  Tax — Index  Page  8. 


1-12-22, 


STAMP  TAX  INDEX, 


[The  references  are  to  paragraph  numbers.] 
Real  estate,  conveyance  of,  by  coowners,  in  consideration  of  capital  stock.  .3867 

Conveyance  of,  by  corporation  to  owner  of  capital  stock.  .3869 

Conveyance  of  by  old  to  new  corporation  on  reorganization.  .3567 

Conveyance  to  officer  of  corporation  by  corporation.  .3876 

Deed  by  executor  conveying  parcels  of.  .3868 

Deed  conveying,  to  a  State.  .3852 

In  foreign  country,  conveyance  of.  .3862 

Judgment  or  decree  of  State  court  transferring  title  to.  .3874 

Options  and  contracts  for  purchase  of.  .3849 

Sold  for  nonpayment  of  taxes,  deeds  conveying.  .3851 

Sold  to  United  States  Government.  .3872 
Real  estate  mortgages,  bonds  accompanying.  .3746 
Real  property,  contracts  for  sale  of.  .3864 

Leases  of.  .3866 

What  constitutes,  determinable  by  law  of  State  where  located.  .3841 
Realty,  what  constitutes.  .3841 

Receipt,  Form  1,  not  to  be  used  in  reporting  tax  paid  for  stamps.  .3991 
Receivers,  certificates  of  indebtedness  issued  by.  .3759 

Reconveyance  of  partnership  property  by.  .3859 
Recommendation  of  prosecution,  separate  report  required.  .3990 
Reconveyance,  of  partnership  property  by  receivers.  .3859 

By  building  and  loan  association.  .3856 

By  "straw  man".  .3857 
Records  of  policies  issued.  .3971 
Redemption  of  stamps.  .3986 
Referee,  deed  executed  by,  tax  on.  .3834 
Refund,  for  stamps.  .3972 

Regulations  40  (under  1918  Act),  covering  issue,  sales,  and  transfers  of  stock,  and  sales  of 

products  for  future  delivery.  .3546 
Regulations  55  (under  1918  Act),  covering  stamp  taxes  on  documents.  .3743 
Generally  applicable  to  stamp  taxes  under  act  of  October  3,  1917.  .3974 
Promulgation  of.  .3993 
Release,  deeds  of.  .3850 

Renewal,  agreement  extending  maturity  of  mortgage  bond  taxable  as.  .3748 

Indorsement  of  payment  of  interest  in  advance  after  maturity  of  promissory  note,  a 
3825 

Of  bond,  agreement  extending  mortgage  accompanied  by  bond,  operates  as.  .3747 
Of  promissory  note.  .3812,  4008 

Of  promissory  note  by  extension  of  mortgage.  .3813,  4008 
Payment  of  interest  on  demand  note  not  a.  .3824 
Reports,  how  marked.  .3989 

Resident  agents,  powers  of  attorney  by  corporations  to.  .3904 
Returns,  not  required.  .3971 
Revenue  Act  of  1918  effective  date.  .3743 
Revenue  Act  of  1921 .  .  3500 
Schedule  A.  .3520 

Title  XI,  Stamp  taxes,  Section  1100.  .3500 

Section  1101.  .3501 

Section  1102.  .3502 

Section  1103.  .3507 

Section  1104.  .3513 

Section  1105.  .3514 

Section  1106.  .3516 

Section  1107.  .3517 

Section  1300.  .8000 

Section  1303.  .8009 

Section  1312.  .8007 

Section  1316.  .8056 
Revenue  Agents,  reports  of.  .3989 
Revenue  agents  and  collectors  to  report.  .3989 
Revenue  officers  to  make  investigations.  .3988  j 
Round-trip  tickets.  .3889 

Sale  of  stock,  power  of  attorney  in  connection  with.  .3913 
Sale  of  stock,  regulations  in  connection  with.  .3590 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  9. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
Sale,  power  of,  embodied  in  mortgage.  .3902 

Sales  of  products  for  future  delivery,  regulations  covering  tax  on.  .3647 

Schedule  A,  revenue  act  of  1918,  an  extension  of  Schedule  A  of  revenue  act  of  1917.  .3975 

Schedule  A,  Revenue  Act  of  1921.  .3520 

School  districts,  bonds  issued  by.  .3763 

Scrip  dividend  certificates,  or  warrants.  .3752 

Security,  bonds  of  indebtedness,  executed  and  delivered  as.  .3760 

Promissory  notes  given  as.  .3811 
Section  1100.  .3500 
Section  1101.  .3501 
Section  1102.  .3502 
Section  1103.  .3507 
Section  1104.  .3513 
Section  1105.  .3514 
Section  1106.  .3516 
Section  1107.  .3517 
Section  1300.  .8000 
Section  1303.  .8009 
Section  1312.  .8007 
Section  1316.  .8056 
Separate  reports,  to  be  made.  .3989 

When  not  required.  .3990 
Sheriff,  deed  executed  by.  .3834,  3839 
Sight  draft,  accompanied  with  instructions.  .3787 

When  taxable.  .3787 
"Sold"  defined.  .3835 

Stamp  deputy  collectors,  stamps  for  sale  by.  .3978 
Stamp  tax  acts,  former.  .3976 

Stamp  tax,  to  be  reported  for  assessment  only  where  instruments  can  not  be  stamped.  .  3991 

When  not  to  be  reported  for  assessment.  .3991 
Stamp  taxes,  present  regulations  generally  applicable.  .3974 

Title  XI.  .3500 

Schedule  A.  .3520 

Under  Revenue  Act  of  1918.  .3974 
Stamps,  affixed  and  canceled  not  to  be  again  used.  .3972 

Affixed  to  interim  certificates.  .3750 

Affixed  to  temporary  bonds.  .3750 

Assistant  treasurers  of  United  States,  stamps  to  be  delivered  to.  .3979 

Both  parties  to  taxable  instrument  responsible  for  affixing.  .3973 

Documentary,  issued.  .3977 

May  be  affixed  to  indenture,  when.  .3749 

May  be  affixed  to  proxies  by  corporation .  73897 

Necessary  amount  of,  to  be  affixed  to  indenture  at  time  of  each  issue  of  bonds.  .3749 

New,  on  packages  of  playing  cards,  when  required.  .3919 

Not  to  be  defaced  by  cancellation.  .3981 

Of  value  of  10  cents  or  more,  cancellation  of.  .3982 

On  articles  imported  into  the  United  States.  .3980 

On  articles  manufactured  in  foreign  countries.  .3980 

On  imported  articles,  may  be  affixed  at  place  of  manufacture.  .3980 

On  proxies,  may  be  affixed  and  cancelled  by  either  party.  .3S91 

On  time  drafts,  who  pays  for,  subject  for  adjustment  between  parties  thereto.  .3785 

Refund  for.  .3972 

Removal  from  instrument.  .3972 

Rendered  useless.  .3986 

Revenue,  required  on  each  instrument  executed  under  general  power  of  attorney  by 

person  not  an  officer.  .3901 
To  be  affixed  to  bonds.  .3749 
Two  or  more  may  be  used,  when.  .3987 
Where  purchased.  .3978 
Who_shouldaflix.  .3831 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  10. 


1-12-22. 


STAMP  TAX  INDEX. 


[The  references  are  to  parargaph  numbers.] 
Stamps,  documentary,  additional  cancellation  required.  .3982 
Cancellation  of.  .3981 

Issued  under  act  of  October  22,  1914.  .3984 

Issued  under  act  of  October  3,  1917.  .3984 

Only  to  be  used.  .3983 
Standing  timber.  .3841 
State,  deeds  to.  .3852 

State  officials,  passage  tickets  issued  to.  .3880 
State  officer,  deeds  by.  .3851 

Stock,  authority  to  secretary  of  corporation  to  transfer,  on  the  books.  .3907 
In  corporation  a  valuable  consideration.  .3847 
Of  building  and  loan  association,  proxies  to  vote.  .3893 
Power  of  attorney  authorizing  vendee  to  transfer.  .3913 

Or  bonds,  pro  forma  power  of  attorney  in  printed  assignment  on.  .3908 
Or  bonds,  resolution  of  board  of  directors  authorizing  an  officer  of  the  corpora- 
tion tc  sell,  etc..  .3900 
Or  bonds,  resolution  of  board  of  directors  authorizing  person  not  an  officer  to 
sell,  etc..  .3900 
Stock:  original  issue.  . 3547 
Stock:  sale  and  transfer.  .3590 
"Straw  man,"  deed  by  husband  and  wife  to.  .3857 
Surety  bonds.  .(No  tax  on  such  under  1921  act.) 
Suspension  of  payment  or  forbearance.  .3821 
Tax,  attaches  to  instrument.  .3899 

Liability  to,  determined  by  form  or  face  of  draft.  .3787 

Not  measured  by  number  of  parties  to  power  of  attorney.  .3899 

On  conveyance  of  land  in  consideration  of  maintenance,  how  measured.  .3845 

On  deed,  executed  by  sheriff,  referee,  or  commissioner,  how  computed.  .3834 

On  deed,  how  computed.  .3833 

On  deeds  on  exchange  of  properties.  .3840 

On  proxies,  not  measured  by  number  of  grantors  or  grantees.  .3890 

On  time  draft  or  check,  by  whom  paid.  .3785 

Payment  of,  on  deed  on  foreclosure  or  execution.  .3839 
Taxability  of  foreign  insurance  policies.  .3946 
Taxes  and  assessments,  when  deductible.  .3875 
Temporary  bonds.  .3750 
Through  ticket.  .3889 
Timber,  standing.  .3841 

Time  draft,  covering  exports  to  foreign  country.  .3791,  4005 
Covering  period  of  transit  to  seaboard.  .3803 
Covering  shipment  to  Canal  Zone.  .3805 

Covering  shipment  to  Virgin  Islands,  Philippines,  and  Porto  Rico.  .3806 
Covering  shipment  from  Virgin  Islands,  Philippines,  and  Porto  Rico.  .3807 
Delivered  or  accepted  in  the  United  States.  .3804 
Draft  against  actual  shipment  taxable  as.  .3790 

Drawn  against  proceeds  of  draft  covering  exports  to  foreign  country.  .3791  4005 
Or  check,  when  taxable.  .3784 
Payable  in  foreign  country.  .3804 
To  secure  purchase  money.  .3802 
Trade  acceptance  taxable  as.  .3789,  4005 
Title,  abstract  of.  .3865 

Deed  confirming.  .3863 

To  real  estate,  judgment  or  decree  of  State  court  transferring.  .3874 
Title  XI,  Stamp  taxes.  .3500 
Trade  acceptances.  .3789,  4005 

Transfers  of  stock,  power  of  attorney  in  connection  with.  .3913 
Transit  to  seaboard,  time  draft  covering  period  of.  .3803 
Transfers  of  stock,  regulations  covering  tax  on.  .3590 
Trust  certificates  as  certificates  of  indebtedness.  .4010 
Trust,  deeds  of.  .3850 

Trust  indenture,  instruments  issued  by  corporations  in  numbers,  under.  .3751 
Trustee,  conveyance  by,  to  cestui  qui  trust,  without  consideration.  .3871 

Conveyance  to,  without  consideration.  .3871 

Deed  to,  for  benefit  of  creditor.  .3855 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Stamp  Tax — Index  Page  11, 


1-12-22. 

STAMP  TAX  INDEX. 


[The  references  are  to  paragraph  numbers.] 
"United  States,"  denned.  .3955 

United  States,  bonds  executed  in  Canada  and  delivered  in  .  .3761 
Conveyance  to. .3872 

Includes  States,  District  of  Columbia,  Hawaii,  and  Alaska.  .3784 
Passage  tickets  issued  in,  to  ports  not  in  United  States,  Canada,  or  Mexico.  .3886 
Passage  tickets  sold  in  United  States  from  ports  not  in.  .3889 
Passage  tickets  to  ports  not  in.  .3887 
Power  of  attorney  mailed  in,  to  point  abroad.  .3911 
Power  of  attorney  mailed  in  foreign  country  to  point  in.  .3911 
Time  drafts  covering  shipments  from,  to  Canal  Zone.  .3805 
United  States  bonds,  power  of  attorney  authorizing  Federal  reserve  bank  officer  to  assign.  . 

3916 

Promissory  notes  secured  by.  .3818 
United  States  obligations,  promissory  notes  secured  by.  .3818 
United  States  officials,  customhouse  entries  by.  .3878 

Passage  tickets  issued  to.  .3880 
Unstamped  instruments.  .3964 
Validity  of  unstamped  instruments.  .3877 
Valuable  consideration,  stock  in  a  corporation  is  a.  .3847 
Value,  actual,  basis  of  tax  on  exchange  of  properties.  .3840 

Actual,  measure  of  tax,  when.  .3832 
Vendee,  of  shares  of  stock,  power  of  attorney  authorizing  transfer  by.  .3913 

Or  grantee  to  pay  the  tax.  .3839 
Verification  of  amount  of  tax.  .3961 

Virgin  Islands,  time  drafts  covering  shipments  from.  .3807 

Time  drafts  covering  shipments  to.  .3806 
War  Finance  Corporation  bonds.  .3820 

Warrant  of  attorney,  in  a  judgment  note  authorizing  confession  of  judgment.  .3909 
In  a  lease.  .3910 

In  a  promissory  note  authorizing  confession  of  judgment.  .3909 
Warrants,  scrip  dividend  certificates  or.  .3752 
"Whereby  insurance  is  made  or  renewed"  denned.  .3951 

Withdrawal  entries  from  customs  bonded  warehouses,  Schedule  A  8.  .3538,  3879 
Withdrawal  of  goods,  or  merchandise,  entries  for.  .3879 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Stamp  Tax — Index  Page  12. 


» 
♦ 

* 


CALENDAR  FOR  EXCISE  TAXES 
AND 

GUIDE  TO  EXCISE  TAXES  REGULATIONS. 


(See  other  side.) 


CALENDAR  FOR  EXCISE  TAXES. 

Returns:  Monthly  on  or  before  the  last  day  of  the  month,  each  month's 
return  to  cover  the  transactions  of  the  preceding  month. 

Tax:  Monthly  at  the  time  of  filing  the  return,  (or  before  the  last  day  of  the 
month). 

GUIDE  TO  EXCISE  TAXES  REGULATIONS. 

Law  Section  Subject  Regulations 

Sec.  900.    Manufacturer's  sales  tax  (Tax  based  on  price  for  which 

article  is  sold  or  leased.)  No.  47. — Page  910 

Return  and  payment  of  tax  1[4663  and  ^4698 

Sec.  901.    Colorable  sales  and  leases  No.  47— Page  926,  ^[4652 

Sec.  902.    Works  of  art  No.  48.— Page  934 

Return  and  payment  of  tax  1(4752 

By  agents   .  ,f4753 

Sec.  903.    Return  and  payment  of  tax  (as  noted  above  and  below). 

Sec.  904.    Manufacturer's  sales  tax  (Tax  based  on  so  much  of  the 

amount  for  which  article  is  sold  or  leased  as 

exceeds  a  specified  price.)  No.  47. — Page  910 

Return  and  payment  of  tax  *|4663  and  ^4689 

Sec.  905    Jewelry,  etc  No.  48— Page  934 

Return  and  payment  of  tax  1(4752 

Sec.  906.    Bona  fide  prior  contracts  made  No.  47. — Page  93 1 ,  #;4686 


INSERT  THIS  SHEET  TO  FACE  PAGE  901. 


1-2-22. 


EXCISE  TAXES 

BEING  TITLE  IX  OF  THE  REVENUE  ACT  OF  1921. 


TITLE  IX— Excise  Taxes. 
[Articles  Sold  or  Leased  by  the  Manufacturer  or  Importer.] 

[Tax  based  on  price  for  which  article  is  sold  or  leased.] 

4500  Sec.  900.    That  from  and  after  January  1,  1922,  there  shall  be  levied, 
assessed,  collected,  and  paid  upon  the  following  articles  sold  or 

leased  by  the  manufacturer,  producer,  or  importer,  a  tax  equivalent  to  the 
following  percentages  of  the  price  for  which  so  sold  or  leased — 

4501  (1)  Automobile  trucks  and  automobile  wagons  (including  tires, 
inner  tubes,  parts,  and  accessories  therefor,  sold  on  or  in  connection 

therewith  or  with  the  sale  thereof),  3  per  centum; 

4502  (2)  Other  automobiles  and  motor  cycles  (including  tires,  inner  tubes, 
parts,  and  accessories  therefor,  sold  on  or  in  connection  therewith 

or  with  the  sale  thereof),  except  tractors,  5  per  centum; 

4503  (3)  Tires,  inner  tubes,  parts,  or  accessories  for  any  of  the  articles 
enumerated  in  subdivision  (1)  or  (2),  sold  to  any  person  other  than 

a  manufacturer  or  producer  of  any  of  the  articles  enumerated  in  subdivision 
(1)  or  (2),  5  per  centum; 

4504  (4)  Cameras,  weighing  not  more  than  100  pounds,  and  lenses  for 
such  cameras,  10  per  centum; 

4505  (5)  Photographic   films   and   plates    (other   than  moving-picture 
nlms),  5  per  centum; 

m  iblftfc  rBua  foiiiw  j's  oohq  srft  Vo  siefed  srl*  no  bofuqmoo  sd  HfiHa  noaiarto 

4506  (6)  Candy,  3  per  centum; 

tjfl3m33i«ji  vfis  Hgno-iffj  idcfftnw  stems'  lfstygf  gban^atf  ~t&  fisa&al  tztise  noaiaq 

4507  (7)  Firearms,  shells,  and  cartridges,  except  those  sold  for  the  use 
of  the  United  States,  any  State,  Territory,  or  possession  of  the 

United  States,  any  political  subdivision  thereof,  or  the  District  of  Columbia, 

10  per  centum, jijnad  rbua  d8ubo  oS  Jnatni  dim  (£)  to  no3i3d  d  >ua 

Drt3  ad  ot  nsJfil  ddJIfjffa  bpsosaif  %0  bo?,&<A  <blo2  ai  obhris  dous  ibidw  ioi 

4508  (8)  Hunting  and  bowie  knives,  10  per  centum; 

.oorfr  tOiJifirft  list  srit  tfi  b^nsoil  io  b^aBo!  tb!oa  Yi  slatiifi 

4509  (9)  Dirk  knives,  daggers,  sword  canes,  stilettos,  and  brass  or  metallic 
knuckles,  100  per  centum; 

4510  (10)  Cigar  or  cigarette  holders  and  pipes,  composed  wholly  or  in 
part  of  meerschaum  or  amber,  humidors,  and  smoking  stands,  10 

per  centum; 

4511  (11)  Automatic  slot-device  vending  machines,  5  per  centum,  and 
jQ  .  automatic  slot-device  weighing  machines,  10  per  centum;  if  the  manu- 
facturer, producer,  or  importer  of  any  such  machine  operates  it  for  profit, 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WA*R  TAX  901  SERVICE 


1-2-22. 


EXCISE  TAXES  LAW. 


he  shall  pay  a  tax  in  respect  to  each  such  machine  put  into  operation  equiva- 
lent to  5  per  centum  of  its  fair  market  value  in  the  case  of  a  vending  machine, 
and  10  per  centum  of  its  fair  market  value  in  the  case  of  a  weighing  machine: 

4512  (12)  Liveries  and  livery  boots  and  hats,  10  per  centum; 

4513  (13)  Hunting  and  shooting  garments  and  riding  habits,   10  per 
centum; 

4514  (14)  Yachts  and  motor  boats  not  designed  for  trade,  fishing,  or 
national  defense;  and  pleasure  boats  and  pleasure  canoes  if  sold  for 

more  than  $100,  10  per  centum. 

4515  If  any  manufacturer,  producer,  or  importer  of  any  of  the  articles 
enumerated  in  this  section  customarily  sells  such  articles  both  at 

wholesale  and  at  retail,  the  tax  in  the  case  of  any  article  sold  by  him  at 
retail  shall  be  computed  on  the  price  for  which  like  articles  are  sold  by  him 
at  wholesale. 

4516  The  taxes  imposed  by  this  section  shall,  in  the  case  of  any  article 
in  respect  to  which  a  corresponding  tax  is  imposed  by  section  900  of 

the  Revenue  Act  of  1918,  be  in  lieu  of  such  tax. 

[Selling  or  Leasing  Articles  at  Less  Than  Fair  Market  Price.] 

4517  Sec.  901.    That  if  any  person  who  manufactures,  produces  or 
imports  any  article  enumerated  in  section  900,  or  leases  or  licenses 

for  exhibition  any  positive  motion-picture  film  containing  a  picture  ready 
for  projection,  (a)  sells,  leases,  or  licenses  such  article  to  a  corporation  affili- 
ated with  such  person  within  the  meaning  of  section  240  of  this  Act 
[1J1074  herein],  at  less  than  the  fair  market  price  obtainable  therefor,  the  tax 
thereon  shall  be  computed  on  the  basis  of  the  price  at  which  such  article  is 
sold,  leased  or  licensed  by  such  affiliated  corporation;  and  (b)  if  any  such 
person  sells,  leases,  or  licenses  such  article  whether  through  any  agreement, 
arrangement,  or  understanding,  or  otherwise,  at  less  than  the  fair  market 
price  obtainable  therefor,  either  (1)  in  such  manner  as  directly  or  indirectly 
to  benefit  such  person  or  any  person  directly  or  indirectly  interested  in  the 
business  of  such  person,  or  (2)  with  intent  to  cause  such  benefit,  the  amount 
for  which  such  article  is  sold,  leased  or  licensed  shall  be  taken  to  be  the 
amount  which  would  have  been  received  from  the  sale,  lease  or  license  of  such 
article  if  sold,  leased  or  licensed  at  the  fair  market  price. 

[Works  of  Art.] 

4518  Sec.  902.    That  there  shall  be  levied,  assessed,  collected,  and  paid 
upon  sculpture,  paintings,  statuary,  art  porcelains,  and  bronzes,  sold 

by  any  person  other  then  the  artist,  a  tax  equivalent  to  5  per  centum  of  the 
price  for  which  so  sold.  This  section  shall  not  apply  to  the  sale  of  any  such 
article  (1)  to  an  educational  institution  or  public  art  museum,  or  (2)  by  any 
dealer  in  such  articles  to  another  dealer  in  such  articles  for  resale. 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  902  SERVrCE 


1-2-22. 


EXCISE  TAXES  LAV/. 


[Returns  and  Payments  of  Taxes.] 

451®  Sec.  903.  That  every  person  liable  for  any  tax  imposed  by  section 
900,  902,  or  904,  shall  make  monthly  returns  under  oath  in  duplicate 
and  pay  the  taxes  imposed  by  such  sections  to  the  collector  for  the  district 
in  which  is  located  the  principal  place  of  business.  Such  returns  shall  con- 
tain such  information  and  be  made  at  such  times  and  in  such  manner  as  the 
Commissioner,  with  the  approval  of  the  Secretary,  may  by  regulations 
prescribe. 

4520  The  tax  shall,  without  assessment  by  the  Commissioner  or  notice 
from  the  collector,  be  due  and  payable  to  the  collector  at  the  time 

so  fixed  for  filing  the  return.  If  the  tax  is  not  paid  when  due,  there  shall  be 
added  as  part  of  the  tax  a  penalty  of  5  per  centum,  together  with  interest  at 
the  rate  of  1  per  centum  for  each  full  month,  from  the  time  when  the  tax 
became  due. 

[Articles  Sold  or  Leased  by  the  Manufacturer  or  Importer.] 

[Tax  based  on  so  much  of  the  amount  for  which  sold  or  leased  as  exceeds  a 

specified  price.] 

4521  Sec.  904.    That  from  and  after  January  1,  1922,  there  shall  be 
levied,  assessed,  collected,  and  paid,  in  lieu  of  the  taxes  imposed  by 

section  904  of  the  Revenue  Act  of  1918,  upon  the  following  articles  sold  or 
leased  by  the  manufacturer,  producer,  or  importer,  a  tax  equivalent  to  5  per 
centum  of  so  much  of  the  price  for  which  so  sold  or  leased  as  is  in  excess  of  the 
price  hereinafter  specified  as  to  each  such  article — 

4522  (1)  Carpets  and  rugs,  including  fiber,  on  the  amount  in  excess  of 
$4.50  per  square  yard  in  the  case  of  carpets  and  $6  per  square  yard  in 

the  case  of  rugs; 

4523  (2)  Trunks,  on  the  amount  in  excess  of  $35  each; 

4524  (3)  Valises,  traveling  bags,  suit  cases,  hat  boxes  used  by  travelers, 
and  fitted  toilet  cases,  on  the  amount  in  excess  of  $25  each; 

4525  (4)  Purses,  pocketbooks,  shopping  and  hand  bags,  on  the  amount 
in  excess  of  $5  each; 

4526  (5)  Portable  lighting  fixtures,  including  lamps  of  all  kinds  and  lamp 
shades,  on  the  amount  in  excess  of  $10  each; 

4527  (6)  Fans,  on  the  amount  in  excess  of  $1  each. 

[Consumption  Tax  on  Jewelry  Sold  by  Dealers.] 

4528  Sec.  905.    (a)  That  on  and  after  January  1,  1922,  there  shall  be 
levied,  assessed,  collected,  and  paid  (in  lieu  of  the  tax  imposed  by 

section  905  of  the  Revenue  Act  of  1918)  upon  all  articles  commonly  or  com- 
mercially known  as  jewelry,  whether  real  or  imitation ;Jpearls,  precious  and 
semiprecious  stones,  and  imitations  thereof;  articles  made  of,  or  ornamented, 
mounted  or  fitted  with,  precious  metals  or  imitations  thereof,  orjvory^(not 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  903  SERVICE 


1-2-22. 


EXCISE  TAXES  LAW. 


including  surgical  instruments,  eyeglasses,  and  spectacles);  watches;  clocks; 
opera  glasses;  lorgnettes;  marine  glasses;  field  glasses;  and  binoculars;  upon 
any  of  the  above  when  sold  by  or  for  a  dealer  or  his  estate  for  consumption 
or  use,  a  tax  equivalent  to  5  per  centum  of  the  price  for  which  so  sold. 

[Consumption  Tax  on  Jewelry  to  be  Paid  by  Vendor.] 

4529  (b)  Every  person  selling  any  of  the  articles  enumerated  in  this 
section  shall  make  returns  under  oath  in  duplicate  (monthly  or  quar- 
terly as  the  Commissioner,  with  the  approval  of  the  Secretary, '  may  "pre- 
scribe) and  pay  the  taxes  imposed  in  respect  to  such  articles  bv  this  section 
to  the  collector  for  the  district  in  which  is  located  the  principal  place  of 
business.  ^  Such  returns  shall  contain  such  information  and  be  made  at  such 
times  and  in  such  manner  as  the  Commissioner,  with  the  approval  of  the 
Secretary,  may  by  regulations  prescribe. 

j.T^ioqrnl  io  i9ii#o.6liJri£M  sdi  y;d  bd2£9j  io  blo'd  asIorriA], 
453©  (c)  The  tax  shall,  without  assessment  by  the  Commissioner  or  notice 
from  the  collector,  be  due  and  payable  to  the  collector  at  the  time  so 
fixed  for  filing  the  return.  If  the  tax  is  not  paid  when  due,  there  shall  be 
added  as  part  of  the  tax  a  penalty  of  5  per  centum,  together  with  interest  at 
the  rate  of  1  per  centum  for  each  full  month,  from  the  time  when  the  tax 
became  due. 

[Bona  Fide  Prior  Contracts  Made.] 

4531  Sec.  906.    (a)  That  if  (1)  any  person  has,  prigr  to  August  15.  1921, 
made  a  bona  fide  contract  with  a  dealer  for  the  sale  or  lease,  after 

the  tax  takes  effect,  of  any  article  in  respect  to  which  a  tax  is  imposed  bi- 
section 900  or  904,  or  by  this  subdivision,  and  in  respect  to  which  no  corres- 
ponding tax  was  imposed  by  section  900  of  the  Revenue  Act  of  1918,  and  (2) 
such  contract  does  not  permit  the  adding,  to  the  amount  to  be  paid  there- 
under, of  the  whole  of  the  tax  imposed  by  section  900  or  904  of  this  Act  or 
by  this  subdivision;  then  the  vendee  or  lessee  shall,  in  lieu  of  the  vendor  or 
lessor,  pay  so  much  of  the  tax  imposed  by  section  900  or  904  of  this  Act  or 
by  this  subdivision  as  is  not  so  permitted  to  be  added  to  the  contract  price. 
If  a  contract  of  the  character  above  described  was  made  with  any  person  other 
than  a  dealer,  no  tax  shall  be  collected  under  this  Act. 

4532  (b)  If  (1)  an\-  person  has,  prior  to  August  15,  1921,  made  a  bona 
fide  contract  with  any  other  person  for  the  sale  or  lease,  after  the  tax 

takes  effect,  of  any  article  in  respect  to  which  a  tax  is  imposed  by  section 
900  of  this  Act,  and  in  respect  to  which  a  corresponding  but  greater  tax  was  . 
imposed  by  section  900  of  the  Revenue  Act  of  1918,  (2)  the  contract  price 
includes  the  amount  of  the  tax  imposed  by  section  900  of  tiic  Revenue  Act 
of  1918,  and  (3)  such  contract  does  not  permit  the  deduction,  from  the 
amount  to  be  paid  thereunder,  of  the  whole  of  the  difference  between  the 
corresponding  tax  imposed  by  section  900  of  the  Revenue  Act  of  19 IS  and  the 
tax  imposed  by  section  900  of  this  Act;  then  the  vendor  or  lessor  shall  refund 
to  the  vendee  or  lessee  so  much  of  the  amount  of  such  difference  as  is  not  so 
permitted  to  be  deducted  from  the  contract  price. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  904  SERVICE 


1-2-22. 


EXCISE  TAXES  LAW. 


4533  (c)  If  (1)  an)*  person  has,  prior  to  August  15,  1921,  made  a  bona 
ride  contract  with  any  other  person  for  the  sale  or  lease,  after  Decem- 
ber 31,  1921,  of  any  article  in  respect  to  which  a  tax  was  imposed  by  section 
900  of  the  Revenue  Act  of  1918,  and  in  respect  to  which  no  corresponding 
rax  is  imposed  by  section  900  of  this  Act,  (2)  the  contract  price  includes  the 
amount  of  the  tax  imposed  by  section  900  of  the  Revenue  Act  of  1918,  and 
(3)  such  contract  does  not  permit  deduction,  from  the  amount  to  be  paid 
thereunder,  of  the  tax  imposed  by  section  900  of  the  Revenue  Act  of  1918; 
then  the  vendor  or  lessor  shall  refund  to  the  vendee  or  lessee  so  much  of  the 
amount  of  such  tax  as  is  not  so  permitted  to  be  deducted  from  the  contract 
price.  >i  da  llBfl«  pidfiJ  3  Bri  J     .Ipalssqai  rra 

moil  osJinU  arLt .  oJai  sncmoo  33jbrtifi  noqu  t39J£lo  b^JiriU  3rfi  ni  bi£q 

[Method  of  Handling  Taxes  Payable  by  Vendee.] 

4534  (d)  The  taxes  payable  by  the  vendee  or  lessee  under  subdivision  (a), 
shall  be  paid  to  the  vendor  or  lessor  at  the  time  the  sale  or  lease  is 

consummated,  and  collected,  returned,  and  paid  to  the  United  States  by  such 
vendor  or  lessor  in  the  same  manner  and  subject  to  the  same  penalties  and 
interest  as  provided  by  section  903. 

4535  (e)  Any  refund  by  the  vendor  or  lessor  under  subdivision  (b)  or  (c) 
shall  be  made  at  the  time  the  sale  or  lease  is  consummated.  Upon 

the  failure  of  the  vendor  or  lessor  so  to  refund,  he  shall  be  liable  to  the  vendee 
or  lessee  for  damages  in  the  amount  of  three  times  the  amount  of  such  refund, 
and  the  court  shall  include  in  any  judgment  in  favor  of  the  vendee  or  lessee 
in  any  suit  for  the  recovery  of  such  damages,  costs  of  the  suit  and  a  reasonable 
attorney's  fee  to  be  fixed  by  the  court. 

[The  Term  "Dealer"  Defined.] 

4536  (f)  A  vendee  who  purchases  any  article  with  intent  to  use  it  in  the 
manufacture  or  production  of  another  article  intended  for  sale  shall 

be  included  in  the  term  "dealer,"  as  used  in  this  section. 

Frauds  on  Purchasers. 

4537  Sec.  1326  [of  Title  XIII  of  the  Revenue  Act  of  1921].   That  whoever 
in  connection  with  the  sale  or  lease,  or  offer  for  sale  or  lease,  of  any 

article,  or  for  the  purpose  of  making  such  sale  or  lease,  makes  any  statement, 
written  or  oral,  (1)  intended  or  calculated  to  lead  any  person  to  believe  that 
any  part  of  the  price  at  which  such  article  is  sold  or  leased,  or  offered  for  sale 
or  lease,  consists  of  a  tax  imposed  under  the  authority  of  the  United  States, 
or  (2)  ascribing  a  particular  part  of  such  price  to  a  tax  imposed  under  the 
authority  of  the  United  States,  knowing  that  such  statement  is  false  or  that 
the  tax  is  not  so  great  as  the  portion  of  such  price  ascribed  to  such  tax,  shall 
be  guilty  of  a  misdemeanor  and  upon  conviction  thereof  shall  be  punished  by 
a  fine  of  not  more  than  $1,000  or  by  imprisonment  not  exceeding  one  year,  or 
both. 

[Export  Sales.] 

4538  Sec.  1305  [of  Title  XIII  of  the  Revenue  Act  of  1921].    That  under 
such  rules  and  regulations  as  the  Commissioner  with  the  approval  of 

the  Secretary  may  prescribe,  the  taxes  imposed  under  the  provisions  of 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  905  SERVICE 


1-2-22. 


EXCISE  TAXES  LAW. 


Titles  VI,  VII  or  IX  shall  not  apply  in  respect  to  articles  sold  or  leased  for 
export  and  in  due  course  so  exported.  Under  such  rules  and  regulations  the 
amount  of  any  internal-revenue  tax  erroneously  or  illegally  collected  in 
respect  to  exported  articles  may  be  refunded  to  the  exporter  of  the  article, 
instead  of  to  the  manufacturer,  if  the  manufacturer  waives  any  claim  for 
the  amount  so  to  be  refunded. 

[Articles  Purchased  from  and  Sold  to  Virgin  Islands.) 

4539  Sec.  1304  [of  Title  XIII  of  the  Revenue  Act  of  1918,  which  section 
has  not  been  repealed].  That  there  shall  be  levied,  collected,  and 
paid  in  the  United  States,  upon  articles  coming  into  the  United  States  from 
the  Virgin  Islands,  a  tax  equal  to  the  internal-revenue  tax  imposed  in  the 
United  States  upon  like  articles  of  domestic  manufacture;  such  articles 
shipped  from  such  islands  to  the  United  States  shall  be  exempt  from  the 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  such  islands: 
Provided,  That  there  shall  be  levied,  collected,  and  paid  in  such  islands,  upon 
articles  imported  from  the  United  States,  a  tax  equal  to  the  internal-revenue 
tax  imposed  in  such  islands  upon  like  articles  there  manufactured;  and  such 
articles  going  into  such  islands  from  the  United  States  shall  be  exempt  from 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  the  United 
States. 

[Overpayments  and  Ovecollections.] 

[See  Section  1304,  Revenue  Act  of  1921,  at  1[8018  herein.] 

[Special  Methods  for  Collecting  Certain  Taxes.] 

[See' Section  1301,  Revenue  Act  of  1921,  at  1(8012  herein.] 

[General  Penalty  Provisions.] 

[See  law  provisions  beginning  at  H8014  herein.] 

[General  Administrative  Provisions.] 

[Read  under  "Miscellaneous  Matters"  at  the  back  of  the  book.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  906  SERVICE 


2-1-22.    (2)  17-11-22. 

EXCISE  TAXES  REGULATIONS. 


MANUFACTURER'S  EXCISE  TAXES 


CHARACTER  OF  TAX 


LhVJt  CTEf.  01  TAX 


AMOUNT  OF  TAX 


SECTION  900. 

(1)  Automobile track,  wagons,  etc 

(2)  Automobiles,  mdsr  cycles,  ctc- 

(4)  Cameras  and  lenses  


(10)  CigarkolJcrs.de  

(//)  Automatic  Bending  machines. 


SECTION  904: 


(!)  Trunk,..   

(3)  Valises,  suitcases,  etc... 

(4)  Purses,  pocketboobs,  etc  . 

(5)  Portcblc  lighting  fixtures - 

(6)  Fens   


/  swear  (or  affirm)  that  the  forcgolnl  Is  a  true  return  of  ti: 
t  allowable  by  lax.    Sworn  to  and  subscribed  before  mc  Otis  . 


!  due  In  respect  to  the  aboce-mcnUoncJ articles  for  the  month  of  192  ,andthaltht 


i  deducted  for  overpayment 


(Name)  or  (Witness) 


lis   day  of  

(See  paragraph  4  on  back)  (Title)  < 


Return  with  remittance  should  be  sent  to  the  Collector  of  Internal 
Revenue  for  your  district  end  not  to  the  Commissioner  of  Internal  Keve- 
nnc  at  Washingtoc,  D.  C.  (Sec  instructions,  par.  4.  on  reverse  of  this 
form.)  If  you  havo  nothing  to  report,  make  notation  to  that  effect  on  this 
form  and  return  to  the  Collector  of  Internal  Revenue. 


ORIGINAL  RETURN-T-Tbie  form  must  be  returned  to  the  Collector  of  Internal  Revenue 


MANUFACTURER'S  EXCISE  TAXES 


CHARACTER  OF  TAX 


CHARACTER  OF  TAX 


AMOUNT  OF  TAX 


(2)  Automobiles,  motor  cycles,  etc 

(3)  Tires,  parts, etc   

If)  Cameras  and  lenses  

f>)  Photographic  films  and  plates 


(?)  Firearms,  shell,.  <*  

IS)  Hunting  and  bowi  c  kniccs  . 
(9)  Dlrlr  knttes.  doggers,  etc... 


(13)  Hunting  garments,  etc. 

(14)  Yachts,  motor  boats,  tt, 

SECTION  904: 

(3)  Valises,  suitcases,  etc.. 

(4)  Purses,  pocketbooks,  etc 
Portable  lighting  fixtures 


Tolalurr. 


tent  for  month  of 

Tola  I  amount  of  lax  due... 

Penally  25%  

Penalty  5%  


(or  affirm)  that  the  foregoing  Is  a  true  return  of the  czmeunt  of lax  due  In  respect  to  the  aboennentloned  articles  for  the  month  of  . 

Sworn  U  and  subscribed  before  im  this  day  of   /« 

Signed  


,  192   i  and  ihdtthe  a  mount  deducted for  ooerpaymenl 


(Name)  or  (Witness) 


(See  paragraph  4  on  back) 


(Title)  or  (Witness) 


Return  with  remittance  should  be  sent  to  the  Collector  of  Interna! 
Revenue  for  your  district  and  not  to  the  Commissioner  of  Internal  Reve- 
nue at  Washington,  D.  C.  (See  instructions,  par.  4,  on  reverse  of  this 
Term.)  If  you  have  nothing  to  report,  make  notation  to  that  effect  on  this 
form  and  return  to  the  Collector  of  Internal  Revenue. 

%— 11638b 


D'.TUCATE  RETURN— Thii  form  mutt  be  relumed  to  the  CoDector  of  Internal  Revenue 


[Obverse  of  Form  728.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         907  SERVICE 


2-1-22.    (2)  10-17-22. 


EXCISE  TAXES  REGULATIONS. 


INSTRUCTIONS. 

(For  full  instructions,  seo  Regulations  No.  47,  Revised.) 

1.  TAX.— Section  900  of  the  Revenue  Act  ofl  921  provides:  "That  from  and  after  January  1, 1922,  there  shall  be  levied,  assessed,  collected,  ati.I 
paid  upon  the  following  articles  sold  or  leased  by  the  manufacturer,  producer,  or  importer,  a  tax  equivalent  to  the  following  percentages  of  the  price 
lor  which  so  sold  or  leased :  p. 
"(1)  Automobile  trucks  and  automobile  wagons  (including  tires,  inner  tubes,  parts,  and  accessories  therefor,  sold  on  or  in 

connection  therewith  or  with  the  sale  thereof)    _    _  „   3  per  cent. 

"(2)  Other  automobiles  and  motor  cycles  (including  tires,  inner  tubes,  parts,  and  accessories  therefor,  sold  on  or  in  con- 
nection therewith  or  with  the  sale  thereof),  except  tractors  _    _     5  per  cent. 

"  (3)  Tires,  inner  tubes,  parts,  or  accessories  for  any  of  the  articles  enumerated  in  subdi virion  (1)  or  (2),  sold  to  any  person 

other  than  a  manufacturer  or  producer  of  any  of  the  articles  enumerated  in  subdivision  (1)  or  (2)   5  per  cent 

"  (4)  Cameras,  weighing  not  more  than  100  pounds,  and  lenses  for  such  cameras   10  per  cent 

"(b)  Photographic  films  and  plates  (other  than  moving-picture  films)  _    _   5  per  cent. 

"(7)  Firearms,  shells,  and  cartridges,  except  those  sold  for  the  use  of  the  United  States,  any  State,  Territory,  or  possession 

of  the  United  States,  any  political  subdivision  thereof,  or  the  District  of  Columbia.  :   10  per  cent. 

"  (8)  Hunting  and  bowie  knives.    _   10  per  cent. 

"  (9)  Dirk  knives,  daggers,  sword  canes,  3tiletio8,  and  brass  or  metallic  knuckles    _     100  per  cent. 

"  (10)  Cigar  or  cigarette  holders,and  pipes  composed  wholly  Or  in  part  of  meerschaum  or  amber  humidors,  and  smoking  stands   10.  pur  cent. 

"(11)  Automatic  slot-device  vending  machines  —    -  -   5  percent. 

Automatic  slot-device  weighing  machines      10  per  cent. 

(If  the  manufacturer,  producer,  or  importer  of  any  such  machine  operates  it  for  profit,  he  shall  pay  a  tax  in  respect 
to  each  such  machine  put  into  operation  equivalent  to  5  per  centum  of  its  fair  market  value  in  the  case  of  a  vend- 
ing machine,  and  10  per  centum  of  its  fair  market  value  in  the  case  of  a  weighing  machine.) 

"  (12)  Liveries  and  livery  boots  and  hats...    -  —     10  per  cent. 

"  (13)  Hunting  and  shooting  garments  and  riding  habits        10  per  cent. 

"  (14)  Yachts  and  motor  boats  not  designed  for  trade,  fishing,  or  national  defense;  and  pleasure  boats  and  pleasure  canoes 

if  sold  for  more  than$100   ,   —    10  per  cent." 

»— 11536 


2.  Section  904  of  the  Revenue  Act  of  1921  provides:  "  That  from  and  after  January  1, 1922,  there  shall  be  levied,  assessed,  collected,  and  paid,  in 
lieu  of  the  taxes  imposed  by  section  904  of  the  Revenue  Act  of  1918,  upon  the  following  articles  sold  or  leased  by  the  manufacturer,  producer,  or 
importer,  a  tax  equivalent  to  5  per  centum  of  so  much  of  the  price  for  which  so  sold  or  leased  as  is  in  excess  of  the  price  hereinafter  specified 
as  to  each  such  article: 

"  (1)  Carpets  and  rugs,  including  fibre,  on  the  amount  in  excess  of  $4.50  per  square  yard  in  the  case  of  carpets  and  $0.00  per  square  yard  in 

the  case  of  rugB; 
"(2)  Trunks,  on  the  amount  in  excess  of  $35  each; 

"(3)  Valises,  traveling  bags,  suit  cases,  hat  boxes  used  by  travelers,  and  fitted  toilet  cases,  on  the  amount  in  excess  of  $25  each; 
"(4)  Purses,  pocketbooks,  shopping  and  hand  bags,  on  the  amount  in  excess  of  $5  each, 

"(5)  Portable  lighting  fixtures,  including  lamps  of  all  kinds  and  lamp  shades,  on  the  amount  in  excess  of  $10  each; 
"(6)  Fans,  on  the  amount  in  excess  of  $1  each." 

3.  COMPUTATION  OF  TAX.— The  tax  under  sections  900  and  904  is  based  on  the  sale  price  of  the  goods  sold  and  should  be  computed  on 
each  transaction. 

4.  RETURNS  AND  PAYMENT  OF  TAX.— Return  with  remittance  covering  taxes  due  in  any  month  must  be  in  the  hands  of  the  Collector 
of  Internal  Revenue  (or  his  authorized  repreEentative^  of  the  district  in  which  the  principal  office  or  place  of  businebS  of  tbe  person  making  the 
return  islocated  on  or  before  the  last  day  of  the  succeeding  month.  Returns  must  be  signed  and  sworn  to  before  an  officer  authorized  to  administer 
oaths,  but  if  the  tax  is  less  than  $10  the  return  may  be  signed  or  acknowledged  before  two  subscribing  witnesses. 

5.  CREDITS. — In  case  of  any  overpayment  of  tax  due  to  an  error  in  calculation,  credit  may  be  taken  therefor  against  taxes  due  upon  any  sub- 
sequent monthly  return.  Credit  may  also  be  taken  as  outlined  in  the  regulations.  A  complete  and  detailed  record  of  such  overpayment  must  be 
kept  by  the  person  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return ,  hill  information 
must  be  attached  showing  the  reasons  therefor  and  designating  the  kind  of  tax ,  the  month  for  which  th6  previous  return  was  filed,  and  the  date  of 
payment.    In  the  case  of  illegal  or  erroneous  payment,  such  asexports,  nontaxable  articles,  etc.,  claim  for  refund  on  Form  46  must  be  filed. 

G.  RECORDS. — Every  manufacturer,  producer,  or  importer  required  to  make  returns  must  keep  such  records  as  will  clearly  show  each  taxable- 
transaction,  in  order  that  returns  may  be  easily  verified  by  revenue  officers. 

7.  PEN AI.TD3 S. — Failure  to  file  on  time,  25  per  cent  of  tax.  Failure  to  pay  on  time,  5  per  cent  of  tax  and  1  per  cent  interest  a  niuuth. 
Severe  penalties  for  failure  to  file  returns  or  for  false  or  fraudulent  returns. 

'   2—11688  ntunmnmima 


UNITED  STATES  INTERNAL  REVENUE 
Form  738— Revised  Sept.,  1922 


RECEIPT  FOR  PAYMENT  OF  MANUFACTURER'S  EXCISE  TAXES 


 192 

THIS  RECEIPT  NOT  TO  BE  DETACHED  BY  TAXPAYER 
NOT  VALID  UNLESS  RECEIPTED  BY  CASHIER 

TAXPAYER  WILL  ENTER  AMOUNT  PAID  IN  THE  SPACE  PROVIDED  THEREFOR 

NAME  AND  ADDRESS 

DATE  PAID 

AMOUNT  PAID 

(CASlllElt'8  &T4ICT) 

2— HUM 


[Reverse  of  Form  728  and  tax  receipt  form.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         908  SERVICE 


2-1-22.      (2)  11-6-22. 

EXCISE  TAXES  REGULATIONS. 


MISCELLANEOUS  EXCISE  TAXES 

(Title  IX,  Sections  902  and  905,  of  the  Revenue  Act  of  1921) 


CHARACTER  OF  TAX. 

RATE  OF  TAX. 

AMOUNT  OF  TAX. 

Section  902— 

Sculpture,  pninlinfs,  ddutry,  ui  porxtUtiu,  intnza    _     ,.. 

Section  SOS— 

s% 

i% 

1  

(State  whether  indivi'lual  ownc-r  of  business,  member  of  Aim,  rr  it  officer  lateral  

of  corporation  or  duly  authorized  manager  or  agent,  gi\  e  titlo) 

Sworn  (o  W  ,ui:rribeJ  hcjorc  me  this  Jay  cj  192 

(N»3ii)  or  ^iUm)  (,Seo  paragraph  3  uo  bick)  (T.UeJ  of  (.Wilnr  a»> 


GRKINAL  RETURN— This  form  rami  be  returned  to  She  CoDecio.-  at  Internal  Revenue 


Return  with  remittance  should  be  sent  to  the  Collector  of  Internal 

Revenue  for  your  district  and  not  to  the  Commissioner  of  Interna]  Reve- 
nue at  Washington,  D.  C.  (See  Instructions,  par.  3,  on  reverse  of  this 
form.)  If  you  have  nothing  to  report,  make  notation  to  that  effect  on  this 
form  and  return  to  the  Collector  of  Internal  Revenue. 


(Obverse  of  Form  728-A.] 


INSTRUCTIONS. 

(For  full  instructions,  see  Regulations  No.  48,  Revised.) 

1.  TAX.— Section  902  of  the  Revenue  Act  of  1921  provides:  "That  there  shall  be  levied,  assessed,  collected,  and  paid  upon  sculpture, 
paintings,  statuary,  art  porcelains,  and  bronzes,  sold  by  any  person  other  than  the  artist,  a  tax  equivalent  to  5  per  centum  of  the  price  for  which 
co  sold.  This  section  shall  not  apply  to  the  sale  of  any  such  article  (1)  to  an  educational  institution  or  public  art  museum,  or  (2)  by  any  dealer 
in  such  articles  to  another  dealer  in  such  articles  for  resale." 

Section  905  of  the  Revenue  Act  of  1921  provides:  "That  on  and  after  January  1,  1922,  there  shall  be  levied,  assessed,  collected,  and  paid 
(in  lieu  of  the  tax  imposed  by  section  905  of  the  Revenue  Act  of  1918)  upon  all  articles  commonly  or  commercially  known  as  jewelry,  whether 
lea!  or  imitation ;  pearls,  precious  and  semiprecious  stones,  and  imitations  thereof ;  articles  made  of,  or  ornamented,  mounted  or  fitted  with,  precious 
meluls  or  imitations  thereof  or  ivory  (not  including  surgical  instruments,  eyeglasses,  and  spectacles);  watches;  clocks;  opera  glasses;  lorgnettes; 
marine  glasses;  field  glatses;  and  binoculars;  upon  any  of  the  above  when  sold  by  or  for  a  dealer  or  hi3  estate  for  consumption  or  use,  a  tax  equivalent 
to  5  per  centum  of  tne  price  for  which  so  sold." 

2.  COMPUTATION  OF  TAX. — Any  person  other  than  the  artist  who  sells  any  of  the  articles  enumerated  in  section  902  is  required  to 
make  returns  based  on  sales.   Any  dealer  who  sells  any  of  the  articles  enumerated  in  section  905  is  required  to  make  returns  based  on  salc3. 

3.  RETURNS  AND  PAYMENT  OF  TAX. — Return  with  remittance  covering  taxes  collected  in  any  month  must  be  in  the  hands  of 
the  Collector  of  Internal  Revenue  (or  his  authorized  representative)  of  the  district  in  which  the  principal  office  or  place  of  business  of  the  person 
making  the  return  is  located  on  or  before  the  last  day  of  the  succeeding  month.  Returns  must  be  signed  and  sworn  to  before  an  officer  authorized 
to  administer  oaths,  but  if  the  tax  is  less  than  $10  tb.9  return  may  be  signed  or  acknowledged  before  two  subscribing  witnesses. 

4.  CREDITS. — In  case  of  any  overpayment  of  tax  due  to  an  error  in  calculation,  credit  may  be  taken  therefor  against  taxes  due  upon  aay 
subsequent  monthly  return.    Credit  may  also  be  taken  as  outlined  in  the  regulations.    A  complete  and  detailed  record  of  such  overpayment  I 
must  be  kept  by  the  person  taking  credit  therefor.    In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return,  full 
information  must  be  attached  stowing  the  reasons  therefor  and  designating  the  kind  of  tax,  the  month  for  which  the  previous  return  was  filed 
and  the  date  of  payment. 

5.  RECORDS. — Every  person  required  to  make  returns  under  sections  902  and  905  must  keep  such  records  as  will  clearly  show  each  taxablo 
transaction,  in  order  that  returns  may  be  easily  verified  by  revenue  officers.  S 

"  6.  PENALTIES.— Failure  to  file  on  time,  25  per  cent  of  tax.  Failure  to  pay  ©n  time,  5  per  cent  of  tax  and  1  per  cent  interest  a  month. 
Severe  penalties  for  failure  to  filo  returns  or  for  false  or  fraudulent  returns. 


[Reverse  of  Form  728-A.] 


RECEIPT  FOR  PAYMENT  OF  MISCELLANEOUS  EXCISE  TAXES 


Month  of  .. 


....  192 


THIS  RECEIPT  NOT  TO  BE  DETACHED  BY  TAXPAYER 
NOT  VALID  UNLESS  RECEIPTED  BY  CASHIER 

TAXPAYER  WILL  ENTER  AMOUNT  PAID  JN  THE  SPACE  PROVIDED  THEREFOR 


NAH 

E  AND  ADDRESS 

DATE  PAID 

AMOUNT  PAID 

(Cashier's  Stamp) 

[Form  728-A  tax  receipt  form. 
Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         909  SERVICE 


2.1-22.    ()  11-6-22. 


Reg*  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


REGULATIONS  47 

Relating  to  the 

EXCISE  TAXES  ON  SALES  BY  THE  MANUFACTURER 

Under 

Sections  900  and  904  of  Title  IX  of  the  Revenue  Act  of  1921. 


[Promulgated  January  6,  1922.] 
[Released  for  publication  February  1,  1922.] 


CONTENTS. 

Paragraph. 

Sections  900  and  904.    Imposition  of  tax: 

Article    1.  Effective  date   4540 

2.  Use  of  terms   4541 

3.  Basis  of  tax   4542 

4.  Discounts  and  expenses   4553 

5.  Exchanges   4558 

6.  Credit  for  taxes  already  paid   4562 

7.  Who  is  a  manufacturer   4564 

8.  Tax  payable  by  manufacturer   4570 

9.  When  tax  attaches   4576 

10.  Sales  to  the  Government  or  a  State   4581 

Section  900  (1)  (2).  Automobiles: 

Article  11.  Automobiles:  Scope  of  tax   4582 

12.  Automobile  trucks  and  automobile  wagons   4587 

13.  Other  automobiles  and  motor  cycles   4595 

Section  900  (3).  Automobile  parts  and  accessories: 

Article  14.  Tires,  inner  tubes,  parts  and  accessories  sold  to  manufacturers   4601 

15.  Definition  of  "parts".   4611 

16.  Definition  of  "accessories"   4623 

Section  900  (4).  Cameras: 

Article  17.  Cameras  ,   4630 

Section  900  (5).  Films: 

Article  18.  Photographic  films  and  plates   4631 

Section  900  (6).  Candy: 

Article  19.  Candy   4632 

Section  900  (7).  Firearms: 

Article  20.  Firearms,  shells,  and  cartridges   4635 

Section  900  (8)  (9).    Hunting  knives: 

Article  21.  Hunting  knives,  dirk  knives,  dagger:,  etc   4636 

Section  900  (10).    Smokers'  articles: 

Article  22.  Cigar  and  cigarette  holders,  pipes,  humidors,  and  smoking  stands..  .  4637 
Section  900  (11).    Slot  machines: 

Article  23.  Automatic  slot-device  machines   4638 

Section  900  (12).  Liveries: 

Article  24.  Liveries  and  livery  boots  and  hats   4639 

Section  900  (13).    Hunting  garments: 

Article  25.  Hunting  and  shooting  garments  and  riding  habits   4640 

Section  900  (14).    Pleasure  boats: 

Article  26.  Yachts  and  motor  boats   4641 

Section  900 — Continued.    Manufacturer  also  retailer: 

Article  27.    Manufacturer  also  retailer   4643 

Section  900 — Continued.    Repeal  of  former  taxes: 

Article  28.  Repeal  of  former  taxes   4651 

Section  901.    Colorable  sales: 

Article  29.  Colorable  sales   4652 

Section  904: 

Article  30.  Carpets  and  rugs   4654 

31.  Trunks   4658 

32.  Valises   4659 

33.  Purses  •  •  •  4660 

34.  Portable  lighting  fixtures   4o61 

35.  Fans   4662 

Copyright  1922,  by  The  Corporation  Trust  Compmmy. 
WAR  TAX         910  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


Paragraph. 


Section  903.    Return  and  payment  of  tax: 

Article  36.  Return  and  payment  of  tax   4663 

Section  1304  (1918  Act).    Trade  with  possessions  of  United  States: 

Article  37.  Trade  with  possessions  of  United  States   4669 

Section  1300.    Extension  of  existing  statutes: 

Article  38.  Aids  to  collection  of  tax   4670 

Section  1302.  Penalties: 

Article  39.  Penalties   4671 

Section  1304.    Credits  and  refunds: 

Article  40.  Credits  and  refunds   4675 

Section  1305.  Exports: 

Article  41.  Exemption  of  export  sale   4677 

42.  Proof  of  exportation   4682 

Section  906.    Transfer  of  burden  of  tax: 

Article  43.  Contract  of  sale  before  August  15,  1921   4686 

44.  Contract  of  sale  before  August  15,  1921   4687 

45.  Contract  of  sale  before  August  15,  1921   4688 

46.  Return  of  tax   4689 

47.  Meaning  of  "dealer"   4694 

Section  1316.    Fractional  part  of  cent: 

Article  48.  When  fractional  part  of  cent  may  be  disregarded   4695 

Section  1325.    Medium  of  payment  of  tax: 

Article  49.  Payment  of  tax  by  uncertified  checks   4696 

50.  Procedure  with  respect  to  dishonored  checks   4697 

Section  1326.    Misrepresentation  of  tax: 

Article  51.  Misrepresentation  of  tax   4698 

Section  1303.    Authority  of  regulations: 

Article  52.  Promulgation  of  regulations   4699 


Imposition  of  tax. 

4540  Art.  1.  Effective  date. — The  tax  is  imposed  on  all  articles  sold  or 
4500  leased  by  the  manufacturer,  producer,  or  importer  on  or  after  January 
4521     1,  1922,  even  though  manufactured,  produced,  or  imported  before 

that  date. 

4541  Art.  2.  Use  of  terms. — In  these  regulations,  for  convenience,  unless 
obviously  inapplicable,  the  term  "manufacturer"  is  used  to  include 

also  "producer"  and  "importer;"  the  term  "sale"  or  "sold"  to  include  "lease" 
of  "leased;"  the  term  "purchaser"  to  include  "lessee,"  and  the  term  "vendor" 
to  include  "lessor."  The  term  "person"  is  used  to  include  partnerships, 
corporations,  and  associations,  as  well  as  individuals. 

4542  Art.  3.  Basis  of  tax. — The  tax  is  imposed  on  the  sale  by  the  manu- 
facturer and  should  be  returned  and  paid  by  him  whether  the  sales 

price  is  actually  collected  or  not.  It  is  measured  by  the  price  for  which 
the  article  is  sold  by  the  manufacturer  and  not  by  the  list  price  where  that 
differs  from  the  actual  sales  price.  If  the  price  of  a  taxable  article  is  increased 
to  cover  the  tax,  and  the  article  is  sold  at  such  price,  including  the  tax,  the 
tax  is  on  such  increased  price. 

4543  The  manufacturer  may  reimburse  himself  in  the  amount  of  the  tax 
by  agreement  with  the  purchaser  in  the  following  manner:  (a)  By 

quoting  the  selling  price  and  the  tax  in  separate  and  exact  amounts,  and 
where  invoices  are  rendered,  by  segregating  these  amounts  on  the  invoices  as 
outlined  in  examples  (1)  and  (6)  below;  or  (b)  by  stating  to  the  purchaser 
in  advance  of  the  sale  what  portion  of  the  quoted  price  represents  the  price 
charged  for  the  article  and  what  portion  represents  tax,  and  where  invoices 
are  rendered  by  invoicing  in  the  manner  outlined  in  examples  (2)  and  (3) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         911  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


below,  in  which  cases  the  amount  of  the  tax  need  not  be  included  in  the  price 
of  the  article  in  computing  the  tax. 

4544  Where  goods  are  ordered  direct  from  the  manufacturer  with  no 
agreement  as  to  price,  the  tax  is  based  on  the  amount  billed  or  in- 
voiced to  the  purchaser  as  the  selling  price.  Mere  statements  or  agreements 
that  the  quoted  or  contract  price  includes  the  tax  do  not  operate  to  exclude 
any  part  thereof  from  tax,  unless  the  price  is  billed  in  the  manner  outlined  in 
example  (1),  (2),  (3),  or  (6)  below. 

4545  Where  a  lump  sum  is  specified  as  the  price  of  a  taxable  article  or 
articles,  and  other  articles  not  taxable  and  not  a  component  part  of 

the  taxable  articles  are  included  in  the  price,  the  tax  attaches  to  the  entire 
amount  unless  the  selling  prices  of  the  taxable  and  nontaxable  articles  are 
segregated.  In  such  case  the  tax  will  be  measured  by  the  price  specified  as 
the  selling  price  of  the  taxable  article  or  articles  (examples  4  and  5).  The 
following  examples  illustrate  the  method  by  which  the  manufacturer  may 
separate  the  tax  from  the  selling  price  in  invoicing  goods  to  the  purchaser. 

4546  Example  (1).    A,  the  manufacturer,  quotes  a  selling  price  to  B  of 
$1  and^bills  the  goods  to  B  as: 

"Article  No.  1.  selling  price,  $1;  tax,  $0.05." 

4547  Example  (2).    A,  the  manufacturer,  quotes  a  selling  price  of  $1.05, 
stating  that  the  price  includes  a  tax  of  5  cents,  and  bills  the  goods 

to  B  as: 

"Article  No.  1,  selling  price  $1.05,  5  cents  of  the  total  represents  tax." 

4548  Example  (3).    A,  the  manufacturer,  quotes  a  selling  price  of  $1.05, 
stating  that  1-21  of  the  price  represents  tax,  and  bills  the  goods  to 

B  as: 

"Article  No.  1,  selling  price  $1.05,  1-21  of  the  total  represents  tax." 
It  should  be  noted  that  example  (3)  applies  only  to  articles  taxable  under 
section  900,  and  not  to  articles  taxable  under  section  904. 

4549  The  tax  in  examples  (1),  (2),  and  (3)  is  computed  upon  $1,  the  quoted 
and  actual  selling  price. 

4550  Example  (4).    A,  the  manufacturer,  quotes  a  cost  price  or  contracts 
to  sell  goods  at  $1.05,  including  tax,  and  bills  the  goods  to  B  as: 

"Article  No.  1,  selling  price  including  tax  $1.05." 

The  tax  is  computed  upon  $1.05,  the  quoted  and  invoiced  selling  price. 

4551  Example  (5).    A  manufacturer  sells  an  automobile  to  B,  including 
insurance,  gas,  and  oil,  and  bills  it  as: 

"One  car,  $2,150." 

The  tax  is  based  on  the  full  amount  of  $2,150. 

4552  Example  (6).    If  in  example  (5)  the  invoice  separates  the  charges 
into  items  as,  "car  $2,000,  gas  and  oil  $20,  insurance  $30,  tax  $100," 

the  tax  is  based  on  $2,000,  the  selling  price  of  the  car  as  specified. 

4553  Art.  4.    Discounts  and  expenses. — A  discount  for  cash  or  discount 
made  subsequently  to  the  sale  can  not  be  deducted  in  computing 

the  price  for  the  purpose  of  the  tax. 

4554  An  adjustment  in  price,  where  articles  are  sold  over  a  period  of  time, 
under  an  agreement  for  a  quantity  rebate,  or  an  agreement  for  a 

rebate  on  goods  remaining  unsold  in  the  hands  of  the  dealer,  and  which  were 
purchased  by  such  dealer  within  a  definitely  specified  period,  in  case  of  a 
decline  in  the  market,  is  held  not  to  be  a  discount  made  subsequently  to  the 
sale,  and  the  tax,  if  originally  computed  on  the  gross  price,  maybe  adjusted 
in  the  return  for  the  month  in  which  the  price  is  finally  determined.    If  in 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         912  SERVICE 


"  2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


such  cases  the  tax  assumed  to  be  due  on  the  original  selling  price  has  been 
billed  to  the  dealer  and  by  him  to  the  purchaser  as  a  separate  item,  and 
collected  from  the  purchaser,  the  overcollection  of  tax  arising  from  the  as- 
justment  of  the  sale  price  under  the  contract  between  the  manufacturer  and 
the  dealer  must  be  refunded  to  the  pruchaser. 

4555  Commissions  to  agents  and  other  expenses  of  sale  are  not  deductible 
from  the  price. 

4556  Freight  and  delivery  charges  are  taxable  as  part  of  the  sales  price 
when  the  price  to  the  purchaser  includes  transportation  and  delivery 

charges  paid  by  the  manufacturer,  or  when  the  amount  charged  the  purchaser, 
whether  billed  as  a  separate  item  or  not,  does  not  represent  the  actual  trans- 
portation charges. 

4557  Freight  and  delivery  charges  are  not  part  of  the  sales  price  when 
the  goods  are  sold  at  the  factory  or  f.  o.  b.  cars  at  place  of  manufac- 
ture, when  the  transportation  charges  are  paid  by  the  purchaser  as  a  specific 
item,  or  when  the  goods  are  sold  delivered  at  a  definite  price  less  actual 
transportation  charges  to  be  paid  by  the  purchaser. 

4558  Art.  5.    Exchanges. — If  articles  sold  are  returned  and  the  sale 
entirely  rescinded,  no  tax  is  payable,  and  if  paid  it  may  be  credited 

against  the  tax  included  in  a  subsequent  monthly  return.  (See  article  40.) 
If  a  part  only  of  the  articles  sold  at  one  time  is  returned,  and  credit  or  rebate 
allowed  by  the  vendor  therefor,  the  portion  of  the  tax  to  be  credited  will  be 
only  the  proportion  of  the  total  tax  paid  which  the  amount  allowed  as  a 
credit  or  rebate  bears  to  the  total  sales  price  of  all  the  articles. 

4559  If  an  article  is  sold  under  a  guaranty  as  to  its  quality  or  service  and 
is  thereafter  returned  and  a  rebate  made  pursuant  to  the  guaranty, 

the  manufacturer  may  claim  as  a  credit  against  the  tax  included  in  a  sub- 
sequent return  such  portion  of  the  tax  originally  paid  in  respect  of  the  article 
as  is  proportionate  to  the  amount  of  the  price  refunded. 

4560  Where  any  article  taxable  under  section  900  or  904  is  returned  to 
the  manufacturer  thereof  for  adjustment,  replacement,  or  exchange, 

under  a  guaranty  as  to  quality  or  service,  and  a  new  article  given  pursuant 
to  a  guaranty,  free  or  at  a  reduced  price,  the  tax  shall  be  computed  on  the 
actual  price,  if  any,  to  be  paid  to  the  manufacturer  for  the  new  article. 

4561  If  an  article  is  sold  and  thereafter,  before  use,  exchanged  for  another 
article  of  a  higher  price,  the  purchaser  paying  the  difference,  the 

manufacturer  should  pay  the  tax  on  the  second  sale,  but  may  take  as  a  credit 
against  such  tax  such  part  of  the  tax  paid  on  the  returned  article,  which  the 
amount  allowed  as  a  credit  for  the  return  of  such  article  on  the  second  sale 
bears  to  the  amount  of  the  purchase  price  in  the  case  of  the  first  sale.  The 
tax  also  attaches  to  the  subsequent  sale  by  the  manufacturer  of  the  article 
so  returned. 

4562  Art.  6.    Credit  for  taxes  already  paid. — A  manufacturer  may  take  as 
a  credit  against  the  tax  imposed  on  him  in  respect  to  the  sale  of  any 

article  taxable  under  section  900  an  amount  equal  to  any  tax  imposed  under 
section  900  which  he  has  reimbursed  to  the  manufacturer  from  whom  he  pur- 
chased any  article  forming  a  component  part  (whether  or  not  changed  in 
form  by  process  of  manufacture)  of  the  article  sold  by  him  and  in  respect  to 
which  tax  is  paid  by  him,  provided  the  tax  was  billed  to  him  as  a  specific  item 
and  in  the  exact  amount  of  the  tax.  Similarly,  he  may  take  credit  against  a 
tax  imposed  on  an  article  under  section  904,  a  tax  under  the  same  section. 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX         913  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


Credit  is  not  allowed  unless:  (1)  The  article  forms  a  compenent  part  of  an 
article  sold  by  such  manufacturer  and  in  respect  to  which  a  tax  is  payable  by 
him;  (2)  such  manufacturer  has,  in  fact,  reimbursed  the  manufacturer  from 
whom  purchased,  who  has  himself,  in  fact,  paid  the  tax  upon  which  such 
credit  is  sought;  (3)  unless  the  taxpayer  keeps  such  records  and  evidence  as 
will  clearly  establish  his  right  to  the  same. 

4563  The  following  records  and  evidence  will  be  deemed  sufficient  to 
establish  this  right  of  exemption:  (1)  Any  record  or  statement  show- 
ing the  exact  amount  of  tax  paid  upon  such  article;  (2)  a  certificate  or  state- 
ment of  the  following  tenor:  "The  undersigned  hereby  certifies  that  the 
articles  on  which  credit  for  tax  is  claimed  were  tax  paid  and  that  said  articles 

were  used  by  in  the  further  manufacture  of  other  articles  taxable 

under  section  900  of  the  Revenue  Act  of  1921.    (Signed)  ."  In 

cases  of  doubt,  in  order  to  avoid  penalty  for  default  if  the  claim  is  not  estab- 
lished, the  tax  should  be  paid  in  full  and  application  made  for  refund. 

4564  Art.  7.    Who  is  a  manufacturer. — A  manufacturer  is  generally  a  per- 
son who  (1)  actually  makes  a  taxable  article,  or  (2)  by  changes  in 

the  form  of  an  article  produces  a  taxable  article,  or  (3)  by  the  combination 
of  two  or  more  articles  produces  a  taxable  article.  Under  certain  circum- 
stances, however,  the  person  who  actually  makes,  produces,  or  assembles  the 
taxable  article  is  not  the  manufacturer  for  the  purpose  of  the  tax.  There 
may  be  several  stages  of  manufacture  and  several  manufacturers,  each  of 
whom  must  pay  a  tax.  In  such  cases  the  tax  attaches  on  successive  sales, 
subject  to  the  provisions  as  to  credits  (see  art.  6.).  The  following  examples 
are  merely  illustrative: 

4565  Example  1.  "A,"  an  automobile  manufacturer,  sells  an  automobile 
in  a  knockdown  condition  but  complete  as  to  all  the  component  parts. 

"B,"  a  dealer,  assembles  these  component  parts  into  a  complete  usable 
automobile,  without  further  manufacture,  and  sells  the  automobile.  "A" 
is  the  manufacturer. 

4566  Example  2.  "A,"  an  automobile  body  manufacturer  sells  an  auto- 
mobile body  in  a  knockdown  condition  but  complete  as  to  all  its 

component  parts,  to  "B,"  a  dealer,  who  assembles  these  component  parts 
into  a  complete  usable  automobile  body,  and  installs  it,  or  causes  it  to  be 
installed  on  a  chassis  which  he  has  purchased  from  a  manufacturer  who  is 
a  different  person  from  the  manufacturer  of  the  body,  and  sells  the  com- 
pleted automobile.  "A"  is  the  manufacturer  of  the  automobile  body,  but 
may  sell  the  same  to  "B"  tax  free  under  the  certificate  provided  for  in  article 
14.  "B"  is  the  manufacturer  of  the  automobile  and  subject  to  tax  on  the 
selling  price  of  the  completed  automobile,  but  may  take  credit  for  the  amount 
of  tax  paid  by  the  manufacturer  of  the  chassis.    (See  arts.  3  and  6.) 

4567  Example  3.  "A,"  a  dealer  or  jobber,  contracts  with  "B"  for  the 
manufacture  of  a  taxable  article,  whereby  "B"  receives  from  "A" 

the  cost  of  materials  and  labor  plus  a  specified  profit.  "A"  is  the  manu- 
facturer. 

4568  Example  4.  "A,"  a  dealer  or  jobber,  contracts   with  "B"  for  the 
manufacture  of  a  taxable  article,  whereby  "A"  furnishes  "B"  all  or 

a  portion  of  the  material  to  be  used  and  pays  "B"  for  the  labor  plus  a  specified 
profit.    "A''  is  the  manufacturer. 

4569  Example  5.  "A,"  a  dealer  or  jobber,  owns  a  patent,  trade-mark, 
formula,  or  recipe  for  a  taxable  article,  and  contracts  with  "B"  for 

the  manufacture  thereof,  the  contract  specifying  that  "B"  can  manufacture 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         914  SERVICE 


^    *95J  -  I  ,,.     ,,,,    Mi,,     w         ,  ,    „   .  m 

2-1-22.  Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
 EXCISE  TAXES  REGULATIONS. 


the  article  only  for  "A";  that  "A"  will  take  the  entire  output;  and  that  it 
will  be  sold  by  "A"  as  the  manufacturer,  "B's"  name  not  appearing  on  the 
article.    "A"  is  the  manufacturer. 

4570  Art.  8.    Tax  payable  by  the  manufacturer. — The  tax  is  to  be  paid  by 
the  manufacturer  on  all  sales  made  directly  by  him  or  through  an 

agent. 

4571  If  the  manufacturer  has  a  sales  agent  or  sales  agency  to  whom  he 
only  nominally  sells  an  article,  but  retains  an  interest  in  the  profits 

from  the  resale  of  the  article,  the  taxable  sale  is  that  made  by  the  sales  agent 
or  sales  agency. 

4572  On  articles  manufactured  for  a  jobber  by  a  foreign  manufacturer, 
the  jobber  must  pay  the  tax  as  the  importer. 

4573  A  receiver  or  trustee  in  bankruptcy  of  a  manufacturer  conducting  a 
business  under  court  order  is  liable  to  the  tax  upon  articles  sold  by 

him. 

4574  Where  a  manufacturer  consigns  articles  to  a  dealer,  retaining  owner- 
ship in  them  until  they  are  disposed  of  by  the  dealer,  the  manu- 
facturer must  pay  the  tax  upon  the  basis  of  the  manufacturer's  selling  price 
on  all  goods  sold  to  the  dealer,  as  shown  by  reports  to  be  procured  by  him 
monthly  from  the  dealer.  Where  the  agent  of  a  manufacturer  makes  a  sale, 
it  is  to  be  treated  as  a  sale  by  the  manufacturer. 

4575  Where  a  so-called  sales  agent  or  distributor  is  a  separate  corpora- 
tion and  the  sale  to  it  is  absolute  and  at  prices  and  under  terms  and 

conditions  such  as  ordinarily  obtain  between  persons  dealing  at  arm's  length 
with  no  further  payment  or  benefit  accruing  to  the  manufacturer  upon  resale 
or  otherwise  except  the  receipt  of  dividends  on  stock  holdings,  the  taxable 
sale  is  that  made  by  the  manufacturer  to  such  sales  corporation  even  though 
all  or  substantially  all  of  the  stock  of  such  sales  corporation  is  held  by  or  for 
the  benefit  of  the  manufacturer  or  the  stockholders  in  the  manufacturing 
corporation.  Where,  however,  there  are  special  arrangements  between  the 
manufacturer  and  the  selling  corporation  such  as  special  terms,  prices,  etc., 
the  taxable  sale  is  the  sale  by  the  selling  corporation  as  the  selling  agent  of 
the  manufacturer.  The  same  rule  applies  in  the  case  of  the  selling  corpora- 
tion which  owns  substantially  all  the  stock  of  a  manufacturing  corporation. 

4576  Art.  9.    When  tax  attaches. — The  tax  attaches  when  the  title  to  an 
article  passes  from  the  manufacturer  to  the  purchaser  pursuant  to 

a  contract  of  sale. 

4577  When  title  passes  is  a  question  of  fact  dependent  upon  the  intention 
of  the  parties  as  gathered  from  the  contract  of  sale  and  the  attendant 

circumstances. 

4578  Where  goods  are  segregated  from  other  goods  owned  by  the  vendor 
and  it  is  the  intention  of  both  the  vendor  and  the  purchaser  at  the 

time  the  goods  are  so  segregated  that  they  shall  then  belong  to  the  purchaser, 
the  title  will  be  presumed  to  pass  at  such  time. 

4579  In  the  absence  of  an  intention  to  the  contrary  the  title  is  presumed 
to  pass  upon  delivery  of  the  article  to  the  purchaser  or  to  a  carrier  for 

the  purchaser. 

4580  In  the  case  of  a  conditional  sale,  where  title  is  reserved  in  the  vendor 
until  payment  of  the  purchase  price  in  full,  the  tax  attaches  (a)  upon 

such  payment,  or  (b)  when  title  passes  if  before  completion  of  the  payments, 
or  (c)  when,  before  completion  of  the  payments,  the  dealer  disposes  of  the 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX         915  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


sale  by  charging  off  by  any  method  of  accounting  he  may  adopt  the  unpaid 
portion  of  the  contract  price,  or  (d)  when  the  vendor  discounts  the  notes  of 
of  the  purchaser  for  cash  or  otherwise,  or  (e)  when  the  vendor  transfers  to 
another  his  title  in  the  article  sold. 

4581  Art.  10.    Sales  to  the  Government  or  a  State. — The  tax  applies  to 
articles  enumerated  in  sections  900  and  904,  except  those  enumerated 

under  subdivision  7,  section  900  (see  art.  20),  when  sold  to  the  United  States 
Government.  The  same  is  true  of  articles  sold  to  a  State  or  political  subdiv- 
sion  thereof,  even  though  they  are  to  be  paid  for  entirely  out  of  public  moneys 
and  are  to  be  used  in  the  carrying  on  of  governmental  operation.  Where  the 
Government  supplies  a  manufacturer  with  all  materials  and  parts,  except  a 
small  portion  furnished  by  the  manufacturer  under  a  contract  stipulating  that 
the  manufacturer  shall  be  guaranteed  a  certain  profit,  no  tax  is  payable. 
Articles  manufactured  for  Government  use  in  plants  taken  over  and  operated 
by  the  Government  are  not  subject  to  tax.  The  rules  applicable  to  the  tax- 
ability of  sales  to  the  United  States  Government  apply  equally  in  the  case  of 
articles  sold  to  foreign  Governments.  (See  also  art.  20.) 
• 

Automobiles. 

4582  Art.  11.    Automobiles:  Scope  of  tax. — An  automobile  truck,  auto- 

4501  mobile  wagon,  or  other  automobile  is  a  self-propelling  vehicle  de- 

4502  signed  to  transport  along  highways  and  roads  persons  or  property 
or  both. 

4583  Where  the  vehicle  is  capable  of  transporting  both  property  and  per- 
sons, the  primary  use  for  which  it  is  designed  will  control  as  to  whether 

it  is  taxable  at  3  per  cent  under  subdivision  (1)  as  an  automobile  truck  or 
automobile  wagon,  or  at  5  per  cent  under  subdivision  (2)  as  an  "other  auto- 
mobile." 

4584  The  act  specifically  exempts  tractors.    A  tractor  is  a  machine 
operated  and  controlled  by  its  own  motive  power,  and  designed  to 

draw  or  pull,  as  distinguished  from  carry,  a  load.  So-called  tractors  or 
"semitractors,"  which  carry  a  portion  of  the  load,  are  taxable  as  automobile 
trucks  or  automobile  wagons. 

4585  Trailers  are  not  taxable.    A  trailer  is  a  vehicle  not  operated  or  con- 
trolled by  its  own  motive  power,  but  which  is  pulled  or  drawn  behind 

another  vehicle  containing  the  motive  power.  So-called  trailers  or  "semi- 
trailers" so  designed  that  a  portion  of  the  load  or  the  weight  thereof  is  carried 
or  borne  by  the  tractor  or  "semitractor"  are  taxable  as  "parts"  of  auto- 
mobile trucks  or  automobile  wagons. 

4586  A  usuable  substantially  completed  automobile  or  automobile  truck 
produced  by  assembling  new  parts  of  trucks  or  cars  is  subject  to  tax, 

but  a  rebuilt  car  is  not  subject  to  tax  as  such,  although  the  new  parts  thereof 
are  subject  to  tax  when  sold  by  the  manufacturer.  (See  Arts.  12  and  13  for 
examples  of  articles  taxable  and  not  taxable,  and  Art.  \5  for  the  classification 
of  chassis.) 

4587  Art.  12.    Automobile  trucks  and  automobile  wagons.  —The  tax  is  3 
per  cent  of  the  price  for  which  automobile  trucks  and  automobile 

wagons  are  sold  by  the  manufacturer.  It  applies  to  automobile  trucks 
and  automobile  wagons  primarily  designed  or  adapted  for  the  transportation 
of  property  along  highways  and  roads,  although  persons  may  incidentally 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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2-1-22.  Reg'  47,  Rev.  Manufacturer's  Sales  Taxes. 
 EXCISE  TAXES  REGULATIONS. 


be  transported  at  the  same  time,  as  outlined  in  article  11,  and  to  automobile 
truck  and  automobile  wagon  chassis  as  denned  in  article  15. 

4588  For  example,  fire  apparatus,  including  fire  engines,  hose  carts,  hook 
and  ladder  trucks,  water-tower  trucks,  etc.,  tank  trucks  for  carrying 

oil,  gasoline,  water,  etc.,  moving  and  furniture  vans,  and  drays,  delivery 
wagons,  etc.,  are  all  taxable  as  automobile  trucks  and  wagons.  Auto- 
mobile hearses  are  taxable  as  automobile  trucks  or  automobile  wagons. 

4589  An  automobile  truck  or  automobile  wagon  formed  by  joining  to- 
gether a  so-called  tractor  or  "semitractor"  which  carries  or  bears  a 

portion  of  the  load,  and  a  so-called  trailer  or  "semitrailer"  is  taxable  as  a 
whole  as  an  automobile  truck  or  an  automobile  wagon. 

4590  When  sold  separately  the  so-called  tractor  or  "semitractor"  is  taxable 
as  an  automobile  truck  or  automobile  wagon,  and  the  so-called 

trailer  or  "semitrailer"  as  a  "part"  of  an  automobile  truck  or  automobile 
wagon. 

459 1  Motor-driven  machines  for  pulling  or  drawing  vehicles  around  factories 
and  railway  stations,  small  trucks  for  handling  baggage  and  trunks 

at  railway  stations  and  for  transporting  materials,  articles,  or  goods  around 
and  adapted  for  restricted  use  in  factory  yards  or  elsewhere  as  distinguished 
from  use  on  highways  and  roads,  are  not  subject  to  tax. 

4592  Self-propelling  motor-driven  machines,  such  as  concrete  mixers, 
stone  crushers,  excavating  shovels,  ditch  diggers,  etc.,  and  machines 

which  perform  a  mechanical  function  as  they  move  along  highways  and  roads, 
such  as  road  graders,  road  scrapers,  street  sweepers,  road  sprinklers  and 
oilers,  are  not  taxable.  Where,  however,  the  mechanical  part  of  a  machine, 
as  the  mixing  machine  of  a  concrete  mixer,  the  blades  of  a  road  scraper,  the 
tank  of  a  street  sprinkler,  or  the  boiler  of  a  road  oiler,  is  superimposed  or 
mounted  on  a  truck  chassis,  the  chassis  is  taxable  at  3  per  cent  when  sold  by 
the  manufacturer. 

4593  Motor-propelled  wheel  or  rolling  chairs,  motor-driven  machine-gun 
and  artillery  carriages  of  the  tractor  type,  motor-driven  railroad  cars 

and  vehicles  designed  and  adapted  solely  for  use  on  rails  or  tracks,  and  not 
capable  of  use  on  highways  and  roads,  are  not  taxable. 

4594  Any  tires,  inner  tubes,  parts,  or  accessories  for  automobile  trucks 
and  automobile  wagons  sold  on  or  in  connection  therewith  or  with 

the  sale  thereof  are  taxable  at  3  per  cent  as  part  of  the  selling  price  of  the 
automobile  truck  or  automobile  wagon.  This  applies  only  to  such  tires,  inner 
tubes,  parts,  or  accessories  as  are  not  in  excess  of  the  quantities  usually  sold 
in  the  ordinary  course  of  trade  to  a  single  customer  at  the  time  and  in  connec- 
tion with  the  sale  of  an  automobile  truck  or  an  automobile  wagon.  Any 
quantity  of  tires,  inner  tubes,  parts,  or  accessories  in  excess  of  this  amount 
is  taxable  under  subdivision  (3)  at  5  per  cent  of  the  selling  price  thereof. 

4595  Art.  13.  Other  automobiles  and  motor  cycles. — The  tax  is  5  per  cent 
of  the  price  for  which  such  articles  are  sold  by'the  manufacturer.  It 

applies  to  automobiles  primarily  designed  for  carrying  persons,  although 
property  may  incidentally  be  transported  at  the  same  time,  as  outlined  in 
Article  11,  and  to  other  automobile  chassis  as  defined  in  Article  15. 

4596  It  also  applies  to  all  motor  cycles  sold  separately  and  to  motor 
cycles  sold  with  side  cars  attached. 

4597  Automobiles  that  are  designed  and  primarily  adapted  for  the  transport- 
ation of  persons  as  distinguished  from  property  are  taxable  as  "other 

automobiles."    For  example,  ordinary  passenger  or  pleasure  cars,  taxicabs, 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         917  SERVICE 


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Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


automobile  busses,  sight-seeing  cars,  hotel  busses,  omnibusses,  police  patrols, 
ambulances,  cars  used  by  fire  department  chiefs  and  marshals,  mourners' 
coaches  with  accommodations  for  persons  other  than  that  afforded  by  the 
seat  occupied  in  whole  or  in  part  by  the  driver,  etc. 

4598  Where  an  automobile  chassis  of  such  construction  that  it  is  ordi- 
narily used  as  an  automobile  truck  or  an  automobile  wagon  is  fitted 

with  a  body  designed  for  the  carriage  of  persons,  the  completed  whole  is 
taxable  at  5  per  cent  as  an  "other  automobile." 

4599  A  side  car  sold  separately  from  a  motor  cycle  is  taxable  as  a  "part" 
under  subdivision  (3). 

4600  Tires,  inner  tubes,  parts  and  accessories  for  other  automobiles  and 
motor  cycles  sold  on  or  in  connection  therewith  or  with  the  sale 

thereof  or  separately  are  taxable  at  5  per  cent. 

Automobile  Parts  and  Accessories. 

4601  Art.  14.  Tires,  inner  tubes,  parts,  and  accessories  sold  to  manufac- 
4503     turers. — The  words  "tires,  inner  tubes,  parts,  or  accessories"  shall  be 

understood  to  embrace  only  such  tires,  inner  tubes,  parts,  or  accessories 
as  have  reached  such  a  stage  of  manufacture  that  they  constitute  articles 
commonly  or  commercially  known  as  "tires,  inner  tubes,  parts,  or  accessories," 
and  shall  not  be  understood  to  embrace  raw  materials  used  in  the  manufacture 
of  such  articles. 

4602  Unvulcanized  sheet  rubber,  liquid  rubber  vulcanizing  cement,  and 
friction  fabrics  are  considered  raw  materials,  and  are  exempt  from 

tax. 

4603  Any  article  which  has  reached  a  state  of  manufacture  wherein  it 
is  in  itself  a  component  part  or  accessory,  and  is  of  such  a  nature  that 

it  may  be  used  or  attached  by  an  ordinary  repair  man  or  individual  user  as 
distinguished  from  a  manufacturer  or  producer,  is  subject  to  tax  as  a  "part  or 
accessory." 

4604  Subdivision  (3)  exempts  from  tax  sales  of  tires,  inner  tubes,  parts, 
or  accessories  to  a  manufacturer  or  producer  of  automobile  trucks, 

automobile  wagons,  other  automobiles,  motor  cycles,  tires,  inner  tubes, 
parts,  or  accessories. 

4605  In  order  to  come  within  the  exemption  of  the  statute,  the  sale  must 
be  made  by  a  manufacturer  and  such  manufacturer  must,  at  the  time 

the  goods  are  shipped  or  sold  (whichever  is  prior),  have  in  his  possession  an 
order  or  contract  of  sale,  with  certificate  of  the  purchaser  printed  thereon  or 
in  writing,  permanently  attached  thereto,  to  the  effect  that  the  purchaser  is 
a  manufacturer  of  automobile  trucks,  automobile  wagons,  other  automobiles, 
motor  cycles,  tires,  inner  tubes,  parts,  or  accessories;  that  he  is  purchasing 
the  articles  in  question  as  such  manufacturer  for  resale  in  some  form  or  manner, 
or  for  free  replacement  under  contract  or  guaranty;  and  that  he  will  account 
to  the  internal-revenue  collector  and  pay  the  tax  on  the  sale  of  such  articles, 
unless  such  sales  by  him  are  exempted  as  provided  in  article  16  on  account  of 
being  purchased  for  other  uses  or  are  made  to  another  manufacturer  of  auto- 
mobile trucks,  automobile  wagons,  other  automobiles,  motor  cycles,  tires, 
inner  tubes,  parts,  or  accessories  for  resale  by  him  in  some  form  or  manner  or 
for  free  replacement,  in  which  case  he  will  require  the  same  form  of  certifi- 
cate from  such  manufacturer;  that  when  such  tires,  inner  tubes,  parts,  or 
accessories  are  sold  other  than  on  or  in  connection  with  the  sale  of  new  auto- 
mobile trucks,  wagons,  automobiles,  or  motor  cycles  he  will  pay  the  tax  on 
such  sales  (unless  exempted  in  accordance  with  the  regulations);  that  when 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         918  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


such  articles  are  sold  on  or  in  connection  with  the  sale  of  such  new  vehicles 
he  will  pay  the  tax  on  the  selling  price  of  such  vehicles,  including  such  articles. 

4606  Manufacturers  furnishing  such  certificate  will  be  deemed  manufac- 
turers within  the  meaning  of  the  law  and  subject  to  the  tax  imposed 

on  sales  of  such  articles  by  manufacturers,  unless  the  sales  are  made  to 
another  manufacturer  or  producer  of  automobile  trucks,  automobile  wagons, 
other  automobiles,  motor  cycles,  tires,  inner  tubes,  parts,  or  accessories  for 
resale  by  him  in  some  form  or  manner  or  for  free  replacement  under  a  contract 
or  guaranty,  who  furnishes  a  certificate  so  stating. 

4607  Jobbers  or  dealers,  who  are  not  manufacturers,  and  users  who  are 
not  manufacturing  for  resale,  are  not  entitled  to  purchase  tax  free 

under  certificate. 

4608  Following  is  a  form  of  the  certificate  or  statement  which  will  be 
accepted  and  in  substance  must  be  strictly  adhered  to: 

The  undersigned  hereby  certifies  that  he  is  a  manufacturer  or  producer  of  automo- 
bile trucks,  automobile  wagons,  other  automobiles,  motorcycles,  tires,  inner  tubes, 
parts,  or  accessories,  and  that  the  tires,  inner  tubes,  parts,  or  accessories  purchased 
hereunder  are  purchased  by  him  as  such  a  manufacturer  or  producer  for  resale  in 
some  form  or  manner  or  for  free  replacement  under  contract  or  guaranty  and  agrees 
if  any  of  the  tires,  inner  tubes,  parts,  or  accessories  are  sold  by  him  exempt  from 
tax  to  another  manufacturer  or  producer  of  automobile  trucks,  automobile 
wagons,  other  automobiles,  motor  cycles,  tires,  inner  tubes,  parts,  or  accessories 
for  like  purposes  he  will  require  a  similar  certificate  from  such  manufacturer  or 
producer.  The  undersigned  further  agrees  that  in  respect  to  all  tires,  inner  tubes, 
parts,  or  accessories  sold  by  him,  unless  such  sale  is  made  to  such  a  manufacturer 
or  producer,  he  will  pay  the  tax  on  such  sale  direct  to  the  internal-revenue  col- 
lector, including  it  in  his  tax  return  covering  the  month  in  which  such  sale  is 
made;  said  tax  to  be  paid  on  the  basis  of  the  taxpayer's  selling  price  of  such 
articles  when  sold  other  than  on  or  in  connection  with  the  sale  of  new  automobile 
trucks,  automobile  wagons,  other  automobiles,  motor  cycles,  tires,  inner  tubes, 
parts,  or  accessories,  and  on  the  selling  price  of  such  vehicles  or  articles  when 
the  same  includes  such  articles. 

4609  If  it  is  impracticable  to  furnish  a  certificate  for  each  order,  a  certificate 
covering  all  orders  between  given  dates  (such  period  not  to  exceed 

a  month)  will  be  accepted.  If  in  any  case  such  an  order  and  certificate  can 
not  be  produced  on  demand  of  any  authorized  agent  of  the  department,  the 
tax  in  respect  to  the  sale  will  be  considered  in  default. 

4610  Where  the  form  of  certificate  outlined  in  this  article  is  used  it  must 
be  in  the  exact  form  specified,  except  that  when  such  form  is  used  to 

cover  orders  for  a  period  of  one  month  the  language  may  be  altered  to  indicate 
that  fact. 

4611  Art.  15.    Definition  of  parts. — A  "part"  for  an  automobile  truck, 
automobile  wagon,  other  automobile,  or  motor  cycle  is  any  article 

designed  or  manufactured  for  the  special  purpose  of  being  used  as  or  to  re- 
place a  component  part  of  any  such  vehicle  and  which  by  reason  of  some 
peculiar  characteristic  is  not  such  a  commercial  commodity  as  would  ordin- 
arily be  sold  for  general  use  and  which  is  primarily  adapted  only  for  use  as  a 
component  part  of  such  vehicle. 

4612  The  term  includes  bodies,  wheels,  engines,  springs,  axles,  radiators, 
etc.    When  sold  separately  a  side  car  and  a  so-called  trailer  or  "semi- 
trailer" so  designed  that  a  portion  of  the  load  or  the  weight  thereof  is  carried 
or  borne  by  the  tractor  or  "semitractor"  are  taxable  as  "parts." 

4613  Mere  stock  or  commercial  commodities,  such  as  bolts,  nuts,  washers, 
screws,  etc.,  though  used  as  components  for  such  vehicles,  are  not 

"parts"  within  the  meaning  of  subdivision  (3).    Articles,  however,  which 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         919  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


ordinarily  would  be  classed  as  commercial  commodities  become  parts  when, 
because  of  their  design  or  construction,  they  are  primarily  adapted  for  use  as 
component  parts  of  such  vehicles. 

4614  Component  parts  of  articles  taxable  under  this  definition  are  taxable 
when  sold  separately  if  they  have  reached  such  stage  of  manufac- 
ture that  they  are  primarily  adapted  for  use  as  a  component  part.  Blow-out 
shoes  are  subject  to  tax  as  "parts"  regardless  of  the  fact  that  they  may  be 
made  from  old  casings. 

4615  A  chassis  provided  with  a  "superstructure"  of  such  design  that  it 
is  without  substantial  additions  adaptable  for  hauling  heavy  loads 

is  an  "automobile  truck"  or  "automobile  wagon"  and  taxable  at  the  rate  of 
3  per  cent  when  sold  by  the  manufacturer  thereof.  The  term  "superstructure" 
means  any  chassis  frame  of  steel  or  wood  or  other  material  which  is  adaptable 
by  the  addition  of  a  few  bolsters  or  planks  for  carrying  a  heavy  load.  A 
chassis  not  so  equipped  is  an  "other  automobile"  or  a  "part"  taxable  at  the 
rate  of  5  per  cent  when  sold  by  the  manufacturer  thereof  unless  (1)  the  man- 
ufacturer has  actual  knowledge  from  the  construction  of  the  chassis  which  he 
sells  that  it  is  to  be  used  as  an  automobile  truck  or  automobile  wagon  or  has 
in  his  possession  at  the  time  the  chassis  is  shipped  or  sold  (whichever  is 
prior)  an  order  or  contract  of  sale  with  a  certificate  of  the  purchaser  printed 
thereon  or  in  writing  permanently  attached  thereto,  showing  that  the  chassis 
specified  in  the  order  is  to  be  so  used,  in  which  case  the  chassis  will  be  taxable 
at  the  rate  of  3  per  cent  when  sold  by  the  manufacturer  thereof;  or  (2)  unless 
the  manufacturer  has  in  his  possession  at  the  time  the  chassis  is  snipped  or 
sold  (whichever  is  prior)  an  order  or  contract  of  sale  with  certificate  of  the 
purchaser  printed  thereon  or  in  writing  permanently  attached  thereto,  showing 
that  the  chassis  specified  in  the  order  is  to  be  used  by  him  in  the  further  man- 
ufacture and  sale  of  an  automobile  truck,  automobile  wagon,  or  other  auto- 
mobile, in  which  case  the  chassis  may  be  sold  as  a  "part"  free  from  tax  if  the 
purchaser  furnishes  the  certificate  provided  for  in  article  14,  for  purchasing 
parts  tax  free.  In  the  case  of  a  chassis  which  is  taxable  as  an  automobile 
truck  or  automobile  wagon  at  the  rate  of  3  per  cent,  the  manufacturer  of  the 
chassis  must  return  the  tax  to  the  Government  in  all  instances. 

4616  It  should  be  noted  that  a  chassis  which  is  essentially  an  automobile 
truck  or  automobile  wagon  chassis  can  not  be  sold  tax  free  under 

the  certificate  provided  for  in  article  14.  The  exemption  from  tax  in  the 
sale  of  a  chassis  can  be  taken  advantage  of  only  in  the  sale  of  a  chassis  that  is 
essentially  a  passenger  car  chassis  (as  distinguished  from  an  automobile 
truck  or  automobile  wagon  chassis),  and  which  is  to  be  used  by  the  pur- 
chaser in  the  further  manufacture  and  sale  of  an  automobile  truck,  auto- 
mobile wagon,  or  other  automobile. 

4617  In  case  the  purchaser  of  a  tax-paid  chassis  further  completes  the 
chassis  by  the  addition  of  a  body  and  sells  the  completed  automobile 

truck,  automobile  wagon,  or  other  automobile,  the  tax  must  be  paid  by  him 
on  his  selling  price  of  the  complete  automobile  truck,  automobile  wagon,  or 
other  automobile  less  any  tax  previously  paid  by  the  manufacturer  of  the 
chassis  from  whom  he  purchased  it.    (See  Arts.  3  and  6.) 

4618  A  manufacturer  who  purchases  from  the  manufacturer  thereof  tires, 
inner  tubes,  parts,  or  accessories  for  use  in  further  manufacturing  an 

automobile  truck,  automobile  wagon,  other  automobile  or  motor  cycle,  may 
purchase  them  tax  exempt  by  furnishing  the  certificate  provided  for  in  article 
14. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         920  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 
EXCISE  TAXES  REGULATIONS. 


4619  In  all  cases  where  a  subsequent  manufacturer  does  not  furnish  the 
certificate  provided  for  in  article  14,  and  the  original  manufacturer 

pays  the  tax  thereon,  if  the  subsequent  manufacturer  uses  such  tires,  inner 
tubes,  parts,  or  accessories  in  the  manufacture  and  sale  of  an  automobile 
truck,  automobile  wagon,  other  automobile,  motorcycle,  tire,  inner  tube, 
part,  or  accessory,  he  may  take  credit  for  such  tax  paid  by  the  original  man- 
ufacturer, in  the  same  manner  as  is  provided  in  the  case  of  a  chassis. 

4620  If  a  person  manufactures  for  sale  separately  parts  or  accessories  and 
is  also  engaged  in  the  business  of  repairing  and  rebuilding  automobile 

trucks,  automobile  wagons,  other  automobiles,  or  motor  cycles,  such  parts  or 
accessories  used  for  repair  or  rebuilding  purposes  are  subject  to  taxation  upon 
the  amount  charged  for  the  entire  job,  unless  the  amount  charged  for  the  parts 
so  used  is  billed  separately,  in  which  case  the  tax  will  attach  to  the  sale  price 
of  the  parts  only. 

4621  A  concern  which  does  not  manufacture  for  sale  separately  any  part 
or  accessory,  but  is  engaged  in  doing  strictly  a  repair  business,  and 

makes  only  occasionally  a  part  which  may  be  needed  for  an  immediate 
repair  job  performed  by  it,  is  not  considered  a  manufacturer  and  is  not  re- 
quired to  pay  any  tax  in  respect  to  parts  so  manufactured  and  used. 

4622  A  person,  partnership,  or  corporation  engaged  in  the  business  of 
building  over  automobile  tops  or  bodies  for  installation  on  new  or 

old  chassis  is  not  considered  to  be  doing  strictly  a  repair  business,  even 
though  all  such  tops  or  bodies  are  manufactured  as  needed  for  an  immediate 
job,  but  is  held  to  be  a  manufacturer  of  automobile  "parts  or  accessories" 
and  subject  to  a  tax  as  such. 

4623  Art.  16.    Definition  of  accessories. — An  "accessory"  for  an  auto- 
mobile truck,  automobile  wagon,  other  automobile,  or  motor  cycle  is 

any  article  designed  to  be  attached  to  or  used  in  connection  with  such  vehicle 
to  add  to  its  utility  or  ornamentation  and  which  is  primarily  adapted  for  use 
in  connection  with  such  vehicle,  whether  or  not  essential  to  its  operation. 

4624  The  term  "accessories"  includes,  for  example,  automobile  tops,  back 
and  side  curtains,  horns,  speedometers,  self-starters,  spot  lights, 

shock  absorbers,  tire  pumps,  pressure  gauges,  and  hydrometers. 

4625  Articles  which  have  a  general  commercial  use  and  which  are  not 
especially  designed  and  peculiarly  adapted  for  use  in  connection  with 

automobile  trucks,  automobile  wagons,  other  automobiles,  or  motor  cycles 
are  not  subject  to  tax  as  "parts"  or  "accessories."  Thus  a  wrench  or  other 
tool  of  a  kind  ordinarily  sold  in  hardware  stores  for  general  purposes  is  not 
subject  to  tax  when  sold  separately,  but  if  incorporated  in  an  automobile 
tool  kit,  designed,  intended,  advertised,  or  held  out  for  use  on  an  automobile 
as  distinguished  from  garage  or  shop  equipment,  is  taxable  as  part  of  the 
completed  kit. 

4626  A  wrench  or  other  tool  of  special  design  or  construction  primarily 
adapted  for  use  in  connection  with  automobiles  is  taxable. 

4627  If  any  doubt  exists  as  to  the  special  adaptability  of  any  article,  the 
fact  of  its  sale  by  the  manufacturer  to  be  used  with  an  automobile,  or 

to  an  automobile  accessories  dealer,  would  determine  its  taxability. 

4628  Robes,  goggles,  and  lunch  kits  are  not  subject  to  tax.  Asbestos 
brake-band  linings,  generator  tubing,  and  radiator  hose  are  not  sub- 
ject to  tax  unless  sold  in  prepared  sizes,  lengths,  shapes,  or  with  such  fittings 
as  make  them  adapted  for  use  only  on  or  in  connection  with  automobiles. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         921  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 

EXCISE  TAXES  REGULATIONS. 


4629  Parts  or  accessories  for  automobile  trucks,  automobile  wagons,  other 
automobiles,  or  motorcycles  primarily  adapted  for  use  on  or  in  con- 
nection therewith  when  sold  for  any  other  purpose  are  not  taxable  provided 
the  purchaser  files  with  his  order  a  statement  that  such  parts  or  accessories 
are  to  be  used  on  or  in  connection  with  another  article  of  commerce  not 
enumerated  or  included  in  subdivisions  (1),  (2),  or  (3)  of  section  900.  For 
example,  a  self-starter  primarily  adapted  for  use  on  an  automobile  if  sold  to 
a  manufacturer  of  motor  boats,  such  manufacturer  stating  in  his  order  that 
it  is  to  be  used  in  the  manufacture  of  a  motor  boat  and  not  upon  an  auto- 
mobile, is  not  taxable. 

Cameras 

4630  Art.  17.  Cameras  'and  lenses. — The  tax  [is  10  per  cent  of  the  price 

4504  for  which  cameras  weighing  not  more  than  [1 00  pounds,  and  lenses 
for  such  cameras,  are  sold  by  the  manufacturer.    Stands  and  tripods 

are  not  to  be  weighed  in  computing  the  weight  of  the  camera.  Process  and 
motion-picture  cameras  are  subject  to  the  tax.  Toy  cameras  are  taxable  if 
capable  of  taking  a  picture.  Parts  of  cameras  other  than  lenses  are  not 
taxable,  unless  sold  in  combination  with  a  camera. 

Films 

4631  Art.  18.  Photographic  films  and  plates. — The  tax  is  5  per  cent  of  the 

4505  manufacturer's  selling  price  of  photographic  films  and  plates,  other 
than  moving-picture  films.    X-ray  plates  are  taxable  as  photographic 

plates.  Motion-picture  film  cut  up  and  placed  in  packets  inclosed  in  a 
patented  wrapper  and  known  as  dental  films  are  taxable  under  this  section. 
Unsensitized  squeegee,  and  ferrotype  plates  are  not  taxable. 

Candy 

4632  Art.  19.  Candy. — Candy  within  the  meaning  of  this  subdivision — 

4506  (a)  Includes   chocolate  creams,   bonbons,  gumdrops,  jelly  drops, 
jelly  beans,  imperials,  caramels,  stick  candy,  lozenges,  taffies,  candy 

kisses,  wafers,  fudges,  or  Italian  creams,  nougats,  peanut  brittle,  sugared 
almonds,  chocolate-covered  fruits  and  nuts,  glace  or  candied  fruits  and  nuts 
not  specified  in  paragraph  (b)  of  this  subdivision;  pop  corn  and  other  cereals 
or  cereal  products  not  specified  in  paragraph  (b)  of  this  subdivision,  mixed 
with  or  covered  with  molasses,  sugar,  or  other  sweetening  agent;  hard  candies, 
plain  and  chocolate-covered  marshmallows;  candy  cough  drops  sold  in  bulk 
and  without  remedial  claims;  sweetened  licorice;  sweet  chocolate  and  sweet- 
milk  chocolate,  whether  plain  or  mixed  with  fruit  or  nuts,  not  specified  in 
paragraph  (b)  of  this  subdivision;  maple  sugar  mixed  with  fruit,  nuts,  etc., 
not  specified  in  paragraph  (b)  of  this  subdivision;  and  all  similar  articles  how- 
ever designated;  but 

4633  (b)  Does  not  include  cereal  breakfast  foods,  cake  and  pastries, 
bitter  chocolate  which  needs  the  addition  of  sugar  before  it  becomes 

pleasing  to  the  taste,  powdered  chocolate,  maple  sugar  or  sirup  not  mixed 
with  nuts,  etc.,  rnarshmallow  paste,  glace  or  candied  fruit  peel  and  citron,  or 
sweet  chocolate,  glace  or  candied  fruits  and  nuts  sold  by  the  manufacturer 
under  circumstances  where  it  is  obvious  from  the  condition  of  the  product, 
method  of  packing,  or  from  other  facts  in  connection  with  the  sale,  that  it 
will  not  be  consumed  in  the  form  in  which  it  is  then  sold. 

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EXCISE  TAXES  REGULATIONS. 


4634  Where  a  manufacturer  sells  candy  which  is  packed  or  put  up  for 
sale  in  a  fancy  or  plain  box  or  container  the  tax  is  computed  upon 

the  selling  price  of  the  candy  and  container,  whether  the  container  is  billed 
separately  or  not.  However,  where  candy  is  purchased  and  the  purchaser 
selects  a  fancy  box  or  container  in  which  the  candy  is  placed  the  tax  attaches 
to  the  selling  price  of  the  candy  and  not  to  the  cost  of  the  box.  In  such 
cases,  if  the  sale  is  billed,  the  container  and  candy  must  be  billed  as  separate 
items. 

Firearms 

4635  Art.  20.  Firearms,  shells,  and  cartridges. — A  firearm  is  any  weapon 

4507  from  which  shot  is  discharged  by  an  explosive.    For  the  purpose  of 
the  act,  firearms  include  only  portable  firearms,  as  pistols,  revolvers, 

rifles,  carbines,  machine  guns,  shotguns,  and  fowling  pieces.  Shells  and 
cartridges  include  projectiles  for  all  such  portable  arms  when  in  such  com- 
pleted state  that  they  may  be  discharged  from  firearms  without  further 
manufacture. 

Knives 

4636  Art.  21.  Hunting  knives,  dirk  knives,  daggers,  etc. — A  hunting  or 

4508  bowie  knife  is  a  knife  with  a  blade  over  3  inches  in  length,  having  a 

4509  sharp  point  and  one  cutting  edge,  especially  adapted  for  sticking, 
skinning,  and  cutting  game.    The  knife  may  be  of  a  rigid  type, 

carried  in  a  sheath,  or  it  may  be  of  a  clasp  type,  containing  devices  other  than 
the  blades.  Hunting  and  bowie  knives  are  subject  to  a  tax  of  10  per  cent 
of  the  manufacturer's  selling  price,  whereas  the  weapons  described  in  (9)  are 
subject  to  a  tax  of  100  per  cent  upon  the  price  for  which  sold  by  the  manu- 
facturers . 

Smokers'  Articles 

4637  Art.  22.  Cigar  and  cigarette  holders,  pipes,  humidors,  and  smoking 

4510  stands. — For  the  purpose  of  the  tax  a  humidor  is  either  (1)  a  device 
for  maintaining  moist  atmosphere  in  any  receptacle  used  for  holding 

tobacco  products,  or  (2)  a  portable  receptacle  used  for  holding  tobacco  prod- 
ucts and  fitted  with  a  device  for  maintaining  moist  atmosphere  therein.  A 
smoking  stand  is  (1)  a  tobacco  ash  tray  having  a  pedestal  and  base,  or  (2)  a 
stand  supporting  two  or  more  ash  trays  in  an  upright  position  from  a  common 
base  and  designed  to  be  placed  on  a  table,  desk,  floor,  or  other  surface.  Cigar 
and  cigarette  holders  and  pipes,  made  wholly  or  in  part  of  briar  or  other 
material,  as  distinguished  from  meerschaum,  and  fitted  with  a  mouthpiece 
of  amber,  are  taxable  under  section  900,  even  though  ornamented,  mounted, 
or  fitted  with  precious  metals  or  imitations  thereof,  or  ivory.  Cigar  and 
cigarette  holders  and  pipes  with  no  meerschaum  or  amber  in  their  composition 
are  not  taxable  under  section  900,  but  if  ornamented,  mounted,  or  fitted 
with  precious  metals  or  imitations  thereof,  or  ivory,  are  taxable  under  section 
905.    (See  Regulations  48)  [page  934]. 

Slot  Machines 

4638  Art.  23.  Automatic  slot-device  machine. — A  machine  used  for  both 

4511  vending  and  weighing  is  taxable  as  a  weighing  machine.    For  the 
purpose  of  the  tax  fair  market  value  is  deemed  to  be  the  average 

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EXCISE  TAXES  REGULATIONS. 


wholesale  price  at  which  like  machines  have  been  sold  by  the  manufacturer 
at  wholesale  during  the  month  next  preceding  the  month  in  which  such 
machine  is  put  into  operation.  In  case  there  has  been  no  prior  sale  of  such 
machines,  fair  market  value  is  deemed  to  be  the  average  wholesale  price  for 
which  similar  machines  are  sold  at  the  time  the  taxable  machine  is  put  into 
operation.  Automatic  machines  operated  by  a  hand  lever  released  by 
dropping  a  coin  are  taxable  as  automatic  machines. 

Liveries 

4639  Art.  24.  Liveries  and  livery  boots  and  hats. — For  the  purpose  of  the 

4512  tax  the  enumerated  articles  include  the  liveries  and  uniforms,  hats, 
and  caps,  of  personal  or  domestic  servants  as  maids,  nurses  and  like 

help,  or  doormen,  footmen,  pages,  bell  boys,  ushers  and  similar  employees 
of  clubs,  hotels,  theaters,  cafes,  stores,  bakeries,  safe-deposit  companies, 
newspapers  and  similar  places;  but  uniforms  otherwise  taxed,  and  the  uni- 
forms of  employees  of  public-service  corporations,  such  as  railroads,  telegraph, 
and  telephone  companies,  are  not  taxable.  Uniforms  manufactured  for  any 
of  the  personal  or  domestic  servants  mentioned  in  this  article  are  defined  to 
be  such  uniforms  as  are  of  a  description,  character,  or  design  prescribed  by 
the  person  in  whose  service  they  are  worn  as  an  evidence  of  such  service  and 
possess  some  distinctive  characteristic  to  distinguish  them  from  ordinary 
dress.  A  chauffeur's  uniform  is  not  taxable  as  a  livery  unless  it  has  some 
distinctive  characteristic  to  distinguish  it  from  civil  dress. 

The  following  uniforms  are  not  taxable  under  this  section:  Uniforms  of 
members  of  an  orchestra  (not  employed  by  a  hotel  or  similar  place);  private 
watchmen;  court  attendants;  letter  carriers;  elevator  conductors  and  oper- 
ators, or  other  similar  employees  of  a  public  building;  police  reserves;  Indians 
in  the  United  States  Indian  Service;  hospital  attendants  (private  and  public 
hospitals);  Army  and  Navy  officers  and  students  at  military  schools;  bands 
and  musical  organizations  (when  sold  to  the  organization  or  to  an  individual 
member);  actors  or  participants  in  any  theatrical  production;  attendants  of 
public  zoological  parks,  museums  of  art  and  natural  history;  officers  of  steam- 
ship companies;  chauffeurs  of  taxicab  companies,  if  such  taxicab  companies 
are  adjuncts  of  public  service  corporations;  fraternal  organizations,  G.  A.  R., 
Spanish  War  Veterans,  and  the  American  Legion;  overalls. 

Hunting  Garments 

4640  Art.  25.  Hunting  and  shooting  garments  and  riding  habits. — Hunting 

4513  and  shooting  garments  and    riding  habits  are  deemed  to  include 
clothing  primarily  adapted  for  use  in  hunting,  shooting,  and  riding, 

and  commonly  so  used,  such  as  hunting  coats,  sleeveless  and  other;  duck 
shooters' jackets  and  coats;  shooting  caps  and  hats;  shell  belts;  ladies'  divided 
skirts  and  shell  skirts;  ladies'  riding  coats,  men's  riding  breeches  and  coats, 
riding  hats  and  caps. 

Leather  puttees  and  canvas  or  other  leggings  are  not  taxable  as  hunting 
or  shooting  garments  or  riding  habits. 

Pleasure  Boats 

4641  Art.  26.  Yachts[jand  motor^boats. — Yachts  and  motor  boats  include 

4514  vessels  driven  by  steam,  sail,  or  motor  and  not  designed  for^trade, 
fishing,  or  national  defense.    Vessels  adapted  to  the  public  transpor- 

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EXCISE  TAXES  REGULATIONS. 


tation  of  persons  or  property,  or  both,  or  for  the  carrying  on  of  a  commercial 
enterprise,  are  designed  for  trade.  Thus,  excursion  steamers,  freighters, 
pilot  boats,  lighters,  and  the  like  are  designed  for  trade.  To  be  classed  as 
designed  for  fishing  a  vessel  must  be  adapted  to  commercial  fishing  carried 
on  as  a  means  of  livelihood.  Vessels  built  according  to  plans  and  specifica- 
tions previously  approved  by  the  Navy  Department  are  held  to  be  designed 
for  national  defense  and  are  not  taxable.  The  sale  of  vessels  constructed 
according  to  a  design  adapted  to  racing,  to  the  personal  comfort  or  con- 
venience of  the  owner,  or  to  official  use  other  than  in  national  defense,  is 
taxable  as  the  sale  of  a  yacht  or  motor  boat  not  designed  for  trade,  fishing, 
or  national  defense. 

4642  Pleasure  boats  include  small  open  boats  driven  by  oars,  paddles, 
or  sails,  not  capable  of  long  trips,  when  adapted  for  pleasure  or 

recreation  of  the  owner  or  lessee.  The  sale  thereof  is  taxable  if  the  selling 
price  is  greater  than  $100. 

Manufacturer  also  Retailer 

4643  Art.  27.  Manufacturer  also  retailer. — It  should  be  noted  that  the  pro- 
4515     visions  of  this  subdivision  apply  only  to  articles  taxable  under  sec- 
tion 900. 

4644  By  "customarily  sells"  is  meant  a  bona  fide  practice  of  selling  the 
same  article  at  both  wholesale  and  retail,  in  substantial  quantities, 

and  not  mere  occasional  sales  at  wholesale,  with  the  bulk  of  the  business  done 
at  retail.  Only  a  manufacturer  who  does  a  legitimate  wholesale  and  retail 
business  and  holds  himself  out  as  a  wholesaler  as  well  as  a  retailer  with  respect 
to  the  goods  sold  will  be  entitled  to  compute  the  tax  upon  goods  sold  at  retail 
on  the  price  for  which  like  articles  are  sold  by  him  at  wholesale. 

4645  It  should  be  noted  that  the  provision  of  the  law  is  that  the  tax  in 
respect  to  retail  sales  shall  be  computed  "on  the  price  for  which  like 

articles  are  sold"  at  wholesale.  To  take  advantage  of  this  provision,  there- 
fore, it  is  necessary  that  a  manufacturer  shall  have  sold  identical  articles  both 
at  wholesale  and  at  retail,  in  order  to  arrive  at  a  basis  for  computing  the  tax. 

4646  In  arriving  at  the  basis  of  tax  on  retail  sales,  if  a  manufacturer  has 
but  one  regular  wholesale  selling  price  or  rate  of  discount  from  list, 

the  basis  of  tax  on  all  sales,  whether  wholesale  or  retail,  is  the  same — that  is, 
his  regular  wholesale  selling  price. 

4647  If  a  manufacturer  sells  regularly  at  wholesale  at  two  or  more  rates 
of  discount,  it  will  be  necessary  for  him  to  arrive  at  his  average  whole- 
sale selling  price  to  determine  the  basis  of  tax  on  retail  sales;  and  this  must 
be  done  by  dividing  the  sum  of  the  actual  wholesale  selling  prices  of  the 
article  in  question  by  the  total  number  of  such  articles  so  sold,  and  not  by 
the  process  of  "averaging  discounts." 

4648  Except  as  provided  herein,  the  basis  of  tax  on  retail  sales  for  any 
given  calendar  month  shall  be  the  manufacturer's  actual  average 

wholesale  selling  price  for  the  same  month.  But  if  the  manufacturer  desires 
to  pass  the  tax  on  as  such  and  to  bill  his  customer  a  definite  amount  as  tax 
previous  to  the  determination  of  his  actual  average  wholesale  selling  price 
for  that  month,  he  may  base  the  tax  on  his  average  wholesale  selling  price  for 
the  second  calendar  month  preceding  that  in  which  such  retail  sale  is  made, 
provided  no  change  has  been  made  in  the  meantime  in  his  retail  list  price; 
if  his  retail  list  price  has  been  changed,  the  average  wholesale  price  deter- 
mined as  aforesaid  must  be  adjusted  accordingly,  so  that  the  amount  upon 

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EXCISE  TAXES  REGULATIONS. 


which  the  tax  is  based  will  bear  the  same  proportion  to  the  retail  list  price 
then  in  force  as  the  average  wholesale  price  for  the  second  preceding  month 
bears  to  the  retail  list  price  then  in  force. 

4649  For  example,  the  tax  on  retail  sales  made  in  June  may  be  based  on 
the  manufacturer's  average  wholesale  selling  price  for  the  same  article 

during  the  month  of  April,  provided  he  has  made  no  change  in  his  retail  list 
price  of  the  article.  If  in  April  his  retail  list  was  $15  and  his  average  whole- 
sale price  was  $10,  and  in  June  his  retail  list  price  had  been  increased  20  per 
centum,  to  $18,  the  average  wholesale  price  or  basis  of  tax  would  be  likewise 
increased  20  per  centum,  to  $12. 

4650  For  the  purpose  of  the  tax,  a  wholesale  sale  is  held  to  be  a  sale  to  a 
vendor  for  resale,  or  a  sale  to  a  consumer  or  user  in  wholesale  quantity 

as  distinguished  from  a  sale  to  a  consumer  or  user  at  a  wholesale  price.  All 
sales  at  wholesale  are  subject  to  tax  on  the  basis  of  the  actual  selling  price  of 
each  article  sold.    (See  Art.  3.) 

Repeal  of  Former  Taxes 

4651  Art.  28.  Repeal  of  former  taxes. — The  present  taxes,  under  section 

4516  900  of  the  1921  Act,  supersede  the  excise  taxes  imposed  by  section  900 
of  the  Revenue  Act  of  1918  upon  the  sale  of  automobiles,  musical 

instruments,  sporting  goods,  chewing  gum,  cameras,  toilet  soaps,  and  similar 
articles.  The  Revenue  Act  of  1918  remains  in  force  for  the  assessment  and 
collection  of  all  taxes  which  have  accrued  thereunder,  and  for  the  imposition 
and  collection  of  all  penalties  or  forfeitures  which  have  accrued  and  may 
accrue,  in  relation  to  any  such  taxes.  In  the  case  of  any  tax  imposed  by 
section  900  of  the  Revenue  Act  of  1918,  if  there  is  a  tax  imposed  by  the 
present  statute  in  lieu  thereof,  the  provision  imposing  such  tax  remains 
in  force  until  the  corresponding  tax  under  the  present  statute  takes  effect. 
See  section  1400  of  the  statute  [1f8076]. 

Colorable  Sales 

4652  Art.  29.  Colorable  sales. — If  a  manufacturer,  through  the  device  of 

4517  a  selling  branch  or  in  any  other  manner,  contrives  to  sell  under  the 
market  price,  with  the  result  of  benefiting  his  business  or  with  the 

intent  to  cause  such  benefit,  the  tax  shall  be  based  on  the  fair  market  value 
of  the  articles  and  not  on  their  nominal  selling  price,  such  fair  market  value 
to  be  determined  by  the  Commissioner  in  each  instance.    (See  Art.  8.) 

4653  If  a  manufacturer  sells  a  taxable  article  to  a  subsidiary  corporation 
at  less  than  the  fair  market  value  thereof,  the  tax  shall  be  based  on 

the  selling  price  of  the  subsidiary  corporation. 

Carpets  and  Rugs 

4654  Art.  30. — For  the  purpose  of  the  tax,  carpets  and  rugs  shall  include 
4522     all  merchandise  commonly  or  commercially  known  as  carpets,  rugs, 

or  matting,  either  woven  or  felted,  and  whether  used  as  floor  cover- 
ings or  otherwise,  or  mats  when  used  as  floor  covering. 

4655  A  rug  shall  beheld  to  be  distinguishable  from  carpet  when  manufac- 
tured as  one  piece  or  made  by  the  manufacturer  from  breadths  which 

are  united  so  as  to  form  one  piece,  of  a  distinctive  manufacture,  size,  shape, 
and  design,  figured  or  plain.  Carpet,  when  sold  by  the  yard  and  sewed 
together  so  as  to  produce  a  certain  size  or  design  desired  by  the  purchaser, 
shall  not  be  deemed  to  be  a  rug  within  the  meaning  of  the  act. 

Copyright  1922,  by  The'Cotpotittion  Trust  Company. 
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Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 

EXCISE  TAXES  REGULATIONS. 


4656  The  unit  of  measurement  is  the  square  yard.  Therefore,  the  size  of 
a  rug  or  the  quantity  of  carpet  shall  be  so  calculated  as  to  be  capable 

of  applying  the  tax  thereto  at  so  much  per  square  yard.  All  lineal  yardage, 
whether  the  strips  be  wider  or  narrower  than  36  inches,  must  be  converted 
into  square  measure.  For  example,  a  lineal  yard  of  carpet  of  the  ordinary 
width  of  27  inches  contains  but  three-quarters  of  a  square  yard.  If  such 
carpet  is  sold  for  more  than  $3.37j^  per  lineal  yard,  it  is  taxable,  because 
$3.37j^  per  lineal  yard  is  equivalent  to  $4.50  per  square  yard.  Fringe  will 
not  be  considered  in  computing  the  yardage. 

4657  If  carpet  is  sold  at  a  specified  price  per  yard  and  such  price  includes 
sewing,  sizing,  or  laying,  the  tax  shall  attach  to  the  combined  price 

in  excess  of  $4.50  per  rquare  yard,  unless  the  sewing,  sizing,  or  laying  is  billed 
separately,  in  which  case  the  tax  attaches  only  to  the  price  of  the  carpet  in 
excess  of  $4.50  per  square  yard. 

Trunks 

4658  Art.  31.    For  the  purpose  of  the  tax  the  term  "trunks"  shall  be 

4523  held  to  include  all  receptacles  which  are  commonly  or  commercially 
designated  as  trunks,  designed  to  be  used  wherin  to  convey  the 

effects  of  a  traveler.  It  shall  not,  however,  be  held  to  include  articles  such  as 
hampers,  packing  boxes  or  cases,  nor  chests  designed  to  be  used  wherein  to 
convey  tools,  medicine,  or  silver. 

Valises,  Bags,  Etc. 

4659  Art.  32.    For  the  purposes  of  the  tax  valises,  traveling  bags,  and 

4524  suit  cases  shall  include  all  receptacles  which  are  commonly  or  com- 
mercially designated  as  such  or  designed  to  be  used  wherein  o  carry 

in  the  hand  the  effects  of  a  traveler.  Hat  boxes  shall  include  any  receptacle 
designed  to  be  used  wherein  to  convey  hats  in  traveling.  Fitted  toilet  cases 
shall  not  be  imited  in  meaning  to  those  designed  and  used  for  travel  ng  pur- 
poses, but  shall  include  all  receptacles  of  any  form  whatsoever  (other  than 
purses,  pocketbooks,  shopping  and  hand  bags,  as  defined  in  Art.  33)  designed 
and  fitted  to  contain  toilet  articles. 

Purses,  Pocketbooks,  Etc. 

4660  Art.  33.    For  the  purpose  of  the  tax  purses  shall  be  deemed  to  include 

4525  all  receptacles  used  for  carrying  money  on  or  about  the  person.  The 
term  "pocketbook"  is  broader  in  meaning  than  "purse,"  and  includes 

any  receptacle  other  than  a  purse  for  carrying  money,  papers,  cards,  memor- 
anda, etc.,  in  the  pocket  or  on  or  about  the  person.  The  term  "shopping 
and  hand  bags"  shall  include  all  bags,  whether  or  not  fitted  with  toilet  articles, 
designed  to  be  carried  in  the  hand  or  on  the  arm  for  the  purpose  of  conveying 
commodities  or  personal  effects;  but  it  shall  not  include  articles  such  as 
valises,  traveling  bags,  suit  cases,  and  fitted  toilet  cases  mentioned  in  article 
32.  The  fact  that  a  purse,  pocketbook,  hand  or  shopping  bag  is  fitted  with 
or  for  toilet  articles  does  not  take  it  from  this  subdivision  nor  make  it  taxable 
under  the  provisions  of  article  32. 

Portable  Lighting  Fixtures 

4661  Art.  34.  For  the  purpose  of  the  tax,  portable  lighting  figures  and 

4526  portable  lamps  shall  be  deemed  to  include  all  lighting  devices  adapted 
for  interior  illumination  and  not  designed  to  be  affixed  permanently 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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in  one  location,  and  all  articles  commonly  or  commercially  known  as  such, 
irrespective  of  the  principle  of  illumination  used.  A  portable  lamp  and 
shade,  even  though  sold  at  the  same  time,  shall  not  be  regarded  as  a  single 
item,  but  as  separate  items,  and  in  computing  the  tax  the  manufacturer  shall 
be  entitled  to  a  separate  $10  deduction  as  to  each  item.  For  example,  if  the 
selling  price  of  a  lamp  is  $50  and  a  shade  $30,  even  though  the  two  articles  are 
sold  to  one  purchaser,  the  tax  on  the  sale  of  the  lamp  will  be  $2.00  and  on  the 
sale  of  the  shade  $1.00. 

Fans 

4662  Art.  35.  For  the  purpose  of  the  tax,  fans  shall  be  deemed  to  include 
4527     those  articles  commonly  or  commercially  known  by  this  name, 

designed  to  produce  movements  of  the  air  by  waving  in  the  hand. 

Return  and  Payment  of  Tax 

4663  Art.  36.  Return  and  payment  of  tax. — Each  manufacturer  of  any  of 
4519     the  articles  hereinabove  enumerated  must  make  monthly  returns 

under  oath  in  duplicate  on  Form  728  (revised)  [page  907],  and  pay 
the  taxes  imposed  on  such  articles  to  the  collector  of  internal  revenue  for  the 
district  in  which  his  principal  place  of  business  is  located. 

4664  Any  return  may,  if  the  amount  of  the  tax  covered  thereby  is  not  in 
excess  of  $10,  be  signed  or  acknowledged  before  two  witnesses  instead 

of  under  oath.  Instructions  for  preparing  will  be  found  on  the  back  of  the 
form. 

4665  The  returns  must  be  rendered  and  the  tax  paid  in  time  to  be  in  the 
office  of  the  collector  or  zone  deputy  on  or  before  the  last  day  of  each 

month,  covering  all  the  transactions  of  the  preceding  month,  the  first  return 
to  cover  all  transactions  after  January  1,  1922. 

4666  Branch  houses  should  in  general  make  reports  to  the  parent  house, 
which  is  liable  to  make  monthly  returns  of  the  sales  of  the  branch 

house.  An  itinerant  manufacturer  should  make  return  and  pay  the  tax 
to  the  collector  of  the  district  where  the  sales  were  made. 

4667  The  books  of  every  person  liable  to  the  tax  shall  be  open  at  all  times 
for  inspection  by  examining  internal-revenue  officers.    (As  to  penal- 
ties, see  Art.  39.) 

4668  The  person  responsible  for  the  return  and  payment  of  the  tax  shall, 
in  order  that  returns  may  be  readily  checked  and  verified  by  examin- 
ing internal-revenue  officers,  keep  such  records  and  memoranda  as  will 
clearly  show  the  amounts  of  the  sales  of  taxable  articles  for  each  month. 


Trade  with  Possessions  of  ^United  States 

4669  Art.  37.  Trade  with  possessions  of  United  States. — A  sale  which 
4539  results  in  the  shipment  of  articles  into  the  United  States  from  the 
Virgin  Islands  is  taxable  to  the  same  extent  as  a  sale  of  articles  within 
the  United  States.  Articles  going  into  the  Virgin  Islands  from  the  United 
States  are  free  from  tax  in  the  United  States.  The  same  rules  apply  to  trade 
with  Porto  Rico  and  the  Philippine  Islands.  (See  section  1000  of  the  Revenue 
Act  of  1917,  and  Section  V  of  the  Act  of  August  4,  1909,  as  amended  by  Sec- 
tion IV,  Subdivision  C,  of  the  Act  of  October  3,  1913.)  The  tax  attaches, 
however,  to  articles  shipped  to  other  possessions  of  the  United  States,  includ- 
ing the  Canal  Zone. 

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Extension  of  Existing  Statutes 

4670  Art.  38.  Aids  to  collection  of  tax. — In  collecting  the  excise  taxes  the 

8000  Commissioner  has  the  benefit  of  all  existing  internal-revenue  laws. 

8001  In  aid  of  the  enforcement  of  the  statute  the  Commissioner  may  re- 
soo>  quire  any  person  to  keep  specified  records,  to  render  returns  and 

statements  as  directed,  to  submit  himself  and  his  books  to  examina- 
tion, and  to  comply  with  such  regulations  as  may  be  prescribed. 

Penalties 

467  1    Art.  39.  Penalties. — Any  manufacturer  who  fails  to  file  a  return 
8014     within  the  time  prescribed  is  liable  under  section  3176  to  a  penalty 
8071     of  25  per  cent  of  the  amount  of  the  tax,  unless  it  is  shown  that  the 
failure  to  file  it  was  due  to  a  reasonable  cause  and  not  to  willful  neglect. 
4672    Any  manufacturer  who  willfully  files  a  false  or  fraudulent  return 
is  liable  under  section  3176  to  a  penalty  of  50  per  cent  of  the  amount 
of  the  tax. 

4  673    Any  manufacturer  who  fails  to  pay  a  tax  when  due  is  liable  under 
section  903  to  a  penalty  of  5  per  cent  of  the  amount  of  the  tax,  together 
with  interest  at  the  rate  of  1  per  cent  per  month.    (See  Art.  36.) 

4674  In  addition  to  the  above,  under  certain  circumstances  the  penalties 
provided  under  section  1302  may  also  be  imposed  on  any  such  manu- 
facturer and  also  on  the  officer,  partner,  or  employee  whose  duty  it  was  to 
perform  the  duties  in  respect  of  which  the  violat'on  occurred.  (See  also  sec. 
906  and  Art.  46.) 

Credits  and  Refunds 

4675  Art.  40.  Credits  and  refunds.— If  a  manufacturer  overpays  the  tax 
4535  due  with  one  monthly  return,  or  if,  under  section  906  of  the  statute  he 
8018  overcollects  the  tax,  he  may  take  credit  for  the  overpayment  or  over- 
collection  against  the  tax  due  with  a  succeeding  return.  If  he  over- 
collects  the  tax,  he  shall  upon  proper  application  refund  the  over-collection 
to  the  person  entitled  thereto,  even  though  such  amount  has  already  been 
paid  over  to  the  collector  of  internal  revenue  and  no  corresponding  credit 
has  yet  been  secured.  In  case  a  credit  is  claimed,  a  statement  shall  be 
attached  to  the  return  setting  forth  fully  the  facts  regarding  alleged  over- 
payment or  overcollection.  In  the  case  of  the  overcollection  of  a  tax,  no  credit 
for  the  amount  overcollected  shall  be  allowed  until  the  manufacturer  making 
the  overcollection  submits  a  sworn  statement  showing  that  the  tax  in  each 
case  so  overcollected  has  been  returned  to  the  person  making  the  overpayment, 
that  no  claim  for  a  refund  of  any  part  of  such  amount  has  been  filed  with  the 
collector  or  commissioner  on  behalf  of  any  person  who  paid  such  amounts, 
and  a  complete  list  of  such  persons.  It  should  be  noted  that  a  credit  may  be 
taken  under  section  1304  only  in  the  case  of  overpayment  or  overcollection  as 
distinguished  from  an  illegal  or  erroneous  payment  or  collection. 

4676  In  all  cases  where  a  tax  has  been  collected  or  paid  and  such  collection 
or  payment  is  alleged  to  be  illegal  or  erroneous,  it  will  be  necessary  for 

the  person  so  paying  the  tax  to  file  claim  for  refund  on  Treasury  Department 
Form  46  [page  1609].  For  procedure  with  reference  to  claims  for  refunds  see 
sections  3220  [1f8023.]  and  3225  [T8047J  of  the  Revised  Statutes,  as  amended 
by  sections  1315  and  1323  of  the  Revenue  Act  of  1921,  and  Regulations  14 
(revised). 

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EXCISE  TAXES  REGULATIONS. 


Exports 

467  7    Art.  41.  Sales  for  export. — The  tax  does  not  attach  to  the  sale  of  an  ^ 
4538     article  which  is  sold  for  export  by  the  manufacturer  and  in  due  course 
so  exported. 

4678  An  article  may  be  sold  for  export  but  never  exported  or  not  exported 
in  due  course.   Also,  an  article  may  be  exported  in  due  course  by  the 

purchaser,  although  not  sold  for  export. 

4679  In  order  to  be  exempt  from  tax,  however,  it  is  necessary  that  the 
article  be  both  sold  for  export  by  the  manufacturer  and  in  due  course 

so  exported.  ^ 

4680  An  article  will  be  regarded  as  having  been  sold  for  export  if  the  manu- 
facturer has  in  his  possession  at  the  time  that  title  passes  or  of  ship- 
ment (whichever  is  prior)  (a)  an  order  or  contract  of  sale  or  document  inci- 
dental thereto  showing  in  writing  that  the  manufacturer  is  to  ship  the  article 
direct  to  a  foreign  destination;  or  (b)  where  the  delivery  is  to  be  made  to  the 
purchaser  or  his  agent  within  the  United  States,  a  certificate  from  such  pur- 
chaser or  agent,  as  the  case  may  be,  showing  (1)  that  the  article  is  purchased  * 
either  to  fill  a  firm  order  then  held  by  such  purchaser  requiring  shipment  to  a 
foreign  destination,  or  for  shipment  (or  transportation)  by  him  in  due  course 

to  himself  or  to  his  agent  or  to  his  principal  in  a  foreign  country,  or  that  the 
article  is  purchased  to  fill  future  orders  calling  for  shipment  thereof  by  the 
purchaser  direct  to  a  foreign  destination,  and  (2)  that  the  article^will  be 
transported  to  a  foreign  destination  in  due  course  prior  to  use,  resale,  or  further 
manufacture  within  the  United  States. 

4681  In  these  cases  the  manufacturer,  for  a  period  of  twelve  months  from 
the  date  when  title  passes  or  of  shipment  (whichever  is  prior),  is 

excused  from  filing  returns  for  the  articles  so  sold.  This  temporary  exemption 
becomes  permanent  upon  the  manufacturer's  attaching  to  such  order,  con-  * 
tract,  or  certificate  before  the  expiration  of  such  period  of  twelve  months  due 
proof  of  exportation  (see  Art.  42).  On  the  other  hand,  if  within  such  period 
of  twelve  months  the  manufacturer  has  not  received  and  attached  to  such 
order  or  contract  such  "proof  of  exportation,"  then  the  temporary  exemption 
ceases  and  the  manufacturer  shall  include  a  tax  on  the  sale  of  such  article  in 
his  return  for  the  month  in  which  such  period  of  twelve  months  expires.  The 
order  or  contract  of  sale  and  certificate  and  the  "proof  of  exportation"  must  be 
preserved  by  the  manufacturer  in  such  a  way  as  to  be  readily  accessible  for 
inspection  by  internal-revenue  officers.  No  sale  shall  be  considered  to  be 
exempt  from  tax  under  section  1305  of  the  Act,  unless  its  character  as  an 
export  sale  has  been  established  in  accordance  with  the  above  provisions. 

4682  Art.  42.  Proof  of  exportation. — By  the  term  "proof  of  exportation" 
is  meant  an  affidavit  of  the  exporter  (who,  if  not  the  manufacturer, 

must  be  the  purchaser  from  the  manufacturer  or  an  agent  of  one  or  the  other) 
containing  the  following  information:  (1)  The  name  and  address  of  manu- 
facturer; (2)  the  name  and  address  of  the  exporter;  (3)  whether  exporter  is 
acting  in  his  own  behalf  or  as  agent,  and  if  agent  name  of  principal;  (4)  a  brief 
description  of  the  article;  (5)  the  date  upon  which  the  article  was  delivered 
to  a  carrier  for  transportation  beyond  the  limits  of  the  United  States  (or  if  not 
transported  by  carrier  the  actual  date  and  manner  of  transportation  out  of  the 
United  States);  (6)  the  name  of  carrier  issuing  export  bill  of  lading,  and  if  a 
carrier  by  sea,  the  name  of  vessel  carrying  the  article  and  date  of  departure 
from  United  States;  (7)  destination  of  article;  (8)  statement  that  the  article 

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EXCISE  TAXES  REGULATIONS. 


was  in  fact  exported  in  due  course  prior  to  use,  resale,  or  further  manufacture 
within  the  United  States. 

4683  Where  the  manufacturer  is  the  exporter  there  may  be  attached  to  the 
original  contract  or  order  as  proof  of  exportation,  in  lieu  of  the  affidavit 

provided  for  in  the  preceding  paragraph,  (1)  a  copy  of  export  bill  of  lading, 
or  (2)  a  certificate  by  the  agent  or  representative  of  the  export  carrier  showing 
exportation  of  the  article,  or  (3)  certificate  of  mailing,  where  the  article  was 
shipped  by  parcel  post.  Where  the  exportation  is  accomplished  by  a  person 
other  than  the  manufacturer,  the  exporter  must  carefully  preserve  in  his  own 
files  a  copy  of  export  bill  of  lading  or  other  shipping  document  and  all  other 
papers  bearing  on  the  transaction,  readily  accessible  for  inspection  by  any 
authorized  official  of  the  United  States. 

4684  Where  the  exportation  is  accomplished  by  a  person  other  than  the 
manufacturer,  the  affidavit  above  required  may  cover  all  the  articles 

received  from  the  manufacturer  upon  any  one  contract  or  shipment,  whether 
exported  on  different  dates  or  shipped  to  different  consignees. 

4685  In  any  case  where  the  manufacturer  does  not  have  in  his  possession, 
within  the  twelve  months'  period,  proof  of  exportation  as  outlined 

herein,  the  manufacturer  must  pay  the  tax.  Whenever  proper  proof  of 
exportation  is  available,  claim  for  refund  of  the  amounts  so  paid  may  be  filed. 

Transfer  of  Burden  of  Tax 

4686  Art.  43.  Contract  of  sale  prior  to  August  15,  1921,  of  article  taxed 
4531    under  section  900  or  904,  1921  Act,  on  which  no  corresponding  tax 

was  levied  under  section  900  of  the  1918  Act. — If  before  August  15, 
1921,  "A,"  a  manufacturer,  made  with  "B,"  a  dealer,  a  contract  of  sale  for 
an  article  taxed  under  section  9C0  or  904  of  the  Revenue  Act  of  1921,  and  in 
respect  to  which  no  corresponding  tax  was  imposed  by  section  900  of  the 
Revenue  Act  of  1918,  which  does  not  permit  the  addition  of  the  tax  to  the 
amount  payable  under  the  contract,  then  the  liability  for  the  tax  is  on  "B," 
with  the  duty  on  "A"  only  to  collect  and  pay  it  to  the  collector  as  provided  in 
article  46.  If,  however,  "A,"  before  August  15,  1921,  made  a  contract  of  the 
character  described  with  any  person  other  than  a  dealer  as  defined  in  article 
47,  no  tax  is  payable  in  respect  of  the  sale  by  him,  since  on  August  15,  1921, 
no  tax  was  in  force  on  the  sale  of  the  articles. 

4687  Art.  44.  Contract  of  sale  before  August  15,  1921,  of  article  taxable 
4532   under  section  900,  1918  Act,  at  rate  greater  than  tax  on  same  article 

under  section  900,  1921  Act.— -If  before  August  15,  1921,  "A,"  a  man- 
ufacturer of  candy  taxable  at  5  per  cent  under  section  900  of  the  Revenue  Act 
of  1918,  made  a  contract  with  "B,"  a  dealer  or  not,  wnich  included  in  the 
price  stipulated  in  the  contract  the  tax  under  section  900  of  the  1918  Act, 
and  the  contract  does  not  permit  the  deduction  from  the  amount  to  be  paid 
of  the  difference  between  the  tax  at  5  per  cent  under  section  900  of  the  1918 
Act  and  the  tax  at  3  per  cent  under  section  900  of  the  1921  Act,  "A"  must 
refund  to  "B"  so  much  of  the  amount  of  such  difference  as  is  not  permitted  to 
be  deducted  from  the  contract  price.  (See  articles  40  and  46  as  to  credits 
for  such  refunds.) 

4688  Art.  45.  Contract  of  sale  prior  to  August  15,  1921,  of  article  taxable 
4533    under  section  900,  1918  Act,  on  which  no  corresponding  tax  under 

section  900,  1921  Act.— If  before  August  15,  1921,  "A,"  a  manufac- 
turer of  chewing  gum,  taxable  under  section  900  of  the  1918  Act,  but  not 

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taxable  under  section  900  of  the  1921  Act,  made  a  contract  with  "EL"  a  dealer 
or  not,  which  includes  in  the  price  stipulated  in  the  contract  the  tax  imposed 
under  section  900  of  the  1918  Act,  and  the  contract  does  not  permit  the  deduc- 
tion from  the  amount  to  be  paid  of  such  tax,  "A"  must  refund  to  "B"  so  much 
of  the  amount  of  such  tax  as  is  not  so  permitted  to  be  deducted  from  the  con- 
tract price.    (See  articles  40  and  46  as  to  credit  for  such  refunds.) 

4689  Art.  46.  Return  of  tax. — Each  person  receiving  any  payments  referred 

4534  to  in  section  906  of  the  statute  shall  collect  the  amount  of  the  lax, 
if  any,  imposed  by  such  section  from  the  person  making  such  pay- 
ments, and  shall  make  monthly  returns  under  oath  in  duplicate  and  pay  Un- 
taxes so  collected  to  the  collector  of  the  district  in  which  his  principal  office 
or  place  of  business  is  located.  If  sale  is  made  on  credit,  other  than  on  con- 
ditional sale,  the  manufacturer  shall  return  the  tax  at  the  time  of  sale,  but 
may  defer  collection  thereof  from  the  purchaser. 

4690  Any  person  making  a  refund  of  any  payment  upon  which  the  tax  is  so 

4535  collected  may  repay  therewith  the  amount  of  the  tax  collected  on  such 
payment,  and  if  the  tax  on  the  sale  in  respect  to  which  refund  is  made 

has  been  paid  to  the  Government  the  amount  of  the  tax  so  repaid  to  the  pur- 
chaser may  be  credited  against  amounts  included  in  any  subsequent  monthly 
return.    (See  also  Art.  40.) 

4691  The  return  must  be  made  on  Form  728  (revised)  [page  907]  in  time  to 
be  in  the  office  of  the  collector  or  zone  deputy  on  or  before  the  last 

day  of  the  month  following  the  month  in  which  the  sale  is  made,  as  provided 
in  article  36. 

4692  The  tax  shall,  without  assessment  by  the  Commissioner  or  notice 
from  the  collector,  be  due  and  payable  to  the  collector  at  the  time 

fixed  for  filing  the  return. 

4693  If  the  tax  is  not  paid  when  due,  there  shall  be  added  as  a  part  of  the 
tax  a  penalty  of  5  per  cent,  together  with  interest  at  the  rate  of  1  per 

cent  for  each  full  month  from  the  time  when  the  tax  became  due. 

4694  Art.  47.  Meaning  of  "dealer." — The  term  "dealer"  includes  not  only 

4536  dealers  in  the  ordinary  sense — that  is,  persons  engaged  in  the  business 
of  selling  articles — but  also  a  person  who  purchases  an  article  with 

the  intention  of  using  it  in  the  manufacture  or  production  of  any  article  in- 
tended for  sale.  The  term  does  not  include  a  person  buying  an  article  for  his 
personal  consumption  or  use.  The  United  States,  a  State,  Territory,  or  a 
political  subdivision  thereof,  or  a  foreign  Government,  purchasing  an  article 
for  its  own  use  is  not  a  dealer. 

Fractional  Part  of  Cent 

4695  Art.  48.  When  fractional  part  of  cent  may  be  disregarded. — la  the 

8019  payment  of  taxes,  a  fractional  part  of  a  cent  may  be  disregarded  un- 
less it  amounts  to  one-half  cent  or  more,  in  which  case  it  shall  be 

increased  to  1  cent. 

Medium  of  Payment  of  Tax 

4696  Art.  49.  Payment  of  tax  by  uncertified  checks.-  Collectors  may  accept 

8020  uncertified  checks  in  payment  of  excise  taxes,  provided  such  checks 
are  collectible  at  par — that  is,  for  their  full  amount,  without  any 

deduction  for  exhange  or  other  charges.  The  collector  will  stamp  on  the  face 
of  each  check  before  deposit  the  words,  "This  check  is  in  payment  of  an 

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EXCISE  TAXES  REGULATIONS. 


obligation  to  the  United  States  and  must  be  paid  at  par.  No  protest,"  with 
his  name  and  title.  The  day  on  which  the  collector  receives  the  check  will  be 
considered  the  date  of  payment  so  far  as  the  taxpayer  is  concerned,  unless 
the  check  is  returned  dishonored.  If  one  check  is  remitted  to  cover  two  or 
more  persons'  taxes,  the  remittance  must  be  accompanied  by  a  letter  of  trans- 
mittal stating  (a)  the  name  of  the  drawer  of  the  check;  (b)  the  amount  of  the 
check;  (c)  the  amount  of  any  cash,  money  order,  or  other  instruments  included 
in  the  same  remittance;  (d)  the  name  of  each  person  whose  tax  is  to  be  paid  by 
the  remittance;  (e)  the  amount  of  the  payment  on  account  of  each  person; 
and  (f)  the  kind  of  tax  paid. 

4  69  7  Art.  50.  Procedure  with  respect  to  dishonored  checks. — If  the  bank 
on  which  any  such  check  is  drawn  should  refuse  to  pay  it  at  par,  the 
check  should  be  returned  through  the  depositary  bank  and  be  treated  in  the 
same  manner  as  a  bad  check.  All  exepnses  incident  to  the  attempt  to  collect 
such  a  check  and  the  return  of  it  through  the  depositary  bank  must  be  paid  by 
the  drawer  of  the  check  to  the  bank  on  which  it  is  drawn,  since  no  deduction 
can  be  made  from  amounts  received  in  payment  of  taxes.  See  section  3210 
of  the  Revised  Statutes.  If  any  taxpayer  whose  check  has  been  returned 
uncollected  by  the  depositary  bank  should  fail  at  once  to  make  the  check 
good  the  collector  should  proceed  to  collect  the  tax  as  though  no  check  had 
been  given.  A  taxpayer  who  tenders  a  certified  check  in  payment  for  taxes 
is  also  not  released  from  his  obligation  until  the  check  has  been  paid.  Sec 
chapter  191  of  the  Act  of  March  2,  1911  (36  Stats.  965). 

Misrepresentation  of  Tax 

4608  Art.  51 .  Misrepresentation  of  tax. — If  a  manufacturer  or  other  vendor 
4537  misrepresents  the  tax  he  is  guilty  of  a  misdemeanor  and  is  liable  to  a 
fine  of  $1,000  and  to  imprisonment'for  a  year.  This  provision  is 
designed,  among  other  things,  >o  prevent  a  vendor  adding  more  than  the 
amount  of  the  tax  to  the  price  of  an  article  and  representing  that  the  increase 
is  due  to  the  tax. 

Authority  for  Regulations 

4  639    Art.  52   Promulgation  of  regulations. — In  pursuance  of  the  statute 
8009     the  foregoing  regulations  arc  hereby  made  and  promulgated  and  all 
rulings  inconsistent  herewith  are  hereby  revoked. 

D.  H.  BLAIR, 

Commissioner  of  Internal  Revenue. 

Approved  January  6,  1922  [Released  for  publication  February  1,  1922]: 

A.  W.  MELLON, 

Secretary  of  the  Treasury. 


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Reg.  48,  Rev.    Works  of  Art  and  Jewelrv. 
EXCISE  TAXES  REGULATIONS. 


REGULATIONS  NO.  48 

Relating  to  the 
EXCISE  TAXES 
on 

WORKS  OF  ART  AND  JEWELRY 

under 

SECTIONS  902  AND  905  OF  TITLE  IX  OF  THE  REVENUE  ACT  OF  1921. 

[Promulgated  January  12,  1922.] 
[Released  for  publication  February  1,  1922.] 

CONTENTS. 

General  Provisions. 


Article  Paragraph 

1.  Basis  of  tax   4700 

2.  Rescission  of  sales   4701 

3.  Tax  payable  by  vendor   4702 

4.  When  tax  attaches   4703 

5.  Giving  of  premiums   4704 

6.  Sale  to  the  United  States  or  a  State   4705 


Sec.  902.— Works  of  Art. 

7.  Effective  date  

8.  Taxable  sales  

9.  Taxable  sales:  Examples  

10.  Sales  by  the  artist  

11.  Articles  taxed:  Sculpture  

12.  Articles  taxed:  Paintings  

13.  Articles  taxed:  Statuary  

14.  Articles  taxed:    Art  porcelains  .  * 

15.  Articles  taxed:  Bronzes  

16.  Articles  taxed:  Frames  


Sec.  905. — Jewelry. 

17.  Effective  date   4717 

18.  Use  of  terms   4718 

19.  Articles  taxpaid  under  other  acts   4719 

20.  Consumption  or  use   4720 

21.  Jewelry   4722 

22.  Articles  not  taxable   4727 

23.  Pearls,  precious  and  semiprecious  stones  and  imitations  thereof   4729 

24.  Articles  made  of,  or  ornamented,  mounted  or  fitted  with  precious  metals  or 

imitations  thereof  or  ivory   4730 

25.  Watches  and  clocks  '   4736 

26.  Opera  glasses,  lorgnettes,  marine  glasses,  field  glasses,  and  binoculars   4737 

27.  Secondhand  articles   4738 

28.  Repairs   4739 

Administrative  Provisions. 

29.  Exemption  of  export  sale   4741 

30.  Proof  of  exportation   4746 

31.  Trade  with  possessions  of  the  United  States   4750 

32.  Return  and  payment  of  tax   4752 

33.  Returns  by  agents   4753 

34.  Credits  and  refunds   4754 

35.  Fractional  part  of  cent   4755 

36.  '  Penalties   4756 

37.  "  Promulgation   4757 


  4706 

  4707 

  4708 

  4709 

  4710 

  4711 

  4712 

  4713 

  4715 

  4716 


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EXCISE  TAXES  REGULATIONS. 


GENERAL  PROVISIONS 

4700  Article  1.  Basis  of  tax. — The  tax  is  measured  by  the  price  for  which 
4518  the  article  is  sold.  It  is  on  the  actual  sales  price  of  the  goods,  and 
4528     not  on  the  list  price,  where  that  differs  from  the  sales  price.  If 

the  price  of  a  taxable  article  is  increased  to  cover  the  tax,  the  tax  is 
on  such  increased  price.  Where,  however,  the  tax  is  billed  as  a  separate 
item,  such  amount  need  not  be  included  in  the  price  of  the  article  in  computing 
the  tax.  The  tax  is  payable  in  respect  to  a  sale  made  whether  or  not  the 
purchase  price  is  actually  collected.  A  discount  for  cash  or  other  discount 
made  subsequently  to  the  sale  can  not  be  deducted  in  computing  the  price 
for  the  purpose  of  the  tax.  Where,  however,  articles  are  sold  over  a  period 
of  time  under  an  agreement  for  a  quantity  rebate,  the  tax,'  if 
originally  computed  on  the  gross  price,  may  be  adjusted  in  the  return  for 
the  month  in  which  the  price  is  finally  determined.  Commissions  to  agents 
and  other  expenses  of  sale  are  not  deductible  from  the  price.  If  articles 
are  sold  and  the  delivery  charges  to  point  of  delivery  are  paid  by  the  purchaser 
as  a  specific  item,  or  if  they  are  sold  delivered  at  a  sum  less  delivery  charges 
to  be  paid  by  the  purchaser,  such  charges  need  not  be  included  as  a  part 
of  the  price  of  the  goods;  but  if  the  vendor  sells  goods  at  a  delivered  price  and 
pays  the  delivery  charges,  he  is  not  entitled  to  make  any  deduction  on  account 
of  the  inclusion  in  the  price  of  such  charges. 

4701  Art.  2.  Recission  of  sales. — If  articles  sold  are  returned  and  the 
sale  entirely  rescinded,  no  tax  is  payable,  and  if  paid  it  may  be  credited 

against  the  tax  included  in  a  subsequent  monthly  return.  See  Article  34. 
If  part  only  of  articles  sold  at  one  time  is  returned,  and  credit  or  rebate 
allowed  by  the  vendor  therefor,  the  portion  of  the  tax  to  be  credited  will  be 
only  the  proportion  of  the  total  tax  paid  which  the  amount  allowed  as  credit 
or  rebate  bears  to  the  total  sale  price  of  all  the  articles.  If  an  article  is  sold 
and  thereafter  exchanged  for  another  article  of  a  higher  price,  the  purchaser 
paying  the  difference,  the  vendor  should  pay  the  tax  on  the  second  sale,  but 
may  take  as  a  credit  against  such  tax  the  proportion  of  the  tax  paid  on  the 
returned  article  which  the  amount  allowed  as  a  credit  for  the  return  of  such 
article  on  the  second  sale  bears  to  the  amount  of  the  purchase  price  in  the 
case  of  the  first  sale. 

4702  Art.  3.  Tax  payable  by  vendor. — The  tax  is  to  be  paid  by  the  vendor 
on  all  sales  made  direct  by  him  or  through  an  agent,  whether  a  sales 

agent,  broker,  .or  auctioneer.  In  the  case  of  articles  taxable  under  section 
905,  where  an  article  is  consigned  to  a  dealer,  the  taxable  sale  is  that  made  by 
the  consignee,  provided  the  article  is  sold  for  consumption  or  use. 

4703  Art.  4.  When  tax  attaches. — The  tax  attaches  when  the  article  is 
sold;  that  is  to  say,  when  the  title  to  it  passes  from  the  vendor  to  the 

purchaser.  When  title  passes  is  a  question  of  fact,  dependent  upon  the 
intention  of  the  parties  as  gathered  from  the  contract  of  sale  and  the  attendant 
circumstances.  Where  goods  are  segregated  from  other  goods  owned  by  the 
vendor  and  it  is  the  intention  of  both  the  vendor  and  the  purchaser  at  the 
time  the  goods  are  segregated  that  they  shall  then  belong  to  the  purchaser, 
the  title  will  be  presumed  to  pass  at  such  time.  In  the  absence  of  any  inten- 
tion to  the  contrary  the  title  is  presumed  to  pass  upon  delivery  of  the  article 
to  the  purchaser  or  to  a  carrier  for  the  purchaser.  In  the  case  of  a  con- 
ditional sale,  where  the  title  is  reserved  until  payment  of  the  purchase  price 

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EXCISE  TAXES  REGULATIONS. 


in  full,  the  tax  attaches  (a)  upon  such  payment,  or  (b)  when  title  passes  if 
before  completion  of  the  payments,  or  (c)  when  before  completion  of  the  pay- 
ments, the  dealer  disposes  of  the  sale  by  charging  off  by  any  method  of 
accounting  he  may  adopt  the  unpaid  portion  of  the  contract  price,  or  (d) 
when  the  vendor  discounts  the  notes  of  the  purchaser  for  cash  or  otherwise, 
or  (e)  when  the  vendor  transfers  his  title  in  the  article  sold  to  another. 

4  704  Art.  5.  Giving  of  premiums. — The  giving  of  so-called  "premiums"  in 
return  for  wrappers,  labels,  coupons,  trading  stamps,  or  other  scrip 
delivered  or  sold  in  connection  with  the  sale  of  a  commodity  is  a  sale  within 
the  meaning  of  section  902  and  section  905  if  the  premium  is  within  the  class 
of  articles  enumerated  in  those  sections.  In  such  cases  the  tax  attaches 
at  the  time  title  in  the  premium  passes  to  the  person  receiving  it  in  exchange 
for  such  scrip,  and  is  to  be  computed  on  the  fair  market  value  of  the  premium 
at  such  time.  No  tax  attaches  to  the  gift  of  an  article  which  if  sold  would  be 
taxable.  Premiums  given  in  return  for  wrappers,  labels,  coupons,  trading 
stamps,  or  other  scrip  are  not  considered  as  gifts. 

4705  Art.  6.  Sale  to  the  United  States  or  a  State. — The  tax  applies  to 
articles  enumerated  in  sections  902  and  905  when  sold  to  l he  United 

States,  or  to  a  State  or  political  subdivision  ihereot  for  use  in  earn ibg  W  its 
governmental  ope  ra  tio  n  s . 

WORKS  OF  ART 

4706  Art.  7.  Effective  date. — The  tax  applies  to  all  sales  made  on  or 
4518     after  January  1,  1922. 

4707  Art.  8.  Taxable  sales. — The  tax  imposed  by  section  902  is  on  any 
sale  of  the  articles  enumerated  other  than  a  sale  by  the  actual  artist, 

or  to  an  educational  institution  or  public  art  museum,  or  by  any  dealer  in  such 
articles  to  another  dealer  in  such  articles,  for  resale.  The  tax  attaches 
whether  the  sale  is  made  directly  or  through  an  agent.  If  made  through  an 
agent  the  tax  is  payable  by  the  owner,  but  the  agent  may  make  return  and 
pay  the  tax  for  the  owner.  A  receiver  conducting  a  business  under  court 
order  is  liable  to  the  tax  upon  articles  sold  by  him.  When  a  person  other 
than  the  artist  consigns  articles,  retaining  ownership  in  them  until  the}'  are 
disposed  of  by  the  consignees,  such  person  must  pay  the  tax  upon  all  such 
goods  sold  by  the  consignee. 

4708  Art.  ^Taxable  sales:  Examples. — The  tax  applies  to  all  sales  from 
private  owner  to  private  owner,  or  from  private  owner  to  dealer,  or 

from  dealer  to  private  owner,  and  the  tax  to  be  paid  upon  each  such  sale  is  to 
be  reckoned  upon  the  full  amount  of  the  price  for  which  the  article  was  sold. 
For  example,  a  picture  is  sold  by  a  private  owner  to  a  dealer  for  $10,000; 
the  private  owner  must  pay  a  tax  of  5  per  cent  of  $10,000,  or  $500,  but  if  this 
picture  is  thereafter  sold  to  another  dealer  for  $15,000,  and  the  second  dealer 
in  turn  sells  the  picture  to  a  third  dealer  for  $20,000,  no  tax  is  payable  on 
such  sales  by  one  dealer  to  another  for  the  purpose  of  resale.  However,  if 
the  third  dealer  sells  the  painting  to  a  private  collector  for  $25,000,  the  third 
dealer  must  pay  a  tax  of  5  per  cent  of  $25,000,  or  $1 ,250.  Should  the  private 
owner  sell  it  to  another  private  owner  for  $30,000,  the  former  must  pay  a 
tax  of  5  per  cent  of  $30,000,  or  $1,500. 

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EXCISE  TAXES  REGULATIONS. 


4709  Art.  10.  Sales  by  the  artist. — Sales  by  the  artist  are  not  taxable. 
By  "artist"  is  meant  the  individual  who  by  his  own  hands,  com- 
pletely or  as  to  the  important  part  so  far  as  the  article's  artistic  merit  is 
concerned,  produces  the  article.  The  artist's  sale  may  be  made  directly 
or  through  a  dealer,  commission  merchant,  or  other  person.  The  exempt 
sale  is  only  the  original  sale  by  the  artist.  If  the  artist  regains  title  to  an 
article  and  again  sells  it,  such  sale  is  taxable. 

Sculpture 

4710  Art.  11.  Articles  taxed:  Sculpture. — The  term  "sculpture"  means 
any  production  (whether  antique  or  modern,  and  whether  original, 

replica,  copy,  or  reproduction)  which  is  cut  or  carved  by  hand  from  marble, 
stone,  alabaster,  agate,  crystal,  jade,  lapis  lazuli,  or  other  semiprecious  stone, 
terra  cotta,  ivory,  bone,  wood,  clay,  wax,  metal,  or  any  other  substance, 
and  which  is  of  such  a  character  that  the  use  to  which  under  general  custom  or 
ordinary  usage  it  should  be  put  (irrespective  of  the  use  to  which  the  purchaser 
intends  to  put  it)  is  entirely  or  principally  an  ornamental  or  decorative  one 
as  distinguished  from  a  useful  or  utilitarian  one.  The  following  list,  not 
intended  to  be  exhaustive,  is  given  to  show  the  class  of  articles  embraced 
within  this  definition,  Aiz:  Statues,  statuettes,  figures,  figurines,  groups, 
busts,  haut  or  bas-reliefs,  plaques,  pedestals,  vases,  flower  bowls,  or  holders, 
jardinici\ s,  brackets,  fountains,  sundials,  book  ends,  paper  weights,  cabinet 
pieces  or  curios,  and  the  numerous  articles  included  within  the  term  bric-a- 
brac,  when  such  articles  are  cut  or  carved  by  hand.  The  term  "sculpture" 
shall  not  be  understood  to  include  (a)  such  articles  as  are  in  the  nature  of 
material,  work,  or  labor  furnished  in  connection  with  the  erection  or  con- 
struction of  a  building  and  which  form  an  integral  part  thereof,  or  (b)  cut 
glassware,  or  engravings  on  metal,  wood,  shell,  stone,  or  other  substance, 
or  (c)  furniture,  altars^  candlesticks,  chandeliers,  railings,  gates,  doors, 
memorial  monuments,  tombstones,  or  other  articles  designed  primarily  for  a 
useful  purpose. 

Paintings 

47  11  Art.  12.  Articles  taxed:  Paintings. — The  terms  "paintings"  means 
any  pictures,  images,  likenesses,  scenes,  designs,  or  sketches,  wholly 
or  in  part  in  oil,  mineral,  water,  or  other  colors  on  canvas  or  other  textile, 
wood,  paper,  metal,  plaster,  or  other  material,  {a)  whether  antique  or  modern, 
(b)  whether  originals,  replicas,  copies,  or  reproductions,  and  (c)  whether  or 
not  intended  for  reproduction  by  printing  or  other  processes.  The  term 
"paintings"  shall  not  be  understood  to  include  (i)  such  as  are  in  the  nature 
of  work  or  labor  furnished  in  connection  with  the  erection  or  construction  of 
a  building  and  which  form  an  integral  part  thereof;  (2)  furniture,  windows, 
tableware,  toilet  articles,  glove,  handkerchief,  candy,  or  other  fancy  boxes, 
menu,  place,  greeting,  and  similar  cards,  stationery,  candlesticks,  signs, 
placards,  desk  fittings,  and  other  articles  of  utility  when  the  same  arc  orna- 
mented or  decorated  with  oil,  mineral,  water,  or  other  colors;  (3)  such  as  are 
produced  wholly  or  in  part  by  stenciling,  printing,  or  other  mechanical  pro- 
cess; and  (4)  pastels  or  drawings.  The  term  "drawings"  as  used  in  this 
article  shall  include  only  pictures,  images,  likenesses,  scenes,  designs,  or 
sketches  produced  by  means  of  lines. 


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EXCISE  TAXES  REGULATIONS. 


Statuary  eo\* 

4712  Art.  13.  Articles  taxed:  Statuary. — The  term  "statuary"  means  any 
production  (whether  anique  or  modern  and  whether  original,  replica, 

copy,  or  reproduction)  cut,  carved,  or  otherwise  wrought  by  hand^from 
marble,  stone,  alabaster,  agate,  crystal,  jade,  lapis  lazuli,  or  other  semi- 
precious stone,  terra  cotta,  ivory,  bone,  wood,  clay,  wax,  metal,  or  other  sub- 
stance, when  such  production  is  a  representation  in  the  round  of  the  human 
or 'animaljform  (irrespective  of  size),  whether  real,  mythical,  fabulous,  or 
allegorical.  %The  term  "statuary"  shall  not  be  understood  to  include  (a)  such 
productions  as  are  in  the  nature  of  material,  work,  or  labor  furnished  in  con- 
nection with  the  erection  or  construction  of  a  building  and  which  form  an 
integral  part  thereof,  (b)  dolls  or  toys,  or  (c)  such  productions  as  are  designed 
for  a  primarily  useful  purpose. 

Art  Porcelains 

4713  Art.  14.  Articles  taxed:  Art  porcelains.-— The  term  "art  porcelains" 
means  that  class  of  articles,  such  as  statues,  statuettes,  figure?, 

figurines,  groups,  busts,  haut  or  bas-reliefs,  plaques,  pedestals,  vases,  flower 
bowls  or  holders,  jardinieres,  brackets,  fountains,  sundials,  cabinet  pieces 
or  curios,  and  the  numerous  articles  included  within  the  term  bric-a-brac  by 
whatever  process  made  (except  as  provided  in  the  following  paragraph)  when 
such  articles  are  made  wholly  or  in  chief  value  (a)  of  any  ceramic  production 
of  translucent  ware,  of  hard  or  soft  paste,  whether  vitrified  or  semi-vitrified, 
by  whatever  name  known;  or  (b)  of  that  which  is  commonly  or  commercially 
known  as  porcelain,  in  either  case,  whether  or  not  decorated,  colored,  or 
ornamented,  whether  modern  or  antique,  and  whether  originals,  replicas, 
copies,  or  reproductions,  which  are  of  such  a  character  that  the  use  to  which 
under  general  custom  or  ordinary  usage  they  should  be  put  (irrespective  of  the 
use  to  which  the  purchaser  intends  to  put  them)  is  entirely  or  principally  an 
ornamental  or  decorative  one  as  distinguished  from  a  useful  or  utilitarian  one. 

4714  The  term  "art  porcelains"  shall  not  be  understood  to  include  (a)  such 
articles  as  are  in  the  nature  of  material,  work,  or  labor  furnished  in 

connection  with  the  erection  or  construction  of  a  building  and  which  form  an 
integral  part  thereof,  (b)  tableware  or  other  articles  designed  for  a  primarily 
useful  purpose,  or  (c)  such  articles  as  are  duplicated  by  the  manufacturer 
in  commercial  quantity  wholly  or  chiefly  by  the  ordinary  mechanical  processes 
of  manufacture.  Articles  shall  not  be  deemed  to  be  duplicated  in  commercial 
quantity  if  they  are  ordinarily  sold  by  the  manufacturer  in  quantities  of  less 
than'a  dozen. 

Bronzes 

4715  Art.  15.  Articles  taxed:  Bronzes. — The  term  "bronzes"  means  that 
r  class  of  articles  covered  by  "sculpture"  and  "statuary"  as  defined 

in  articles  11  and  13  by  whatever  process  made,  when  such  articles  are  made 
wholly  or  in  chief  value  of  that  substance  which  is  commonly  or  commercially 
known  as  bronze,  whether  such  articles  are  modern  or  antique,  and  whether 
originals,  replicas,  copies,  or  reproductions,  which  are  of  such  a  character 
that  the  use  to  which  under  general  custom  or  ordinary  usage  they  should  be 
put  (irrespective  of  the  use  to  which  the  purchaser  intends  to  put  them)  is 
entirely  or  principally  an  ornamental  or  decorative  one  as  distinguished  from  a 
useful  or  utilitarian  one.  The  term  "bronzes"  shall  not  be  understood  to 
include  (a)  architectural  bronzes,  (b)  such  articles  as  are  in  the  nature  of 

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EXCISE  TAXES  REGULATIONS. 


material,  work,  or  labor  furnished  in  connection  with  the  erection  or  con- 
struction of  a  building  and  which  form  an  integral  part  thereof,  (c)  medals, 
memorial  or  commemorative  tablets,  or  (d)  such  articles  as  are  designed  for 
a  primarily  useful  purpose.  The  sale  to  an  artist  by  a  foundry  of  a  casting 
made  from  the  artist's  model  is  not  subject  to  the  tax. 

Frames 

4716  Art.  16.  Articles  taxed:  Frames. — If  a  taxable  article  is  sold  in  a 
frame,  the  tax  attaches  to  the  price  for  which  both  the  article  and 

the  frame  are  sold.  If,  however,  the  article  is  sold  without  the  frame,  the 
tax  applies  only  to  the  price  at  which  the  article  itself  is  sold.  The  frame, 
however,  if  sold  separately,  may  be  taxable  under  section  905  of  the  Revenue 
Act  of  1921. 

JEWELRY 

4717  Art.  17.  Effective  date. — The  tax  is  effective  as  to  all  sales  made  on 
4528     or  after  January  1,  1922. 

4718  Art.  18.  Use  of  terms. — For  the  purpose  of  the  tax  and  as  used  in 
these  regulations,  the  term  "dealer"  means  any  individual,  partner- 
ship, association,  or  corporation  engaged  in  the  business  of  selling  for  profit 
any  of  the  enumerated  articles  to  a  purchaser  for  consumption  or  use,  and 
the  estate  of  such  a  dealer.  Thus,  a  dealer  may  be  a  manufacturer,  jobber, 
wholesaler,  retailer,  mail-order  house,  installment  house,  trustee  in  bank- 
ruptcy, receiver,  pawnbroker,  or  peddler,  if  the  sale  is  for  consumption  or 
use;  but  a  casual  sale,  not  in  the  course  of  trade  or  business,  by  an  individual 
of  any  of  the  enumerated  articles,  does  not  constitute  the  vendor  a  "dealer" 
within  the  meaning  of  section  905.  An  auctioneer  or  broker  is  a  dealer  within 
the  meaning  of  the  act  in  respect  to  all  sales  made  by  him  of  articles  in  which 
he  has  title,  but  not  in  respect  to  articles  which  he  is  selling  as  an  agent. 

4719  Art.  19.  Articles  tax  paid  under  other  acts. — The  tax  is  on  the  sale 
by  or  for  a  dealer  or  his  estate  when  any  of  the  enumerated  articles 

are  sold  for  consumption  or  use,  whether  or  not  a  tax  under  any  other  law  has 
been  previously  paid  on  such  articles. 

4720  Art.  20.  Consumption  or  use. — An  article  is  sold  "for  consumption 
or  use"  within  the  meaning  of  section  905  of  the  act  if  it  is  sold  for  any 

other  purpose  than  to  be  sold,  leased,  or  otherwise  disposed  of  for  profit, 
whether  or  not  after  change  in  form  by  process  of  manufacture. 

4721  Unless  the  purchaser  is  a  wholesaler,  retailer,  or  manufacturer  cus- 
tomarily engaged  in  the  business  of  selling  or  further  manufacturing 

the  articles  in  respect  to  which  the  applicability  of  the  tax  is  in  question,  the 
sale  to  such  purchaser  will  be  deemed  to  be  for  consumption  or  use,  unless 
the  contrary  is  clearly  shown. 

Common  or  Commercial  Jewelry 

4722  Art.  21.  Jewelry. — The  following  articles  are  taxable  as  jewelry: 

4723  (1)  Articles  to  be  worn  on  the  person  or  apparel  for  purpose  of  adorn- 
ment, which  according  to  general  custom  or  ordinary  usage  are  worn 

so  as  to  be  displayed,  such  as  brooches,  rings,  chains,  cuff  buttons,  necklaces, 

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EXCISE  TAXES  REGULATIONS. 


fobs,  and  shoe  buckles.  Such  articles  are  taxable  regardless  of  the  substance 
of  which  made  (except  as  provided  in  subdivision  (I)  of  article  22),  and 
regardless  of  their  utilitarian  value. 

4  724    The  term  "worn  on  the  person"  as  ffsid  in  this  paragraph  does  not 
include  articles  to  be  carried  in  the  hand  or  hung  over  the  arm,  such 
as  bags  or  purses. 

4725  (2)  Articles  to  be  carried  in  the  hand,  or  hung  on  the  arm,  or  carried 
or  worn  concealed  on  the  person,  whether  in  pocket  or  bag  or  under 

the  outer  garment,  such  as  cigarette  cases,  eyeglass  cases,  pencils,  powder 
boxes,  garter  buckles,  purses  or  hand  bags.  Such  articles  are  taxable  as 
jewelry  only  if  made  of  or  ornamented,  mounted  or  fitted  with  pearls,  precious 
or  semiprecious  stones,  or  imitations  thereof;  but  if  so  made,  ornamented, 
mounted,  or  fitted,  they  are  taxable  regardless  of  their  utilitarian  value. 
See  also  article  24. 

4726  (3)  Articles  not  taxable  under  the  following  articles  may  be  taxable 
by  reason  of  being  articles  commonly  or  commercially  known  as 

jewelry,  real  or  imitation.  It  should  be  carefully  noted  that  the  rulings  in 
this  article  are  only  as  to  articles  taxable  as  jewelry.  Articles  which  arc  not 
taxable  as  jewelry  may  be  taxable  under  articles  23  or  24.  Thus  a  cigarette 
case,  if  made  of,  or  ornamented,  mounted,  or  fitted  with  a  precious  metal  or 
imitation  thereof,  although  not  taxable  under  this  article  is  taxable  under 
article  24.  It  should  also  be  noted  that  the  examples  given  in  this  article 
are  not  intended  to  be  exhaustive,  but  merely  illustrative. 

Articles  Not  Taxable 

4727  Art.  22.  Articles  not  taxable. — (1)  The  following  articles  of  personal 
adornment  are  not  taxable  under  section  905,  unless  ornamented, 

mounted  or  fitted  with  pearls,  precious  or  semi-precious  stones,  or  imitations 
thereof:  (a)  Articles  made  of  textiles  or  feathers;  (b)  hat  trimmings  (not 
including  hatpins);  (c)  shoe  trimmings  (not  including  buckles);  (d)  buttons 
ordinarily  worn  permanently  attached  to  wearing  apparel. 

4728  (2)  Articles  used  as  ornaments  for  wearing  apparel  are  taxable  if 
coming  within  the  classification  of  subdivision  (1)  or  (2)  of  article  21, 

or  if  within  the  provisions  of  any  of  the  following  articles: 

Pearls,  Stones,  and  Imitations 

4729  Art.  23.  Pearls,  precious  and  semiprecious  stones  and  imitations 
thereof. — The  tax  attaches  to  the  sale  of  all  pearls  and  precious  or 

semiprecious  stones,  whether  real  or  imitation,  cut  or  uncut,  whether  or  not 
drilled,  mounted,  or  matched,  and  whether  or  not  temporarily  or  permanently- 
strung,  and  whether  with  or  without  clasps. 

Articles  Made  of  Precious  Metals  or  Imitations  or  Ivory 

4730  Art.  24. — Articles  made  of,  or  ornamented,  mounted  or  fitted  with 
precious  metals  or  imitations  thereof  or  ivory. — The  term  ''precious 

metals"  includes  silver,  gold,  platinum,  and  all  metals  more  valuable  than 
these.  The  term  "imitations  thereof"  includes  only  platings  or  alloys  of 
any  of  the  above  materials. 

4731  The  following  articles  are  not  taxable  under  the  clause  of  section 
905  construed  in  this  article:    (1)  Articles  made  of  imitation  ivory; 

(2)  surgical  instruments,  eyeglasses  and  spectacles;  (3)  articles  merely  orna- 
mented or  overlaid  with  gold  or  silver  leaf  or  paint,  such  as  picture  frames, 

books,  and  Christmas  cards. 

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EXCISE  TAXES  REGULATIONS. 


4  732    Glassware,  china,  pottery,  and  like  articles  are  only  taxable  if  orna- 
mented, mounted  or  fitted  with  precious  metals  or  imitations  thereof, 
but  are  not  taxable  when  ornamented  with  gold  or  silver  leaf  or  paint. 

4733  It  should  be  carefully  noted,  however,  that  the  articles  above  enumer- 
ated, although  not  taxable  as  "articles  made  of,  or  ornamented, 

mounted,  or  fitted  with,  precious  metals  or  imitations  thereof  or  ivory," 
may  be  taxable  as  jewelry.  Thus  a  hatpin  with  a  head  of  imitation  ivory 
is  taxable  as  jewelry.    For  articles  taxable  as  jewelry  see  article  21. 

4734  Shoe  buckles  not  attached  to  shoes  are  taxable  as  jewelry  under 
section  905,  regardless  of  the  material  of  which  made,  if  they  are 

ornamented,  mounted,  or  fitted  with  pearls,  precious  or  semi-precious  stones, 
or  imitations  thereof.  Shoe  buckles  made  of  or  ornamented,  mounted  or 
fitted  with  precious  metals  or  imitations  thereof,  or  ivory,  are  taxable  under 
section  905. 

4735  Fountain  pens  equipped  with  gold  pen  points  are  taxable  on  the  total 
price  for  which  such  pens  are  sold. 

Watches  and  Clocks 

4736  Art.  25.  Watches  and  clocks. — Watch  or  clock  movements  sold 
separately  are  taxable.    Watch  or  clock  cases  sold  separately  are 

taxable  when  made  of  or  ornamented,  mounted,  or  fitted  with  precious  metals 
or  imitations  thereof  or  genuine  ivory.  Watches  and  clocks  sold  complete 
are  taxable  regardless  of  the  substance  of  which  made.  Watch  or  clock 
cases  and  movements  sold  separately,  but  intended  to  be  used  together, 
are  taxable. 

4737  Art.  26.  Opera  glasses,  lorgnettes,  marine  glasses,  field  glasses,  and 
binoculars.— The  enumeration  in  the  statute  includes  only  portable 

instruments.  Instruments  of  the  character  enumerated,  which  by  reason 
of  their  size  or  weight  are  ordinarily  mounted  upon  tripods  or  other  bases, 
are  not  taxable. 

Second-hand  Articles 

4738  Art.  27.  Second-hand  articles. — Articles  coming  within  the  enumera- 
tion of  section  905  are  not  exempt  from  taxation  when  sold  by  a 

dealer  for  consumption  or  use  at  second-hand  or  after  being  used,  but  are 
taxable  on  the  price  for  which  sold. 

Repairs 

4739  Art.  28.  Repairs. — Ordinary  repairs  which  do  not  increase  the  value 
of  the  article  repaired  are  not  taxable,  but  repairs  involving  the 

addition  of  precious  metals  or  imitations  thereof,  or  ivory,  are  taxable  upon 
the  price  of  the  added  parts,  which  will  be  presumed  to  be  the  price 
charged  for  the  job,  unless  the  contrary  is  shown. 

4740  Repairs  which  are  merely  such  as  to  put  the  article  in  a  serviceable 
condition  as  originally  sold  and  which  do  not  increase  the  original 

value  of  the  article  repaired,  even  though  such  repairs  involve  the  addition 
of  precious  metals  or  imitations  thereof,  or  ivory,  are  not  taxable  under 
section  905.  However,  repairs  involving  the  addition  of  precious  metals  or 
imitations  thereof,  or  ivory,  not  falling  in  the  above  class,  or  pearls,  precious 
and  semiprecious  stones  and  imitations  thereof,  are  taxable  upon  the  price  of 
the  added  parts,  which  will  be  presumed  to  be  the  price  charged  for  the  job 
unless  the  contrary  is  shown. 

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EXCISE  TAXES  REGULATIONS. 


ADMINISTRATIVE  PROVISIONS 
Exports 

4741  Art.  29.  Sales  for  export. — The  tax  does  not  attach  to  the  sale  of 
4538     an  article  which  is  sold  for  export  by  the  vendor,  and  in  due  course 

so  exported. 

4742  An  article  may  be  sold  for  export  but  never  exported,  or  not  exported 
in  due  course;  also,  an  article  may  be  exported  in  due  course  by 

the  purchaser,  although  not  sold  for  export. 

4743  In  order  to  be  exempt  from  tax,  however,  it  is  necessary  that  the 
article  be  both  sold  for  export  by  the  vendor  and  in  due  course  so 

exported. 

4744  An  article  will  be  regarded  as   having  been   sold  for  export  if 
the  vendor  has  in  his  possession  at  the  time  that  title  passes  or  of 

shipment  (whichever  is  prior)  (a)  an  order  or  contract  of  sale  or  document 
incidental  thereto  showing  in  writing  that  the  vendor  is  to  ship  the  article 
direct  to  a  foreign  destination;  or  (b)  where  the  delivery  is  to  be  made  to  the 
purchaser  or  his  agent  within  the  United  States,  a  certificate  from  such  pur- 
chaser or  agent,  as  the  case  may  be,  showing  (1)  that  the  article  is  purchased 
either  to  fill  a  firm  order  then  held  by  such  purchaser  requiring  shipment  to  a 
foreign  destination,  or  for  shipment  (or  transportation)  by  him  in  due  course 
to  himself  or  to  his  agent  or  to  his  principal  in  a  foreign  country,  or  that  the 
article  is  purchased  to  fill  future  orders  calling  for  shipment  thereof  by  the 
purchaser  direct  to  a  foreign  destination,  and  (2)  that  the  article  will  be  trans- 
ported to  a  foreign  destination  in  due  course  prior  to  use,  resale,  or  further 
manufacture  within  the  United  States. 

4745  In  these  cases  the  vendor,  for  a  period  of  12  months  from  the  date 
when  title  passes  or  of  shipment  (whichever  is  prior),  is  excused  from 

filing  returns  for  the  articles  so  sold.  This  temporary  exemption  becomes 
permanent  upon  the  vendor's  attaching  to  such  order,  contract,  or  certificate 
before  the  expiration  of  such  period  of  12  months  due  proof  of  exportation 
(see  Art.  30).  On  the  other  hand,  if  within  such  period  of  12  months  the 
vendor  has  not  received  and  attached  to  such  order  or  contract  such  "proof 
of  exportation,"  then  the  temporary  exemption  ceases  and  the  vendor  shall 
include  a  tax  on  the  sale  of  such  article  in  his  return  for  the  month  in  which 
such  period  of  12  months  expires.  The  order  or  contract  of  sale  and  certifi- 
cate and  the  "proof  of  exportation"  must  be  preserved  by  the  vendor  in  such 
a  way  as  to  be  readily  accessible  for  inspection  by  internal-revenue  officers. 
No  sale  shall  be  considered  to  be  exempt  from  tax  under  section  1305  of  the 
act  unless  its  character  as  an  export  sale  has  been  established  in  accordance 
with  the  above  provisions. 

4746  Art.  30.  Proof  of  exportation. — By  the  term  "proof  of  exportation" 
is  meant  an  affidavit  of  the  exporter  (who,  if  not  the  vendor,  must 

be  the  purchaser  from  the  vendor  or  an  agent  of  one  or  the  other)  containing 
the  following  information:  (1)  The  name  and  address  of  vendor;  (2)  the  name 
and  address  of  the  exporter;  (3)  whether  exporter  is  acting  in  his  own  behalf 
or  as  agent,  and  if  agent  name  of  principal;  (4)  a  brief  description  of  the 
article;  (5)  the  date  upon  which  the  article  was  delivered  to  a  carrier  for 
transportation  beyond  the  limits  of  the  United  States  (or  if  not  transported 
by  carrier  the  actual  date  and  manner  of  transportation  out  of  the  United 
States);  (6)  the  name  of  carrier  issuing  export  bill  of  lading,  and  if  a  carrier 
by  sea,  the  name  of  vessel  carrying  the  article  and  date  of  departure  from 

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United  States;  (7)  destination  of  article;  (8)  statement  that  the  article  was  in 
fact  exported  in  due  course  prior  to  use,  resale,  or  further  manufacture  within 
the  United  States. 

4747  Where  the  vendor  is  the  exporter  there  may  be  attached  to  the 
original  contract  or  order  as  proof  of  exportation,  in  lieu  of  the  affi- 
davit provided  for  in  the  preceding  paragraph,  (1)  a  copy  of  export  bill  of 
lading,  or  (2)  a  certificate  by  the  agent  or  representative  of  the  export  carrier 
showing  exportation  of  the  article,  or  (3)  certificate  of  mailing,  where  the 
article  was  shipped  by  parcel  post.  Where  the  exportation  is  accomplished 
by  a  person  other  than  the  vendor  the  exporter  must  carefully  preserve  in 
his  own  files  a  copy  of  export  bill  of  lading  or  other  shipping  document  and  all 
other  papers  bearing  on  the  transaction,  readily  accessible  for  inspection  by 
any  authorized  official  of  the  United  States. 

4748  Where  the  exportation  is  accomplished  by  a  person  other  than  the 
vendor,  the  affidavit  above  required  may  cover  all  the  articles  received 

from  the  vendor  upon  any  one  contract  or  shipment,  whether  exported  on 
different  dates  or  shipped  to  different  consignees. 

4749  In  any  case  where  the  vendor  does  not  have  in  his  possession,  within 
the  12-months'  period,  proof  of  exportation  as  outlined  herein,  the 

vendor  must  pay  the  tax.  Whenever  proper  proof  of  exportation  is  available, 
claim  for  refund  of  the  amounts  so  paid  may  be  filed. 

Trade  with  Possessions  of  the  United  States 

4750  Art.  31.  Trade  with  the  possessions  of  the  United  States. — Section 
4539     1304  of  the  revenue  act  of  1918  provides  as  follows: 

That  there  shall  be  levied,  collected,  and  paid  in  the  United  States,  upon  articles 
coming  into  the  United  States  from  the  Virgin  Islands,  a  tax  equal  to  the  internal- 
revenue  tax  imposed  in  the  United  States  upon  like  articles  of  domestic  manufacture; 
such  articles  shipped  from  such  islands  to  the  United  States  shall  be  exempt  from  the 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  such  islands:  Provided,  That 
there  shall  be  levied,  collected,  and  paid  in  such  islands,  upon  articles  imported  from 
the  United  States,  a  tax  equal  to  the  internal-revenue  tax  imposed  in  such  islands 
upon  like  articles  there  manufactured;  and  such  articles  going  into  such  islands  from 
the  United  States  shall  be  exempt  from  payment  of  any  tax  imposed  by  the 
internal-revenue  laws  of  the  United  States. 

4751  A  sale  which  results  in  the  shipment  of  articles  into  the  United  States 
from  the  Virgin  Islands  is  taxable  to  the  same  extent  as  a  sale  of 

articles  within  the  United  States.  Articles  going  into  the  Virgin  Islands 
from  the  United  States  are  free  from  tax  in  the  United  States.  The  same  rules 
apply  to  trade  with  Porto  Rico  and  the  Philippine  Islands.  See  section  1000 
of  the  revenue  act  of  1917  and  Section  V  of  the  act  of  August  4,  1909,  as 
amended  by  Section  IV,  subdivision  C,  of  the  act  of  October  3,  1913.  The 
tax  attaches,  however,  to  articles  shipped  to  other  possessions  of  the  United 
States,  including  the  Canal  Zone. 

Return  and  Payment  of  Tax 

4752  Art.  32.  Return  and  payment  of  tax. — In  accordance  with  the  law 
4519     sections  here  cited,  every  person  liable  for  the  tax  in  respect  to  the 

4529  sale  of  any  of  the  articles  enumerated  in  section  902  or  section  905 

4530  must  make  monthly  returns  under  oath  in  duplicate  (except  that  if 
8010     the  amount  of  tax  covered  thereby  is  not  in  excess  of  $10  such  returns 

may  be  signed  and  acknowledged  before  two  witnesses  instead  of 
under  oath),  and  pay  the  taxes  imposed  on  such  articles  to  the  collector  of 

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internal  revenue  for  the  district  in  which  his  principal  place  of  business  is 
located.  If  he  has  no  place  of  business,  return  should  be  made  to  the  collector 
for  the  district  in  which  he  resides.  An  itinerant  dealer  should  make  return 
and  pay  the  tax  to  the  collector  of  the  district  where  the  sales  are  made.  The 
returns  shall  be  made  on  Form  728A  (Revised)  [see  page  909J.  Instructions 
for  preparing  the  return  will  be  found  on  the  back  of  the  form.  The  returns 
are  to  be  rendered  and  the  tax  paid  on  or  before  the  last  day  of  each  month 
covering  the  transactions  of  the  preceding  month.  The  first  return  musi 
cover  all  transactions  from  January  1  to  January  31,  1922,  both  inclusive,  and 
is  to  be  made  on  or  before  February  28,  1922.  The  books  of  every  person 
liable  to  the  tax  shall  be  open  at  all  times  for  inspection  by  examining  internal- 
revenue  officers. 

Returns  By  Agents 

4753  Art.   33.  Returns   by   agents. — Every   auctioneer,    agent,  factor, 
broker,  dealer,  or  other  person  selling  any  of  the  articles  enumerated 

in  section  902,  as  agent  for  the  owner,  unless  such  owner  is  the  artist,  shall 
make  monthly  return  under  oath  to  the  collector  for  the  district  in  which  his 
principal  place  of  business  is  located,  stating  as  to  each  article  sold  for  any  such 
owner  the  name  and  address  of  such  owner,  the  date  and  amount  of  the  sale, 
and  a  brief  description  of  the  article. 

Credits  and  Refunds 

4754  Art.  34.  Credits  and  refunds. — If  a  person  overpays  the  tax  due  with 

8018  one  monthly  return,  he  may  take  credit  for  the  overpayment  against 
the  tax  due  with  a  succeeding  return.    For  the  procedure  with 

reference  to  claims  for  refund  see  Regulations  No.  14  (revised)  and  sections 
13 15  and  1323  of  the  revenue  act  of  1921,  reenacting  sections  3220  [*  8023J 
and  3225,  [1[8047]  of  the  Revised  Statutes,  as  amended. 

Fractional  Part  of  Cent 

4755  Art.  35.  Fractional  part  of  cent. — In  computing  the  tax  a  fractional 

8019  part  of  a  cent  shall  be  disregarded  unless  it  amounts  to  one-half  cent 
or  more,  in  which  case  it  shall  be  increased  to  a  full  cent. 

Penalties 

4756  Art.  36.  Penalties.— [See   1f4520,   1J4530,   114537,   1J8014,  1J8073, 
H8074.] 

Authority  for  Regulations 

4757  Art.  37.  Promulgation. — In  pursuance  of  the  statute  the  foregoing 
8009  -  regulations  are  hereby  made  and  promulgated  and  all  rulings  incon- 
sistent herewith  are  hereby  revoked. 

D.  H.  BLAIR, 
Commissioner  of  Internal  Revenue. 
Approved  January  12,  1922  [Released  for  publication  Februarv  1,  1922]: 
A.  W.  MFL'LON,  > 

Secretary  of  the  Treasury. 


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(T.  D.  3307.) 

4758  Cash  Discounts. — Article  4  [*[4553]  of  Regulations  47  (Revised 
4553     December  1921)  is  amended  to  read  as  follows: 

4759  Art.  4.    Discounts  and  Expenses. — A  discount  made  subsequently 
to  the  sale  can  not  be  deducted  in  computing  the  price  for  the  purpose 

of  the  tax. 

47  60  Where  articles  are  sold  with  the  understanding  that  if  paid  for 
within  a  certain  period  the  purchaser  may  take  a  cash  discount,  and 
the  purchaser  elects  to  take  advantage  of  this  provision  of  the  contract  of 
sale,  the  amount  of  such  d  scount  is  deductible  in  determining  the  sale  price 
of  the  article. 

4  761  An  adjustment  in  price,  where  articles  are  sold  over  a  period  of  time, 
under  an  agreement  for  a  quantity  rebate,  or  an  agreement  for  a  rebate 
on  goods  remaining  unsold  in  the  hands  of  the  dealer,  and  which  were  pur- 
chased by  such  dealer  within  a  definitely  specified  period,  in  case  of  a  decline 
in  the  market,  is  held  not  to  be  a  discount  made  subsequently  to  the  sale. 
4  7  62  The  tax  in  the  above  cases,  if  originally  computed  on  the  gross  price, 
may  be  adjusted  in  the  return  for  the  month  in  which  the  price  is 
finally  determined.  If  in  such  cases  the  tax  assumed  to  be  due  on  the  original 
selling  price  has  been  billed  to  the  dealer  and  by  him  to  the  purchaser  as  a 
separate  item,  and  collected  from  the  purchaser,  the  overcollection  of  tax 
arising  from  the  adjustment  of  the  sale  price  under  the  contract  between  the 
manufacturer  and  the  dealer  must  be  refunded  to  the  purchaser. 

4763  Commissions  to  agents  and  other  expenses  of  sale  are  not  deductible 
from  the  price. 

4764  Freight  and  delivery  charges  are  taxable  as  part  of  the  sales  price 
when  the  price  to  the  purchaser  includes  transportation  and  delivery 

charges  paid  by  the  manufacturer,  or  when  the  amount  charged  the  purchaser, 
whether  billed  as  a  separate  item  or  not,  does  not  represent  the  actual  trans- 
portation charges. 

4765  Freight  and  delivery  charges  are  not  part  of  the  sales  price  when  goods 
are  sold  at  the  factory  or  f.  o.  b.  cars  at  place  of  manufacture,  when  the 

transportation  charges  are  paid  by  the  purchaser  as  a  specific  item,  or  when 
the  goods  are  sold  delivered  at  a  definite  price  less  actual  transportation 
charges  to  be  paid  by  the  purchaser.  (T.  D.  3307,  signed  by  Commissioner 
D.  H.  Blair,  and  dated  March  20,  1922.) 


(T.  D.  3312.) 

4766  Revenue  Act  of  1918. — Decision  of  Court. — Ouija  boards  held  to  be 
4651  taxable  as  games. — (Syllabus  only.) — The  scope  of  the  Sales  Tax  is 
comprehensive  and  not  limited  to  the  articles  named  in  Section  900 
Subdivision  5  of  the  Revenue  Act  of  1918.  In  its  broadest  sense  a  game  is 
"a  play  or  sport  for  amusement."  In  its  restricted  and  more  generally  applied 
sense  it  is  "a  contest  for  success  or  superiority  in  a  trial  of  chance,  skiil  or 
endurance,  or  any  two  or  all  of  the  three  combined."  (Century  Dictionary.) 
The  word  "games"  as  used  in  Section  900  Subdivision  5  of  the  Revenue  Act  of 
1918,  does  not  mean  the  games  themselves,  but  the  instrumentalities  used  in 
playing  them,  and  includes  ouija  boards,  the  purpose  of  which  is  to  supply 
amusement  and  diversion.  Size  alone  does  not  make  a  game  a  child's  toy 
and  a  "wee"  ouija  board  is  not  exempt  from  taxation  as  a  child's  toy.  The 

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rule  that  taxing  acts  are  to  be  construed  most  strongly  against  the  Govern- 
ment only  applies  in  cases  where  doubt  remains  after  all  recognized  rules  for 
ascertaining  a  statute's  meaning  have  been  tried.  Doubt  as  to  the  meaning 
of  a  word  is  often  removed  by  consideration  of  the  legislative  intent  as  shown 
by  the  entire  statute.  Gould  v.  Gould,  245  U.  S.  151,  and  other  cases  dis- 
tinguished. The  findings  and  practice  of  the  administrative  officers  of  the 
Government  are  presumed  to  be  based  on  fair  conclusions  as  the  result  of 
investigation  required  of  them  by  Sections  3165  and  3172  R.  S.,  as  amended 
by  the  Revenue  Act  of  1918.  Judgment  of  the  United  States  District  Court 
for  the  District  of  Maryland  (273  Fed.  531),  affirmed. 

4767  (The  decision  [syllabus  only]  of  the  United  States  Circuit  Court  of 
Appeals  for  the  Fourth  Circuit  in  the  case  of  Baltimore  Talking 
Board  Company,  Incorporated  v.  Miles,  Collector,  affirming  the  United 
States  District  Court  for  the  District  of  Maryland  (273  Fed.  531),  the  syllabus 
of  which  appears  above  [^4766]  is  published  not  as  a  ruling  of  the  Treasury 
Department,  but  for  the  information  of  internal  revenue  officers  and  others 
concerned.)    (T.  D.  3312,  March  29,  1922.) 


{Decision.) 

(Revenue  Act  of  1918  but  applicable  to  1921  Act.) 
May  16,  1922. 

Sweet  chocolate  manufactured  and  sold  for  consumption  in  the  form 
sold,  and  not  for  cooking  or  domestic  purposes,  is  within  the  meaning  of  the 
word  "candy"  and  so  sales  thereof  by  the  manufacturer  are  subject  to  tax 
as  sales  of  "candy." 

United  States  Circuit  Court  of  Appeals 
for  the  First  Circuit. 

John  F.  Malley,  Formerly  Collector  of  Internal  Revenue, 
Defendant,  Plaintiff  in  Error, 
v. 

Walter  Baker  &  Co.,  Limited, 
Plaintiff,  Defendant  in  Error. 


Error  to  the  District  Court  of  the  United  States 
For  the  District  of  Massachusetts. 


4768  Anderson,  J.   The  ultimate  question  in  this  case  is  whether  all,  or 
4506     any,  of  the  sweet  chocolate  manufactured  and  sold  by  the  defendant 
4632     in  error,  herein  called  the  plaintiff,  is  subject  to  a  5  per  tent  excise- 
tax  as  candy,  under  the  provisions  of  Title  9,  section  900,  of  the 

Revenue  Act  of  1918  (40  Sts.  1122),  and  the  regulations  made  by  the  Com- 
missioner of  Internal  Revenue  under  authority  granted  by  this  act. 

4769  Between  February  24  and  August  31,  1919,  the  plaintiff  made  sales 
of  such  chocolate  aggregating  $635,137.30,  and  under  protest  paid 

the  5  per  cent  tax  thereon,  amounting  with  interest  to  December  5,  1921,  to 
$35,232.25.  Suit  to  recover  this  tax  came  on  for  trial  before  the  District 
Court  with  a  jury.  After  much  evidence  on  both  sides  had  been  taken,  much 
of  it  having  little  or  no  bearing  on  the  real  issue,  the  court  below  found 
and  ruled  that  the  word  "candy"  had  no  special  trade  significance  different 

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from  its  meaning  in  ordinary  speech;  that  the  regulations  of  the  Commissioner 
hereinafter  set  forth  were  invalid  as  an  attempt  to  extend  the  natural  meaning 
of  the  language  of  the  statute;  that  chocolate  is  an  independent  substance 
used  directly  for  food  and,  though  used  in  the  manufacture  of  candy,  is  not 
candy  within  the  meaning  of  this  tax  act;  and  ordered  a  verdict  for  the 
plaintiff  in  the  full  amount  claimed.  The  case  comes  here  on  writ  of  error. 
4  770    The  Revenue  Act,  supra,  provides: 

"There  shall  be  levied,  assessed,  collected,  and  paid  upon  the  following 
articles  sold  or  leased  by  the  manufacturer,  producer,  or  importer,  a  tax 
equivalent  to  the  following  percentages  of  the  prices  for  which  so  sold  or 
leased  ...    (9)  Candy,  5  per  centum." 

47  71     The  Commissioner  ot  Internal  Revenue,  under  the  usual  grant  of 
power  found  in  such  statutes,  promulgated  regulations  duly  approved 
on  May  1,  1919,  by  the  Secretary  of  the  Treasury.   Article  22  of  these  regula- 
tions is  as  follows: 

"Candy- — Candy  within  the  meaning  of  the  act  includes  chocolate  creams, 
bonbons,  gum  drops,  jelly  drops,  jelly  beans,  imperials,  caramels,  stick 
candy,  losenges,  taffies,  candy  kisses,  wafers,  fudges,  or  Italian  creams, 
nougats,  peanut  brittle,  sugared  almonds,  chocolate  covered  fruits  and  nuts, 
glace  or  candied  fruits  and  nuts,  popcorn  and  other  cereals  and  cereal  products 
mixed  with  or  covered  with  molasses,  sugar  or  other  sweetening  agent,  hard 
candies,  plain  and  chocolate  covered  marshmallows,  candy  cough  drops  and 
sweetened  licorice  not  taxed  as  cough  drops,  sweet  chocolate  and  sweet  milk 
chocolate  whether  plain  or  mixed  with  fruit  or  nuts ;  and  all  similar  articles 
hozvever  designated.  It  does  not,  however,  include  cereal  breakfast  foods, 
cake  and  pastries,  nor  bitter  chocolate  which  needs  the  addition  of  sugar  before 
it  becomes  pleasing  to  the  taste.  If  a  manufacturer  of  glace  or  candied  fruits 
at  the  time  the  goods  are  shipped  or  sold  (whichever  is  prior)  has  in  his 
possession  an  order  or  contract  of  sale  with  certificate  of  the  purchaser  printed 
thereon  or  in  writing  and  permanently  attached  thereto  snowing  that  such 
fruits  so  purchased  are  to  used  in  the  manufacture  of  food  products,  such  as 
ice  cream,  cakes,  and  pastries,  the  sale  thereof  shall  not  be  taxable.  Where 
a  manufacturer  of  candy  sells  in  connection  with  the  sale  of  his  own  product 
candy  which  he  has  bought  from  another  manufacturer,  and  on  which  he  has 
performed  no  further  process  of  manufacture,  the  tax  attaches  only  to  such 
portion  of  the  goods  sold  as  have  been  manufactured  by  him."  Particularly 
pertinent  words  we  have  italicized. 

4772    On  May  10,  1919,  the  Commissioner  ruled  as  follows: 

"Sweet  chocolate  sold  in  parcels  of  such  size  and  shape  that  it  is  com- 
monly purchased  and  consumed  as  candy  by  the  general  public  is  taxable 
as  candy,  but  sweet  chocolate  sold  in  large  packages  not  as  candy  but  intended 
for  further  manufacturing  purposes  is  not  taxable  provided  the  manufacturer 
has  in  his  possession  a  certificate  of  the  purchaser  in  writing  showing  that  the 
chocolate  so  purchased  is  to  be  used  for  further  manufacturing  purposes." 
4  7  73  This  ruling  applies  to  sweet  chocolate  the  exemption  procedure  "ap- 
plicable under  the  regulation,  supra,  to  glace  and  candied  fruits. 
47  74  Article  22  of  the  regulations  was  revised  in  December,  1920,  so  that, 
while  still  covering  affirmatively  "sweet  chocolate  and  sweet  milk 
chocolate,  whether  plain  or  mixed  with  fruit  or  nuts,"  it  by  the  addition  of 
paragraph  (b)  excluded. 

"sweet  chocolate,  glace  or  candied  fruits  or  nuts  sold  by  the  manufacturer 
used  under  circumstances  where  it  is  obvious  from  the  condition  of  the 


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product,  method  of  packing  or  from  other  facts  in  connection  with  the  sale, 
that  it  will  not  be  consumed  in  the  form  in  which  it  is  then  sold." 
47  75    The  Commissioner,  on  January  25,  1921,  in  response  to  inquiry  from 
the  plaintiff,  applied  in  detail  the  regulation  to  the  plaintiff's  business, 
as  disclosed,  and  also  ruled  that, 

"upon  the  submission  of  evidence  from  the  taxpayer,  claims  already  rejected 
will  be  reopened  and  allowed  in  the  amount  representing  tax  paid  on  products 
herein  held  not  taxable.  Action  on  pending  claims  will  be  held  in  abeyance 
for  further  evidence." 

4776  It  thus  appears  that,  even  after  suit  brought,  the  Department  was. 
ready  to  entertain  claims  for  taxes  paid  on  sweet  chocolate  "sold  for 

use  in  a  form  other  than  that  in  which  it  is  sold  by  the  manufacturer." 

4777  In  the  plaintiff's  declaration,  it  admitted  in  each  of  the  five  counts, 
referring  to  the  certificate  called  for  by  the  ruling  of  May  10,  1919, 

supra, — that  it  had  "no  such  certificates  with  respect  to  the  chocolate  upon 
the  sale  of  which  the  tax  was  assessed,  and  says  that  it  was  impossible  for 
the  purchaser  to  determine  at  the  time  of  the  sale  of  such  chocolate  whether 
it  would  be  used  for  further  manufacture  or  not,"  The  record  does  not  sup- 
port this  allegation  of  the  impossibility  of  obtaining  such  certificates.  No 
reason  is  apparent  why  in  much,  if  not  all,  of  the  business  such  certificates 
could  not  have  been  obtained.  But  this  was  not  made  the  exclusive  method 
of  distinguishing  sweet  chocolates  intended  for  consumption,  as  such,  from 
sweet  chocolate  intended  as  a  food  ingredient;  any  reasonable  method  of 
showing  the  determinative  facts  was  available  to  this  plaintiff. 

4778  At  the  trial  it  was  agreed  that: 

"An  analysis  if  the  various  brands  of  chocolate  upon  which  the  tax  in 
suit  was  paid  would  show  the  following  percentages  of  sugar: 

Between  60  and  65  per  cent  in  'Caracas'  chocolate. 

Between  50  and  55  per  cent  is  'German's'  chocolate. 

Between  50  and  55  per  cent  in  'Century'  and  'Vanilla'  chocolate. 

Between  30  and  35  per  cent  in  'Dot'  chocolate. 

Between  50  and  55  per  cent  in  'Eagle'  chocolate. 
47  79  It  was  also  agreed  that  an  annexed  schedule  showed  the.  sales  of  the 
various  brands  from  February  24  to  April  30,  1919.  Sales  for  the 
months  of  May  to  August,  inclusive,  were  shown  only  in  the  aggregate. 
Assuming,  as  we  fairly  may,  that  the  schedule  for  February,  March  and 
April  is  fairly  typical  of  the  whole  period  of  about  seven  months,  it  is  clear 
that  about  half  of  the  sales  in  question  consisted  of  the  Caracas  sweet  choco- 
late, which  contains  from  60  to  65  per  cent  of  sugar;  and  that  the  sales  of  the 
Dot  chocolate,  containing  only  from  30  to  35  per  cent  of  sugar,  were  not 
more  than  about  10  per  cent  of  the  aggregate.  All  the  other  brands  con- 
tained from  50  to  55  per  cent  of  sugar.  The  necessary  inference,  therefore, 
is  that  the  sweet  chocolates  sold,  taken  as  a  mass,  were  considerably  more 
than  half  sugar. 

4780  It  is  a  matter  of  common  knowledge,  and  the  evidence  and  numerous 
exhibits  also  show,  that  this  sweet  chocolate  is  manufactured  in 
cakes  and  bars,  adapted  for  consumption  as  candy,  packed  in  convenient, 
cartons  for  sale  as  candy,  advertised  as  "delicious  for  eating,"  or  "excellent 
as  a  confection,"  and  sold  in  large  quantities  over  the  candy  counters,  and 
consumed,  at  least  in  substantial  part,  in  the  form  put  out  by  the  manu- 
facturer for  such  consumption.  Plainly,  it  is  a  mixture,  about  half  and  half 
of  sugar  and  chocolate,  sometimes  with  flavoring  material  like  vanilla,  and 


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in  the  form  in  which  it  is  put  up  and  marketed,  intended  to  cater  to  the  same 
tastes  and  to  appeal  to  the  same  class  of  consumers  as  arc  chocolate  bonbons 
(barely  distinguishable  in  composition)  and  other  well-known  forms  of  candy 
or  confectionery.  Sugar,  "the  appeal  to  the  sweet  tooth,"  is,  of  course,  the 
basic  ingredient  in  all  candy.  Sweet  chocolate  is  a  most  toothsome  form  of 
sugar  compound. 

4781  Plaintiff's  chief  contention  is  that  this  sweet  chocolate  product  is 
in  its  entirety,  food,  and  not  candy  within  the  fair  meaning  of  the 

act.  This  view  was  adopted  by  the  District  Judge,  who  held  it  all  exempt 
from  the  tax,  denying  the  defendant's  request  to  submit  to  the  jury  an  issue 
"as  to  the  proportion  of  the  total  sales  of  each  exhibit  which  was  used  for 
domestic  or  cooking  purposes." 

4782  We  think  this  was  error.    We  construe  the  statute  as  the  Commis- 
sioner construed  it.    While,  as  it  is  a  tax  statute,  reasonable  doubts 

must  be  resolved  in  favor  of  the  tax-payer,  we  can  see  no  such  reasonable 
doubts  as  to  the  legislative  intent  to  tax  such  products  as  sweet  chocolate 
when  manufactured,  and  sold  for  consumption  in  the  form  sold,  and  not  for 
cooking  or  domestic  purposes. 

4783  Revenue  Acts  are  not  penal  statutes.     See  Cliquofs  Champagne, 
3  Wall.  114,  145,  where  the  court  said: 

"Revenue  laws  are  not  penal  laws  in  the  sense  that  requires  them  to  be 
construed  with  great  strictness  in  favor  of  the  defendant.  They  arc  rather 
to  be  regarded  as  remedial  in  their  character,  and  intended  to  prevent  fraud, 
suppress  wrong,  and  promote  the  public  good.  They  should  be  so  construed 
as  to  carry  out  the  intention  of  the  legislature  in  passing  them,  and  most 
effectively  accomplish  these  objects." 

To  the  same  effect  is  the  case  of  United  States  v.  Hodson,  10  Wall.  395, 
406,  where  Mr.  Justice  Swayne  said: 

"Revenue  statutes  are  not  to  be  regarded  as  penal  and  therefore  to  be 
construed  strictly.  They  are  remedial  in  their  character,  and  to  be  construed 
liberally  to  carry  out  the  purposes  of  their  enactment." 

4784  The  Circuit  Court  of  Appeals  for  the  Third  Circuit  in  Carbon  Steel 
v.  Lewellyn,  258  Fed.,  533,  534,  stated  the  rule  as  follows: 

"In  ascertaining  the  true  construction  of  the  law,  and  thus  carrying  out  its 
purpose,  this  court  must  necessarily  put  itself  in  the  position  of  Congress  when 
it  enacted  the  law,  and  from  the  circumstances  and  surroundings  then  existing 
and  the  general  proposition  then  in  ^  iew,  seek  to  ascertain,  from  what  was 
meant  to  be  done,  how  best  to  construe  and  apply  what  was  done." 
4  785  See  also  same  case,  251  U.  S.  501;  Worth  Brothers  v.  Lederer,  251 
U.  S.  507;  Baltimore  Talking  Board  Co.,  Inc.,  v.  Miles,  273  Fed. 
531;  Citizens  Bank  v.  Parker,  192  U.  S.  73;  American  Security  Co.  v.  District 
of  Columbia,  224  U.  S.  491. 

4786  Looking  at  the  statute  as  a  whole,  it  is  clear  that  Congress,  impelled 
by  the  expenses  of  the  WTorld  War,  intended  to  lay  a  pretty  heavy 

tax  on  luxuries  as  distinguished  from  necessaries.  Candy,  manufactured  and 
consumed  in  tremendous  quantities  because  of  the  well-known  and  extraor- 
dinary American  appetite  for  sweets,  was  regarded  as  a  luxury. 

4787  But  this  sweet  chocolate  product  consists,  as  already  noted,  more 
than  half  of  sugar.    Sugar  is  far  more  important  as  a  food  element 

than  is  chocolate.  Sugar  is  admittedly  the  basic  ingredient  of  candy.  To 
hold,  as  the  court  below  held,  that  sweet  chocolate  is  not  candy  because 
chocolate  is  also  food,  falls  logically  little  short  of  holding  that  candy  is  not 

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EXCISE  TAXES  REGULATIONS. 


candy  because  sugar  is  also  food.  Nuts  and  practically  all  the  other  ingredients 
of  candy,  except  perhaps  some  of  the  flavoring  materials,  are  also  food.  We 
cannot  agree  with  the  court  below  that  sweet  chocolate  is  not  candy  simply 
because  made  up  about  half  and  half  of  chocolate  and  sugar, — each  of  which 
is  a  food.  Some  other  test  must  be  found.  Sugar  compounds  are  admittedly 
candy,  when  manufactured,  advertised,  sold  and  consumed  as  candy  and  not 
as  a  food  ingredient.  The  distinction  turns  not  so  much  on  the  composition 
of  the  arliclc  as  on  the  way  or  form  in  which  it  is  sold  and  upon  the  use 
made  of  it  by  its  purchasers. 

4788  We  think  the  court  below  erred  in  holding  invalid  this  distinction 
made  by  the  Commissioner  as  to  sweet  chocolate.  The  plaintiff's 

contention,  in  effect  adopted  by  the  District  Court,  that  the  tax  was  on  the 
product, — sweet  chocolate, — and  applicable  to  all  or  to  none  of  it,  is  unten- 
able. The  use  or  destination  of  the  product  may  well  have  been  made  by 
Congress  the  basis  of  classification  for  taxing  purposes.  Coal  and  diamonds 
are  chemically  much  alike;  practically  and  for  tax  purposes  they  are  radically 
different.  We  think  the  test  applied  by  the  Commissioner  was  consonant  with 
the  statute.  Apart  from  the  weight  given  Department  rulings  and  regulations 
in  such  cases,  our  construction  of  the  act  conforms  to  that  of  the  Commissioner; 
it  seems  to  us  fairly  plain. 

4789  But  it  is  elementary  that,  if  ambiguity  is  found  in  a' statute  or  when 
it  is  necessary  to  determine  a  fact  upon  which  the  operation  of  a 

statute  is  made  to  depend,  the  regulations  made  by  the  department  charged 
with  the  administration  of  the  act  are  to  be  given  great,  sometimes  practically 
controlling,  weight. 

See  Edwards,  Lessee  v.  Darby,  12  Wheat.  206,  212; 
•    Houghton  v.  Payne,  194  U.  S.  88,  96; 
Komada  v.  United  States,  215  U.  S.  392; 
Jacobs  v.  Pritchard,  223  U.  S.  200,  214; 

Houston  v.  Si'.  Louis  Independent  Packing  Co.,  249  U.  S.  479; 

Noble  v.  Union  River  Logging  R.  R.  Co.,  147  U.  S.  165; 

Coopersville  Co-op.  Creamery  Co.  v.  Lemon,  163  Fed.  145; 

United  States  v.  llealey,  160  U.  S.  136,  141; 

Robertson  v.  Downing,  127  U.  S.  607,  613. 
Cf.  American  Casualty  Co.  v.  United  States,  251  U.  S.  342  at  349, 
where  the  court  by  Mr.  Justice  Clarke  said: 

"It  is  settled  by  many  recent  decisions  of  this  court  that  a  regulation  by 
a  department  of  Government,  addressed  to  and  reasonably  adapted  to  the 
enforcement  of  an  act  of  Congress,  the  administration  of  which  is  confided  to 
such  department,  has  the  force  and  effect  of  law  if  it  be  not  in  conflict  with 
express  statutory  pro\  isions."  Citing  United  States  v.  Grimaud.  220  U.  S. 
506;  United  States  v.  Birdsall,  233  U.  S.  233,  251 ;  United  States  v.  SmuIL  2$6 
V.  S.  405,  409,  41 1 ;  United  States  v.  Moorhead,  243  U.  S.  607. 

4790  It  comes  to  this:  Congress  intended  that  various  compounds  of  sugar 
and  other  ingredients,  practically  all  of  which  arc  also  foot!  ingredients 

should,  when  compounded,  sold  and  consumed  as  candy — a  luxury  be 
subjected  to  this  tax.  The  distinction  undertaken  to  be  made  by  the  Depart- 
ment that  sweet  chocolate  should  be  taxed  when  put  up  and  sold  in  such 
form  as  to  indicate  that  it  was  to  be  consumed  as  candy  is  consumed,  and 
not  taxed  when  it  was  obvious  from  the  packing  or  other  circumstances 
surrounding  the  transaction  that  it  was  to  be  merely  an  ingredient  for  further 
manufacture,  is  a  sound  distinction.    At  any  rate  unless  this  distinction  is 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  950  SERVICE 


6-1-22.     (2)  6-26-22.     (3)  10-30-22.      (4)  11-29-22. 

EXCISE  TAXES  REGULATIONS. 


made,  it  is  difficult  to  see  how  candy  can  be  taxed  at  all;  for,  as  already  stated, 
candy  is  in  its  main  characteristics  sugar  compounds  intended  for  luxury, 
taste-gratifying,  consumption.  When  somewhat  less  than  half  of  a  toothsome 
sweet  is  chocolate — also  a  common  ingredient  of  candy  compounds — the 
resultant  is  not  transmuted  into  food  within  the  fair  meaning  of  this  tax 
statute,  if  the  compound  is  sold  and  consumed  as  confectionery  or  candy. 

4791  The  eighteenth  assignment  of  error  brings  before  us  the  refusal  of 
the  court  below  to  submit  to  the  jury  the  question  of  what  proportion 

of  the  sweet  chocolate  in  question  was  used  for  cooking  or  domestic  purposes. 
This  assignment  must  be  sustained.  The  burden  of  proof  is  on  the  plaintiff 
to  show  that  the  taxes  collected  was  illegal  or  the  assessments  excessive. 

Anderson  v.  Farmers'  Loan  &  Trust  Co.,  241  Fed.  322; 

New  York  Life  Ins.  Co.  v.  Anderson,  263  Fed.  527,  530; 

Germantown  Trust  Co.  v.  Lederer,  263  Fed.  672; 

Bailey  v.  R.  R.  Co.,  22  Wall.  604,  638; 
Black  Fed.  Cases,  sec.  547; 

Skafer  v.  Craft,  Collector,  144  Fed.  907,  909; 

South.  Pacific  v.  Lowe,  Collector,  328  Fed.  847,  849; 

Cohen  v.  Lowe,  Collector,  234  Fed.  474,  476. 

4792  The  plaintiff  is  not  entitled  to  recover  more  than  the  amount  that  it 
can  show  it  paid  as  a  tax  on  such  portions  of  the  product  in  question 

as  were  not  sold  and  used  as  candy  within  the  meaning  of  the  Department's 
regulation. 

The  judgment  of  the  District  Court  is  reversed  and  the  case  is  remanded  to 
that  court  for  further  proceedings  not  inconsistent  with  this  opinion;  and  the 
plaintiff  in  error  recovers  costs  in  this  court. 


(T.  D.  3344.) 

4793    [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Malley 
4768     vs.  Walter  Baker  &  Company,  Limited,  which  is  reproduced  in  full, 
above,  beginning  at  ^4768. — The  Corporation  Trust  Company.] 


(T.  D.  3358.) 

4794  Discounts  and  Expenses. — Revocation  of  T.  D.  3307. — Treasury 
4553  Decision  3307  [<![4758]  is  hereby  revoked  as  of  date  July  1,  1922, 
4758  and  Article  4  of  Regulations  47  (revised  December,  1921  [1|4553])  is 
restored  to  read  as  it  stood  prior  to  the  promulgation  of  the  above 

mentioned  Treasury  Decision.   (T.  D.  3358,  signed  by  Commissioner  D.  H. 

Blair,  and  dated  June  22,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  951  SERVICE 


10-30-22.    (2)  11-29-22. 

EXCISE  TAXES  REGULATIONS. 


(T.  D.  3401.) 

47 85  Revenue  Act  of  1918. — Decision  of  Court. — Ouija  boards  held  to  be 
4766  taxable  as  games. — [This  Treasury  Decision  (Oct.  18,  1922)  reprints 
the  decision  of  the  4th  Circuit  Court  of  Appeals  in  the  case  of  Balti- 
more Talking  Board  Co.  (Inc.)  vs.  Miles,  Collector,  (280  Fed.  658),  as 
reported  in  T.  D.  3312  [Tf4766].  "for  the  purpose  of  correcting  typographical 
errors  in  T.  D.  3312,"  merely,  adding,  incidentally,  that  "Certiorari  was 
denied  in  U.  S.  Supreme  Court,  6-5-22,  42  Sup.  Ct.  590."— The  Corporation 
Trust  Company.] 


(T.  D.  3412.) 

Exports  under  the  Revenue  Act  of  1917:  Decision  of  Court. 

4796  1.    Nature  of  Tax  Imposed  by  Section  600. 

4680     The  tax  imposed  by  Section  600  of  the  Revenue  Act  of  1917  is  upon 
the  sale  of  the  particular  articles  named  in  the  Statute,  not  upon  their 
manufacture. 

4797  2.    Exports — Sales  Within   United   States  for  Export- — Constitu- 
tionality. 

Where  goods  are  sold  and  delivered  by  the  manufacturer  within  the 
United  States  and  are  later  exported  by  the  purchaser,  the  purchaser, 
and  not  the  manufacturer,  is  the  exporter,  and  a  tax  levied  upon  such 
sale  is  not  a  tax  upon  exports,  in  violation  of  Article  1,  Section  9,  of  the 
Constitution  of  the  United  States,  even  though  such  sale  was  made 
with  the  knowledge  and  intention  of  the  manufacturer  that  the  articles 
sold  would  be  immediately  exported,  and  the  articles  were,  in  fact,  so 
exported. 

4  7  98    3.    Exports — Sale  and  Delivery  Within  United  States,  What  Con- 
stitutes. 

A  sale  by  a  manufacturer  to  a  foreign  purchaser  through  the  latter' s 
agent  resident  in  the  United  States  and  consummation  of  such  sale  by 
delivery  to  the  agent  through  delivering  the  goods  to  a  steamship  com- 
pany at  its  dock  in  New  York  and  taking  a  receipt  therefor  and  deliver- 
ing such  receipt  to  the  agent,  the  agent  later  bringing  about  the  ship- 
ment abroad  by  himself  taking  out  the  bill  of  lading  and  other  shipping 
documents,  is  a  sale  and  delivery  by  the  manufacturer  within  the  United 
States  and  hence  taxable. 
4799    (The  decision  of  the  United  States  District  Court  for  the  Southern 
District  of  New  York  in  the  case  of  A.  G.  Spalding  and  Bros.  v. 
William  H.  Edwards,  Collector,  the  syllabus  of  which  appears  above  is  pub- 
lished not  as  a  ruling  of  the  Treasury  Department,  but  for  the  information 
of  internal  revenue  officers  and  others  concerned.)    (T.  D.  3412,  signed  by 
Commissioner  D.  H.  Blair,  and  dated  November  24,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  tympany. 
WAR  TAX  952  SERVICE 


12-6-22. 


EXCISE  TAXES  REGULATIONS. 


(T.  D.  3415.) 

4800   Automobile  Accessories:  Article  16  of  Regulations  47  (Revised 
4624     December,  1921)  amended. — The  second  paragraph  of  Article  16 
of  Regulations  47  (Revised  December,  1921),  in  order  to  eliminate 
the  word  "hydrometers,"  is  hereby  amended  to  read  as  follows: 

"The  term  Accessories'  includes,  for  example,  automobile  tops,  back  and 
side  curtains,  horns,  speedometers,  self-starters,  spot  lights,  shock  absorbers, 
tire  pumps,  and  pressure  gauges."  (T.  D.  3415,  signed  by  Commissioner 
D.  H.  Blair,  and  dated  December  2,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         953  SERVICE 


12-6-22 

SALES  (EXCISE)  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Sales  and  Excise  Taxes  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.  Subject  Paragraph 

Law  Provisions   4500 

Reg.  47  Manufacturer's  and  producer's  excise  taxes  (revision  of  January  6, 

1922).    (Indexed  on  the  blue  sheets  following).  ..  .  4540 

Reg.  48  Works  of  art  and  jewelry  taxes  regulations  (revision  of  January  12, 

1922).   (See  exhaustive  Table  of  Contents  on  page 


934.)   4700 

3307  Art.  4,  Reg.  47,  amended. — Cash  discounts  (March  20,  1922)   4758 

3312  Court  decision,  1918  Act.    Ouija  boards  held  to  be 

taxable  (April  5,  1922)   4766,  4795 

Decision  Malley  vs.  Walter  Baker  &  Co.,  Ltd.,  1918  Act.  Sweet 

chocolate  as  candy  (May  16,  1922)   4768 


3344  Treasury  Decision  designation  for  Malley  vs.  Walter 

Baker  &  Co.,  Ltd.,  case  (H4768).    (June  10,  1922)  4793 
3358  Art.  4,  Reg.  47,  restored  to  original  form.-— T.  D.  3307  [1J4758] 

revoked. — Cash  discounts  and  expenses  (June  22,  1922)  4794 
3401  Correcting  typographical  errors  in  T.  D.  3312  above.  .  4795 

3412  Spalding  and  Bros.  vs.  Edwards:  Court  Decision. — 

Exports  under  the  1917  Act     4796 

3415  Art.  16,  Reg.  47,  amended. — Automobile  accessories   4800 


Insert  this  page  immediately  before  the  blue  "Saies  Taxes"  icdex. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Sales  (Excise)  Taxes  Supplementary  Page  1. 


2-1-22. 

INDEX  TO  MANUFACTURER'S  SALES  TAXES 
REGULATIONS. 

See  page  934  for  taxes  on  works  of  art  and  jewelry. 

[Government  index  with  references  changed  from  "articles"  to  "paragraphs."! 

Accessories,  tires,  inner  tubes,  etc..  .4594,4601,  4623 
Agents,  sales  by.  .4570,  4652 
Authority  for  regulations.  .4699 
Automobiles: 

Defined.  .4582 

Parts  and  accessories  for.  .4601,  4623 

Road  machines,  exempt.  .  4592 

Taxability  of.  .4587,  4595 

Vehicles  for  use  on  rails,  exempt.  .  1593 
Automobile  trucks  and  wagons.  .4587 
Basis  of  tax,  computation.  .4542 
Boats.  .4641 

Branch  houses,  returns  by.  .  4666 

Busses.  .4597 

Cameras.  .  4630 

Canal  Zone.  .  4669 

Candy.  .4632 

Carpets.  .  4654 

Certificates: 

For  exemption  from  tax.  .4562,  4605,  4629 

Form  of.  .  4608 

Printed  on  order  blanks.  .4615 
Chassis,  taxability  of.  .4615 
Cigar  holders,  etc..  .4637 
Clothing: 

Liveries.  .  4639 
Collection  of  taxes,  extension  of  existing  statutes.  .4670 
Commissions  to  agents,  deduction  of.  .4555 
Computation  of  tax,  fractional  part  of  cent.  .4542,  4553,  4695 
Conditional  sales.  .4580 

Contracts  of  sale,  before  law  took  effect.  .4686,  4687,  4688 

"Cost-plus"  contracts.  .4581 

Credit: 

Evidence  necessary  to  obtain.  .4562 

For  over  payment  of  tax.  .4675 

Goods  used  in  further  manufacture.  .4562 

On  returned  goods.  .4558 
"Customarily  sells,"  at  wholesale  and  retail.  .4643 
Dealer: 

Defined.  .4694 

Burden  of  tax  on.  .4542 
Definitions: 

Accessories.  .4623 

Chassis.  .4615 

Parts.  .4611 

Repairer.  .4621 

Tires,  etc..  .4601 

Wholesale  and  retail.  .4643 
Delivery  charges,  deduction  of.  .4553 
Discount,  deduction  of  in  computing  price.  .4553 
Dishonored  checks.  .4697 
Effective  date.  .4540 

Exchange  of  goods,  tax  in  cases  of.  .4558 
Exemption: 

Certificate  for.  .4608 

Goods  used  in  further  manufacture.  .4562,  4605 
Jobbers  not  exempt.  .4607 
Sale  of  boats.  .4641 
Sale  of  firearms.  .4581 
Uniforms .  .4639 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Manufacturer's  Sales  Taxes. — Index  Page  1. 


2-1-22 

INDEX  TO  MANUFACTURER'S  SALES  TAXES  REGULATIONS. 
See  page  934  for  taxes  on  works  of  art  and  jewelry. 

The  references  are  to  paragraph  numbers. 

Export: 

Sales  for,  exempt.  .4677 

Proof  of.  .4682 
Fans. .4662 
Films.  .4631 
Firearms: 

Tax  on . . 4635 

Sales  of,  to  United  States  and  States.  .4581 
Fire  engines,  etc..  .4588 
Fractional  part  of  cent.  .4695 

Freight  charges,  deduction  of  in  computing  sale  price.  .4556 

Glace  fruits,  nuts,  etc..  .4632 

Government,  sales  to,  tax  in  case  of.  .4581 

Government  sales  of  firearms.  .4581 

Humidors .  .4637 

Hunting  garments.  .4640 

Imposition  of  tax.  .4540 

Increased  price  to  absorb  tax.  .4542 

Inspection  of  books.  .4667,  4670 

Island  possessions.  .4669 

Itinerant  merchant,  return  of.  .4666 

Knives .  .4636 

Lamps .  .  4661 

Liveries .  .4639 

Manufacturer,  defined.  .4564 

Manufacturer  also  retailer.  .4643 

Misrepresentation  of  tax.  .4698 

Motion-picture  cameras.  .4630 

Motor  busses.  .4597 

Motorcycles,  tax  on.  .4596 

Motors  for  use  on  rails.  .4593 

"National  defense,"  boats  designed  for.  .4641 

Payment  of  tax: 

Dishonored  checks.  .4697 

Due  date.  .4665,  4692 

Uncertified  checks.  .4696 
Penalties: 

Delinquency  in  payment,  5  per  cent.  .4673,  4693 

Failure  to  file  return.  .4671 

Misrepresentation  of  tax.  .4698 
Philippines,  trade  with.  .4669 
Pipes,  etc..  .4637 
Portable  lighting  fixtures.  .4661 
Porto  Rico.  .4669 

Possessions  of  the  United  States,  trade  with.  .4669 

Proof  of  exportation.  .4682 

Purses.  .4660 

Raw  materials.  .4601 

Rebates.  .4553,  4558 

Receiver  in  bankruptcy  liable  for  tax.  .4573 

Refunds,  claims  for.  .4675 

Refunds  of  tax  to  vendor.  .4675 

Refunds  of  tax  on  rescission  of  sale.  .455S 

Repairer,  manufacturing  small  parts.  .4621 

Repeal  of  former  acts.  .4651 

Return  of  tax.  .4663,  4689 

Due  date  of.  .4665,  4692 
Returned  goods. .4558 
Riding  habits.  .4640 
Road  machines,  etc..  .4592 
Rugs.  .4654 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Manufacturer's  Sales  Taxes. — Index  Page  2. 


-1-22 

INDEX  TO  MANUFACTURER'S  SALES  TAXES  REGULATIONS. 

See  page  534  for  taxes  on  works  of  art  and  jewelry. 


The  references  are  to  paragraph  numbers. 

Sale  price.  .4542,  4553 
Sales  agency.  .4571 

Sales  to  Government,  State,  etc..  .4581 

Selling  branch.  .4652 

Side  cars  for  motorcycles.  .4599 

Slot  machines.  .4638 

Smokers'  articles.  .4637 

Taxable  as  jewelry.  .4637 
Sweet  chocolate.  .4632 
Tax: 

Basis  of.  .4542 

Manufacturer's  liability  for.  .4570 

Passing  of  title.  .4576 

Payment  of.  .4696 

Repeal  of  former  acts.  .4651 
Taxable  articles  used  in  further  manufacture: 

Automobiles,  parts,  etc..  .4604 
Temporary  exemption,  certificates.  .4680 
Tires,  inner  tubes,  etc.,  tax  on.  .4594,  4601 
Title,  passing  of.  .4576 
Tractors,  tax  on.  .4584,  4590 
Trailers,  tax  on.  .4585,  4590 
Transfer  of  burden  of  tax.  .4686 
Trucks,  automobiles,  etc..  .4587 
Trunks.  .4658 
Uncertified  checks.  .4696 
Uniforms,  exempt  goods.  .4639 

Taxed  as  liveries.  .4639 
United  States  not  a  dealer.  .4694 
Valises.  .4659 

Vehicles  for  use  on  rails.  .4593 
Virgin  Islands.  .4669 
Weighing  machines.  .4638  . 
Wholesaler  also  retailer.  .4643 
X-ray  plates.  .4631 
Yachts.  .4641 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Manufacturer's  Sales  Taxes. — Index  Page  3. 


3-22-22. 

SALES  (EXCISE)  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Sales  and  Excise  Taxes  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.                                                 Subject  Paragraph 
Law  Provisions   -  4500 

Reg.  47  Regulations  under  the  1918  law  (revision  of  December  27,  1920) 

relating  to  the  excise  taxes  on  sales  by  the  manu- 
facturer, as  amended  and  supplemented  (but  see 
page  907)  to  December  20,  1921.  (See  exhaustive 
Table  of  Contents  beginning  on  page  908) .......  4540- 

3307  Art.  4,  Reg.  47  amended— Cash  discounts  (March  20,  1922). . ....  4758 


Insert  this  page  immediately  before  the  yellow  guide  card  * 'Telegraph  and  Telephone.' 


Copyright  1922,  hy  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Sales  (Excise)  Taxes  Supplementary  Page  1. 


5% 


• 

$ 


1-2-22.  (2)2-28-22. 

TAX  ON  TELEGRAPH  AND  TELEPHONE 

MESSAGES. 

BEING  TITLE  V  OF  THE  REVENUE  ACT  OF  1921. 
CALENDAR. 

Returns:    On  or  before  the  last  day  of  the  month  following  that  for  which 

the  return  is  made. 

Tax:  Amount  of  tax  due  to  accompany  return. 


TITLE  V.— TAX  ON  TELEGRAPH  AND  TELEPHONE  MESSAGES. 

5500  Sec.  500.  That  from  and  after  January  1,  1922,  there  shall  be  levied, 
assessed,  collected,  and  paid,  in  lieu  of  the  taxes  imposed  by  section 

500  of  the  Revenue  Act  of  1918— 

5501  (a)  In  the  case  of  each  telegraph,  telephone,  cable,  or  radio,  dispatch, 
message,  or  conversation,  which  originates  on  or  after  such  date 

within  the  United  States,  and  for  the  transmission  of  which  the  charge  is 
more  than  14  cents  and  not  more  than  50  cents,  a  tax  of  5  cents;  and  if  the 
charge  is  more  than  50  cents,  a  tax  of  10  cents;  Provided,  That  only  one 
payment  of  such  tax  shall  be  required,  notwithstanding  the  lines  or  stations 
of  one  or  more  persons  are  used  for  the  transmission  of  such  dispatch,  message, 
or  conversation;  and 

[Tax  on  Leased  Wire  and  Talking  Circuit  Special  Service.] 

5502  (b)  A  tax  equivalent  to  10  per  centum  of  the  amount  paid  after 
such  date  to  any  telegraph  or  telephone  company  for  any  leased 

wire  or  talking  circuit  special  service  furnished  after  such  date.  This  sub- 
division shall  not  apply  to  the  amount  paid  for  so  much  of  such  service  as 
is  utilized  (1)  in  the  collection  and  dissemination  of  news  through  the  public 
press,  or  (2)  in  the  conduct,  by  a  common  carrier  or  telegraph  or  telephone 
company,  of  its  businesses  such; 

[The  United  States  and  the  States  are  Exempt.] 

6503  (c)  No  tax  shall  be  imposed  under  this  section  upon  any  payment 
received  for  services  rendered  to  the  United  States  or  to  any  State 
or  Territory  or  the  District  of  Columbia.  The  right  to  exemption  under 
this  subdivision  shall  be  evidenced  in  such  manner  as  the  Commissioner, 
with  the  approval  of  the  Secretary,  may  by  regulation  prescribe. 

[Refund  on  partially  used  passage,  seat,  berth,  and  stateroom  tickets, 

and  mileage  books.] 

5504  (d)  Under  regulations  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary,  refund  shall  be  made  of  the  proportionate 
part  of  the  tax  collected  under  subdivision  (c)  or  (d)  of  section  500  of  the 
Revenue  Act  of  1918  on  tickets  or  mileage  books  purchased  and  only  partially 
used  before  January*!,  1922. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1101  SERVICE 


1-2-22.  (2)2-28-22. 


TELEGRAPH  AND  TELEPHONE  TAXES  LAW 

[Tax  paid  by  person  paying  for  the  Service.] 


5505  Sec.  501.    That  the  taxes  imposed  by  section  500  shall  be  paid 
by  the  person  paying  for  the  services  or  facilities  rendered. 

[Returns  and  Payment  to  the  Government  of  Collected  Taxes.] 

5506  Sec.  502.    (a)  That  each  person  receiving  any  payments  referred  to 
in  section  500  shall  collect  the  amount  of  the  tax,  if  any,  imposed  by 

such  section  from  the  person  making  such  payments,  and  shall  make  monthly 
returns  under  oath,  in  duplicate,  and  pay  the  taxes  so  collected  to  the  collector 
of  the  district  in  which  the  principal  office  or  place  of  business  is  located. 

5507  (b)  Any  person  making  a  refund  of  any  payment  upon  which  tax  is 
collected  under  this  section  may  repay  therewith  the  amount  of  the 

tax  collected  on  such  payment;  and  the  amount  so  repaid  may  be  credited 
against  amounts  included  in  any  subsequent  monthly  return. 

5508  (c)  The  returns  required  under  this  section  shall  contain  such  informa- 
tion, and  be  made  at  such  times  and  in  such  manner,  as  the  Com- 
missioner, with  the  approval  of  the  Secretary,  may  by  regulation  prescribe. 

5509  (d)  The  tax  shall,  without  assessment  by  the  Commissioner  or  notice 
from  the  collector,  be  due  and  payable  to  the  collector  at  the  time 

so  fixed  for  filing  the  return.  If  the  tax  is  not  paid  when  due,  there  shall  be 
added  as  part  of  the  tax  a  penalty  of  5  per  centum,  together  with  interest  at 
the  rate  of  1  per  centum  for  each  full  month,  from  the  time  when  the  tax 
became  due. 

[General  Administrative  Provisions  of  Law.] 

[Read  under  "Miscellaneous"  at  back  of  the  book.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1102  SERVICE 


1-2-22.    (2>2-28-22.  (3)  11-15-22. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


TofmK7-R»^8^im    TAX  0N  TELEGRAPH  AND  TELEPHONE  MESSACSS-(7ifc  V,  Section  500,  Rereaae  Ad  of  1321) 


C!:>^ACTER  OF  TAX 

JUTE  OF  TAX 

AMOUNT  OF  TAX 

(a)  Telegraph,  ielcLhcr*.  and  tad:':  me^ages  _  _    _  _   

5c  and  10c 

;  

/  yJKar  (or  affirm)  fiat  the  foregcir.g  h  a  irae  return  of  the 
amcurtl  -of  lex  eolieeted  on  Lie  ahcilt.-ip.eniicr.etl  service  for  ihe  mcnili 

of   — .  192.....  and  U.ai  the  amount  deducted  fcr 

ot'.rp  vjmerd  is  aHooMt  hy  lew. 

[.til  oOtrpayrr.ent  for  month  of  _  _  

.....i92 

P*r.*l  5%  -  ■■  

(St*t3  abettor  -a6.i-  .J.^.  ■  ■         of   n':i3«».  morjb*!-  -M  ticn.  c-  i,' 

 "  j  Swn    arJ  .uixr/W  it/en  rv  lift  Jcy  <J  Itl 

(N»m9)  or  (Witn5».-:>  (S*j  paragraph  2  on  back) 

(Title)  or  (Wltnesa) 

Retam  with  ro.*lt'a*f*  should  be  ur.t  to  the  Collector  of  Interne! 

Heveoae  fcr  roar  dLslric  ?j5d  l.ot  to  the  Commissioner  of  Internal  Bove. 

na:  At  W  aaMna^er;.  I>-  C.    (See  Instructions,  par.  Z.  on  reverse  of  this 

  -     .......  .  —  —   ■  form.)    I.  7cr!  Hato  noiuir.y  to  report,  make  uoiatlua  to  thai  effect  on  this 

ORIGINAL  RETLfuN— Thet  Urra  tiU  be  -rft^as«3  til  tha  Co!St:Ux  si  Internal  R4«wsb  !arm  *»        Cciloctor  of  Internal  Revenue. 

2—11518 


[Obverse  of  Form  727  J 


INSTRUCTIONS. 

(For  full  Instructions,  see  Regulations  Mo.  67,  Revised.) 

Section  500  of  the  Revenue  Act  of  1921  imposes  the  following  taxes  upon  telegraph  and  telephone  messages: 

(a)  In  the  case  of  each  telegraph,  telephone,  cable,  or  radio,  dispatch,  message,  or  conversation,  which  originates  within  the  United 
States,  and  for  the  transmission  of  which  the  charge  is  more  than  14  cents  and  not  more  than  50  cents,  a  tax  of  5  cente;  and  if  the 
charge  is  more  than  50  cents,  a  tax  of  10  cent3.     1  ...... 

(jb)  A  tax  of  10  per  centum  of  the  amount  paid  to  any  telegraph  or  telephone  company  for  any  leased-wiro  or  talking-circuit  special 
service  furnished.  This  subdivision  shall  not  apply  to  the  amount  paid  for  so  much  of  such  service  as  is  utilized  (1)  ia  the  collec- 
tion and  dissemination  of  news  through  the  public  press,  or  (2)  in  the  conduct,  by  a  common  carrier  or  telegraph  or  telephone 
company,  of  its  business  as  such. 

1.  COMPUTATION  CP  TAX.— The  tax  is  imposed  and  must  be  computed  and  collected  upon  each  separate  service  rendered  and  not 

upon  the  aggregate  of  charges  made. 

2.  BETTJS.N3  AND  PAYKEtfT  OF  TAX. — Return  with  remittance  covering  taxes  collected  in  any  month  must  be  in  the  hands  of 
the  Collector  of  Internal  Revenue  (or  his  authorized  representative)  of  the  district  in  which  the  principal  office  or  place  of  business  of  the  person 
making  the  return  ia  located  on  or  before  the  last  day  of  the  succeeding  month.  Returns  mu3t  be  signed  and  sworn  to  before  an  officer  author- 
ized to  administer  oaths,  but  if  the  tax  is  less  than  $10  the  return  may  be  signed  or  acknowledged  before  two  subscribing  witnesses. 

3.  CREDITS.— In  case  of  any  overpayment  of  tax  due  to  9n  error  in  calculation,  credit  may  be  taken  therefor  against  taxes  due  upon  any 
subsequent  raonth'y  return.  Credit  may  also  be  t&ksrt  as  outlined  ia'the  regulations.  A  complete  and  detailed  record  of  such  overpayment 
must  b?  kept  by  the  p-.rson  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  fcr  an  overpayment  made  on  a  previous  return,  full 
information  mast  be  atfeichc-d  shewing  the  renvois  therefor  and  designating  the  kind  of  tax,  and  the  month  for  which  the  previous  return  was 
filed  and  the  date  of  payment. 

4.  RECORDS. — Everv  person,  corporation,  partnership,  or  association  required  to  make  this  return  must  keep  such  records  as  will  clearly 
show  all  charges  upon  vhicn  tax  k  required  to  be  collected,  in  order  that  returns  may  be  easily  verified  by  revenue  officers. 

5.  PENALTIES.— Failure  to  filt  on  time,  25  per  cent  of  tax.  .Failure  to  pay  on  time,  5  per  cent  of  tax  and  1  per  cent  interest  a  month. 
Severe  penalties  for  failure  to  file  returns  or  for  false  or  fraudulent  returns. 

[Reverse  of  Form  727.J 


UNITED  STATES  INTERNAL  REVENUE 
Form  727— Revised  Sept.,  1922 


RECEIPT  FOR  PAYMENT  OF  TAX  ON  TELEGRAPH  AND  TELEPHONE  MESSAGES 


,  192 

THIS  RECEIPT  NOT  TO  BE  DETACHED  BY  TAXPAYER 
NOT  VALID  UNLESS  RECEIPTED  BY  CASHIER 

TAXPAYER  WILL  ENTER  AMOUNT  PAID  IN  THE  SPACE  PROVIDED  THEREFOR 

NAME  AND  ADDRESS 

DATE  PAID 

AMOUNT  PAID 

(CiSBTIIt'S  STAMP) 

[Form  727  tax  receipt  form.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1 103  SERVICE 


2-28-22.    (2)^1 1-1 5-22.  Reg.  67,  Rev./ 1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


REGULATIONS  57,  REVISED.— 1921  ACT. 

[Promulgated  February  15,  1922.] 
[Released  for  publication  February  28,  1922.] 
RELATING  TO  THE 
TAX  ON  TELEGRAPH,  TELEPHONE,  RADIO,  AND  CABLE  FACILITIES 

UNDER  THE 
REVENUE  ACT  OF  1921. 
TABLE  OF  CONTENTS. 
PART  I. 

TRANSMISSION  OF  DISPATCHES,  MESSAGES,  AND  CONVERSATIONS. 
IMPOSITION  OF  TAX. 

Paragraph 

Article    1.  Imposition  of  tax — Transmission   5510 

2.  Imposition  of  tax — Carrier   5512 

ORIGIN  OF  MESSAGE  DETERMINES  TAXABILITY. 

3.  Origin  within  United  States   5514 

4.  Reversed  or  collect  messages   5517 

5.  Effective  date  of  law   5518 

BASIS,  RATE  AND  COMPUTATION  OF  TAX. 

6.  Basis  for  computation — Amount  of  charge   5519 

7.  Franks   5523 

8.  Overtime  telephone  messages   5524 

9.  Messages  transmitted  under  contract   5525 

EXEMPTIONS. 

10.  Business  of  transmitting  carrier   5526 

11.  Charges  of  14  cents  or  less   5527 

12.  Services  rendered  to  the  United  States,  or  to  any  State  or  Territory,  or  to 

the  District  of  Columbia   5528 

13.  Political  subdivisions  of  State  or  Territory   5529 

14.  Government  agencies   5530 

15.  Evidence  of  right  to  governmental  exemption   5531 

16.  Foreign  diplomats   5535 

17.  Evidence  of  right  to  exemption  of  foreign  diplomats   5538 

PART  IL 

LEASED  WIRE  AND  TALKING  CIRCUIT  SPECIAL1SERVTCE. 

IMPOSITION  OF  TAX. 

18.  Imposition  of  the  tax — Meaning  of  leased  wire  and  talking  circuit  special 

service   5539 

19.  Private  branch  exchange  service   5544 

20.  Tie  lines  ..  ..   5545 

21.  Private  lines  and  extension  lines   5546 

22.  Intercommunication  and  interior  systems   5547 

23.  Long-distance  terminals   554S 

BASIS,  RATE  AND  COMPUTATION  OF  TAX. 

24.  Basis  for  computation  of  tax   5549 

25.  Computation  of  tax — Effective  date   5552 

26.  Computation  of  tax — Service  performed  between  a  point  within  and  a 

point  without  the  United  States   5553 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1104  SERVICE 


2-28-22.  Reg.  57,  Rev..  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


EXEMPTIONS.  Paragraph 

Article  27    Governmental  and  of  foreign  diplomats   5554 

28.  Public  press  '   5555 

29.  Business  of  common  carrier  or  telegraph  or  telephone  company   5558 

PART  III. 

PAYMENT,  COLLECTION,  RETURN,  AND  REMITTANCE  OF  TAXES. 

30.  Payment  of  taxes   5563 

31.  Collection  of  taxes   5564 

32.  Credit  for  taxes   5565 

33.  Records   5566 

34.  Returns — Contents   5567 

35.  Returns — Where  and  when  rendered   5569 

36.  Extension  of  time   5570 

37.  Remittance  of  taxes  collected  •  \   5571 

CREDITS  AND  REFUNDS. 

38.  Credit  for  overpayment   5572 

39.  Refund  of  overpayment   5573 

40.  Refund  of  overcollection   5574 

PENALTIES. 

41.  Penalties   5575 

AUTHORITY  FOR  REGULATIONS. 

42.  Promulgation  of  regulations   5578 


PART  I. 

TRANSMISSION  OF  DISPATCHES,  MESSAGES,  AND 
CONVERSATIONS 

IMPOSITION  OF  TAX. 

5510  Article  1.    Imposition  of  the  tax. — Transmission. — The  tax  is  im- 

5500  posed  upon  the  transmission  of  a  message  or  conversation,  by  tele- 

5501  phone,  telegraph,  radio,  or  cable.   Transmission  includes  services 
rendered  and  facilities  provided  by  the  carrier  necessary  or  inci- 
dental to  the  actual  movement  of  the  message;  for  example,  messenger 
service  utilized  in  the  movement  of  a  toll  message. 

551 1  Transmission  begins  when  the  message  is  delivered  by  the  sender 
to  the  carrier  or  its  agent,  and  continues  until  its  receipt  by  the 

addressee  or  his  agent.  Where,  therefore,  a  message  passes  by  the  combined 
facilities  of  several  lines,  there  is  one  message  and  one  transmission.  But 
where  a  sender  uses  a  telephone  toll  message  to  reach  a  telegraph  office  to 
secure  the  transmission  of  a  telegraph  message,  the  place  of  delivery  of  the 
telegraph  message  by  the  sender  to  the  carrier  is  the  telegraph  office,  and 
the  transmission  of  the  telegraph  message  begins  there.  The  telephone 
message  is  a  separate  message  and  as  such  subject  to  the  provisions  of  the  act. 

5512  Art.  2.    Imposition  of  tax — Carrier. — The  tax  applies  to  transmis- 
sion services  when  rendered  for  hire,  whether  or  not  the  agency 

rendering  them  is  a  common  carrier.  Accordingly,  a  carrier  of  dispatches, 
messages,  or  conversations  by  telegraph,  telephone,  cable,  or  radio  is  held 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1105  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.  -1921  ACT. 


to  be  any  person,  corporation,  partnership,  or  association  who  or  which, 
for  hire,  furnishes  the  services  or  facilities  described  or  referred  to  in  section 
500,  subdivisions  (a)  and  (b)  of  the  acM^^%kCj  £~    *  f*M 

5513  ^Therefore,  where  the  lessee  of  a  leased  wire  or  talking  circuit  special 
■     service  transmits  messages  for  hire,  he  is  a  carrier  of  such  messages 

and  liable  to  the  provisions  of  the  act  relative  to  the  collection,  report,  and 
payment  of  the  taxes  thereon. 

»*  r$    m  ttf       —        K  * "  f$ 

ORIGIN  OF  MESSAGE  DETERMINES  TAXABILITY. 

5514  Art.  3.    Originating  with  the  United  States. — The  tax  is  upon  the 
transmission  by  telephone,  telegraph,  radio,  or  cable  of  dispatches, 

messages,  and  conversations  originating  within  the  United  States. 

5515  Messages  transmitted  from  a  point  within  the  United  States  to  a 
point  without  the  United  States  are  subject  to  the  provisions  of  the 

act  unless  sent  with  charges  "reversed"  or  "collect."  Messages  transmitted 
from  a  point  without  the  United  States  to  a  point  within  the  United  States 
are  not  subject  to  the  tax,  unless  sent  with  charges  "reversed"  or  "collect." 

5516  The  term  "United  States"  includes  the  States,  the  Territories  of 
Alaska  and  Hawaii,  and  the  District  of  Columbia;  it  also  includes  all 

inland  waters  (such  as  rivers,  lakes,  bays,  etc.)  lying  wholly  within  the  United 
States,  and,  where  an  international  boundary  line  divides  inland  waters,  the 
parts  of  such  inland  waters  as  lie  within  the  boundary  of  the  United  States; 
and  also  the  waters  known  as  a  marine  league  from  low^tide  on  the  coast  line. 
Radio  messages  sent  from  ships  within  the  above  limits  are  therefore  subject 
to  the  provisions  of  the  act. 

551  7    Art.  4.   Reversed  or  collect  messages. — The  point  of  origin  of  mes- 
sages transmitted  with  charges  "reversed"  or  "collect"  is  the  point 
at  which  the  charge  is  collectible;  that  is,  the  point  of  receipt  of  the  message 
by  the  addressee. 

551  8  J  Art.  5.  Effective  date  offthe  law. — The  tax  imposed  under  sub- 
divisions (a)  and  (b)  of  section  500  of  the  Revenue  Act  of  1921  is 
in  lieu  of  the  tax  imposed  under  subdivisions  (f)  and  (g)  of  section  500  of 
the  Revenue  Act  of  1918  and  is  upon  the  transmission  by  telephone,  tele- 
graph, radio  or  cable,  of  dispatches,  messages,  and  conversations  originating 
on  or  after  January  1,  1922.  The  rate  of  taxation  is  the  same  under  both 
acts.  The  provisions  of  the  Revenue  Act  of  1918  are  effective  as  to  all  tax- 
able services  or  facilities  furnished  between  midnight  of  March  31,  1919,  and 
midnight  of  December  31,  1921;  the  provisions  of  the  Revenue  Act  of  1921 
do  not  apply  to  services  or  facilities  furnished  prior  to  midnight  of  December 
31,  1921,  but  do  apply  to  such  services  or  facilities  furnished  subsequent  to 
midnight  of  December  31,  1921.  The  time  of  the  payment  of  the  charge  is 
immaterial. 


BASIS,  RATE,  AND  COMPUTATION  OF  TAX. 

5519  Art.  6.  Basis,  rate,  and  computation  of  tax. — The  basis  for  the  com- 
putation of  the  tax  is  the  amount  of  the  charge  for  the  transmission 
of  the  message.  (As  to  the  meaning  of  transmission,  see  art.  1.)  The  term 
"the  charge"  means  the  amount  charged  by  the  carrier  for  the  transmission 
of  the  particular  message.  Such  charge  may  be  due  in  money,  services,  or 
in  any  other  valuable  consideration. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1106  SERVICE 


2-28-22-1  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS,    1921  ACT. 


5520    Only  two  amounts  of  tax  are  provided,  5  cents  and  10  cents,  imposed 
as  follows: 

6521     (1)    5  cents  on  messages  the  charge  for  the  transmission  of  which  is 
more  than  14  cents  and  not  more  than  50  cents. 

5522  (2)    10  cents  on  messages  the  charge  for  the  transmission  of  which 
is  more  than  50  cents. 

5523  Art.  7.    Franks. — If  the  message  is  in  fact  transmitted  free,  no  tax 
applies;  but  if  the  carrier  in  fact  makes  a  charge,  in  money,  services, 

or  any  other  consideration,  for  the  transmission  of  the  message,  the  tax 
applies  and  is  to  be  computed  upon  the  amount  of  the  charge  imposed. 

5524  Art.  8.    Overtime  telephone  messages. — The  tax  on  overtime  tele- 
phone messages  is  to  be  computed  upon  the  total  charge  for  the 

transmission  of  the  message.  The  amount  of  the  initial  rate  for  such  messages 
is  immaterial. 

5525  Art.  9.  Messages  transmitted  under  contract. — Where,  by  contract, 
a  telegraph,  telephone,  radio,  or  cable  company  agrees,  in  considera- 
tion of  the  payment  of  a  lump  sum  or  of  the  performance  of  services,  to 
transmit  messages  on  frank,  such  messages  are  subject  to  the  tax  imposed 
by  this  section  (500  (a)  )  of  the  act.  The  tax  on  each  such  message  is  to  be 
computed  upon  the  amount  of  the  regular  established  charge  for  the  trans- 
mission of  similar  messages  for  ordinary  customers,  calculated  at  the  regular 
fixed  rate  provided  in  the  tariffs  of  the  transmitting  carrier.  The  questions 
as  to  whether  such  messages  relate  to  the  operation  of  the  business  of  a  com- 
mon carrier  and  whether  they  are  "on  line"  or  "off  line"  are  immaterial. 
Thus,  a  telegraph  company  agrees  to  transmit  over  its  lines  on  a  railroad  line 
all  messages  relating  to  railroad  business  "free"  and  all  such  messages  over 
its  lines  off  the  railroad  lines  "free"  to  an  amount  not  exceeding  $10,000  per 
year  calculated  at  its  regular  rates,  and  all  messages  over  that  amount  at 
half  rates,  in  consideration  of  services  to  be  performed  by  the  railroad  in  the 
transportation  of  men  and  materials  of  the  telegraph  company.  All  such 
messages,  whether  "on  line"  or  "off  line,"  and  whether  "free"  or  at  half 
rates,  are  subject  to  the  tax  provided  by  this  section  (500  (a)  )  of  the  act. 
The  tax  must  be  computed,  collected,  and  paid  upon  each  such  message. 

EXEMPTIONS. 

5526  Art.    10.     Exemptions — Business   of  transmitting  carrier. — The 

transmission  of  messages  involved  in  the  conduct  of  the  business  of 
the  transmitting  carrier,  as  such,  is  not  subject  to  the  tax. 

5527  Art.  11.  Exemption — Charges  of  14  cents  or  less. — Dispatches, 
messages,  or  conversations,  for  the  transmission  of  which  by  tele- 
graph, telephone,  radio,  or  cable  the  charge  is  14  cents  or  less,  are  not  sub- 
ject to  tax.  (As  to  the  meaning  of  transmission,  see  Art.  1 ;  as  to  the  com- 
putation of  the  tax,  see  Arts.  6-9.) 

5528  Art.  12.   Exemption — Services  rendered  to  the  United  States  or  to 
5503     any  State  or  Territory  or  to  the  District  of  Columbia. — Telephone, 

telegraph,  cable,  and  radio  dispatches,  messages,  and  conversations 
relating  to  Government  business,  which  originate  in  the  United  States  and 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1107  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.— 1921  ACT. 


which  are  a  charge  against  the  Treasurer  of  the  United  States,  the  District 
of  Columbia,  a  State,  or  Territory,  and  are  paid  from  the  funds  thereof,  are 
exempt  from  the  tax.  Messages,  conversations,  and  dispatches  which  ar- 
not  paid  from  such  funds  are  not  exempt  from  tax,  even  though  they  relate 
to  Government  business. 

5529    Art.  13.    Political  subdivisions  of  State  or  Territory. — The  words 
"State"  and  "Territory"  as  used  in  section  500  (c)  of  the  act  and  in 
article  12  (above)  include  political  subdivisions  thereof,  such  as  counties, 
cities,  towns,  and  other  municipalities. 

553  0  Art.  14.  Government  agencies. — Services  rendered  to  agencies  of 
the  United  States  are,  subject  to  the  conditions  prescribed  in  article 
12,  exempt  from  tax.  Such  agencies  include  the  American  National  Red 
Cross,  United  States  Shipping  Board,  Emergency  Fleet  Corporation,  Federal 
Farm  Appraisers,  Federal  Land  Banks,  Federal  Reserve  Banks,  Panama 
Railroad  Co.,  and  similar  agencies  supported  by  Government  funds. 

5531  Art.  15.    Evidence  of  right  of  exemption. — Where  a  message  is 
accepted  and  transmitted  by  a  carrier  as  a  Government  message 

and  entitled  as  such  to  exemption  under  section  500  from  the  tax  on  charges 
for  transmission  thereof,  the  right  to  such  exemption  shall  be  evidenced  in  one 
of  the  following  ways: 

5532  fa)  Payment  of  such  charge  directly  to  the  carrier  by  the  Govern- 
ment to  which  the  services  are  rendered. 

5533  (b)  A  standard  form  of  exemption  certificate  for  use  of  the  Federal 
Government,  substantially  in  form  following: 

Treasury  Department 
Form  

Exemption  Certificate. 

tax  ox  transmissions  by  telegraph,  telephone,  radio  and  cable. 


(Date.) 

Sender   Place  of  receipt  

Addressee  \   Place  of  delivery  

Place  of  payment  of  charges  

Name  of  carrier  collecting  charges  

Other  indentification  of  message,  conversation,  or  dispatch  


I  certify  that  the  transmission  charges  on  the  message  or  messages  to  which  this  exemption 
certificate  is  attached  have  been  or  will  be  paid  by  the  United  States,  and  such  charges 

thereon  amounting  to  $   are  exempt  under  section  500  of  the  revenue  act 

of  1921  from  the  tax  imposed  by  said  act. 

(Signature  of  Government  officer  or  employee.) 


(Federal  department  or  establishment.) 

(Title.) 

Penalty  for  fraudulent  use,  $1,000  and  imprisonment. 

Note.  -Agents  of  telegraph,  telephone,  radio,  and  cable  companies  should  not  accept  this  certificate 
unless  satisfied,  through  the  production  of  proper  credentials  or  otherwise,  that  the  person  who  signed  it  is 
an  officer  or  employee  of  the  Federal  Government. 

A  separate  exemption  certificate  will  be  required  for  each  message  when  paid  for  as  a  separate  item,  but 
where  periodical  payments  are  made  for  services  rendered  to  Government  officers  or  departments  ••  blanket 
certificate  may  be  accepted  as  evidence  of  right  to  exemption.  ^ 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  1108  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS . — 1 92 1  ACT. 


5534  A  form  of  exemption  certificate  substantially  in  accord  with  the 
above  form  should  be  provided  by  the  States,  the  Territories  of 

Alaska  and  Hawaii,  and  the  District  of  Columbia,  or  the  political  subdiv- 
isions thereof,  for  the  use  of  officials  and  employees. 

5535  Art.  16.    Exemptions — Foreign  diplomats. — (a)  Ambassadors,  min- 
isters, and  other  properly  accredited  diplomatic  representatives  of 

foreign  Governments  to  the  United  States  are  exempt  from  the  payment  of 
taxes  upon  the  transmission  of  messages  sent  by  or  for  them. 

5536  (b)  The  exemption  does  not  apply  to  consuls  or  to  any  officials  of 
foreign  Governments  other  than  those  specified  in  paragraph  (a). 

5537  (c)  The  exemption  does  not  apply  to  messages  the  charge  for  the 
transmission  of  which  is  paid  by  a  foreign  Government,  except  in 

the  cases  provided  for  in  paragraph  (a). 

5538  Art.  17.    Evidence  of  right  to  exemption. — The  following  form  may 
be  used  to  secure  exemption  when  signed  by  an  ambassador,  minister, 

or  any  other  properly  accredited  diplomatic  representative  of  a  foreign 
Government: 

(Date.) 

I  certify  that  this  message  from   to   

over  is  transmitted  by   attached  to 

my  and  is  exempt  from  tax. 

) 


)1   3 1  (llSX   01  i',  291lH  nOlSnsJXd  t>fl£  29H-il--SiS3/iT*X  I\£----i*A  A-      -p.  ■ 

(Title.) 

(Address.) 


LEASED  WIRE  AND  TALKING  CIRCUIT  SPECIAL  SERVICE. 
IMPOSITION  OF  TAX. 

5539  Art.  18.  Imposition  of  the  tax — Leased  wire  or  talking  circuit 
5502     special  service. — The  tax  is  imposed  upon  the  amount  paid  for  any 

leased  wire  or  talking  circuit  special  service. 

5540  Leased  wire  special  service. — Leased  wire  special  service  includes 
exclusive  leases  of  wires  and  also  contracts  by  which  the  carrier  agrees 

to  furnish  a  circuit  (that  is,  a  wire  or  wires,  instruments  and  electrical  energy) 
for  the  transmission  of  messages  in  Morse  characters  or  by  spoken  word 
between  specified  points  or  offices  during  specified  hours.  Operators  may  or 
may  not  be  employees  of  the  carrier. 

5541  For  administrative  purposes  it  is  held  that  where  the  area  covered 
by  leased  wire  special  service  is  served  by  a  local  telephone  exchange, 

tolls  not  being  charged  upon  messages  transmitted  between  points  within 
such  area,  such  special  service  does  not  come  within  the  provisions  of  the  act. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1109  SERVICE 


i  bnti  noij&e>iniimmo3i9jfiI  .££  .)tA  Y*aa 
PART  II. 


2-28-28.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.  -1921  ACT. 


5542  Talking  circuit  special  service. — rJ  alking  circuit  special  service  is  a 
limited  class  of  leased  wire  special  service  and  refers  in  such  service 

where  the  transmission  is  telephonic. 

5543  Such  a  talking  circuit  may  by  contract  have  one  terminal  at  a  switch- 
board of  the  carrier,  allowing  connection  with  any  telephone  within 

the  local  exchange  area  of  the  operating  station.  Such  additional  exchange 
and  other  incidental  service  is  included  in  the  term  "talking  circuit  special 
service." 

5544  Art.  19.    Private  branch  exchange  service. — Amounts  paid  for  private 
branch  exchange  service  (called  P.  B.  X.  service)  where  the  exchange 

equipment  is  located  on  the  premises  of  the  lessee  and  is  used  for  intercom- 
munication between  departments  of  the  business  or  parts  of  the  premises  of 
the  lessee,  are  not  subject  to  tax.  Any  amount  paid  for  special  service  at 
the  central  exchange  in  the  handling  of  calls  from  such  a  private  branch 
exchange  is  included  in  the  term  "private  branch  exchange  service.'' 

5545  Art.  20.    Tie  lines. — The  term  "tie  line"  is  used  to  denote  a  line 
connecting  two  private  branch  exchanges.    The  amount  paid  for 

rental  of  a  tie  line  connecting  two  or  more  private  branch  exchanges  located 
within  an  area  served  by  a  local  telephone  exchange  without  charging  tolls, 
is  to  be  considered  part  of  the  amount  paid  for  private  branch  exchange 
service  and  is  not  subject  to  tax.  But  a  tie  line  connecting  two  or  more 
private  branch  exchanges  not  within  the  same  local  telephone  exchange  area, 
tolls  being  ordinarily  imposed  upon  the  transmission  of  messages  between 
the  points  of  location  of  the  private  branch  exchanges,  is  a  leased  wire  and 
the  amount  paid  for  the  rental  thereof  is  subject  to  the  provisions  of  this 
section  of  the  act. 

5546  Art.  21.    Private  lines  and  extension  lines  are  subject  to  the  same 
distinction  and  same  rules  as  tie  lines. 

5647    Art.  22.    Intercommunication  andjnterior  systems  are  subject  to  the 
same  provisions  as  private  branch  exchanges. 

5548  Art.   23.    Long-distance  terminals. — Amounts   paid   for  a  long- 
distance terminal,  consisting  of  a  special  terminal  loop  from  a  local 

toll  position  or  a  long  line  switchboard  to  the  subscriber's  premises,  and  used 
only  for  long-distance  calls  at  the  regular  toll,  are  not  subject  to  the  tax  im- 
posed by  this  section  of  the  act.  Messages  transmitted  over  such  wires  are 
subject  to  the  "message  tax"  provided  for  in  section  500  (a). 

BASIS,  RATE,  AND  COMPUTATION  OF  TAX. 

5549  Art.  24.    Basis,  rate,  and  computation  of  the  tax. —  The  tax  imposed 
is  to  be  computed  at  10  per  cent  of  the  amount  paid  for  the  services 

specified. 

5650  The  amount  paid  includes  the  contract  consideration  and  all  addi- 
tional charges  therein  provided,  including  salaries  of  operators  if  in 
the  employ  of  the  carrier,  charges  for  equipment,  instruments,  and  other 
apparatus,  drops  intermediate  to  the  terminals,  branch  or  "leg"  lines,  ex- 
change service,  and  overtime  service.  It  also  includes  charges  for  incidental 
additional  service,  including  charges  for  "service  connection,"  "termination," 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1110  TERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.— 1921  ACT. 


and  "moves"  when  such  are  involved  in  the  special  service  contracted  for; 
such  charges  not  involved  in  such  special  service  are  not  subject  to  the  tax. 

5551  In  the  payment  of  any  tax  under  this  section  a  fractional  part  of 
a  cent  shall  be  disregarded  unless  it  amounts  to  one-half  cent  or  more, 

in  which  case  it  shall  be  increased  to  one  cent.  (Sec.  1306  [^[8019]  of  the 
act.) 

5552  Art.  25.    Computation  of  tax — Effective  date. — The  tax  provided  in 
section  500  (b)  applies  where  (a)  the  amount  paid  for  such  service  is 

paid  after -January  f,  1922,  and  (b)  the  service  is  furnished  after  January  1, 
1922.  Therefore,  where  leased-wire  special  service  was  furnished  on  or  after 
January  1,  1922,  but  the  consideration  therefor  had  been  paid  prior  to  that 
date,  the  tax  imposed  by  section  500  (b)  of  the  Revenue  Act  of  1921  does  not 
apply,  but  the  tax  imposed  by  section  500  (g)  of  the  Revenue  Act  of  1918 
would  apply  if  such  consideration  were  paid  subsequent  to  April  1,  1919. 
Where  such  service  was  furnished  prior  to  or  on  April  1,  1919,  the  tax  imposed 
by  section  500  (g)  of  the  Revenue  Act.  of  1918  or  by  section  500  (b)  of  the 
Revenue  Act  of  1921  does  not  apply,  regardless  of  the  date  of  the  payment 
of  the  charges  therefor. 

5553  Art.  26.    Computation  of  tax — Service  performed  between  a  point 
within  and  a  point  without  the  United  States. — When  leased  wire  or 

talking  circuit  special  service  is  furnished  between  a  point  or  points  within 
the  United  States  and  a  point  or  points  without  the  United  States  and  there 
is  in  the  contract  no  reasonable  established  division  of  charges  as  domestic 
and  foreign,  the  tax  shall  be  paid  and  collected  upon  the  amounts  paid  for 
incidental  services  or  facilities  furnished  within  the  United  States  plus  that 
proportion  of  the  general  contract  consideration  as  the  wire  mileage  within 
the  United  States  bears  to  the  total  wire  mileage  contracted  for.  Where 
there  is  a  reasonable  division  of  charges  as  domestic  and  foreign  provided 
in  the  contract,  the  tax  shall  be  paid  and  collected  upon  the  amounts  specified 
as  payments  for  services  or  facilities  rendered  within  the  United  States. 

EXEMPTIONS. 

5554  Art.  27.    Exemptions— Services  to  United  States,  the  States,  the 
District  of  Columbia,  and  to  Foreign  Diplomats. — The  exemptions  of 

services  rendered  the  United  States,  a  State  or  Territory  and  the  District 
of  Columbia,  and  foreign  diplomats  described  in  Articles  12  to  17  above, 
apply  also  to  this  section  of  the  act. 

5555  Art.  28.    Exemptions—Public  press. — The  tax  does  not  apply  to 
the  amount  paid  for  so  much  of  such  special  service  as  is  utilized  in 

the  collection  and  dissemination  of  news  through  the  public  press.  "Public 
press"  is  not  restricted  to  newspapers  or  to  any  particular  portion  of  the 
product  of  printing  presses.  Magazines,  periodicals,  trade  and  scientific 
publications,  published  for  the  information  of  the  public,  are  included. 
Organizations  such  as  the  Associated  Press  and  the  United  Press  are  also 
included. 

5556  "News"  is  a  word  to  be  liberally  construed.    Accounts  of  current 
events,  public    announcements,    information    relating    to  finance, 

science,  commerce,  religion,  civic,  or  other  public  organizations  are  held  to 
be  news. 

Copyright  1922,  by  The  Corporation  Trust  Company^ 
WAR  TAX  1111  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


5557  The  exemption  does  not  apply  to  the  publisher  or  to  the  publication 
as  such.   The  exemption  applies  only  to  the  amount  paid  for  so  much 

of  such  service  as  is  utilized  in  the  collection  and  dissemination  of  nevjs  in  the 
public  press.  If,  however,  a  contract  between  a  person  or  company  engaged 
in  the  collection  and  dissemination  of  news  through  the  public  press  and  a 
carrier  provides  for  leased  wire  or  talking  circuit  special  service  to  be  utilized 
exclusively  in  the  business  mentioned,  the  carrier  is  not  required  to  collect 
the  tax  upon  the  amounts  paid  under  such  contract  in  the  absence  of  actual 
knowledge  on  the  part  of  the  carrier  that  the  service  is  being  used  for  other 
purposes.   The  exemption  has  no  application  to  the  transmission  of  messages. 

5558  Art.  29.    Exemption — Services  utilized  in  the  conduct  of  business 
of  common  carrier  or  telegraph  or  telephone  company. — The  tax 

does  not  apply  to  the  amount  paid  for  so  much  of  such  special  service  as  is 
utilized  in  the  conduct,  by  a  common  carrier  or  telegraph  or  telephone  com- 
pany, of  its  business  as  such. 

5559  A  common  carrier  is  one  who  undertakes,  for  hire  or  reward,  to 
transport  the  goods  or  person  of  such  as  choose  to  employ  him  from 

place  to  place. 

5560  The  exemption  does  not  apply  to  common  carriers,  telegraph  and 
telephone  companies,  as  such.    It  applies  only  to  the  amount  paid 

for  so  much  of  such  service  (leased  wire  or  talking  circuit)  as  is  utilized  in 
the  conduct  by  a  common  carrier,  telegraph  or  telephone  company,  of  its 
business  as  such. 

5561  Where,  however,  a  contract  between  a  common  carrier  (or  tele- 
graph or  telephone  company)  and  a  telegraph,  telephone,  radio,  or 

cable  company  provides  for  leased  wire  or  talking  circuit  special  service  to 
be  utilized  exclusively  in  the  conduct  of  the  business  of  the  common  carrier  (or 
telegraph  or  telephone  company)  as  such,  the  telegraph,  telephone,  cable,  or 
radio  company  is  not  required  to  collect  the  tax  upon  the  amounts  paid 
under  such  contract  in  the  absence  of  actual  knowledge  on  the  part  of  the 
company  that  the  service  is  being  used  for  other  purposes. 

5562  The  exemption  does  not  apply  to  contracts  which  provide  merely 
for  the  transmission  of  messages.  Thus,  where  a  telegraph  or  tele- 
phone company  agrees  by  contract  with  a  railroad  to  transmit,  on  frank  or 
otherwise,  the  messages  of  such  railroad,  its  officials,  or  employees,  in  a  cer- 
tain manner  or  upon  certain  terms,  such  a  contract  is  a  contract  providing 
for  the  transmission  of  messages,  and  each  such  message  is  subject  to  the 
''message"  tax.  (See  Art.  9  above.)  No  exemption  exists  by  reason  of  such 
contract.  The  exemption  applies  only  to  leased  wire  or  talking  circuit  special 
service  utilized  by  a  common  carrier  in  the  conduct  of  its  business  as  such. 
Thus  where  a  telegraph  or  telephone  company  agrees  by  contract  to  set 
apart  a  certain  wire  or  wires  for  the  use  of  a  railroad  in  the  conduct  of  its 
business  as  such,  the  amounts  paid  for  such  service  are  not  subject  to  tax. 
A  proviso  in  such  a  contract  to  the  effect  that  when  such  wire  or  wires  arc 
not  being  used  by  the  railroad  they  may  be  used  by  telegraph  or  telephone 
company  for  the  transmission  of  commercial  messages  will  not  change  the 
character  of  the  contract. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR'TAX  1112  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.  -1921  ACT. 


PART  III. 

PAYMENT,  COLLECTION,  RETURN,  AND  REMITTANCE  OF  TAXES. 

5563  Art.  30.    Payment  of  taxes.— Taxes  imposed  by  section  500  (a)  and 

5505  (b)  shall  be  paid  by  the  person  from  whom  the  carrier  collects  the 

5506  charges  for  the  services  or  facilities  rendered. 

5564  Art.  31.    Collection  of  taxes. — All  such  taxes  shall  be  paid  to  and 
collected  by  the  officers,  agents,  or  other  employees  of  the  carrier  to 

which  the  charges  for  the  services  or  facilities  are  due. 

5565  Art.  32.    Credit. — Where  credit  is  extended  by  a  carrier  to  a  sender 
or  addressee  for  the  payment  of  charges  for  the  transmission  of  a 

message,  or  to  the  lessee  of  special  service  for  the  payment  of  charges  for 
such  service,  and  such  charges  are  not  paid,  the  tax  nevertheless  applies  and 
the  carrier  is  liable  for  the  collection  thereof. 

5566  Art.  33.    Records. — Records  and  accounts  of  telegraph,  telephone, 
radio,  and  cable  companies  showing  records  of  (1)  all  dispatches, 

messages,  or  conversations  originating  on  the  lines  of  such  company,  the 
charge  for  the  transmission  of  which  is  over  14  cents,  whether  taxable  or  not, 
(2)  leased  wire  and  talking  circuit  special  services  rendered  by  the  company, 
and  (3)  evidences  of  the  right  of  exemption  of  dispatches,  messages,  con- 
versations, and  special  service  upon  which  tax  is  not  collected,  such  records 
to  contain  sufficient  information  to  determine  the  taxability  of  the  message 
or  service  and  the  amount  of  tax,  if  any,  upon  same,  shall  at  all  times  be  open 
to  the  inspection  of  officers  of  the  Treasury  Department. 

5567  Art.  34.  Returns — Contents. — The  returns  of  a  telephone,  tele- 
graph, radio,  or  cable  company  shall  be  rendered  oh  Form  727  (Re- 
vised) [page  1103]  and  shall  include  (a)  all  taxable  dispatches,  messages,  or 
conversations  originated  by  it  or  on  its  lines  and  (b)  such  leased  wire  or 
talking  circuit  special  services,  as  are  recorded  and  accounted  for  by  the 
reporting  company  and  reflected  in  its  billing  records  for  the  month,  following 
its  usual  business  routine. 

5568  Taxable  messages  which  originate  at  the  stations  of  rural  or  farmers' 
line  associations  and  which  are  recorded  and  billed  by  the  telephone 

company  operating  the  exchange  to  which  such  stations  are  connected  for 
service  should  be  included  in  the  return  of  said  operating  company.  Taxable 
messages,  if  they  originate  at  the  station  of  such  rural  or  farmers'  line  asso- 
ciations and  are  not  recorded  or  billed  by  the  operating  company,  should  be 
reported  by  such  association. 

5569  Art.  35.    Returns— When  and  where  rendered. — Returns  must  be 
made  for  each  calendar  month.    Such  returns  must  be  made  under 

oath,  in  duplicate,  and  must  be  filed  with  the  collector  of  the  district  in  which 
the  principal  office  or  place  of  business  of  the  company  is  located  on  or 
before  the  last  day  of  the  calendar  month  following  the  month  for  which 
return  is  made.  Where  a  return  covers  a  tax  of  $10  or  less  it  may  be  signed 
and  acknowledged  before  two  witnesses,  instead  of  under  oath. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1113  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.  -1921  ACT. 


5570  Art.  36.    Extension  of  time. — Where  it  is  found  impossible  to  make 
the  proper  return  within  the  prescribed  time,  request  may  be  filed 

with  the  collector  for  an  extension  of  time,  and  upon  a  proper  showing  the 
collector  is  authorized  to  fix  a  definite  time  in  each  instance  within  which  the 
return  may  be  filed,  such  extension  of  time  not  to  exceed  60  days. 

557 1  Art.  37.    Remittance  of  taxes  collected. — The  tax  is  due  and  payable 
by  the  person  collecting  the  tax  to  the  collector  of  internal  revenue 

at  the  time  fixed  for  filing  the  return. 

CREDITS  AND  REFUNDS. 

Law  1|8018,  1[8023. 

5572  Art.  38.  Credit  for  overpayment. — Any  individual,  corporation. 
5507     partnership,  or  association  that  has  paid  to  the  collector  of  internal 

revenue,  as  a  tax  under  section  500  of  the  act,  any  amount  erro- 
neously or  illegally  assessed  or  collected  or  any  amount  in  excess  of  the 
amount  of  the  tax  actually  imposed  by  that  section  for  the  month  covered 
by  that  payment,  may  claim  credit  for  such  overpayment  against  the  amount 
of  the  tax  imposed  by  that  section  which  is  due  upon  any  other  monthly 
return  thereafter  made  in  the  same  behalf  on  Form  727  (Revised).  Such 
credit  will  only  be  granted,  however,  if,  in  making  the  claim,  the  instructions 
printed  on  the  back  of  that  form  are  carefully  followed. 

55  73    Art.  39.    Refund  of  overpayment. — Air-  individual,  corporation. 

partnership,  or  association  that  has  paid  to  the  collector  of  internal 
revenue,  as  a  tax  under  section  500  of  the  act,  any  amount  erroneously  or 
illegally  assessed,  or  any  amount  in  excess  of  the  amount  of  the  tax  actually 
imposed  by  that  section  for  the  month  covered  by  that  payment,  or  any 
amount  as  a  penalty  for  the  collection  of  which  there  was  no  authority,  may 
secure  a  refund  of  the  amount  so  overpaid  by  filing  with  the  collector  to  whom 
such  payment  was  made  a  propeilv  prepared  claim  on  Form  46  (revised) 
[Form  843]. 

5574  Art.  40.    Refund  of  overcollection.-  E\ cry  individual,  corporation, 
partnership,  or  association  that  has  collected  from  an}'  person,  as  a 

tax  under  section  500  of  the  act,  any  amount  in  excess  of  the  amount  of  the 
tax  imposed  by  that  section  actually  due  from  such  person,  shall  upon 
proper  application  promptly  refund  such  amount  to  the  person  entitled 
thereto,  even  though  such  amount  has  already  been  paid  oyer  to  the  col- 
lector of  internal  revenue  and  no  corresponding  credit  (see  art.  38)  or  refund 
(see  art.  39)  has  yet  been  secured.  An}-  person  making  a  refund  of  an}-  pay- 
ment upon  which  tax  is  collected  under  this  section  ma}-  repay  therewith  the 
amount  of  the  tax  collected  on  such  payment. 

PENALTIES. 

5575  Art.  41.  Penalties.-  (1)  Section  502  (d)  of  the  act  specifically  pro- 
5509     \  ides  that  the  taxes  under  section  500  shall  (without  assessment  by 

the  Commissioner  or  notice  from  the  collector)  be  due  at  the  time 
fixed  for  filing  this  return,  and  if  the  tax  is  not  paid  at  such  time  there  t>ha  11 
be  added  as  part  of  the  tax  a  penalty  of  5  per  cent,  together  with  interest  at 
the  rate  of  1  per  cent  for  each  full  month  from  the  time  when  the  tax  becomes 
due. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1114  SERVICE 


2-28-22  Reg.  57,  Kev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


5576    (2)  [See  Sec.  1302,  H8014.] 

5677     (3)  Section  3176  of  the  Revised  Statutes  [1J8073],  as  amended  and 
reenacted,  provides  that  in  case  of  any  failure  to  make  and  file  a  return 
within  the  prescribed  time  there  shall  be  added  to  the  tax  25  per  cent  of  its 
amount. 

5578  (4)  Section  3176  of  the  Revised  Statutes  [If 8073],  as  amended  and 
reenacted,  further  provides  that  in  case  a  false  or  fraudulent  return  is 

willfully  made  there  shall  be  added  to  the  tax  50  per  cent  of  its  amount. 

AUTHORITY  FOR  REGULATIONS. 

5579  Art.  42.    Promulgation  of  regulations. — In  pursuance  of  this  pro- 
vision of  the  act  [Tf8009]  the  foregoing  regulations  are  hereby  made  and 

promulgated  and  all  rulings  inconsistent  with  them  are  hereby  revoked. 

D.  H.  Blair, 
Commissioner  of  Internal  Revenue. 
Approved  February  15,  1922  [Released  for  publication  February  28,  1922.] 

A.  W.  Mellon, 
Secretary  of  the  Treasury. 


Copyright  1922,  by  The  Corporation  Trust  Companv. 
WAR  TAX  1115  SERVICE 


2-28-22. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1 92 1  ACT. 


(T.  D.  3255.) 

5580  Collection  of  tax  on  amounts  paid  for  transportation  service  only 
5504     partially  rendered  before  January  1,  1922  and  adjustments  of  tax 

in  adjusting  overcharges. — Subdivisions  (a),  (b)  and  (e)  of  Section 
500  of  the  Revenue  Act  of  1918  impose  tax  on  amounts  paid  for  transporta- 
tion. The  provisions  of  the  1918  Act  imposing  tax  on  charges  for  transporta- 
tion service  are  repealed  effective  January  1,  1922  by  the  Revenue  Act  of 
1921.  Cases  will  arise  where  the  transportation  service  will  be  only  partially 
performed  before  January  1,  1922.  It  is  held  that  tax  imposed  by  sub- 
divisions (a),  (b)  and  (e)  of  the  Revenue  Act  of  1918  applies  to  amounts 
prepaid  for  transportation  in  cases  where  the  shipments  are  made  before 
January  V,  1922,  but  does  not  apply  in  cases  where  the  charges  are  "collect'" 
on  shipments  made  before  but  arriving  at  destination  on  or  after  Januarv  1, 
1922. 

5581  Transportation  companies  have  been  authorized  as  set  forth  in  Article 
115,  Regulations  49,  Revised,  to  adjust  tax  in  adjusting  overcharges, 

taking  credit  on  any  subsequent  return  for  tax  so  adjusted.  In  order  to 
terminate  this  authority  uniformly  and  at  a  time  that  will  make  it  practicable 
for  the  credits  to  be  taken  on  returns  made  by  the  carriers,  it  is  directed  that 
in  adjusting  overcharges  and  in  redeeming  unused  and  partially  used  tickets 
and  mileage  books,  no  adjustments  be  made  of  tax  after  December  31,  1921. 
It  is  suggested  that  transportation  companies,  as  soon  as  practicable,  advise 
all  claimants  who  have  claims  pending  or  who  file  claims  after  December  31, 
1921,  that  claim  for  refund  of  tax  should  be  filed  on  Treasury  Department 
Form  46,  with  the  Commissioner  of  Internal  Revenue  within  four  years 
from  time  tax  was  paid,  claim  being  barred  by  statute  of  limitations  if  received 
after  such  time.  In  the  event  the  transportation  companies  retain  the  freight 
receipts,  express  receipts,  redeemed  tickets,  or  mileage  books  as  part  of  their 
files  on  a  claim,  it  will  facilitate  handling  claim  filed  with  the  Commissioner 
for  refund  of  the  tax  if  the  transportation  companies  will,  when  adjusting  the 
transportation  charge,  furnish  to  the  claimant  a  statement  or  certificate 
containing  the  following  information,  retaining  a  copy  thereof  in  their  files: 

(a)  Number  assigned  claim  by  transportation  company. 

(b)  Amount  of  charges  refunded  on  the  claim. 

(c)  Amount  of  tax  actually  collected  on  the  refunded  amount. 

(d)  Date  (or  dates)  on  which  tax  was  collected. 

5582  In  order  that  right  to  refund  may  be  established  it  will  be  ne  cess a r) 
for  claimant  to  either  furnish  the  original  receipts,  showing  payment 

Of  tax  or  to  furnish  the  above  statement  or  certificate  in  lieu  thereof.  (T.  D 
*255.  signed  bv  Commissioner  D  H.  Blair,  and  dated  fVcenjher  6,  1921 


(T.  D.  3256.) 

5583  Refund  of  tax  provided  by  subdivision  (d)  of  section  500  of  the 
5504  Revenue  Act  of  1921.—  Subdivision  (d)  of  Section  500  of  the  Revenue 
Act  of  1921  provides  as  follows:  "(d) Under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary,  refund  shall  be  made  of  the 
proportionate  part  of  the  tax  collected  Under  subdivision  (c)  or  (d)  of  section 
500  of  the  Revenue  Act  of  1918  on  tickets  or  mileage  books  purchased  and 
only  partially  used  before  January  1,  1922." 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1116  SERVICE 


2-28-22.    (2)  7-18-22.    (3)  7-27-22. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS.— 1921  ACT. 


6684    No  tax  should  be  collected  on  the  charge  for  a  ticket  or  mileage  book 
sold  before  January  1,  1922,  if  no  part  of  it  can  be  used  until  on  or  after 
January  1,  1922. 

6686  Where,  however,  tax  has  been  collected  under  subdivision  (c)  or 
(d)  of  Section  500  Revenue  Act  of  1918  on  a  ticket  or  mileage  book 
which  is  only  partially  used  before  January  1,  1922,  the  tax  applicable  and 
proportionate  to  the  unused  part  of  such  ticket  or  mileage  book  may  be 
refunded. 

5586    Claim  for  refund  should  be  filed  by  the  person  paying  the  tax,  on 
Form  46  [page  1609]  which  should  show  the  following: 

(a)  Statement  of  the  facts  on  which  claim  is  based. 

(b)  Statement  that  no  claim  is  pending  nor  will  any  be  filed  with  the 
transportation  company  for  adjustment  of  the  tax. 

(c)  Statement  that  the  unused  part  of  the  ticket  or  mileage  book,  in  con- 
nection with  which  relund  is  requested,  if  in  hands  of  claimant  when  claim  is 
filed,  has  been  marked  to  show  the  amount  of  tax  for  which  claim  has  been 
filed. 

6587  The  claim  should  ako  be  supported  by  a  statement  from  an  agent  of 
the  transportation  company  (or  from  a  collector  of  internal  revenue  if 
such  information  can  be  furnished  by  him)  giving  the  following  data  concern- 
ing the  ticket  or  mileage  book  in  connection  with  which  refund  is  requested: 
(a)  the  number,  (b)  date  of  purchase,  (c)  price  paid,  (d)  the  proportionate 
part  remaining  unused  on  January  1,  1922,  and  (e)  the  proportionate  amount 
of  tax  applicable  to  the  unused  part.  (T.  D.  3256,  signed  by  Commissioner 
D.  H.  Blair,  and  dated  December  6,  1921.) 


(T.  D.  3369.) 

6588  To  construe  the  law  as  imposing  a  tax  on  messages  transmitted  under 
5525  contract  (as  with  a  railroad  company)  is  warranted. — The  decision 
[syllabus  only]  of  the  United  States  District  Court,  Southern  District 
of  New  York,  in  the  case  of  The  Western  Union  Telegraph  Company  v.  The 
Delaware,  Lackawanna  and  Western  Railroad  Company,  the  syllabus  of  which 
appears  below  [1(5589-5590]  is  published  not  as  a  ruling  of  the  Treasury 
Department,  but  for  the  information  of  internal  revenue  officers  and  others 
concerned.  (T.  D.  3369,  signed  by  Commissioner  D.  H.  Blair,  and  dated 
July  12,  1922.) 

5589  1.  Messages  transmitted  on  frank — Method  of  testing  legality  of  reg- 
ulations— Friendly  suit  between  telegraph  company  and  carrier. — 

Where  a  telegraph  company  paid  the  tax  imposed  on  telegraph  messages  by 
Section  500  (f)  of  the  Revenue  Act  of  1918,  as  construed  and  applied  by 
Article  9  of  Regulations  No.  57,  on  messages  transmitted  by  it  without  charge 
for  a  railroad  company  under  a  contract  providing  for  the  mutual  interchange 
of  services  between  such  companies,  the  validity  of  such  tax  should  be  raised 
by  a  proceeding  to  recover  the  taxes  back,  and  the  legality  of  the  regulations 
could  not  be  tested  in  any  manner  convenient  to  such  companies,  as  in  a 
friendly  suit  to  which  the  Government  is  not  a  party. 

5590  2.  Same — Section  500  (f)  construed — Validity  of  Art.  9,  Regulations 
No.  57. — Section  500  (f)  of  the  Revenue  Act  of  1918,  levying  a  tax 

on  telegraphic  messages,  must  be  construed  to  cover  all  messages  trans- 
mitted for  an  economic  consideration — money  or  money's  worth — and  no 
differentiation  can  be  made  between  exchanges  and  cash-paid  services; 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1117  SERVICE 


7-18-22.    (2)  7-27-22. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. —1 921  ACT. 


therefore,  the  tax  attaches  to  messages  transmitted  by  a  telegraph  company 
without  charge  for  a  railroad  company  under  a  contract  providing  for  the 
mutual  interchange  of  services  between  such  companies,  and  Art.  9  of  Reg- 
ulations No.  57  (providing  that  where  a  telegraph  company  agrees,  in  con- 
sideration of  the  payment  of  a  lump  sum  or  of  the  performance  of  services, 
to  transmit  messages  on  frank,  such  messages  are  subject  to  the  tax)  is  not 
invalid  as  being  without  the  scope  of  the  statute.  (Syllabus  referred  to  in 
T5588.) 


(T.  D.  3377.) 

5591  Demurrage  charges  as  a  part  of  charge  for  transportation.-  1917 
and  1918  Acts. — The  decision  [syllabus  onlyl  of  the  United  States 

District  Court,  Southern  District  of  Ohio,  Western  Division,  in  the  cases 
of  The  Proctor  &  Gamble  Company  v.  United  States  and  The  Buckeye 
Cotton  Oil  Company  v.  United  States,  the  syllabus  of  which  appears  below 
[^[5592-5593]  is  published  not  as  a  ruling  of  the  Treasury  Department,  but 
for  the  information  of  internal  revenue  officers  and  others  concerned.  (T.  D. 
3377,  signed  by  Commissioner  D.  H.  Blair,  and  dated  July  22,  1922.) 

5592  1.    Demurrage   Charges — Cost   of  Transporation. — Demurrage  is 
a  part  of  the  charge  for  transportation,  and,  conceding  that  its 

purpose  is  primarily  to  prevent  the  detention  of  cars,  the  enforcement  of  its 
payment  is  also  to  be  regarded  as  a  part  of  the  charge  of  transportation. 
The  demurrage  charge  is  a  proper  one,  whether  it  be  regarded  as,  or  as  re- 
lating to,  facilities  of  shipment,  services  in  connection  with  the  delivery 
of  goods,  or  the  storage  or  handling  of  the  same. 

5593  2.    Suit  for  Recovery  of  Taxes — Payment  Under  Duress  or  Protest 
Necessary.    The  payment  of  taxc^  under  duress  or  protest  is  a 

necessary  prerequisite  to  a  suit  for  their  recovery.    (Svllabus  referred  to  in 


Copyright  1922,  by  The  C»rfri*\on  Trust  Lemptny. 
WAR  TAX         1118  SERVICE 


7-27-22. 

TELEGRAPH  AND  TELEPHONE.— RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Telegraph  and  Telephone  Taxes  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General    Subject  Content, 
Date  of  Issue,  and  Paragraph  References. 

T.  D.  Subject  Paragraph 

Law  Provisions   5500 

Reg.  57  Regulations  under  1921  law  (Revision  of  February  15,  1922) 

(Fully  indexed  on  tiie  blue  sheets  following   5510 

3255  Collection  of  tax  on  amounts  paid  for  transportation 

service  only  partially  rendered  before  January  1, 
1922  and  adjustments  of  tax  in  adjusting  over- 
charges.   (December  6,  1921)   5580 

3256  Refund  of  tax  on   tickets  or  mileage  books.  (De- 

cember 6,  1921)   5585 

3369  Decision  of  U.  S.  District  Court  in  W.  U<  Telegraph 

Co.  vs.  D.  L.  &  W.  R.  R.  Co.— Validity  of  tax  on 
messages  transmitted  under  contract  (T.  D.  dated 

July  12,  1922).   5583 

3377  Decision  of  U.  S.  District  Court  in  Proctor  and  Gamble 

Co.  vs.  U.  S.,  etc. — Demurrage  as  part  of  charge 
for  transportation,  1917  and  1918  Acts  (T.  D. 
dated  July  22,  1922)   5591 


Insert  this  page  immediately  before  the  blue  "Telegraph  and  Telephone"  index. 


Copyright  1922,  by  Tht  Corporation  Trust  Company, 
WAR  TAX  SERVICE 
Telegraph  and  Telephone  Taxes  Supplementary  Page  1. 


t 

i 
i 

i 


2-28-22. 

INDEX  TO  TELEGRAPH  AND  TELEPHONE 
REGULATIONS. 

[Government  index  with  references  changed  from  "Articles"  to  "paragraphs.") 

Agencies  of  United  States,  exemption.  .5530 
Ambassadors,  exemption.  .5535,  5538 
American  National  Red  Cross,  exemption.  .5530 
Associated  Press,  exemption.  .5555 
Authority  for  regulations.  .5578 

Basis  of  tax:  leased  wire  and  talking  circuit  special  service.  .5549 
Transmission  of  messages,  etc.  .5519 

Carrier:  Definition.  .  55 12,  5559 

Dispatches,  messages,  etc.  .5512 

Exemption.  .  5558 

Leased  wire  special  service.  .  5540 

Messages  of,  transmitted  under  contract.  .5525 
Charge,  definition.  .5519 

Claim:  Credit  for  overpayment  of  tax.  .5572 
Refund  of  overcollection  of  tax.  .5574 
Overpayment  of  tax.  .5573 
Collect  messages.  .5515 
Collection  of  taxes.  .  5564 
Combined  facilities  of  several  lines.  .5511 
Common  carrier,  definition.  .5559 

Computation  of  tax,  leased  wire  and  talking  circuit  special  service.  .  5549-5553 

Transmission  of  messages,  etc.  .5519-5525 
Consuls,  exemption.  .5536 
Contract,  messages  transmitted  under.  .5525 
Credit:  Overpayment  of  tax.  .5572 

Payment  of  charges,  effect.  .  5565 

Definitions: 

"Carrier".  .5512,  5559 

"Charge".  .5519 

"Common  carrier".  .5559 

"News".  .5556 

"Public  press".  .5555 

"State".  .5529 

"Territory".  .5529 

"Transmission'.  .5510 

"United  States".  .  5516 
Diplomats,  exemption.  .5535,  5538 
District  of  Columbia,  exemption.  .5528 

Effective  date  and  application  of  law.  .5518 
Emergency  Fleet  Corporation,  exemption.  .  5530 
Evidence  of  right  of  exemption.  .5531,  5538 
Exemptions:  Associated  Press.  .5555 

Charges  of  14  cents  or  less.  .5527 

Common  carriers.  .  5559 

District  of  Columbia,  services  rendered  to.  .5528 
Evidence  of  right.  .5531,  5538 
Foreign  diplomats.  .5535,  5538 
Governmental  agencies.  .  5530 
Governmental  business.  .5528 

Leased  wire  and  talking  circuit  special  service.  .5555,  5558 

Public  press.  .  5555 

States,  services  rendered  to.  .  5528 

Telephone  and  telegraph  companies.  .5526,  5558 

Territories,  services  rendered  to.  .5528 

United  Press.  .  5555 

United  States,  services  rendered  to.  .5528 
Extension  lines.  .5546 

Copyright  1922,  by  The  Corporation  Trust  Comply, 
WAR  TAX  SERVICE 

Telephone  and  Telephone  Taxes. — Index  Page  |. 


INDEX  TO  TELEGRAPH  AND  TELEPHONE  REGULATIONS. 


The  references  are  to  paragraph  numbers. 

False  or  fraudulent  return,  penalty.  .  5575 
Federa  Ifarm  appraisers,  exemption.  .  5530 
Federal  Land  banks,  exemption.  .  5530 
Federal  Reserve  banks,  exemption.  .  5530 
Foreign  Government,  exemption.  .  5537 
Frank,  taxability  of  message  sent  under.  .  5523 

Governmental  agencies,  exemption.  .5530 
Governmental  business,  exemption.  .  5528 

Imposition  of  tax:  Carrier.  .5512 

Leased  wire  and  talking  circuit  special  service.  .5539 
Transmission.  .5510 
Inspection  of  records  of  telephone,  etc.,  companies.  .  5566 
Intercommunication  and  interior  systems.  .  5547 

Leased  wire  special  service,  imposition  of  tax.  .  5540 
Long-distance  terminals.  .  5548 

Magazines,  exemption.  .  5555 
Moves,  charges  for.  .  5550 

News,  definition.  .  5556 

Origin  of  message,  determination  of  taxability.  .5514-5518 
Overcollection  of  tax,  refund.  .  5574 
Overpayment  of  tax:  Credit.  .5572 
Refund.  .5573 

Overtime  telephone  messages,  computation  of  tax.  .5524 
Panama  Railroad  Co.,  exemption.  .5530 
Payment  of  taxes.  .5563 

Penalty  for  nonpayment.  .5575 
Penalties.  .5575 
Periodicals,  exemption.  .5555 
Place  of  filing  returns.  .5569 
Private  branch  exchange  service.  .  5544 
Private  lines.  .  5546 
Promulgation  of  regulations.  .  5578 
Public  press:  Definition.  .5555 

Exemption.  .  5555 

Railroads:  Leased  wire  and  talking  circuit  special  service.  .5558 

Messages  of,  transmitted  under  contract.  .5525 
Rate  of  tax:  Leased  wire  and  talking  circuit  special  service.  .5549 

Transmission  of  messages,  etc.  .5520 
Record  of  telephone,  etc.,  companies,  inspection.  .5566 
Red  Cross,  exemption.  .  5530 
Refund:  Overcollection  of  tax.  .5574 

Overpayment  of  tax.  .5573 
Remittance  of  taxes  collected.  .5571 
Returns:  Contents.  .  5567 

Delay,  penalty.  .5575 

False  or  fraudulent,  penalty.  .5575 

Place  of  filing.  .5569 

Time.  .5569,  5570 
Reversed  messages.  .5515 

Scientific  publications,  exemption.  .5555 
Service  connection  charges.  .5550 
State:  Definition.  .  5529 
Exemption.  .  5528 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Telegraph  and  Telephone  Taxes. — Index  Pagej2. 


2-28-22. 

INDEX  TO  TELEGRAPH  AND  TELEPHONE  REGULATIONS. 


The  references  are  to  paragraph  numbers. 

Talking  circuit  special  service:  Basis  of  tax.  .5549 
Computation  of  tax.  .5549-5553 
Extension  lines.  .  5546 
Imposition  of  tax.  .5539 

Intercommunication  and  interior  systems.  .5547 

Long-distance  terminals.  .  5548 

Private  branch  exchange  service.  .  5544 

Private  lines.  .  5546 

Rate  of  tax.  .  5549 

Tie  lines.  .  5545 
Telephone  and  telegraph  facilities  combined.  .5511 
Telegraph  and  telephone  companies,  exemption.  .5558 
Termination  charges.  .5550 
Territory:  Definition.  .5529 

Exemption.  .5528 

Tie  lines.  .  5545 
Time:  Filing  returns.  .5569,  5570 

Furnishing  leased  wire  and  talking  circuit  special  serviceas  determining  taxability.  .5552 

Origin  as  determining  taxability  of  messages,  etc..  .5518 

Penalty  for  delay  in  filing  returns.  .  5575 
Trade  publications,  exemption.  .  5555 
Transmission,  definition.  .5511 

United  Press,  exemption.  .  5555 
United  States:  Definition.  .5516 
Exemption.  .5528 

Services  performed  partly  within  and  partly  without.  .5553 
Taxability  of  messages  originating^  within  or  without.  .5514-5518 

United  States  Shipping  Board,  exemption.  .5530 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Telegraph  and  Telephone  Taxes. — Index  Page  3. 


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22  TAX  ON  ADMISSIONS  AND 

BEING  TITLE  VIII  OF  THE  REVENUE  ACT  OF  1921. 
CALENDAR. 

Returns:    On  or  before  the  last  day  of  the  month  following  that  for  which 
the  return  is  made. 

Tax:  Amount  of  tax  due  to  accompany  return. 


TITLE  VIII. — ADMISSIONS. 

6500  Sec.  800.    (a)  That  from  and  after  January  1,  1922,  there  shall  be 
levied,  assessed,  collected,  and  paid,  in  lieu  of  the  taxes  imposed  by 

section  800  of  the  Revenue  Act  of  1918 — 

[Regular  Admission  in  Excess  of  10  cents  Being  Charged.] 

Jrjonsd  orii  ox  Ybviautax?  (A)  oiunj  ,j(i?idw  jo  ebstappi.^      US  zaomim  <  ^ 

6501  (1)  A  tax  of  1  cent  for  each  10  cents  or  fraction  thereof  of  the  amount 
paid  for  admission  to  any  place  on  or  after  such  date,  including  ad- 
mission by  season  ticket  or  subscription,  to  be  paid  by  the  person  paying 
for  such  admission;  but  where  the  amount  paid  for  admission  is  10  cents  or 
less,  no  tax  shall  be  imposed; 

sniniEJnifiiTi  to  10  YiilkqiDihurn  'lorijo  io  .s^bIIi/  ,nwoJ  tvlio  xnc  ^nivoiqmi 
[Tickets  Sold  by  Ticket  Agencies  J 

6502  (2)  Upon  tickets  or  cards  of  admission  to  theaters,  operas,  and  other 
places  of  amusement,  sold  at  news  stands,  hotels,  and  places  other 

than  the  ticket  offices  of  such  theaters,  operas,  or  other  places  of  amusement, 
at  not  to  exceed  50  cents  in  excess  of  the  sum  of  the  established  price  therefor 
at  such  ticket  offices  plus  the  amount  of  any  tax  imposed  under  paragraph 
(1),  a  tax  equivalent  to  5  per  centum  of  the  amount  of  such  excess;  and  if  sold 
for  more  than  50  cents  in  excess  of  the  sum  of  such  established  price  plus  the 
amount  of  any  tax  imposed  under  paragraph  (1),  a  tax  equivalent  to  50  per 
centum  of  the  whole  amount  of  such  excess,  such  taxes  to  be  returned  and 
paid,  in  the  manner  and  subject  to  the  penalties  and  interest  provided  in 
section  903,  by  the  person  selling  such  tickets; 

[Tickets  Sold  by  Theaters  in  Excess  of  Established  Price.] 

6603  (3)  A  tax  equivalent  to  50  per  centum  of  the  amount  for  which  the 
proprietors,  managers,  or  employees  of  any  opera  house,  theater,  or 

other  place  of  amusement  sell  or  dispose  of  tickets  or  cards  of  admission  in 
excess  of  the  regular  or  established  price  or  charge  therefor,  such  tax  to  be 
returned  and  paid,  in  the  manner  and  subject  to  the  penalties  and  interest 
provided  in  section  903  [If 45 19  herein],  by  the  person  selling  such  tickets; 

[Boxes  or  Seats  Owned  or  Leased.] 

6604  (4)  In  the  case  of  persons  having  the  permanent  use  of  boxes  or 
seats  in  an  opera  house  or  any  place  of  amusement  or  a  lease  for  the 

use  of  such  box  or  seat  in  such  opera  house  or  place  of  amusement  (in  lieu  of 
the  tax  imposed  by  paragraph  (1)),  a  tax  equivalent  to  10  per  centum  of  the 
amount  for  which  a  similar  box  or  seat  is  sold  for  each  performance  or  exhibi- 


CoPyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1301  SERVICE 


1-2-22. 


TAX  ON  ADMISSIONS  AND  DUES  LAW. 


tion  at  which  the  box  or  seat  is  used  or  reserved  by  or  for  the  lessee  or  holder, 
such;' tax  to  be  paid  by  the  lessee  or  holder;  and 

[Cabarets  and  Other  Similar  Entertainments. 1 

6605  (5)  A  tax  of  cents  for  each  10  cents  or  fraction  thereof  of  the 
amount  paid  for  admission  to  any  public  performance  for  profit  at 
any  roof  garden,  cabaret,  or  other  similar  entertainment,  to  which  the  charge 
for  admission  is  wholly  or  in  part  included  in  the  price  paid  for  refreshment, 
service,  or  merchandise;  the  amount  paid  for  such  admission  to  be  deemed  to 
be  20  per  centum  of  the  amount  paid  for  refreshment,  service,  and  merchan- 
dise; such  tax  to  be  paid  by  the  person  paying  for  such  refreshment,  service, 
or  merchandise. 

[Specific  Exemptions.] 

6506  (b)  No  tax  shall  be  levied  under  this  title  in  respect  to  (1)  any  ad- 
missions all  the  proceeds  of  which  inure  (A)  exclusively  to  the  benefit 
of  religious,  educational,  or  charitable  institutions,  societies,  or  organizations, 
any  post  of  the  American  Legion  or  the  Women's  Auxiliary  units  thereof, 
societies  for  the  prevention  of  cruelty  to  children  or  animals,  or  societies  or 
organizations  conducted  for  the  sole  purpose  of  maintaining  symphony  orches- 
tras and  receiving  substantial  support  from  voluntary  contributions,  or  of 
improving  any  city,  town,  village,  or  other  municipality,  or  of  maintaining 
a  cooperative  or  community  center  moving-picture  theater — if  no  part  of  the 
net  earnings  thereof  inures  to  the  benefit  of  any  private  stockholder  or  in- 
dividual; or  (B)  exclusively  to  the  benefit  of  persons  in  the  military  or  naval 
forces  of  the  United  States;  or  (C)  exclusively  to  the  benefit  of  persons  who 
have  served  in  such  forces  and  are  in  need;  or  (2)  any  admissions  to  agri- 
cultural fairs  if  no  part  of  the  net  earnings  thereof  inures  to  the  benefit  of 
any  stockholders  or  members  of  the  association  conducting  the  same,  or 
admissions  to  any  exhibit,  entertainment,  or  other  pay  feature  conducted 
by  such  association  as  part  of  any  such  fair, — if  the  proceeds  therefrom  are 
used  exclusively  for  the  improvement,  maintenance  and  operation  of  such 
agricultural  fairs. 

[The  Term  " Admission' \  Defined.] 

6607     (c)  The  term  "admission"  as  used  in  this  title  includes  seats  and 
tables,  reserved  or  otherwise,  and  other  similar  accommodations,  and 
the  charges  made  therefor. 

[Price  to  be  Printed  on  Each  Ticket.] 

6508  (d)  The  price  (exclusive  of  the  tax  to  be  paid  by  the  person  paying 
for  admission)  at  which  every  admission  ticket  or  card  is  sold  shall  be 
conspicuously  and  indelibly  printed,  stamped,  or  written  on  the  face  or 
back  of  that  part  of  the  ticket  which  is  to  be  taken  up  by  the  management 
of  the  theater,  opera,  or  other  place  of  amusement,  together  with  the  name 
of  the  vendor  if  sold  other  than  at  the  ticket  office  of  the  theater,  opera,  or 
other  place  of  amusement.  Whoever  sells  an  admission  ticket  or  card  on 
which  the  name  of  the  vendor  and  price  is  not  so  printed,  stamped,  or  written, 
or  at  a  price  in  excess  of  the  price  so  printed,  stamped,  or  written  thereon,  is 
guilty  of  a  misdemeanor,  and  upon  conviction  thereof  shall  be  fined  not  more 
than  $100. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1302  SERVICE 


(li  1-2-22  (2)1-23-22 

TAX  ON  ADMISSIONS  AND  DUES  LAW. 


TITLE  VIII.— DUES. 

6609  Sec.  801.  That  from  and  after  January  1,  1922,  there  shall  be  levied, 
assessed,  collected,  and  paid,  in  lieu  of  the  taxes  imposed  by  section 

801  of  the  Revenue  Act  of  1918,  a  tax  equivalent  to  10  per  centum  of  any 
amount  paid  on  or  after  such  date,  for  any  period  after  such  date,  (a)  as  dues 
or  membership  fees  (where  the  dues  or  fees  of  an  active  resident  annual 
member  are  in  excess  of  $10  per  year)  to  any  social,  athletic,  or  sporting  club 
or  organization;  or  (b)  as  initiation  fees  to  such  a  club  or  organization,  if 
such  fees  amount  to  more  than  $10,  or  if  the  dues  or  membership  fees  (not 
including  initiation  fees)  of  an  actfve  resident  annual  member  are  in  excess 
of  $10  per  year;  such  taxes  to  be  paid  by  the  person  paying  such  dues  or  fees: 

6610  Provided,  That  there  shall  be  exempted  from  the  provisions  of  this 
section  all  amounts  paid  as  dues  or  fees  to  a  fraternal  society,  order, 

or  association,  operating  under  the  lodge  system. 

651 1     In  the  case  of  life  memberships  a  life  member  shall  pay  annually,  at 
the  time  for  the  payment  of  dues  by  active  resident  annual  members, 
a  tax  equivalent  to  the  tax  upon  the  amount  paid  by  such  a  member,  but  shall 
pay  no  tax  upon  the  amount  paid  for  life  membership. 

(Returns  and  Payment  of  Taxes.] 

6612  Sec.  802.  That  every  person  receiving  any  payments  for  such 
admission,  dues,  or  fees,  shall  collect  the  amount  of  the  tax  imposed 
by  section  800  or  801  from  the  person  making  such  payments.  Every  club 
or  organization  having  life  members,  shall  collect  from  such  members  the 
amount  of  the  tax  imposed  by  section  801.  In  all  the  above  cases  returns 
and  payments  of  the  amount  so  collected  shall  be  made  at  the  same  time 
and  in  the  same  manner  and  subject  to  the  same  penalties  and  interest  as 
provided  in  section  502  [%5006  herein]. 

[General  Administrative  Law  Provisions.] 

[Read  under  "Miscellaneous  Matters"  at  the  back  of  the  book.] 


ADMISSIONS  REGULATIONS. 

The  Government  is  about  to  promulgate  revised  regulations  bearing  on 
the  admissions  taxes  as  imposed  by  the  Revenue  Act  of  1921.  These  will 
be  reproduced  for  the  Service  as  soon  as  available  for  that  purpose. 


Copyright  1^22,  by  The  Corporation  Trust  Company. 
WAR  TAX  1303  SERVICE 


This  page  will  remain  in  blank. 


WAR  TAX  1304  SERVICE 


1-23-22.     (2)  10-17-22. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


TAX  ON  ADMISSIONS  AND  DUES 

(Title  VIII,  Sections  803-802,  Revenue  Act  of  1921) 


Note:  Ticket  brokers  are  not  to  report  tax 
on  this  form.  Taxes  duo  from  such  brokers 
must  be  reported  on  Form  729-A,  Revised. 


ADMISSIONS — CHARACTER  OF  TAX 

AMOUNT  OF  TAX 

DUES — CHARACTER  OF  TAX 

AMOUNT  OF  TAX 

(a)  Admissions  —  ~- 

$  

$  

(J)  Initiation  fees    _  _  

(c)  Roof  gardens,  cabarets,  and  similar  entertainments  

(g)  Life  members                  _  _    — 

/  swear  (or  affirm)  thai  the  foregoing  Is  a  true  return  of  the  amount  of  tax  collected  on 

admissions  and  dues  for  the  month  of  ,  /  92  ,  and  that  the  amount  deducted 

for  overpayment  is  allowable  by  law. 

Signed    

Less  Oder  payment  for  month  of.   ,  192  — 

Total  amount  of  tax  due    



(State  whether  individual  owner  of  buaineas,  member  of  firm,  orif  officer  of  corporation, 
club,  or  organisation,  or  duly  authorised  manager  or  agent,  give  title.) 

Sworn  to  and  subscribed  before  me  this  day  of  

192 

"(Nun*)or  (Witaeaa)  (r^eVareerepb'eVrbMk)""     "(Title)  o7(Witne«i)" 


Return  with  remittance  should  be  sent  to  the  Collector  of  Internal 
Revenue  for  your  district  and  not  to  the  Commissioner  of  Internal  Reve- 
nue at  Washington,  V.  C.  (See  instructions,  par.  6,  on  reverse  of  this 
form.)  If  you  have  nothing  to  report,  make  notation  to  that  effect  on  this 
form  and  return  to  the  Collector  of  Internal  Revenue. 
.    2—11840 

ORIGINAL  RETURN — This  form  mutt  be  returned  to  the  Collector  of  Internal  Revenue 


TAX  ON  ADMISSIONS  AND  DUES 

(Title  VIII,  Sections  800-802,  Revenue  Act  of  1921) 


Note:  Ticket  brokers  ere  not  to  report  tax 
on  this  form.  Ti-xos  due  from  such  brokers 
must  be  reported  on  Form  729-A,  Revised. 


ADMISSIONS — CHARACTER  OF  TAX 

AMOUNT  OF  TAX 

DUES — CHARACTER  OF  TAX 

AMOUNT  OF  TAX 

(a)  Admissions...  —   _    

s  

W  Dues  _  

i  

(i)  Leases,  etc.,  of  boxes  and  seals  —  

(c)  Roof  gardens,  cabarets,  and  similar  entertainments  

(/)  Initiation  fees   _  

Total  tax  collected.   _   

/  swear  (or  affirm)  that  the  foregoing  Is  a  true  return  of  the  amount  of  tax  collected  on 
admissions  and  dues  for  the  month  of  — — ,  192  ,  and  that  the  amount  deducted 

Total  amount  of  tax  due   

Penalty  25%   _   

for  overpayment  is  allowable  by  law. 

Signed     _  _  





(Stave  whether  individual  < 


aation,  or  duly  authorised  manager  or  a 


Sworn  to  and  subscribed  before  me  this  ... 


(TiUe)  or  (W.tnes.) 


Return  with  remittance  should  be  sent  lo  the  Collector  of  Internal 
Revenue  for  your  district  and  not  to  the  Commissioner  of  Internal  Reve- 
nue at  Washington,  D.  C.  (See  instructions,  par.  6,  on  reverse  of  this 
form.)  If  you  have  nothing  to  report,  make  notation  to  that  effect  on  this 
form  and  return  to  the  Collector  of  Internal  Revenue. 


DUPLICATE  RETURN— This  form  must  be  relumed  to  the  Collector  of  Internal  Rerenue 


[Obverse  of  Form  729,] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1305  SERVICE 


1-23-22.      (2)  10-17-22. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


INSTRUCTIONS. 

(Tor  full  Instructions,  see  Regulations  No.  43,  Parts  1  and  2,  Revised.) 
Sections  800-802  of  the  Revenue  Act  of  1921  impose  the  following  taxes  upon  admissions  and  dues: 

1,  ADMISSIONS. — (a)  Regular  admissions.  One  cent  for  each  10  cents  or  fraction  thereof  of  the  amount  paid  for  admission  to  any  place. 
This  tax  shall  not  be  imposed  where  the  amount  paid  for  admission  is  10  cents  or  less. 

(6)  Tickets  sold  at  news  stands,  hotels,  and  places  other  than  the  ticket  offices  of  theaters,  operas,  or  other  places  of  amusement,  at  an  advance  of  not 
more  than  50  cents  in  excess  of  the  established  price,  5  per  cent  of  such  excess;  when  sold  for  more  than  50  cents  advance,  50  per  cent  of  such 
excess  in  addition  to  the  tax  imposed  by  (a)  above.  (SUCH  TAX  MUST  BE  REPORTED  ON  FORM  729-A,  REVISED.  COMPLETE 
INSTRUCTIONS  ARE  GIVEN  ON  FORM  729-A,  REVISED,  FOR  REPORTING  THIS  TAX.) 

(c)  Tickets  sold  by  theaters  in  excess  of  the  established  price,  50  per  cent  of  such  excess,  in  addition  to  tax  imposed  by  (a)  above. 

(d)  Leases  of  boxes  and  seats.  In  lieu  of  tax  imposed  by  (a)  above,  a  tax  of  10  per  cent  of  the  amount  for  which  a  similar  box  or  seat  is  sold  for 
eacn  performance  at  which  box  or  seat  is  used  or  reserved.   

(e)  Cabarets.  One  and  one-half  cents  for  each  10  cents  or  fraction  thereof  of  the  admission  price;  admission  price  is  deemed  to  be  20  per  cent 
•of  the  amount  paid  for  service  and  merchandise.  .  .        ..  . 

2.  DUES.  (a)  Ten  per  cent  of  amount  paid  to  any  social,  athletic,  or  sporting  organization,  where  the  dues  of  an  active  resident  annual 

member  are  in  excess  of  $10.    f  „, .      .„.  ..  , 

(6)  Initiation  fees.  Ten  per  cent  of  the  amount  paid  to  any  social,  athletic,  or  sporting  organization,  (1)  if  such  lees  exceed  $10,  or  (2)  if  dues 
of  an  active  resident  annual  member  exceed  $10.  . . .,  ,  ,  ,,     ,  . 

(c)  Life  members.  Tax  equivalent  to  that  of  active  resident  annual  member  to  be  paid  at  the  time  of  payment  of  dues  by  such  resident  members. 
3  EXEMPTIONS.— (a)  Duts  or  fees  paid  to  fraternal  societies  operating  under  the  lodge  system. 

(6)  Admissions  all  the  proceeds  of  which  inure  (a)  exclusively  to  the  benefit  of  religious,  educational,  or  charitable  institutions,  societies,  or 
organizations  any  post  of  the  American  Legion  or  the  woman's  auxiliary  units  thereof,  societies  for  the  prevention  of  cruelty  to  children  or  animals, 
or?ociet;es  or  organizations  conducted  for  the  sole  purpose  of  maintaining  symphony  orchestras  and  receiving  substantial  support  from  voluntary 
contributions,  or  of  improving  any  city,  town,  village,  or  other  municipality,  or  of  maintaining  a  cooperative  or  community  center  moving-picture 
theater— if  no  part  of  the  net  earnings  thereof  inures  to  the  benefit  of  any  private  stockholder  or  individual;  or  (6)  exclusively  to  the  benefit  of 
persons  in  the  military  or  naval  forces  of  the  United  States;  or  (c)  exclusively  to  the  benefit  of  persons  who  have  served  in  such  forces  and  are  in 
need;  or  (2)  any  admissions  to  agricultural  fairs  if  no  part  of  the  net  earnings  thereof  inures  to  the  benefit  of  any  stockholders  or  members  of  the 
i— nW 

association  conducting  the  same,  or  admissions  to  any  exhibit,  entertainment,  or  other  pay  feature  conducted  by  such  association  as  part  of  any 
such  fair,  if  the  proceeds  therefrom  are  used  exclusively  for  the  improvement,  maintenance,  and  operation  of  such  agricultural  fairs.  Claim, 
however,  must  be  made  for  exemption  on  Form  755. 

4.  WHO  MUST  MAKE  RETURN,  COLLECT,  AND  PAY  TAX.— Any  person  or  organization  receiving  payment  for  admissions  or 
dues  or  being  a  club  and  having  taxable  life  members  must  collect  the  tax  from" the  person  paying  admission,  dues  or  fees,  except  in  1  (6)  and 
1  (c)  above,  when  vendor  must  pay  tax  on  the  excess  charge. 

6.  COMPUTATION  OF  TAX.— Tax  on  admissions  is  imposed  on  each  payment,  or  upon  each  single  admission.  In  the  case  of  admissions 
by  season  ticket  or  subscription,  the  tax  applies  to  the  amount  paid  for  each  season  ticket  or  subscription. 

6.  RETURNS  AND  PAYMENT  OF  TAX.— (a)  Admissions.  Return  with  remittance  covering  taxes  on  admissions  collected  in  any 
month  must  be  in  the  hands  of  the  Collector  of  Internal  Revenue  (or  his  authorized  representative)  of  the  district  in  which  is  located  the  place 
or  business  of  the  person  making  such  return  and  payment  on  or  before  the  last  day  of  the  month  following  that  for  which  it  is  made.  See  Art. 
41,  Reg.  43,  Part  1  (Revised),  and  footnote. 

(b)  Dues.  Return  with  remittance  covering  taxes  on  dues  collected  in  any  month  must  be  in  the  hands  of  the  Collector  of  Internal  Revenue 
(or  his  authorized  representative)  of  the  district  in  which  is  located  the  principal  office  or  place  of  business  of  the  person  making  such  return  and 
payment  on  or  before  the  last  day  of  the  month  following  that  for  which  it  is  made. 

7.  CREDITS.— In  case  of  overpayment  of  tax  due  to  an  error  in  calculation,  credit  may  be  taken  therefor  upon  any  subsequent  monthly 
return.  Credit  may  also  be  taken  as  outlined  in  the  regulations.  A  complete  and  detailed  record  of  such  overpayment  must  be  kept  by  the 
person  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return,  full  information  must  be 
attached  showing  the  reasons  therefor  and  designating  the  kind  of  tax,  and  the  month  for  which  the  previous  return  was  filed  and  the  date  of 

-Every  person  or  organization  required  to  make  a  return  must  keep  such  records  as  will  show  all  payments,  admissions,  or 
members  upon  which  tax  is  required  to  be  collected,  in  order  that  returns  may  be  easily  verified  by  revenue  officers. 

9.  ADMISSION  TICKETS.— The  price  of  the  ticket  shall.be  conspicuously  and  indelibly  printed,  stamped,  or  written  on  the  face  or  back 
of  that  part  of  the  ticket  which  is  to  be  taken  up  by  the  management  of  the  theater,  opera,  or  other  place  of  amusement,  together  with  the  name 
of  the  vendor,  if  sold  other  than  at  the  ticket  office  of  the  theater,  opera,  or  other  place  of  amusement.  Penalty  of  not  more  than  $100  for  viola- 
tion of  the  clause. 

.  10.  PENALTIES.— Failure  to  file  on  time,  25  per  cent  of  tax.  Failure  to  pay  on  time,  6  per  cent  of  tax  and  1  per  cent  interest  a  month. 
Severe  penalties  for  failure  to  file  returns  or  for  false  or  fraudulent  'returns.  „        rum,  om 


RECEIPT  FOR  PAYMENT  OF  TAX  ON  ADMISSIONS  AND  DUES 


Kt~~lU  „/    

 m 

THIS  RECEIPT  NOT  TO  BE  DETACHED  BY  TAXPAYER 

NOT  VALID  UNLESS  RECEIPTED  BY  CAonifcK 

TAXPAYER  WILL  ENTER  AMOUNT  PAID  EN  THE  SPACE  PROVIDED  THEREFOR 

NAME  AND  ADDRESS 

DATE  PAID 

AMOUNT  PAID 

(CiSBDU'*  StAW) 

'  J-11530*  . 

[Reverse  of  Form  729  and  tax  receipt  form.) 


Copyright  1922,  by  Th*  Corporation  Trust  Company. 
WAR  TAX  1306  SERVICE 


Reg.  43,  Rev. — Part  II.  Dues, 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


REGULATIONS  NO.  43  (REVISED) 

PART  2 

Relating  to  the 

TAX  ON  DUES 

(Promulgated  January  11,  1922.    Released  for 
publication  January  23,  1922.) 

[Fully  indexed  at  the  end  of  this  section.] 

0513    Article  1.    Payments  within  time  scope  of  the  Act.— The  tax  im- 

6509     posed  under  section  801  of  the  Revenue  Act  of  1921  applies  only  to 
amounts  paid  on  or  after  January  1,  1922,  "for  any  period  after  such 
date,"  as  dues  or  membership  fees,  or  as  initiation  fees,  to  any  social,-  athletic, 
or  sporting  club  or  organization,  provided  such  dues  or  fees  are  in  excess  of 
the  amounts  therein  specified. 

65?  4  However,  a  tax  at  the  same  rate  and  on  identically  the  same  basis 
was  imposed  under  section  801  of  the  Revenue  Act  of  1918.  This  tax 
became  effective  April  1,  1919,  and  dues  or  fees  paid  after  January  1,  1922, 
for  a  period  prior  to  that  date  and  while  the  1918  Act  was  in  force  are  taxable 
thereunder.  Dues  and  fees  paid  prior  to  January  1,  1922,  but  for  a  period 
after  that  date,  are  likewise  taxable  under  the  1918  Act. 

651 5  Art.  2.  Rate  and  basis  of  tax. — The  rate  of  the  tax  imposed  by  the 
Revenue  Act  of  1921  is  10  per  cent  of  any  amount  paid  as  dues  or 
membership  fees  or  as  initiation  fees  to  clubs  or  organizations  coming  within 
its  provisions.  It  applies  to  any  amount  paid  (a)  as  dues  or  membership 
fees  where  the  dues  or  membership  fees  of  an  active  resident  annual  member 
are  in  excess  of  $10  per  year;  or  (b)  as  initiation  fees,  if  such  fees  amount  to 
more  than  $10,  or  if  the  dues  or  membership  fees  (not  including  initiation 
fees)  of  an  active  resident  annual  member  are  in  excess  of  $10  per  year. 
Amounts  paid  for  life  memberships  are  not  subject  to  the  tax,  but  life  mem- 
bers shall  pay  annually,  at  the  time  for  the  payment  of  dues  by  active  resident 
annual  members,  a  tax  equivalent  to  the  tax  upon  the  amount  paid  by  such 
a  member.   (See  art.  11.) 

651  S  If  the  dues  or  membership  fees  of  an  active  resident  annual  member 
are  in  excess  of  $10  per  year,  the  tax  applies  to  the  entire  amount 
paid  either  as  dues  or  membership  fees  or  as  initiation  fees.  The  fact  that  the 
tax  does  not  attach  to  dues  or  membership  fees,  where  the  dues  or  member- 
ship fees  of  an  active  resident  annual  member  are  not  in  excess  of  $10  per 
year,  does  not  imply  that  exemption  to  the  extent  of  $10  applies  where  the 
dues  or  membership  fees  exceed  this  amount.  In  other  words,  no  deduction 
is  authorized  in  computing  the  tax  due  if  the  dues  or  membership  fees  are 
taxable  under  the  Act. 

651  7    Likewise,  if  the  dues  or  membership  fees  of  an  active  resident  annual 
member  are  in  excess  of  $10  per  year,  amounts  paid  by  other  classes 
of  members  are  taxable  even  though  the  dues  or  membership  fees  of  such 
members  are  less  than  $10  per  year.   (See  art.  9.) 

6518    Art.  3.    Clubs  and  organizations  included. — Dues  or  membership 
fees,  or  initiation  fees,  paid  to  any  social,  athletic,  or  sporting  club  or 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1307  SERVICE 


1-28-22. 


R(pg.  43,  Rev. — Part  II.  Dues. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


organization,  excepting  fraternal  societies,  orders,  or  associations,  operating 
under  the  lodge  system  (see  art.  7),  if  in  excess  of  the  amounts  specified  by 
the  Act,  are  subject  in  toto  to  the  tax  imposed  by  section  801.  The  Act 
includes  not  only  "clubs''  but  also  "organizations"  of  a  social,  athletic,  or 
sporting  character. 

©51©    Art.  4.   Determination  of  character  of  club. — The  purposes  and 

activities  of  a  club  and  not  its  name  determine  its  character  for  the 
purpose  ofTthe  Tax  on  Dues.  Every  club  or  organization  having  social, 
athletic,  or'sporting  features  is  presumed  to  be  included  within  the  meaning 
of  the  phrase,  "any  social,  athletic,  or  sporting  club  or  organization,"  untii 
the  contrary  has  been  proved,  and  the  burden  of  proof  is  upon  it.  Every 
such  club  or  organization,  therefore,  unless  it  falls  within  the  express  exemp- 
tion of  the  Act  (see  art.  7,  below),  must  collect,  return,  and  pay  over  the  tax 
imposed  by  the  Act,  unless  and  until  it  has  satisfied  the  Commissioner  of 
Internal  Revenue  that  it  is  not  in  fact  "social,  athletic,  or  sporting"  within 
the  meaning  of  the  Act  as  defined  in  these  regulations.  (See  arts.  5  and  6, 
below.)  If  any  such  club  or  organization  desires  to  claim  that  it  is  not  in 
fact  "social,  athletic,  or  sporting"  it  shall  submit  to  the  collector  its  charter 
or  constitution  and  by-laws,  together  with  a  statement  as  to  its  actual  pur- 
poses, activities,  practices,  and  facilities,  the  character  of  its  expenditures, 
and  such  other  evidence  as  may  be  requested.  Upon  consideration  of  the 
evidence  submitted  the  collector  will  determine  whether  or  not  such  club  or 
organization  is  included  within  the  provisions  of  the  Act.  If,  however,  the 
collector  is  in  doubt  as  to  whether  or  not  the  club  or  organization  is  "social, 
athletic,  or  sporting,"  he  will  refer  the  statement  and  accompanying  papers 
to  the  Commissioner  for  decision.  When  a  club  or  organization  has  been 
held  not  to  be  a  "social,  athletic,  or  sporting"  club  or  organization,  it  need  not 
thereafter  make  a  return  of  tax  on  dues  or  fees,  or  any  further  showing  with 
respect  to  its  status  under  the  law,  unless  it  changes  the  character  of  its 
organization  or  operations  or  the  purpose  for  which  it  was  originally  created. 
Collectors  will  keep  a  list  of  all  clubs  or  organizations  held  not  to  be  "social, 
athletic,  or  sporting"  clubs  or  organizations,  to  the  end  that  they  may 
occasionally  inquire  into  their  status  and  ascertain  whether  or  not  they  are 
observing  the  conditions  upon  which  their  exemption  is  predicated.  If  the 
collector  decides  that  the  club  or  organization  is  included  within  the  provisions 
of  the  Act  and  the  club  or.organization  is  not  satisfied  with  his  decision,  it 
may  request  that  the  matter  be  referred  to  the  Commissioner  of  Internal 
Revenue  at  Washington  for  a  ruling,  and  this  will  be  done.  If  the  collector 
or  the  Commissioner  decides  that  the  club  or  organization  is  not  included 
within  the  provisions  of  the  Act,  then  on  the  filing  with  the  collector  to  whom 
the  tax  has  been  paid  of  a  properly  prepared  claim  (see  art.  15  below)  on 
Form  46  (Revised),  the  amount  of  tax  already  paid  to  the  collector  will  be 
refunded  to  the  club  or  organization  for  repayment  by  it  to  the  original 
taxpayers. 

6520  Art.  5.  Social  clubs. — Any  organization  which  maintains  quarters 
or  arranges  periodical  dinners  or  meetings,  for  the  purpose  of  afford- 
ing its  members  an  opportunity  of  congregating  for  social  intercourse,  is  a 
"social  *  *  *  club  or  organization"  within  the  meaning  of  the  Act,  unless 
its  social  features  are  not  a  material  purpose  of  the  organization  but  are 
subordinate  and  merely  incidental  to  the  active  furtherance  of  a  different 
and  predominant  purpose,  such  as,  for  example,  religion,  the  arts,  or  business. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1308  SERVICE 


1-23-22. 


Reg.  iS,  Rev.— Part  II.  Dues. 

TAX  OK  ADMISSIONS  AND  DUES  REGULATIONS. 


The  tax  does  not  attach  to  dues  or  fees  of  a  religious  organization,  singing 
society,  chamber  of  commerce,  commercial  club,  trade  organization,  or  the 
like,  merely  because  it  has  incidental  social  features,  but,  if  the  social  features 
are  a  material  purpose  of  the  organization,  then  it  is  a  "social  *  *  *  club 
or  organization"  within  the  meaning  of  the  Act.  An  organization  that  has 
for  its  exclusive  or  predominant  purpose  religion  or  philanthropic  social  service 
(or  the  advancement  of  the  business  or  commercial  interest  of  a  city  or 
community)  is  so  clearly  not  a  "social  *  *  *  club  or  organization"  that  its 
possession  and  use  of  a  building  furnished  with  social-club  facilities  does  not 
render  taxable  dues  or  fees  paid  to  it.  Most  fraternal  organizations  are  in 
effect  social  clubs,  but  if  they  are  operating  under  the  lodge  system  payments 
to  them  are  expressly  exempt.    (See  art.  7,  below.) 

6521  Exam-pies. — (1)  Neither  a  Young  Men's  Christian  Association  nor 
a  Young  Men's  Hebrew  Association  is  a  social  club  within  the  mean- 
ing of  the  Act,  for  the  predominant  purpose  of  each  is  religion  and  philan- 
thropic social  service. 

6522  (2)  A  social  settlement  which  provides,  among  other  things,  dances 
and  other  social  opportunities  for  a  slum  neighborhood  is  supported 

by  contributions.  Any  person  contributing  $15  a  year  is  called  a  "member" 
of  the  settlement  association.  Such  contributions  are  not  taxable,  for  such 
a  settlement  is  not  a  social  club  within  the  meaning  of  the  Act,  as  its  pre- 
dominant purpose  is  philanthropic  social  service. 

6523  (3)  An  automobile  dealers'  association  is  organized  and  operated 
for  the  purpose  of  maintaining  a  social  organization  of  persons 

residing  in  a  certain  city  and  engaged  in  the  manufacture  or  sale,  or  both,  of 
automobiles  and  their  accessories,  and  for  the  further  purpose  of  affording 
its  members  opportunity  and  inducement  to  enjoy  healthful  indoor  games, 
and  to  acquire  skill  and  efficiency  therein,  and  promote  social  welfare  and 
social  intercourse  between  the  members,  thereby  promoting  their  mental 
and  bodily  health,  and  further  by  debates  and  discussions  between  them- 
selves at  their  meetings  promote  interest  in  automobile  transportation,  traffic, 
and  knowledge  of  the  industry  in  the  city,  and  also  to  enable  its  members  to 
cooperate  in  holding  an  annual  automobile  show  and  in  securing  judicious  and 
needed  legislation  for  the  protection  and  advancement  of  the  automobile 
industry  in  the  city.  This  organization  is  a  social  club  within  the  meaning 
of  section  801. 

6524  Art.  6.    Athletic  or  sporting  clubs. — Tennis,  golf,  boxing,  boating, 
canoe,  fishing,  and  hunting  clubs,  and  any  organization  (of  which  the 

members  are  individuals)  for  the  practice  or  promotion  of  athletics  or  sports, 
are  included  within  the  meaning  of  the  words  of  the  Act,  "athletic,  or  sporting 
club  or  organization."  A  local,  sectional,  or  national  "athletic  or  sporting" 
association,  the  membership  of  which  is  composed  wholly  or  partly  of  member 
clubs,  is  not  within  the  scope  of  the  Act.  The  possession  and  use  of  a  gym- 
nasium, swimming  pool,  or  other  athletic  facilities  by  an  organization  having 
religion  or  philanthropic  social  service  for  its  exclusive  or  predominant 
purpose  does  not  bring  the  organization  within  the  class  of  athletic  or  sporting 
clubs  or  organizations. 

6525  Examples. — (1)  An  intercollegiate  athletic  association,  whose  mem- 
bership is  composed  not  of  individuals  but  of  the  track  teams  of  a 

group  of  colleges,  is  not  within  the  scope  of  the  Act,  and  dues  and  fees  paid 
to  it  by  the  member  teams  are  not  taxable. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1309  SERVICE 


Reg.  43,  Rev. — ] 

TAX  ON  ADMISSIONS  AND  DUES  REGL LATIONS. 


6526  (2)  Dues  and  fees  paid  for  membership  in  a  Young  Men's  Christian 
Association  or  Young  Men's  Hebrew  Association  are  not  taxable, 

although  they  entitle  the  member  to  the  use  of  a  gymnasium,  swimming 
pool,  or  other  athletic  facilities. 

6527  Art.  7.  Exempt  organizations.— The  Revenue  Act  of  1921  expressly 
6510  exempts  from  tax  "all  amounts  paid  as  dues  or  fees  to  a  fraternal  so- 
ciety, order,  or  association,  operating  under  the  lodge  system."  "Oper- 
ating under  the  lodge  system"  means  carrying  on  its  actjvTtieg  under  a  form 
of  organization  that  comprises  local  branches,  charterr  *;  by  a  parent  organiza- 
tion and  largely  self-governing,  called  "lodges,"  "chafers,"  or  the  like. 

6528  Examples. — (1)  An  organization,  formed  for  purely  social  purposes 
by  Masons  of  the  higher  degrees,  consisting  of  locai  "lodges"  and  a 

"grand  lodge,"  falls  within  the  exemption. 

6529  (2)  Dues  and  fees  paid  to  a  "chapter"  of  a  college  fraternity  are 
exempt  from  tax. 

6530  (3)  Dues  and  fees  paid  to  a  "local"  of  a  labor  union  are  free  from  tax. 

653 1  (4)  A  national  organization,  of  a  social,  athletic,  or  sporting  character, 
comprising  no  local  bodies  but  organized  as  a  single  and  nation-wide 

unit,  to  which  each  member  belongs  directly,  does  not  fall  within  the  exemp- 
tion, 

6532  (5)  Dues  and  fees  paid  by  members  of  a  local  organization  among 
the  students  of  a  college  which  is  similar  to  chapters  of  the  larger 

college  fraternities  are  not  exempt  from  tax. 

6533  Art.  8.    Foreign  clubs. — Dues  or  fees  paid  to  a  club  located  outside 
of  the  United  States  and  having  no  branch  or  organization  in  the 

United  States  are  not  taxable. 

6534  Art.  9.  Dues  or  membership  fees. — The  Revenue  Act  of  1921 
imposes  a  tax  of  10  per  cent  on  any  amount  paid  as  dues  or  member- 
ship fees  (including  recurrent  assessments  and  penalties  incurred  by  failure 
to  pay  promptly)  to  any  club  which  is  within  the  terms  of  the  act:  Provided, 
That  the  regular  dues  or  membership  fees  (including  recurrent  assessments 
levied  upon  all  active  resident  annual  members  but  not  including  penalties 
incurred  by  failure  to  pay  promptly)  of  an  "active  resident  annual  member" 
of  such  club  are  in  excess  of  $10  per  year.  "An  active  resident  annual 
member"  is  a  member  who  is  neither  a  life  nor  a  nonresident  member,  but 
who  in  other  respects  enjoys  full  club  privileges,  as  distinguished  from  the 
restricted  privileges  enjoyed  by  a  person  holding  an  associate  or  other  partial 
membership. 

6535  Thus  in  the  case  of  a  club  or  organization  the  regular  dues  or  mem- 
bership fees  of  which  are  less  than  $10  per  year,  but  which  levies  an 

assessment  on  its  active  resident  annual  members  each  year,  if  the  regular 
dues  or  membership  fees,  plus  the  assessment,  exceed  $10  per  year,  the  tax 
is  applicable.  The  tax  would  likewise  apply  in  the  case  of  a  club  or  organiza- 
tion which  collects  no  regular  dues  or  membership  fees  but  meets  its  expenses 
by  levying  assessments  on  its  members  as  funds  are  required,  provided,  of 
course,  the  assessments  aggregate  more  than  $10  per  year  for  members  who 
enjoy  the  full  privileges  of  the  club  or  organization. 

6536  Where  the  dues  or  membership  fees,  determined  in  the  manner 
herein  outlined,  of  an  active  resident  annual  member  are  in  excess 

of  $10  per  year,  dues  or  membership  fees  paid  by  other  classes  of  members, 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1310  SERVICE 


1-23-22.  Reg.  43,  Rev.— Part  II.  Dupb. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


whether  or  not  they  are  in  excess  of  $10  per  year,  are  subject  to  the  tax. 
So,  also  are  extra  charges  which  are  imposed  upon  members  for  the  privilege 
of  using  certain  additional  facilities  for  a  period  of  time,  as,  for  example,  an 
additional  charge  of  $60  per  annum  imposed  upon  members  of  a  country  club 
for  the  privilege  of  using  the  golf  links.  A  "greens  fee"  charged  to  a  guest  is 
not  taxable,  unless  the  right  or  privilege  granted  in  return  is  for  a  period  of 
time,  such  as  a  season.  A  fine  imposed  for  the  violation  of  rules  promulgated 
by  a  club  or  organization  would  be  neither  dues  nor  membership  fees  within  the 
meaning  of  the  Act,  and  therefore  not  taxable. 

6537  As  to  the  time  for  payment  of  the  tax,  see  article  12. 

6538  Examples. — (1)  A  certain  social  club  has  "members,"  nonresident 
members,  associate  members,  and  junior  members.    "Members"  pay 

an  initiation  fee  of  $15  and  regular  dues  of  $10  per  year.  Associate  members 
pay  an  initiation  fee  of  $10  and  regular  dues  of  $5  per  year.  Nonresident 
members  and  junior  members  pay  still  less.  In  the  case  of  this  club  a 
"member"  is  clearly  the  "active  resident  annual  member"  specified  in  the 
Act.  As  a  "member's"  regular  dues  are  not  in  excess  of  $10  per  year,  none 
of  the  dues  or  membership  fees  paid  by  any  member  of  the  club  are  taxable. 
(The  initiation  fee  of  $15  paid  by  a  "member"  is  taxable.) 

6539  (2)  A  certain  athletic  club  had  members,  dues,  and  fees  precisely 
the  same  as  those  of  this  social  club,  except  that  the  initiation  fee 

of  "members"  is  $10  and  the  regular  dues  of  "members"  are  $15  per  year. 
As  these  dues  are  in  excess  of  $10  per  year,  in  this  case  all  dues  paid  to  the  club 
by  members  of  any  class  are  subject  to  tax. 

6540  (3)  The  same  athletic  club  levies  in  a  certain  year,  in  addition  to 
its  regular  dues,  an  assessment  of  $10  on  every  associate  member 

and  provides  a  penalty  of  $1  if  it  be  not  paid  within  a  month  after  due. 
This  assessment  is  taxable,  and  so  is  the  penalty  if  it  be  imposed. 

6541  (4)  A  member  of  this  same  athletic  club  violates  the  house  rules 
and  is  suspended  until  he  pays  a  fine  of  $15.     As  a  fine  is  neither 

dues  nor  membership  fees,  this  $15  payment  is  not  taxable. 

6542  (5)  A  certain  golf  club's  dues  are  $15  per  year.  Of  this  amount  $10 
is  expended  in  the  purchase  for  the  member  of  a  season  ticket  to  a 

municipal  golf  course.    The  whole  $15  is,  nevertheless,  taxable  as  dues. 

6543  (6)  A  certain  golf  club  charges  a  "green"  fee  of  $1  for  each  guest 
that  uses  the  course.  Such  a  fee  is  not  paid  "as  dues  or  membership 
fees,"  and  is,  therefore,  not  taxable  as  such. 

6544  (7)  The  members  of  a  certain  curling  club  pay  annual  dues  of  $20. 
By  the  payment  of  $10  extra  per  year  the  privilege  of  skating  on  the 

club's  rink  can  be  secured  for  the  member's  family.  A  payment  of  this 
extra  $10  is  taxable  as  a  membership  fee. 

6545  (8)  A  certain  social  club,  the  regular  dues  of  which  are  $15  per  year, 
has  honorary  members  who  pay  no  dues,  but  pay  assessments  when 

levied.    Such  members  must  pay  tax  on  the  amounts  paid  for  assessments. 

6546  (9)  A  tennis  club  in  which  the  annual  dues  are  $10,  levies  an  assess- 
ment of  $2  per  year  on  each  member  to  cover  cost  of  tennis  balls. 

The  dues,  fees,  and  assessments  paid  by  members  of  this  club  are  taxable. 

6547  (10)  A  certain  club,  the  dues  and  fees  of  which  are  taxable,  requests 
a  "subscription"  of  a  definite  amount  from  each  resident  member. 

Amounts  paid  by  reason  of  such  request  are  taxable. 

6548  (11)  A  social  club,  the  annual  dues  in  which  are  $10,  levies  an  assess- 
ment of  $5  on  members.    The  tax  applies  with  respect  to  amounts 

paid  as  dues,  fees,  and  assessments. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1311  SERVICE 


lc28r22.TT  «,„.!_         i:i  Reg.  43,  Rev.— Part  II.  Dut*. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6549  (12)  A  certain  social  club,  the  dues  and  fees  of  which  are  taxable, 
passes  a  resolution  providing  that  no  membership  dues  or  fees  shall 

be  collected  from  members  who  are  in  the  military  service  of  the  United 
States.  Such  members  thereafter  pay  no  dues  or  fees  and  are  therefore  not 
liable  for  payment  of  tax  with  respect  to  membership  in  the  club,  but  this 
does  not  relieve  life  members  who  are  in  the  military  service  from  payment 
of  the  tax  on  their  life  memberships. 

6550  (13)  A  certain  golf  club,  the  dues  and  fees  of  which  are  taxable, 
issues  to  wives  of  members  cards  entitling  them  to  the  use  of  the 

course  for  one  year,  making  a  charge  of  $10  therefor.  The  amounts  paid  for 
such  cards  are  taxable. 

6551  (14)  The  membership  of  a  certain  social  club  is  composed  of  its  stock- 
holders.   No  dues  are  collected,  but  the  expenses  of  the  club  are  met 

by  annual  assessments  of  the  necessary  amount  on  each  share  of  stock.  If  a 
stockholder  enjoying  full  privileges  of  the  club  must  pay  assessments  aggre- 
gating more  than  $10  per  year,  then  the  tax  applies  with  respect  to  all  pay- 
ments made  to  the  club  by  any  stockholder,  whether  in  excess  of  $10  per  year 
or  not. 

6552  Art.  10.  Initiation  fees. — Any  amount  paid  as  initiation  fees  to  a 
club  or  organization  coming  within  the  provisions  of  section  801 

of  the  Act  is  subject  to  the  10  per  cent  tax  imposed  thereunder  (a)  if  such 
fees  amount  to  more  than  $10,  or  (b)  if  the  dues  or  membership  fees  (not 
including  initiation  fees)  of  an  activejresident  annual  member  are  in  excess 
of  $10  per  year. 

6553  If  the  prescribed  initiation  fees  amount  to  more  than  $10,  the  tax 
attaches  regardless  of  the  amount  of  dues  or  membership  fees  paid 

by  an  active  resident  annual  member.  On  the  other  hand,  if  the  initiation 
fees  amount  to  less  than  $10,  the  tax  dees  not  apply  unless  the  dues  or  member- 
shipTfees,  exclusive  of  initiation  fees,  of  an  active  resident  annual  member 
are  in  excess  of  $10  per  year.  If  such  dues  or  membership  fees  are  in  excess 
of  $10  per  year  any  amount  paid  as  initiation  fees  is  taxable  whether  or  not 
such  initiation  fees  amount  to  more  than  $10. 

6554  Where  the  application  of  the  tax  to  initiation  fees  depends  upon  the 
amount  paid  as  dues  or  membership  fees  by  an  active  resident  annual 

member,  recurrent  assessments  (but  not  penalties  incurred  by  failure  to  pay 
promptly)  are  to  be  considered  in  ascertaining  whether  such  dues  or  member- 
ship fees  are  in  excess  of  $10  per  year. 

6555  The  term  "initiation  fee"  includes  any  payment  to  the  club  required 
for  becoming  a  member,  whether  evidenced  by  a  certificate  of  member- 
ship or  a  share  of  stock  in  the  club  or  not.  Thus,  it  includes  amounts  paid  to 
such  clubs  or  organizations  for  stock  where  the  purchase  of  such  stock  is 
required  as  a  prerequisite  of  membership.  This  applies  only  to  stock  pur- 
chased from  the  club  or  organization  and  not  to  amounts  paid  for  stock 
purchased  from  retiring  members  or  other  sources. 

6556  Examples. — (1)  In  the  case  of  the  social  club  described  in  the  first 
example  of  article  9,  above,  an  initiation  fee  paid  by  a  "member" 

is  taxable  because  it  amounts  to  more  than  $10,  but  initiation  fees  paid  by 
members  of  the  other  classes  are  not  taxable. 

6557  (2)  In  the  case  of  the  athletic  club  described  in  the  second  example 
in  article  9,  above,  initiation  fees  paid  by  members  of  any  class  are 

taxable,  because  the  regular  dues  of  "an  active  resident  annual  member" 
are  in  excess  of  $10  per  year. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1312  SERVICF 


1-23-22.  Reg.  43,  Rev. — Part  II.  Dues. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6558  (3)  A  certain  tennis  club  is  a  stock  corporation  and  each  new  member 
has  to  buy  a  share  of  stock  in  the  club.    The  amount  paid  for  this 

share  of  stock  is  taxable  as  an  initiation  fee. 

6559  (4)  The  land  of  this  same  tennis  club  is  owned  by  a  corporation, 
organized  for  that  purpose,  in  which  many  of  the  club  members  own 

stock.  Money  being  desired  to  buy  additional  land,  it  is  decided  to  admit 
no  new  members  to  the  club  except  such  as  will  buy,  in  addition  to  the  share 
of  stock  in  the  club  itself,  one  share  of  stock  in  the  land-owning  corporation. 
Money  paid  for  this  stock  in  the  land-owning  corporation  is  not  taxable  as  an 
initiation  fee. 

6560  (5)  The  same  tennis  club,  at  a  later  stage  of  its  career,  drops  the 
requirement  of  the  purchase  of  stock  in  the  land-owning  corporation, 

but  requires  each  applicant  for  membership,  in  addition  to  paying  for  his 
share  of  stock  in  the  club  corporation,  to  purchase  a  first-mortgage  bond 
secured  by  the  club  property.  The  amount  paid  for  this  bond  is  not  taxable 
as  an  initiation  fee. 

6*361  Art.  11.  Life  Membership. — Amounts  paid  for  life  membership  are 
6511  not  taxable  under  the  Revenue  Act  of  1921.  Neither  were  such 
payments  subject  to  the  tax  imposed  under  section  801  of  the  Revenue 
Act  of  1918;  but  they  were  taxable  under  the  Revenue  Act  of  1917.  The  fact 
that  tax  was  collected  on  amounts  paid  for  life  membership  while  the  latter 
Act  was  in  force  does  not  entitle  holders  of  life  memberships  who  paid  such 
tax  to  exemption  from  paying  annually  under  the  1918  and  1921  Acts  a  tax 
equivalent  to  that  paid  by  active  resident  annual  members.  Some  clubs 
provide  that  active  resident  annual  members,  who  have  regularly  paid  dues 
or  membership  fees  as  such  shall,  after  a  specified  period  of  time,  for  example, 
10  years,  automatically  become  life  members  without  being  required  to  pay 
further  dues  or  membership  fees.  In  such  cases  amounts  paid  as  dues  or 
membership  fees  during  the  period  of  active  resident  annual  membership 
are  not  paid  for  life  membership  within  the  meaning  of  the  Act.  They  are 
paid  as  dues  or  membership  fees  and  are  taxable  as  such.  The  tax  likewise 
attaches  to  amounts  paid  for  membership  for  more  than  one  year  but  for  less 
than  life,  such  as  10-year  or  20-year  memberships.  However,  unless  the 
holders  of  such  memberships  are  required  to  pay  annual  dues  or  membership 
fees,  or  recurrent  assessments,  they  are  exempt  from  the  annual  tax  imposed 
on  active  resident  annual  members  and  life  members.  If  any  dues  or  member- 
ship fees  or  assessments  are  levied  on  such  members  they  are  taxable. 

6562  The  annual  tax  imposed  on  life  members  under  the  Revenue  Act  of 
1921  is  measured  or  determined  by  the  tax  paid  by  active  resident 

annual  members,  to  be  computed  in  the  manner  outlined  in  article  9.  The 
annual  tax  must  be  paid  by  life  members  whether  or  not  they  actually  avail 
themselves  of  the  privileges  of  membership  to  which  they  are  entitled. 

6563  As  to  the  time  for  the  payment  of  the  tax,  see  article  12. 

6564  Examples. — (1)  A  certain  tennis  club  has  the  following  classes  of 
membership:  Honorary,  life  voting,  voting,  nonresident,  women's, 

and  junior.  Here  evidently  a  voting  member  is  the  "active  resident  annual 
member''  specified  in  the  Revenue  Act  of  1921.  A  life  voting  member  pays 
$500  on  admission  and  is  exempt  from  dues.  The  dues  of  a  voting  member 
are  $30  a  year,  payable  in  advance  in  three  installments  of  $10  each,  payable 
January  1,  May  1,  and  September  1,  or  February  1,  June  1,  and  October  1, 
or  March  1,  July  1,  and  November  1,  or  April  1,  August  1,  and  December  1, 
depending  on  the  date  on  which  the  voting  member  was  admitted  to  member- 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1313  SERVICE 


1-23-22. 


Reg.  43,  Rev.— Part  II.  Dues. 
TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


ship.  If  any  installment  is  not  paid  on  or  before  the  15th  day  of  the  month 
in  which  it  is  due  a  penalty  of  $2  must  also  be  paid.  In  this  case  each  life 
voting  member  must  pay  (to  the  club,  for  the  Government  imposes  on  it  the 
duty  of  collection)  a  tax  of  $1  on  May  1  and  September  1,  1922,  and  on  Janu- 
ary 1 ,  1923,  etc.  If  any  one  of  these  taxes  is  not  paid  to  the  club  on  or  before 
the  15th  day  of  the  month  in  which  it  is  payable,  the  tax  will  be  $1.20  instead 
of  $1.  If  it  happens  that  an  assessment  of  $20,  in  addition  to  the  regular 
dues  and  payable  November  15,  1922,  is  levied  on  the  voting  members,  then 
a  tax  of  $2  from  each  life  voting  member  must  also  be  paid  on  that  date  to 
the  club.  If  the  $500  life  voting  membership  fee  was  paid  before  November 
1 ,  1917,  or  on  or  after  April  1,  1919,  it  is  not  itself  taxable,  but  if  paid  on  or 
after  November  1,  1917,  and  before  April  1,  1919,  it  is  subject  to  a  tax  of  $50 
under  the  Revenue  Act  of  1917. 

G565  (2)  A  certain  golf  club  has  two  classes  of  members,  life  members 
and  "members/'  A  life  member  pays  $1,000  on  admission  and  is 
exempt  from  dues.  A  "member's"  dues  are  $60  a  year,  a  $30  installment 
for  January — June  being  payable  April  1,  and  a  $30  installment  for  July- 
!;ecembcr  being  payable  October  1.  In  the  case  of  this  club  it  is  clear  that 
a  ''member"  is  the  "active  resident  annual  member"  specified  in  the  Revenue 
Act  of  1921.  John  Smith  is  elected  a  life  member  of  this  club  in  February, 
1919.  and  in  that  month  pavs  his  $1,000  fee  and  a  tax  of  $100  thereon,  under 
the  Revenue  Act  of  1917.  '  Under  the  Revenue  Acts  of  1918  and  1921  he 
will  have  to  pay  (to  the  club,  for  the  Government  imposes  on  it  the  duty 
of  collection)  on' April  1,  1919,  a  tax  of  $1.50,  and  on  October  1,  1919,  April 
1  [  1920,  etc..  a  tax  of  $3 — the  same  taxes  as  those  Acts  impose  on  a  "member." 
(£3)  A  certain  social  club  has  three  classes  of  members,  life  members, 
active  members,  and  associate  members.  The  regular  dues  of  the 
acti  •  -  members  (clearly  the  "active  resident  annual  members"  specified 
in  the  Revenue  Act  of  1921 — see  art.  9,  above)  are  $10  per  year.  Edwin 
UovU  became  a  life  member  in  1916,  paying  a  fee  of  $100.  That  payment 
Ms  not  taxable.  Nor  does  he  have  to  pay  any  annual  tax  under  the  Revenue 
Act  of  1 92 1 .  For  by  that  Act  he  is  to  pay  the  same  annual  tax  as  "an  active 
resident  annual  member,"  and  as  the  regular  dues  of  "an  active  resident 
annual  member"  are  not  in  excess  of  $10  per  year,  such  a  member  pays  no  tax 
whatsoever.     (Sec  art.  9,  above.) 

6G6  7  (4)  A  certain  club  the  dues  and  fees  of  which  are  taxable  has  life 
members  who  do  not  avail  themselves  of  the  privileges  of  member- 
ship. Each  of  such  life  members  must  pay  the  tax  imposed  by  section  801 
of  the  Revenue  Act  of  1921  so  long  as  he  holds  a  life  membership  in  the  club. 
6563  (5)  A  certain  social  club  the  dues  and  fees  of  which  are  taxable  passes 
a  resolution  providing  that  no  membership  dues  or  fees  shall  be  col- 
lected from  members  who  are  in  the  military  service  of  the  United  States. 
Such  members  thereafter  pay  no  dues  or  fees  and  are  therefore  not  liable 
for  payment  of  tax  with  respect  to  membership  in  the  club,  but  this  does  not 
relieve  life  members  who  are  in  the  military  service  from  payment  of  the  tax 
on  their  life  memberships. 

COLLECTION,  RETURN,  AND  PAYMENT  OF  TAX. 

6569    Art.  12.  Duty  to  collect,  return,  and  pay  tax. — Every  club,  organi- 
6512      zation,  corporation,  partnership,  or  individual  receiving  any  taxable 
payment  for  dues  or  fees  must,  at  the  time  of  such  receipt,  collect  the  tax 
from  the  person  making  such  payment.    And  there  rests  on  such  person  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1314  SERVICE 


i-23-22.  Reg.  43,  Rev —Part  II.  Dues. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


corresponding  duty  of  then  paying  such  tax.  Where  the  dues  or  membership 
fees  are  payable  in  periodical  installments,  the  tax  shall  be  collected  as  and 
when  each  installment  is  paid.  In  the  case  of  recurrent  assessments  the  tax 
is  due  and  shall  be  collected  and  paid  when  such  recurrent  assessments  are 
paid.  The  tax  on  initiation  fees  is  due  and  payable  at  the  time  of  payment 
of  such  fees. 

6570  Every  club  or  organization  having  life  members  taxable  under  the 
Revenue  Act  of  1921  must  collect  from  such  life  members  the  tax 

imposed  on  them  by  that  Act.  And  such  life  members  must,  on  their  part, 
promptly  pay  such  tax.  It  shall  be  collected  and  paid  "at  the  time  for  the 
payment  of  dues  by  active  resident  annual  members. "  Thus,  if  the  dues 
or  membership  fees  of  an  active  resident  annual  member,  or  if  another  desig- 
nation is  used,  the  member  whose  privileges  correspond  to  those  usually 
enjoyed  by  active  resident  annual  members  (see  art.  9),  are  payable  in  periodi- 
cal installments  the  tax  due  from  life  members  becomes  due  and  shall  be 
collected  and  paid  as  and  when  these  installments  are  paid.  If  recurrent 
assessments  are  levied  on  active  resident  annual  members,  there  shall  be 
collected  from  life  members  at  the  time  such  assessments  are  paid  a  tax 
equivalent  to  10  per  cent  of  the  amount  so  paid. 

6571  A  monthly  return  and  payment  of  all  taxes  collected  must  be  made 
in  accordance  with  the  provisions  of  article  13,  below. 

6572  Art.  13.  Records,  returns,  and  payments. — Every  "social,  athletic, 
or  sporting  club  or  organization,"  unless  expressly  exempted  from 

the  Tax  on  Dues,  or  unless  free  from  that  tax  because  neither  the  initiation 
fees  of  any  class  of  its  members  nor  the  regular  dues  or  membership  fees  of  an 
"active  resident  annual  member"  exceed  $10  per  year,  shall  keep  an  up-to-date 
record  showing  the  number  of  its  members  of  each  class.  It  shall  also  keep  a 
record  in  which  shall  be  entered  each  day  (1)  under  the  head  of  "Life  member- 
ship:" (a)  the  number  of  life  members  from  whom  a  life  membership  tax  has 
been  collected  on  that  day,  and  (b)  the  total  amount  of  tax  so  collected;  and 
(2)  under  the  head  of  each  other  class  of  membership:  (a)  the  number  of 
members  of  that  class  paying  on  that  day  dues  or  membership  fees  or  initiation 
fees,  (b)  the  total  amount  so  paid  by  members  of  that  class,  and  (c)  the  total 
amount  of  tax  collected  on  such  payments.  Every  such  club  or  organization 
shall  make  up  each  month  from  this  daily  record  a  return  in  duplicate  on  Form 
729  (revised),  in  accordance  with  the  instructions  printed  on  the  back  of  that 
form.  This  return  must  be  made  under  oath,  unless  the  amount  of  the  tax 
returned  is  $10  or  less,  in  which  case  it  may  be  signed  or  acknowledged  before 
two  witnesses  instead  of  being  under  oath.  This  return  together  with  the 
amount  of  the  tax  must  be  in  the  hands  of  the  collector  of  internal  revenue 
of  the  district  in  which  is  located  the  principal  office  or  place  of  business  of  the 
person  making  such  return  and  payment,  on  or  before  the  last  day  of  the 
month  following  that  for  which  it  is  made.  (For  penalties  see  art.  17,  below.) 
A  copy  of  Form  729  (revised)  [page  1305]  will,  as  far  as  possible,  be  mailed 
each  month  to  every  club  or  organization  that  filed  a  return  for  the  pre- 
ceding month,  but  a  failure  to  receive  such  copy  will  not,  of  course,  excuse  a 
failure  to  return  and  pay  the  tax.  A  return  must  be  made  for  each  month 
whether  or  not  taxable  dues  or  fees  have  been  collected.  Where  a  club  has 
no  tax  to  report  during  any  month,  this  fact  should  be  noted  on  the  return 
filed  for  that  month.  The  records  above  described  shall  be  preserved  in  the 
office  of  the  club  or  organization  for  a  period  of  two  years  in  such  a  manner 
as  to  be  readily  accessible  on  request  to  internal  revenue  officers. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1315  SERVICE 


1-23-22.  Reg.  43,  Rev— Part  II.  Dues. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6573  Examples:  (1)  A  member  of  a  club  the  dues  and  fees  of  which  are 
taxable  fails  to  pay  his  dues  and  is  carried  for  a  specified  time  before 

being  expelled.  Such  member  is  not  liable  for  payment  of  tax  with  respect 
to  unpaid  dues  so  long  as  they  remain  unpaid,  but  should  the  club  succeed  in 
collecting  dues  covering  the  period  during  which  the  member  was  delinquent 
it  must  account  for  the  tax. 

6574  (2)  A  member  of  a  club  the  dues  and  fees  of  which  are  taxable  refuses 
to  pay  the  tax  to  the  club.    The  club  should  report  the  case  to  the 

collector  of  internal  revenue  for  the  district  in  accordance  with  article  17  of 
these  Regulations.  There  is,  however,  nothing  in  the  law  to  prevent  a  club 
paying  the  tax  for  its  members  if  it  desires  to  do  so. 

6575  Art.  14.  Credit  to  club  for  overpayment. — If  a  club,  organization, 
8018  corporation,  partnership,  or  individual  overpays  or  overcollects  the 
8023     tax  due  with  one  monthly  return,  credit  for  the  overpayment  or 

overcollection  may  be  taken  against  the  tax  due  with  a  succeeding 
return.  In  case  a  credit  is  claimed,  a  statement  shall  be  attached  to  the 
return  setting  forth  fully  the  facts  regarding  the  alleged  overpayment  or  over- 
collection.  In  the  case  of  the  overcollection  of  a  tax,  no  credit  for  the  amount 
overcollected  shall  be  allowed  until  the  club,  organization,  corporation, 
partnership,  or  individual  making  the  overcollection  submits  a  sworn  state- 
ment showing  that  the  tax  in  each  case  so  overcollected  has  been  returned 
to  the  person  making  the  overpayment,  that  no  claim  for  a  refund  of  any  such 
amount  has  been  filed  with  the  collector  or  Commissioner  on  behalf  of  any  of 
the  members  who  paid  such  amounts,  and  a  complete  list  of  such  members. 

6576  Art.  15.  Refund  of  overpayment. — Any  club,  organization,  corpora- 
tion, partnership,  or  individual  that  has  paid  to  the  collector  of  internal 

revenue,  as  a  tax  under  section  801  of  the  Revenue  Act  of  1918,  or  section 
801  of  the  Revenue  Act  of  1921,  any  amount  erroneously  or  illegally  assessed, 
or  any  amount  in  excess  of  the  amount  of  the  tax  actually  imposed  by  those 
sections  for  the  month  covered  by  that  payment,  or  any  amount  as  a  penalty 
for  the  collection  of  which  there  was  no  authority,  may  secure  a  refund  of  the 
amount  so  overpaid  by  filing  with  the  collector  to  whom  such  payment  was 
made  a  properly  prepared  claim  on  Form  46  (revised).  When  a  club  or 
organization  seeks  to  secure  a  refund  to  it  of  an  amount  collected  by  it  from 
its  members  and  then  paid  over  by  it  to  the  collector  of  internal  revenue,  the 
claim  on  46  (revised)  must  be  accompanied  by  a  list  of  members  who  paid 
such  amount  and  by  a  sworn  statement  of  a  club  officer  that  no  claim  for  a 
refund  of  any  such  amount  has  been  filed  with  the  collector  or  Commissioner 
on  behalf  of  any  such  members. 

657  7  Art.  16.  Refund  by  club  of  overcollection. — Every  club,  organiza- 
tion, corporation,  partnership,  or  individual  that  has  collected  from 
any  person,  as  a  tax  under  section  801  of  either  the  Revenue  Act  of  1918,  or 
of  1921,  any  amount  erroneously  or  illegally  assessed,  or  any  amount  in  excess 
of  the  amount  of  the  tax  imposed  by  that  section  actually  due  from  such  per- 
son, shall  upon  proper  application  promptly  refund  such  amount  to  the 
person  entitled  thereto,  even  though  such  amount  has  already  been  paid  over 
to  the  collector  of  internal  revenue  and  no  corresponding  credit  (see  art.  14, 
above)  or  refund  (see  art.  15,  above)  has  yet  been  secured. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1316  SERVICE 


1-23-22. 


Reg.  43,  Rev.— Part  II.  Dues. 
TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6573 


PENALTIES 


Act  or  Default  Penalized 


"Failure  to  make  and  file"  return  "within 
the  time  prescribed"  (when  return  not 
filed  later  and  reasonable  cause  shown 
for  failure  to  file  in  time). 


Willfully   making  "false   or  fraudulent 
return." 


Failure  to  pay  tax  when  due 


Failure  by  any  "person"*  to  "pay, 
collect,  or  truly  account  for  and  pay 
over  any  such  tax,  make  any  such 
return  or  supply  any  such  informa- 
tion at  the  time  or  times  required  by 
law  or  regulation." 

Willful  refusal  by  any  "person"*  to  "pay, 
collect,  or  tru  y  account  for  and  pay 
over  any  such  tax,  make  such  return 
or  supply  such  information  at  the  time 
or  times  required  by  law  or  regula- 
tion," or  willful  attempt  "in  any  man- 
ner to  evade  such  tax." 

Willful  refusal  by  any  "person"*  to 
"pay,  collect,  or  truly  account  for 
and  pay  over  any  such  tax." 


Penalty  Applicable 


25  per  cent  addition  to  tax 
(to  be  collected  as  part  of 
tax  or  if  tax  already  col- 
lected then  in  same  man- 
ner as  tax). 

50  per  cent  addition  to  tax 
(to  be  collected  as  above). 

5  per  cent  addition  to  tax 
and 

1  per  cent  interest  for  each 
full  month  from  time  tax 
due. 


Penalty  of 
$1,000. 


not  more  than 


Fine    of    not    more  than 
$10,000, 
or 

Imprisonment  for  not  more 
than  one  year,  or  both. 


100   per   cent*  addition  to 
tax .  t 


Section  of 
Revenue  Act 
of  1921 


Section  3  176, 
U.  S.  Revised 
Statutes,  as  re- 
enacted  by  sec- 
tion 1311. 

Do. 


502  (d). 


1302  (a). 


1302  (b). 


1302  (c). 


*"Person"  includes  "an  officer  or  employee  of  a  corporation  or  a  member  or  employee 
of  a  partnership,  who  as  such  officer,  employee,  or  member  is  under  a  duty  to  perform 
the  act  in  respect  of  which  the  violation  occurs."    (Section  1302  (d)  [^[80 17].) 

f"No  penalty  shall  be  assessed  under  this  subdivision  for  any  offense  for  which  a 
penalty  may  be  assessed  under  authority  of  section  3176  of  the  Revised  Statutes,  as 
amended,"  the  substance  of  which  is  stated  above.    (Section  1302  (c)  [^[8016].) 


6579  Art.  17.  Penalties. — The  scope  of  the  penalties  applicable  to  the  Tax 
5509     on  Dues  is  so  broad  that  reference  will  be  made  only  to  their  most 

^  8014  common  applications.  Every  club  or  organization,  on  which  there 
8071  rests  a  duty  (see  art.  13,  above)  to  file  a  monthly  return  on  Form  729 
(revised),  that  fails  to  hie  such  return,  and  to  pay  over  the  tax  due 
thereon,  during  the  month  which  follows  that  for  which  such  return  should 
be  made,  is  subject  to  certain  automatic  penalties.  A  mere  failure  to  file  the 
return  within  the  following  month  causes  to  automatically  accrue  the  25 
per  cent  penalty  imposed  by  section  3176  of  the  Revised  Statutes,  as  amended. 

P  The  50  per  cent  penalty  computed  on  the  total  tax  liability  accrues  when  the 
return  filed  is  false  or  fraudulent.    A  mere  failure  to  pay  over  the  tax  within 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  1317  SERVICE 


1-23-22. 


Reg.  43,  Rev— Part  II.  Dues. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


the  month  following  its  receipt  by  the  club  or  organization  causes  to  auto- 
matically accrue,  under  section  502  (d)  of  the  Revenue  Act  of  1921  [^[5509], 
a  penalty  of  5  per  cent,  and  of  interest  at  1  per  cent  per  month  for  each 
full  month  of  delay.  Every  club  member  who  fails  to  pay  to  his  club  at 
the  proper  time  the  amount  of  the  tax  on  his  dues  or  fees  and  every  club 
or  organization  which  fails  to  collect  or  truly  account  for  and  pay  over  such  tax 
(see  art.  13,  above)  is  subject,  under  section  1302  of  the  Revenue  Act  of  1921, 
[  1f80 1 4] ,  to  a  penalty  of  not  more  than  $1,000.  If  this  failure  amounts 
to  a  willful  refusal  to  pay  or  an  attempt  to  evade  the  tax  on  the  part  of  the 
club  member,  or  a  willful  refusal  to  collect  or  truly  account  for  and  pay  over 
such  tax  on  the  part  of  the  club  or  organization,  such  willful  refusal  subjects 
the  offender  to  a  fine  of  not  more  than  $10,000,  or  imprisonment  for  not  more 
than  one  year,  or  both,  and  in  addition  a  penalty  of  100  per  cent  of  the  amount 
of  the  tax  (see  sees.  1302  (b)  and  (c)  of  the  Revenue  Act  of  1921).  It  is  the 
duty  of  the  club  officer  who  has  charge  of  the  collection  of  dues  and  fees  to 
report  to  the  collector  of  internal  revenue  the  name  and  address  of  any  member 
who  refuses  to  pay  his  tax,  together  with  the  amount  of  the  tax  and  such  other 
information  as  will  enable  the  collector  to  cause  a  proper  investigation  to  be 
made. 

6580    Example. — -A  certain  social  club  collects  $1,000  of  taxable  dues  each 
month,  but  carelessly  fails  to  file  a  return  for  April,  May,  and  June, 
1922,  until  September  2,  1922.    The  taxes  and  automatically  imposed  penal- 
ties then  due  for  those  months  would  be  as  follows: 


April  tax   $100.00 

25  per  cent  penalty   25.00 

5  per  cent  penalty   5.00 

3  months'  interest   3.90 

  $133.90 

May  tax   100.00 

25  per  cent  penalty   25.00 

5  per  cent  penalty   5.00 

2  months'  interest   2.60 

  132.60 

June  tax  !   100.00 

25  per  cent  penalty   25.00 

5  per  cent  penalty   5.00 

1  month's  interest   1.30 

  131.30 

Total  of  taxes  and  penalties   $397.80 


6581     In  addition  the  club  would  be  liable  to  a  penaltv  of  not  more  than 
$1,000. 

AUTHORITY  FOR  REGULATIONS 

658a    Art.  18.  Promulgation  of  regulations. — In  pursuance  of  this  pro- 
8009     vision  of  the  Act  the  foregoing  regulations  are  hereby  made  and 
promulgated  and  all  rulings  inconsistent  with  them  arc  hereby 
revoked. 

C  P.  SMITH, 

Acting  Commissioner  of  Internal  Revenue. 
Approved  January  11,  1922.    jRcIcased  for  publication  Jan.  23,  1922.] 
A.  W.  MELLON,  . 

Secretary  of  the  Treasury. 


Copyright  1922.  by  The  Corporation  Trust  Company 
WAR  TAX  1318  SERVICE 


2-15-22. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


(T.  D.  3282.) 

6583    Revenue  Act  of  1918— Amendment  to  Art.  12,  Reg.  43,  Part  II.— 

The  first  paragraph  of  Article  12,  Regulations  No.  43,  Part  II  (Re- 
vised 1920),  as  amended  by  Treasury  Decision  No.  3246  [1[6938,  1921  War 
Tax  Service],  is  hereby  further  amended  to  read  as  follows: 

"The  Revenue  Act  of  1918  imposes  a  tax  of  10  per  cent  on  any  amount 
paid  as  dues  or  membership  fees  (including  recurrent  assessments,  assess- 
ments for  running  expenses,  and  penalties  incurred  by  failure  to  pay  promptly) 
to  any  club  which  is  within  the  terms  of  the  Act  (see  arts.  1-7,  above) : 
Provided,  That  the  regular  dues  or  membership  fees  (including  recurrent 
assessments,  and  assessments  for  running  expenses,  levied  upon  all  active 
resident  annual  members  but  not  including  penalties  incurred  by  failure  to 
pay  promptly)  of  an  "active  resident  annual  member"  of  such  club  are  in 
excess  of  $10  per  year.  "An  active  resident  annual  member"  is  a  member 
who  is  neither  a  life  nor  a  nonresident  member,  but  who  in  other  respects 
enjoys  full  club  privileges,  as  distinguished  from  the  restricted  privileges 
enjoyed  by  a  person  holding  an  associate  or  other  partial  membership." 
(T.  D.  3282,  signed  by  Commissioner  D.  H.  Blair,  and  dated  February  11, 
1922.) 


(T.  D.  3285.) 

6584  Articles  9,  10,  11  and  12  of  Reg.  43,  Part  II  Amended— The  first 
6534     paragraph  of  Article  9,  Regulations  No.  43,  Part  II  (Revised  De- 
cember, 1921),  is  hereby  amended  to  read  as  follows: 

"The  Revenue  Act  of  1921  imposes  a  tax  of  10  per  cent  on  any  amount 
paid  as  dues  or  membership  fees  (including  recurrent  assessments,  assess- 
ments for  running  expenses,  and  penalties  incurred  by  failure  to  pay  promptly) 
to  any  club  which  is  within  the  terms  of  the  Act:  Provided,  That  the  regular 
dues  or  membership  fees  (including  recurrent  assessments,  and  assessments 
for  running  expenses,  levied  upon  all  active  resident  annual  members  but  not 
including  penalties  incurred  by  failure  to  pay  promptly)  of  an  "active  resident 
annual  member"  of  such  club  are  in  excess  of  $10  per  year.  "An  active  resident 
annual  member"  is  a  member  who  is  neither  a  life  nor  a  nonresident  member, 
but  who  in  other  respects  enjoys  full  club  privileges,  as  distinguished  from 
the  restricted  privileges  enjoyed  by  a  person  holding  an  associate  or  other 
partial  membership." 

6585  The  third  paragraph  of  Article  10,  Regulations  No.  43,  Part  II  (Re- 
6554     vised  December,  1921),  is  hereby  amended  to  read  as  follows: 

"Where  the  application  of  the  tax  to  initiation  fees  depends  upon 
the  amount  paid  as  dues  or  membership  fees  by  an  active  resident  annual 
member,  recurrent  assessments,  and  assessments  for  running  expenses  (but 
not  penalties  incurred  by  failure  to  pay  promptly)  are  to  be  considered  in 
ascertaining  whether  such  dues  or  membership  fees  are  in  excess  of  $10  per 
year." 

6586  The  last  two  sentences  of  the  first  paragraph  of  Article  11,  Regulations 
6561     No.  43,  Part  II  (Revised  December,  1921),  are  hereby  amended  to 

read  as  follows: 

"However,  unless  the  holders  of  such  memberships  are  required  to  pay 
annual  dues  or  membership  fees,  recurrent  assessments,  or  assessments  for 
running  expenses,  they  are  exempt  from  the  annual  tax  imposed  on  active 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1319  SERVICE 


2-15-22. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


resident  annual  members  and  life  members.  If  any  dues  or  membership 
fees  or  such  assessments  are  levied  on  such  members  they  are  taxable." 

6587  The  next  to  the  last  sentence  of  the  first  paragraph  of  Article  12, 
6569     Regulations  No.  43,  Part  II  (Revised  December,  1921),  is  hereby 

amended  to  read  as  follows: 
"In  the  case  of  recurrent  assessments,  and  assessments  for  running  ex- 
penses, the  tax  is  due  and  shall  be  collected  and  paid  when  such  assessments 
are  paid." 

6588  The  last  sentence  of  the  second  paragraph  of  Article  12,  Regulations 
6569     No.  43,  Part  II  (Revised  December,  1921),  is  hereby  amended  to  read 

as  follows: 

"If  recurrent  assessments  or  assessments  for  running  expenses  are  levied 
on  active  resident  annual  members,  there  shall  be  collected  from  life  members 
at  the  time  such  assessments  are  paid  a  tax  equivalent  to  10  per  cent  of  the 
amount  so  paid."  (T.  D.  3285,  signed  by  Commissioner  D.  H.  Blair,  and 
dated  February  11,  1922.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1320  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions: 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


REGULATIONS  NO.  43  (REVISED) 

PART  I. 

Relating  to  the 

TAX  ON  ADMISSIONS 

(Promulgated  February  15,  1922.   Released  for 
publication  February  28,  1922.) 

[Fully  indexed  at  the  end  of  this  section.] 


CHAPTER  ONE. 
TAXES  ON  ADMISSIONS. 

Paragraph 


Basis,  rate,  and  computation  of  tax   6589 

Meaning  of  term  "place"   6593 

Meaning  of  "admission"   6601 

Charges  for  rental  of  property  or  services   6608 

Nontaxable  payments   6637 

CHAPTER  TWO. 

LEASES  OF  BOXES  OR  SEATS. 

Basis,  rate,  and  computation  of  tax   6657 

Meaning  of  "lease"   6662 

CHAPTER  THREE. 

ROOF  GARDENS,  CABARETS,  OR  SIMILAR  ENTERTAINMENTS. 

Basis,  rate,  and  computation  of  tax   6669 

Entertainments  included   6680 

CHAPTER  FOUR. 

TAXES  ON  CHARGES  IN  EXCESS  OF  ESTABLISHED  PRICE, 

Scope  and  basis  of  taxes   6688 

Regular  or  established  price  defined   6690 

Rate  and  computation  of  tax: 

Box-office  sales   6694 

Brokers'  sales   6698 

CHAPTER  FIVE. 

EXEMPTIONS. 

Taxes  to  which  exemption  applies   6711 

Basis  of  exemption   6720 

Necessary  character  of  organization   6723 

Religious  organizations   6729 

Educational  organizations   6735 

Charitable  organizations   6749 

The  American  Legion   6754 

Symphony-orchestra  organizations   6755 

Persons  in  the  military  or  naval  service   6757 

Persons  formerly  in  the  military  or  naval  service   6758 

Municipal  improvement  societies   6760 

Cooperative  -or  community-center  moving-picture  theater  organizations   6763 

Federal,  State,  or  municipal  governments   6765 

Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX  1321  SERVICE 


3-2-22.  Reg.  43,  Rev. — Part  I. — Admissions. 


TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


Paragraph 

Agricultural  fairs: 

Basis  of  exemption  »  .  T .  vr .  _  ,  ,.  .  6766 

Fairs  and  exhibits  included  *Jk*A,?w54   6768 

Claim  for  exemption   6777 

CHAPTER  SIX. 

TICKETS  AND  SIGNS. 

Tickets  or  other  means  to  check  admissions  required   6784 

Requirements  applicable  to? 'Jtjtket£^SJQ I  .,2.1.  .^.TfUTlCISLl  v   6788 

Printing  of  tickets,  notice  to  be  given   6805 

Mechanical  devices   6806 

Signs  to  be  posted   6807 

CHAPTER  SEVEN. 

COLLECTION,  RETURN,  AND  PAYMENT  OF  TAX. 

Duty  to  collect,  return,  and  pay  tax: 

Tax  on  admissions   6S10 

Taxes  on  charges  in  excess  of  established  price   6815 

Application  for  and  certificate  of  registry   6817 

Traveling  shows   6819 

Records: 

Taxes  on  admissions   6823 

Taxes  on  charges  in  excess  of  established  price   6825 

Returns  and  payments   6826 

Leases  of  places  ;©WT  -ilH-T^A-HD   6827 

CHAPTER  EIGHT. 

CREDITS  AND  FUNDS 

Credit  for  overpayment   6828 

Refund  of  erroneous  or  illegal  collection   6831 

Refund  of  overcollection   6832 

CHAPTER  NINE. 

PENALTIES. 

Penalties   6834 


Authority  for  and  promulgation  of  regulations   6836 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  1322  SERVICE 


3-2-22.  Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 
CHAPTER  ONE 


Taxes  on  Admissions 

6539    Art.  1.  Basis,  rate,  and  computation  of  tax. — Any  amount,  if  in 

6500  excess  of  10  cents,  paid  for  admission  to  any  place  (see  Art.  2)  is 

6501  subject  under  these  provisions  of  the  Act  to  a  tax  of  1  cent  for  each 
10  cents  or  fraction  thereof  of  the  whole  amount  so  paid,  which  tax 

is  to  be  paid  by  the  person  paying  for  such  admission.  This  tax  applies  to 
the  payment  for  admission,  not  to  the  admission  itself ,  and  as  soon  as  payment 
for  admission  is  made  the  tax  applies,  whether  or  not  the  admission  itself 
ever  takes  place.1  And  the  tax  applies  if  the  payment  for  admission  occurs 
in  the  United  States,  even  though  the  admission  is  to  take  place  outside  the 
territorial  limits  of  the  United  States.  No  refund  of  the  tax  can  be  allowed 
by  reason  of  nonuser  unless  the  admission  charge  also  is  refunded  (see  Art.  45). 
6580  The  tax  applies  to  the  amount  paid  for  each  admission  separately, 
and,  therefore,  if  two  or  more  admissions  are  paid  for  at  once,  the 
total  tax  is  determined  by  computing  separately  the  tax  on  each  admission 
and  by  then  adding  together  the  taxes  so  obtained.  In  other  words,  the  tax 
for  10  single  admissions  will  always  be  10  times  the  tax  for  each  single  admis- 
sion. In  the  case  of  season  tickets  or  subscriptions  which  entitle  the  holder 
or  subscriber  to  more  than  one  admission  the  tax  is  computed  on  the  amount 
paid  without  regard  to  the  number  of  admissions  involved.  However,  if 
two  or  more  season  tickets  are  paid  for  at  the  same  time,  the  tax  would  be 
computed  on  each  ticket  separately,  and  the  same  rule  would  apply  to  sub- 
scriptions. 

6591  Where  a  single  charge  is  made  to  cover  admission  to  more  than 
one  attraction  under  the  same  management  the  tax  is  computed  on 

the  basis  of  such  charge.  If  separate  charges  are  made  for  each  attraction, 
the  tax  is  computed  on  each  such  charge.  For  example,  if  a  circus  issues  a 
combination  ticket  entitling  the  holder  to  admission  and  to  the  use  of  a 
reserved  seat  for  $1.50  the  tax  due  is  15  cents,  whereas  if  separate  tickets 
for  admission  and  for  a  seat  are  sold  for  75  cents  each,  the  tax  on  each  charge 
would  be  8  cents,  making  a  total  of  16  cents. 

6592  The  amount  paid  for  admission  to  any  place  is  the  amount  which 
must  be  paid  to  the  person  controlling  such  admission  in  order  to 

secure  that  privilege.  If  a  ticket  or  card  of  admission  is  sold  by  the  person 
controlling  said  admission  for  an  amount  in  excess. of  the  regular  or  established 
price  or  charge  therefor,  the  tax  imposed  by  section  800  (a),  paragraph  (1), 
will  apply  to  the  entire  amount  for  which  it  is  so  sold.  In  addition  the  theater 
or  other  place  of  amusement  (or  broker)  selling  such  ticket  or  card  of  admission 
for  an  amount  in  excess  of  the  regular  or  established  price  therefor  will  be 
subject  to  a  tax  on  the  amount  of  the  excess  charge.    (See  Chapter  Four.) 

6593  Art.  2.  Meaning  of  the  term  "place." — The  tax  under  these  provi- 
sions of  the  Act  is  on  "the  amount  paid  for  admission  to  any  place." 

"Place"  is  a  word  of  very  broad  meaning,  and  it  is  not  defined  or  otherwise 
limited  by  the  Act.  But  the  basic  idea  it  conveys  is  that  of  a  definite  location. 
The  phrase,  therefore,  "to  any  place"  does  not  narrow  the  meaning  of  the 
word  "admission,"  except  to  the  extent  that  it  implies  that  the  admission 

•The  Act  applies  generally  only  to  the  mainland  of  the  United  States,  Hawaii,  and  Alaska. 

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is  to  a  definite  location  on  or  beneath  the  surface  of  the  earth,  or  to  a  structure 
whose  location  with  relation  to  the  earth  is  definitely  fixed,  at  least  tempor- 
arily. The  "place"  need  not  be  within  the  territorial  jurisdiction  to  which 
the  act  is  applicable,  for  as  has  been  noted  (Art.  1)  the  tax  applies  to  the 
payment,  not  to  the  admission.  Places  of  amusement  obviously  constitute 
the  most  important  class  of  places  admission  to  which  is  subject  to  this  tax. 

6594  Examples. — (1)  Each  of  the  following  is  a  "place"  within  the  mean- 
ing of  the  Act: 

(a)  An  outdoor  amusement  park,  and  such  attractions  therein 
as  a  scenic  railway,  a  merry-go-round,  a  roller  coaster,  a  Ferris  wheel, 
a  toboggan  slide,  a  bump-the-bumps,  a  whip,  a  dip-the-dips,  a  speed-o- 
plane,  a  hilarity  hall,  and  a  dance  hall. 

(b)  An  observation  tower  on  top  of  a  high  building. 

(c)  A  grandstand  built  for  the  purpose  of  viewing  a  parade  passing 
in  the  street  or  a  baseball  game  in  an  adjoining  baseball  park. 

(d)  A  cave. 

(e)  A  space  inclosed  in  which  are  seats  from  which  to  watch  the 
bathing  along  the  beach. 

(f)  A  floating  theater  operating  along  a  river,  anchored  or  moored 
for  each  performance. 

6595  (2)  None  of  the  following  is  a  "place"  within  the  meaning  of  the 
Act: 

(a)  A  railway  car  (unless  rendered  stationary  by  sidetacking  or 
removal  from  track). 

(b)  A  street  car  (unless  rendered  stationary  by  sidetracking  or  removal 
from  track). 

(c)  A  steamboat  (unless  anchored  or  moored). 

(d)  A  sight-seeing  automobile. 

(e)  A  railroad  train  or  a  boat  following  the  course  of  a  boat  race. 
659  6    (3)  Where  an  admission  charge  is  made  to  a  dancing  pavilion  and 

an  additional  charge  is  made,  in  the  case  of  each  dance,  for  admiscion 
to  the  dancing  floor  within  this  pavilion,  admission  to  the  dancing  floor  (as 
well  as  admission  to  the  pavilion)  is  admission  to  a  "place"  within  the  mean- 
ing of  the  Act. 

659  7  (4)  A  tennis  tournament  is  a  contest  and  not  a  "place"  and,  there- 
fore, an  amount  paid  by  a  player  to  "enter"  such  a  tournament  is 
not  "paid  for  admission  to  any  place"  within  the  meaning  of  the  Act.  On 
the  other  hand,  the  grandstand  at  the  tennis  tournament  is  a  "place"  within 
the  meaning  of  the  Act. 

6598  (5)  Amounts  paid  for  rides  in  an  airplane  making  exhibition  nights 
are  not  taxable.    It  is  not  material  that  the  flights  start  and  termi- 
nate in  a  fair  ground.    Amounts  paid  for  admission  to  a  building  or  other 
inclosure  to  view  an  airplane  are,  however,  taxable. 

6599  (6)  Admissions  to  the  amusements  called  "shoot-the-chutes"  and 
"the  Old  Mill"  are  taxable.    A  charge  for  admission  to  small  boats 

operated  and  propelled  by  means  of  a  current  of  water  confined  to  a  narrow 
channel  which  determines  the  course  and  direction  of  the  boats,  is  taxable  as  an 
admission  to  a  place.  However,  an  amount  paid  for  a  ride  on  a  boat  in  an 
open  lake  or  stream  where  the  boat  may  be  steered  in  any  direction  or  take 
any  course  desired  is  not  taxable. 

6600  As  to  the  application  of  the  tax  where  the  charge  includes  the  rental 
of  property  or  services,  see  Article  4. 


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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6601  Art.  3.  Meaning  of  "admission." — The  tax  is  imposed  on  "the 
6507     amount  paid  for  admission  to  any  place."    It  applies  only  to  amounts 

in  excess  of  10  cents  which  must  be  paid  in  order  to  gain  admission 
to  a  place  (see  Art.  1).  Hence  the  tax  will  not  apply  to  voluntary  contri- 
butions where  no  payment  is  required  for  admission  to  such  place  nor  to 
payments  made  under  certain  other  conditions  (for  which  see  Art.  5).  The 
term  "admission"  primarily  means  being  permitted  the  right  or  privilege  to 
enter  into  a  place.  However,  the  Act  specifically  provides  that  it  shall  also 
include  "seats  and  tables,  reserved  or  otherwise,  and  other  similar  accommo- 
dations." A  charge  for  their  use,  therefore,  in  any  place,  must  be  treated 
as  a  taxable  charge  for  admission,  and  not  as  a  rental  charge,  which  would 
escape  those  taxes.  (See  Art.  4.)  So  an  amount  paid  for  the  right  to  use 
a  reserved  seat  in  a  theater  or  circus,  a  table  in  a  roof  garden,  a  seat  in  a 
hotel  room  or  window  to  view  a  parade,  or  the  like,  is  taxable.  This  is  true 
whether  the  charge  made  for  the  use  of  the  seat,  table,  or  similar  accommc* 
dation  is  combined  with  an  admission  charge  proper  to  form  a  single  charge, 
or  is  separate  and  distinct  from  an  admission  charge,  or  is  itself  the  sole 
charge. 

6602  Where  an  original  admission  charge  carries  the  right  to  remain  in 
a  place,  or  to  use  a  seat,  table,  or  other  similar  accommodation  for 

a  limited  time  only,  and  an  additional  charge  is  made  for  an  extension  of  such 
time,  the  extra  charge  is  paid  for  "admission"  within  the  meaning  of  the  Act. 
For  instance,  amounts  paid  for  second  or  repeat  rides  on  roller  coasters  and 
merry-go-rounds  are  paid  for  "admission."  Other  examples  which  will 
illustrate  the  principle  stated  herein  follow: 

6603  Examples. — (1)  Where  75  cents  is  paid  for  general  admission  to  a 
circus  and  then  50  cents  is  paid  for  a  reserved  seat,  the  latter  amount, 

equally  with  the  former,  is  "paid  for  admission"  within  the  meaning  of  the  Act. 

6604  (2)  Where  $10  is  paid  to  a  hotel  to  reserve  a  table  for  celebrating 
New  Year's  eve,  this  amount  is  "paid  for  admission"  within  the 

meaning  of  the  Act. 

6605  (3)  An  amount  paid  for  the  use  of  a  swinging  beach  chair  at  a  coast 
resort  is  not  "paid  for  admission"  within  the  meaning  of  the  Act 

unless  it  is  located  in  a  space  so  enclosed  or  set  apart  as  to  constitute  a  place. 
(See  Art.  2.) 

6606  (4)  An  amount  paid  for  the  use  of  a  rolling  or  movable  chair  to  be 
moved  at  the  will  of  the  occupant,  no  definite  limits  of  space  being 

set,  is  not  "paid  for  admission  to  any  place"  within  the  meaning  of  the  Act. 
(See  Art.  2.) 

6607  (5)  While  the  use  of  a  seat  must  be  considered  an  "admission" 
within  the  meaning  of  the  Act,  an  amount  paid  for  a  seat  in  a  parlor 

car  is  not  an  "amount  paid  for  admission  to  any  place  "  because  a  parlor  car  is 
not  a  place  within  the  meaning  of  the  Act.    (See  Art.  2.) 

6608  Art.  4.  Charges  for  rental  of  property  or  services. — The  provisions 
of  this  article  do  not  relate  to  charges  for  "seats  and  tables  .  .   .  and 

other  similar  accommodations,"  which  by  the  express  terms  of  the  Act  are 
taxable  as  admissions  (see  Art.  3).  Reference  is  here  made  to  charges 
which  are  designated  as  rental  or  service  charges,  but  which  in  fact  may  or 
may  not  represent,  in  whole  or  in  part,  admissions  within  the  provisions  of 
the  Act. 

6609  These  charges  are  of  two  general  classes,  viz:  (A)  where  there  is 
a  single  undivided  charge,  and  (B)  where  there  are  separate  and 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


distinct  charges  designated  for  admission  and  for  rental  or  services.  These 
will  be  considered  in  the  order  named. 

A.    Where  There  Is  a  Single  Undivided  Charge 

6610  A  charge  imposed  on  a  person  admitted  to  a  place  which  is  not  in 
fact  or  name  an  admission  charge,  but  is  a  bona  fide  charge  for  the 
rental  of  real  or  personal  property  or  equipment,  or  for  personal  services,  is 
not  taxable.  If  a  charge  involving  rental  or  service  is  designated  as  an 
admission  charge  it  will  be  presumed  that  it  is  in  fact  a  charge  for  admission. 
The  tax  will  apply  in  such  case  unless  it  is  conclusively  proven  that  the 
charge,  in  whole  or  in  part,  is  for  rental  or  service,  and  the  burden  of  proof 
will  rest  on  the  person  asserting  that  it  is  of  such  a  character.  On  the  other 
hand,  the  designation  of  a  charge  as  a  rental  or  service  charge  will  not  avoid 
the  application  of  the  tax  if  it  in  fact  represents  a  charge  for  admission.  In 
such  cases  the  following  rules  will  be  applied  in  determining  the  true  character 
of  the  charge: 

661  1     (1)  If  the  charge  actually  includes  the  right  to  use  property  or  equip- 
ment or  the  right  to  services,  and  applies  only  to  persons  availing 
themselves  of  the  use  of  the  property,  equipment,  or  services  provided,  other 
persons  being  admitted  free  or  not  admitted  at  all,  the  tax  does  not  apply. 

6612  (2)  If  the  charge  (a)  does  not  involve  rental  or  service,  or  (b)  is 
clearly  unreasonable  and  excessive,  the  tax  applies. 

6613  (3)  If  persons  are  admitted  who  are  not  permitted  to  use  property 
or  equipment  or  avail  themselves  of  the  services  afforded  others,  and 

persons'  so  admitted  are  required  to  pay  the  same  charge  as  is  imposed  on 
persons  to  whom  property,  equipment,  or  services  are  furnished,  the  tax 
applies  to  amounts  paid  by  all  persons  admitted. 

6614  (4)  If  persons  not  permitted  to  use  property  or  equipment,  or  to 
avail  themselves  of  services,  are  required  to  pay  a  lesser  charge  than 

persons  who  are  furnished  property,  equipment,  or  services,  this  lesser  charge 

is  taxable  as  an  admission. 

6615  In  the  situation  outlined  in  the  preceding  paragraph,  such  part  of 
the  charge  exacted  from  persons  using  property,  equipment,  or 

services  as  equals  the  charge  imposed  on  persons  not  using  such  property, 
equipment,  or  services  is  deemed  to  represent  an  admission  charge  and  is 
taxable  as  such. 

B.    Where  There  Are  Separate  and  Distinct  Charges 

6616  In  cases  where  there  is  a  charge  (whether  called  an  admission  charge 
or  not)  generally  applicable  to  persons  admitted  to  a  place,  and  also 

one  or  more  bona  fide  separate  charges  for  rental  or  services,  as  the  case 
may  be,  then  only  the  amount  paid  for  the  generally  applicable  charge  is 
"paid  for  admission"  within  the  meaning  of  the  act. 

6617  Examples. — (1)  Where  a  charge  is  made  for  admission  to  a  build- 
ing or  inclosure  in  which  a  roller  or  ice  skating  surface  is  located, 

such  charge  is  taxable  the  same  as  an  admission  to  any  other  place  of  amuse- 
ment regardless  of  whether  or  not  persons  paying  the  charge  are  also  furnished 
with  skates  and  admitted  to  the  skating  surface  without  the  payment  of  an 
additional  amount.  Therefore,  where  the  manager  of  a  skating  rink  makes 
a  single  charge  of  50  cents  for  admission  to  a  building  or  inclosure,  the  skating 
surface,  and  for  the  use  of  skates,  the  tax  to  be  collected  in  this  case  is  5  cents. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


The  same  tax  would  be  payable  on  this  charge  if  it  covered  admission  to  the 
building  or  inclosure  only. 

6618  The  building  or  inclosure  in  which  the  skating  surface  is  located 
and  the  skating  surface  proper  are  separate  places  within  the  mean- 
ing of  the  law.  Therefore,  where  single  charges  are  made  for  admission  to 
the  building  and  the  skating  surface,  the  latter  charge  including  the  rental 
of  skates,  both  charges  are  taxable  as  amounts  paid  for  admission.  For 
example,  if  a  charge  of  25  cents  is  made  for  admission  to  the  building  or 
inclosure  and  another  charge  of  25  cents  covering  rental  of  skates  and  admis- 
sion to  the  skating  surface,  the  tax  to  be  collected  is  3  cents  on  each  charge. 

6619  Where  bona  fide  separate  charges  are  made  for  admission  to  the 
skating  rink,  skating  surface,  and  for  rental  of  skates,  and  persons 

using  their  own  skates  are  required  to  pay  the  first  two  charges  and  no  more, 
the  tax  attaches  only  with  respect  to  the  admission  charges.  For  example, 
where  20  cents  is  charged  for  admission  to  the  rink,  10  cents  for  admission 
to  the  skating  surface,  and  30  cents  for  skate  rental,  tax  would  not  attach 
to  the  skate  rental  charge. 

6620  Where  no  charge  is  made  for  admission  to  the  skating  rink  and  a 
single  charge  covers  rental  of  skates  and  admission  to  the  skating 

surface,  tax  attaches  to  the  entire  amount  of  this  charge. 

6621  Where  a  charge  is  made  for  admission  to  the  skating  rink  and  sep- 
arate charges  are  made  for  rental  of  skates  and  admission  to  the 

skating  surface,  the  admission  charges  only  are  taxable  provided  persons 
using  their  own  skates  are  required  to  pay  the  admission  charges  and  no  more. 

6622  Whether  a  charge  is  made  to  the  rink  or  not  where  persons  using 
their  own  skates  are  not  required  to  pay  as  much  for  admission  to  the 

skating  surface  as  the  charge  exacted  from  persons  who  rent  skates  from  the 
rink,  the  charge  for  admission  to  the  skating  surface  shall  be  deemed  to  be  the 
amount  paid  by  persons  using  their  own  skates.  For  example,  where  10 
cents  is  charged  for  admission  to  the  rink  (or  where  no  charge  is  made  for 
admission  to  the  rink),  10  cents  for  admission  to  the  skating  surface,  and  30 
cents  for  rental  of  skates — but  a  person  using  his  own  skates  is  required  to  pay 
25  cents— the  established  price  for  admission  to  the  skating  surface  is  25  cents'. 

6623  (2)  A  certain  golf  club  charges  guests  and  other  nonmembers  a 

green  fee"  of  $2  for  each  time  they  play  on  its  course.    This  charge 
is  not  taxable  as  an  amount  paid  for  admissions. 

6624  (3)  In  a  certain  amusement  park  is  a  tennis  court  which  is  rented 
for  50  cents  per  hour.    This  charge  is  clearly  a  rental  charge  for  the 

use  ot  the  court  and  is  not  "paid  for  admission"  within  the  meaning  of  the  Act. 

6625  (4)  A  certain  bathing  establishment  at  a  coast  resort  makes  a  "rental" 
_    charge  of  50  cents,  for  which  it  furnishes  a  bathing  suit,  towel,  and  a 

dressing  room.  The  patrons  bathe  in  the  ocean  from  an  uninclosed  beach. 
Were  the  50  cents  is  clearly  for  rental  and  is  not  "paid  for  admission"  within 
the  meaning  of  the  Act. 

6626  (5)  A  50-cent  charge  is  made  to  everyone  going  out  on  a  certain 
•  n  hjhingPier-  ™s  charge  covers  the  use  of  fishing  tackle.  No  one 
is  allowed  on  the  pier  unless  he  fishes  and  everyone  must  pay  the  full  charge 
whether  he  uses  his  own  fishing  tackle  or  not.  In  this  case  the  amount  paid 
is  clearly   paid  for  admission"  within  the  meaning  of  the  Act. 

6627  (6)  A  certain  dancing  school  charges  admission  and  an  additional 
iee,  which  is  reasonable,  for  "instruction."    It  is  only  imposed  on 

persons  desiring  dancing  instruction.    This  instruction  charge  is  evidently 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


paid  for  services  and  so  is  not  "paid  for  admission"  within  the  meanin?  of  the 
Act. 

6628  (7)  The  charge  for  "admission"  to  a  certain  dance  is  only  $1  per 
person,  but  each  person  is  charged  by  the  management  a  "hat- 
checking  fee"  of  50  cents.  This  checking  charge  is  so  clearly  unreasonable 
that^the  whole  amount  ($1.50)  must  be  treated  as  an  "amount  paid  for 
admission"  within  the  meaning  of  the  Act. 

6629  (8)  The  manager  of  a  dancing  academy  permits  persons  attending 
classes  to  dance  either  with  instructors  or  with  other  patrons  of  the 

academy.  Amounts  paid  by  all  patrons,  including  those  attending  as 
students,  are  taxable  as  admissions. 

6630  (9)  The  manager  of  a  so-called  dancing  academy  employs  a  number 
of  young  ladies  whom  he  pays  a  nominal  sum  for  their  services  as 

dancing  partners.  Gentlemen  are  charged  $1  for  the  privilege  of  dancing 
and  ladies  are  permitted  to  dance  free.  The  charges  made  to  gentlemen  under 
these  circumstances  must  be  regarded  as  amounts  paid  for  admission  within 
the  meaning  of  the  Act,  and  the  manager  must  collect  a  tax  of  ten  cents  from 
each  gentleman  admitted  to  the  dance  hall. 

6631  (10)  Where  25  cents  an  hour  is  charged  for  the  use  of  a  rowboat 
on  a  pond  in  an  amusement  park,  this  amount  is  clearly  paid  for 

rental  and  is  not  an  "amount  paid  for  admission"  within  the  meaning  of  the 
Act. 

6632  (11)  Where  a  child  pays  25  cents  for  a  "ride"  around  a  track  on  a 
pony,  the  amount  paid  is  clearly  for  the  rental  of  the  pony  or  the 

services  of  the  attendant,  or  both,  and  is  not  an  "amount  paid  for  admission" 
within  the  meaning  of  the  Act. 

6633  (12)  A  certain  bath  establishment  makes  a  charge  of  $1  for  a  "Turkish 
bath"  and  does  not  allow  anyone  not  taking  such  a  bath  to  enter 

the  Turkish  bath  section  of  its  establishment.  This  charge  is  clearly  not  an 
"amount  paid  for  admission"  within  the  meaning  of  the  Act. 

6634  (13)  An  amount  paid  for  the  use  of  a  seat  in  the  window  of  a  hotel 
room,  in  order  to  watch  a  parade,  would  clearly  be  an  amount  paid 

for  rental  were  it  not  that  section  800  (c)  of  the  Act  expressly  provides  that 
the  use  of  "seats  and  tables,  reserved  or  otherwise,  and  other  similar  accom- 
modations," is  included  in  the  meaning  of  "admission"  as  used  in  the  Act. 
In  view  of  this  provision  of  the  Act  such  an  amount  must  be  treated  as  "paid 
for  admission."  If  the  whole  room  were  rented,  however,  it  is  clear  that  the 
amount  paid  for  it  would  not  be  "paid  for  admission." 

6635  (14)  A  certain  dance  hall  makes  no  charge  for  "admission"  but 
forces  everyone  entering  to  pay  25  cents  for  "hat  check  privilege." 

The  amount  paid  is  clearly  an  "amount  paid  for  admission." 

6636  (15)  A  sanitarium  makes  a  charge  of  50  cents  for  the  privilege  of 
swimming  in  pools  filled  with  medicated  water  and  does  not  allow 

anyone  not  using  the  pools  to  enter  that  part  of  the  establishment.  This 
charge  is  not  an  amount  paid  for  admission  within  the  meaning  of  the  Act. 

6637  Art.  5.  Nontaxable  payments. — As  stated  in  Art.  3,  the  tax  imposed 
under  section  800  of  the  Act  applies  only  to  amounts  necessarily 

paid  in  order  to  gain  admission  to  a  place.  Under  peculiar  circumstances 
amounts  may  apparently  be  paid  for  admission  to  a  place,  or  in  connection 
with  such  admission,  which  are  not  taxable  as  admissions.  Instances  in  which 
this  situation  may  arise,  with  examples  to  illustrate  the  principle  involved, 
follow: 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


A.    Cooperative  Parties 

6638  Where  a  group  or  organization  of  persons  cooperate  in  giving  a 
dance  or  other  function  for  its  own  entertainment,  and  the  expenses 

are  prorated  amongst  the  members  of  such  group  or  organization,  the  amounts 
paid  under  such  an  arrangement  are  not  "paid  for  admission"  within  the  mean- 
ing of  the  Act.  Such  payments  represent  each  individual's  share  of  the  rental 
and  services  constituting  the  expense  of  the  affair  and  are  not  taxable.  The 
fact  that  a  limited  number  of  persons,  outside  of  the  group  or  organization, 
are  invited  to  attend  as  free  guests  or  that  the  individual  share  of  the  expense 
is  fixed  at  an  even  figure  will  not  make  the  tax  apply  if  the  affair  is  truly  a 
cooperative  party  of  the  character  above  described.  But  if  any  guests  are 
required  or  allowed  to  pay,  or  if  any  profit  is  sought  or  divided,  then  any 
amounts  paid  by  the  organizers  or  guests  are  paid  for  admission  within  the 
meaning  of  the  Act,  and  are  subject  to  tax. 

6639  Examples. — (1)  A  men's  bowling  club  decides  to  give  a  dance  on 
a  certain  night  and  circulates  a  list  to  be  signed  by  all  members  who 

care  to  attend.  On  securing  the  names  and  estimating  the  expenses,  the 
share  of  each  member  is  fixed  at  $2.  (No  charge,  of  course,  is  to  be  made  to 
the  partners  brought  by  the  members.)  The  dance  is  held  without  the  use 
of  tickets.  The  expenses  proved  to  be  less  than  expected,  and  there  is  a 
balance  left  on  hand.  This  balance  is  refunded  pro  rata  to  those  who  paid 
$2.  In  this  case  it  is  plain  that  the  amounts  paid  by  the  members  are  not 
"paid  for  admission"  within  the  meaning  of  the  Act. 

6640  (2)  A  young  men's  club  conducts  a  series  of  monthly  dances  and 
through  friends  and  acquaintances  establishes  a  mailing  list  of  per- 
sons to  whom  invitations  are  sent  each  month.  A  charge  of  $2  is  imposed 
on  each  couple  who  attend,  though  no  tickets  are  used.  That  amount  is 
clearly  an  "amount  paid  for  admission"  within  the  meaning  of  the  Act. 

6641  (3)  A  certain  social  club  sends  out  to  its  members  and  certain  non- 
members  invitations  and  tickets  to  a  musicale,  the  price  of  the  tickets 

being  $1.50  each.  Such  a  ticket  is  necessary  to  secure  admission  to 
the  musicale.  In  this  case  the  $1 .50  is  clearly  an  "amount  paid  for  admission" 
within  the  meaning  of  the  Act. 

6642  (4)  A  group  of  10  young  men  desire  to  give  a  dance  and  propose 
to  defray  the  expenses  by  selling  100  $2  tickets.    Each  member 

agrees  to  sell  10  tickets  or  to  pay  the  full  price  thereof.  A  payment  of  $2 
for  such  a  ticket  is  clearly  an  "amount  paid  for  admission"  within  the  meaning 
of  the  Act. 

B.    Rental  of  Entire  Place 

6643  Where  a  person  or  organization  acquires  the  sole  right  to  use  any 
place  or  the  right  to  dispose  of  all  the  admissions  to  any  place  for 

one  or  more  occasions,  the  amount  paid  for  such  right  is  not  subject  to  the 
tax  on  admissions.  Such  a  transaction  constitutes  a  rental  of  the  entire 
place  and  of  the  attraction,  if  any,  whether  or  not  it  is  so  designated.  How- 
ever, if  the  person  or  organization  in  turn  sells  admissions  to  the  place  the  tax 
will  apply  to  amounts  paid  for  such  admissions  (see  Art.  42). 

6644  Examples. — (1)  A  local  lodge,  desiring  to  entertain  the  delegates 
to  a  national  convention  of  its  order,  contracts  with  a  theater  to  pay 

SI, 200  for  its  entire  seating  capacity  for  a  particular  performance  in  the 
course  of  a  long  run  of  an  attraction.    This  transaction  is  in  effect  a  rental 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


of  the  theater  and  the  attraction  for  that  performance  and  the  $1,200  is  not 
an  "amount  paid  for  admission"  within  the  meaning  of  the  Act.  As  to  the 
position  occupied  by  the  lodge  with  respect  to  admissions  to  the  performance 
in  question,  see  Art.  42. 

6645  (2)  A  certain  public  dance  hall,  where  public  dances  are  held  every 
night  by  its  proprietors,  is  rented  by  them  to  a  certain  social  club  for 

a  certain  night  for  $150.  The  club  charges  its  members  the  same  fee  as  that 
charged  by  the  proprietor  of  the  hall  on  other  nights.  The  $150  is  not  an 
"amount  paid  for  admission,"  but  the  amount  paid  by  each  member  is  an 
"amount  paid  for  admission,"  within  the  meaning  of  the  Act. 

C.    Purchase  of  Property 

6646  In  some  cases  entrance  to  a  place  is  granted  only  to  such  persons  as 
have  made  a  purchase  of  property  of  some  sort,  which  must  be 

exhibited  to  secure  admission,  but  which  is  not  taken  from  the  holder  on  his 
admission.  In  such  a  case,  unless  the  sale  appears,  by  reason  of  the  undesir- 
ability  or  lack  of  value  of  the  article,  to  be  a  mere  subterfuge,  the  amount 
paid  for  such  article  is  not  an  "amount  paid  for  admission"  within  the  meaning 
of  the  act. 

6647  Examples. — (l)  Where  a  person,  in  order  to  be  admitted  to  an 
entertainment,  is  required  to  purchase  a  25-cent  "thrift  stamp," 

which  is  to  remain  his  property,  the  amount  paid  for  the  stamp  is  not  an 
"amount  paid  for  admission"  within  the  meaning  of  the  Act. 

6648  (2)  A  certain  amusement  park  company  makes  the  purchase  of  two 
15-cent  tickets  a   requirement  of  admission  to  its  park.  These 

tickets  are  kept  by  the  purchaser  and  can  be  used  by  him  in  payment  of 
an}-  charges  for  admission  to  attractions  within  the  park.  Within  the  mean- 
ing of  the  Act,  the  amount  paid  for  these  two  tickets  is  not  "paid  for  admis- 
sion" to  the  amusement  park  but  is  "paid  for  admission"  to  the  particular 
attractions  for  which  they  are  used.  (Unless  the  amusement  park  company 
is  exempt  from  tax  there  will  be  a  tax  of  2  cents  on  each  of  these  tickets — see 
Art.  1 — to  be  paid  at  the  time  they  are  paid  for.  This  tax  applies  even  if 
such  a  ticket  is  good  in  payment  of  a  nontaxable  rental — for  example,  of  a 
row-boat — as  well  as  for  a  taxable  admission  to  an  attraction,  because  it 
can  not  be  told  for  which  it  will  be  used.  But  if  the  park  company  sells 
two  distinct  kinds  of  15-cent  tickets,  one  kind  good  for  a  taxable  admission 
to  an  attraction  and  the  other  not,  then  the  2  cents  tax  will  apply  only  on  the 
former  kind,  and  if  the  person  entering  the  park  takes  two  tickets  of  the  latter 
kind,  then  he  will  have  no  tax  to  pay  on  them.) 

D.  Memberships 

6649  An  amount  paid  to  become  regularly  entitled  to  vthe  privileges  of  a 
club  or  other  organization,  as  member  or  otherwise,  is  not  an  "amount 

paid  for  admission,"  even  though  one  of  the  privileges  be  the  right  to  enter  a 
clubhouse,  club  grounds,  gymnasium,  swimming  pool,  or  the  like.  But 
where  the  chief  or  sole  privilege  of  a  so-called  membership  is  a  right  of  admis- 
sion to  certain  particular  performances  or  to  some  place  on  a  definite  number 
of  occasions  (as  contrasted  with  a  more  or  less  unlimited  right  to  enter  a 
clubhouse  or  other  place  as  many  times  as  desired  during  a  year  or  some  other 
period),  then  the  amount  paid  for  such  so-called  membership  is  an  "amount 
paid  for  admission"  within  the  meaning  of  the  Act.  A  tax  is  levied  under 

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Reg.  43,  Rev. — Part  I.— Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


certain  circumstances  on  amounts  paid  as  initiation  fees  or  as  dues  or  member- 
ship fees  to  certain  classes  of  clubs  or  organizations,  and  also  upon  life  mem- 
bers of  such  clubs,  by  section  801  of  the  Act.  For  this  tax,  called  the  "Tax 
on  Dues,"  see  Part  2  of  these  Regulations,  under  separate  cover. 

6650  Examples. — (1)  Where  one  of  the  privileges  of  membership  in  a 
tennis  club  is  the  right  of  free  admission  to  its  grounds  at  all  times, 

including  the  days  on  which  the  annual  tennis  tournament  is  in  progress, 
neither  the  dues  paid  by  such  a  member  nor  any  part  thereof  can  possibly 
be  considered  an  "amount  paid  for  admission"  to  such  tennis  tournament 
within  the  meaning  of  the  Act. 

6651  (2)  Where  a  so-called  membership  in  a  musical  club  costs  $10  a  year 
and  the  chief  or  sole  privilege  of  membership  is  the  right  to  a  ticket 

to  each  of  five  musical  entertainments,  the  amount  paid  for  this  so-called 
membership  is  an  "amount  paid  for  admission"  within  the  meaning  of  the 
Act. 

6652  (3)  A  certain  athletic  club  has  "swimming  memberships,"  with 
annual  dues  of  $15,  giving  certain  privileges,  chief  among  which  is 

the  right  to  use  the  club  swimming  pool  on  any  Tuesday,  Thursday,  or 
Saturday  during  the  year.  In  this  case  neither  the  $15  nor  any  part  thereof 
can  be  considered  as  "paid  for  admission"  within  the  meaning  of  the  Act. 

E.  Contributions 

6653  Since  the  tax  applies  only  to  amounts  necessarily  paid  for  admission, 
it  follows  that  contributions  or  donations  voluntarily  made,  before 

or  after  admission  to  a  place,  are  not  taxable. 

6654  Examples. — (1)  Where  everyone  attending  an  exhibition  given  in  a 
public  park,  freely  open  to  the  public,  is  requested  during  the  course 

of  the  performance  to  make  a  contribution  to  the  expenses  of  the  exhibition 
and  a  tag  is  given  to  each  contributor,  an  amount  so  contributed  is  not  "paid 
for  admission"  within  the  meaning  of  the  Act. 

6655  (2)  Where  oil  paintings  are  exhibited  without  any  entrance  fee 
being  charged,  but  at  the  close  of  the  explanatory  lecture  a  statement 

is  made  that  contributions  to  pay  the  expenses  of  the  exhibition  will  be 
cheerfully  received,  an  amount  so  contributed  is  not  "paid  for  admission" 
within  the  meaning  of  the  Act. 

6656  (3)  A  certain  baseball  game  is  played  on  Sunday,  in  a  State  where 
amusements  charging  admissions  are  not  allowed  on  that  day,  and, 

therefore,  admission  is  made  free  to  all,  but,  in  order  to  make  up  as  far  as 
possible  for  the  lack  of  admission  fees,  score  cards  are  sold  at  an  excessive 
price  to  such  as  will  buy.  An  amount  paid  for  such  a  score  card  is  not  "paid 
for  admission"  within  the  meaning  of  the  Act.  However,  if  the  purchase  of  a 
score  card  at  a  fixed  price  is  obligatory  on  all  persons  admitted,  then  amounts 
paid  therefor  are  taxable,  provided  the  price  is  in  excess  of  10  cents. 


CHAPTER  TWO 

Leases  of  Boxes  or  Seats 

6657    Art.  6.  Basis,  rate,  and  computation  of  tax. — In/the  case  of  a  per- 
6504     son  having  the  permanent  use  or  a  lease  for  the  use  of  a  box  or  a 
seat  in  any  opera  house  or  other  place  of  amusement  (see  Art.  7), 

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Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


the  tax  imposed  by  section  800  (a)  (l)  of  the  Act  on  "the  amount  paid  for 
admission  to  any  place"  does  not  apply..  Instead,  the  above  provisions  of 
the  Act  impose  a  tax  on  the  right  to  the  use  of  the  box  or  seat  equivalent  to 
10  per  cent  of  the  total  amount  that  would  be  realized  by  the  sale,  at  the 
established  price,  of  the  right  to  occupy  a  similar  box  or  seat  for  each  per- 
formance or  exhibition  during  the  period  for  which  . such  box  or  seat  is  reserved 
for  the  lessee  or  holder.  In  other  words,  the  tax  is  based  not  on  the  amount, 
if  any,  actually  paid  for  the  box  or  seat,  but  on  the  amount  that  would  be  paid, 
at  the  established  price,  for  admission  and  the  use  of  similar  accommodations — 
not  on  the  actual  use  of  the  box  or  seat,  but  on  the  most  extensive  possible  use. 
Note  that  the  rate  of  the  tax  here  is  10  per  cent  and  not  "1  cent  for  each 
10  cents  or  fraction  thereof,"  as  it  is  under  section  800  (a)  (1).  In  the  case 
of  a  box,  if  there  is  no  box  of  similar  size,  the  tax  for  each  performance  or 
exhibition  is  to  be  computed  by  calculating  on  the  above  basis  the  tax  payable 
on  a  single  box  seat  in  the  same  part  of  the  house  and  multiplying  that 
amount  by  the  number  of  seats  in  the  box.  If  there  is  no  box  occupying  a 
similar  position,  the  tax  for  each  performance  or  exhibition  is  to  be  computed 
by  calculating,  on  the  above  basis  the  tax  payable  on  a  single  seat  in  the 
same  part  of  the  house  and  multiplying  that  amount  by  the  number  of  seats 
in  the  box. 

6658  Examples .-— (1)  The  season  of  a  certain  professional  baseball  club 
runs  from  April  15  to  October  15.    The  club  sells  six-seat  boxes 

under  contracts  which  entitle  the  holders  to  occupy  the  same  on  all  occasions 
when  attractions  are  presented  on  the  field  between  those  dates.  There  are 
70  games  scheduled  for  the  season,  and  the  price  of  a  six-seat  box  for  a  single 
game  (including  general  admission  of  six  persons  to  the  grandstand)  is  S10. 
In  the  case  of  the  sale  of  a  box  under  the  above-mentioned  contract,  the  tax 
to  be  collected  from  the  holder  at  the  time  the  contract  is  made  is  $70  (70 
times  10  per  cent  of  $10),  and  if  extra  attractions  are  presented  on  the  field 
at  any  time  during  the  period  for  which  the  box  is  held,  additional  tax  equiva- 
lent to  10  per  cent  of  the  established  price  of  a  similar  box  must  be  collected 
on  each  such  occasion,  whether  or  not  the  box  is  occupied. 

6659  (2)  The  same  club  sells  box  seats  under  contracts  which  entitle  the 
holders  to  occupy  the  same  on  all  occasions  when  attractions  are 

presented  on  the  field  between  April  15  and  October  15.  The  price  of  one 
of  these  seats  for  a  single  game  (not  including  general  admission  to  the  grand 
stand)  is  50  cents.  In  the  case  of  the  sale  of  a  seat  under  the  above-mentioned 
contract  the  tax  to  be  collected  at  the  time  the  contract  is  made  is  $3.50  (5 
cents  for  each  of  the  70  games  scheduled),  and  if  extra  attractions  are  pre- 
sented on  the  field  at  any  time  during  the  period  for  which  the  seat  is  held, 
additional  tax  equivalent  to  10  per  cent  of  the  established  price  of  a  similar 
seat  must  be  collected  on  each  such  occasion,  whether  or  not  the  seat  is 
occupied.  The  person  who  occupies  the  seat  will,  of  course,  be  required  to 
pay  tax  on  the  amounts  paid  from  time  to  time  for  general  admission  to  the 
grand  stand,  but  this  tax  should  be  collected  only  when  payments  are  made 
for  general  admission. 

6660  (3)  The  same  club  sells  grand-stand  seats  under  contracts  which 
entitle  the  holders  to  occupy  same  on  all  occasions  when  attractions 

are  presented  on  the  field  between  April  15  and  October  15.  The  price  for 
one  of  these  seats  for  a  single  game  is  75  cents.  In  the  case  of  the  sale  of  a 
seat  under  the  above-mentioned  contract  the  tax  to  be  collected  at  the  time 
the  contract  is  made  is  $5.25  iJ}/2  cents  for  each  of  the  70  games  scheduled), 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


and  if  extra  attractions  are  presented  on  the  field  at  any  time  during  the 
period  for  which  the  seat  is  held,  additional  tax  equivalent  to  10  per  cent  of 
the  established  price  of  a  similar  seat  must  be  collected,  whether  or  not  the 
seat  is  occupied. 

6661  (4)  The  owners  of  a  certain  opera  house,  in  leasing  it  to  an  opera 
company,  reserve  for  their  own  use  the  whole  parterre  tier  of  thirty- 
live  6-seat  boxes,  paying  therefore  annually  the  sum  of  $70,000.  These 
boxes  are  distributed  among  the  various  owners,  $2,000  a  year  being  paid 
for  an  annual  lease  of  each.  There  are  no  similar  boxes  in  the  house,  but  the 
established  price  of  each  seat  in  the  box  in  the  next  tier,  which  is  less  desirable, 
is  $10  per  seat.  The  number  of  performances  during  the  season  is  fixed  in 
advance  at  100.  Each  lessee  of  such  a  box  on  paying  the  $2,000  for  the  season 
must  pay  a  tax  of  at  least  $600  (100  times  10  per  cent  of  6  times  $10),  to  be 
paid  over  in  turn  to  the  opera  company  and  the  collector  of  internal  revenue. 
This  minimum  figure  for  the  tax  is  based  on  the  established  price  of  the  box 
seats  which  are  the  most  nearly  similar,  but  which  are  less  desirable.  If  extra 
attractions  are  presented  at  any  time  during  the  period  for  which  the  box  is 
leased  additional  tax  equivalent  to  10  per  cent  of  the  established  price  of  a 
similar  box  must  be  collected  on  each  such  occasion,  whether  or  not  the  box 
is  occupied. 

6662  Art.  7.  Meaning  of  "lease." — This  tax,  as  stated  in  Article  6,  applies 
to  cases  where  a  person  has  the  permanent  use,  or  a  lease  for  the  use, 

of  a  box  or  seat  in  any  opera  house  or  other  place  of  amusement.  The  only 
term  here  used  that  seems  to  need  definition  is  the  term  "lease."  The  term 
"lease,"  as  used  in  the  foregoing  provision  of  the  law,  means  a  continuous 
and  exclusive  right  to  use  a  particular  box  or  seat  for  the  term  of  the  lease. 
The  term  "lease"  does  not  include  the  right  lo  use  a  box  or  seat  merely  on 
the  occasion  of  regular  performances  given  by  a  particular  company,  but  the 
contract  must  give  the  holder  of  the  box  or  seat  the  right  to  use  the  same 
whenever  an  attraction  of  any  kind  is  presented  in  that  place  during  the 
continuance  of  the  lease.  To  constitute  a  lease  of  a  box  or  seat  within  the 
meaning  of  these  provisions  of  the  Act  a  formal  document  of  lease  is  not 
necessary. 

6663  Examples. — The  following  are  examples  of  leases: 

(1)  A  person  owning  a  theater  leases  it  to  a  producing  company, 
reserving  the  right  to  the  perpetual  use,  without  charge,  of  a  certain  box. 

6664  (2)  The  owners  of  a  certain  opera  house,  in  leasing  it  to  an  opera 
company,  reserve  for  their  own  use  the  parterre  tier  of  35  boxes, 

paying  annually  $70,000.  These  boxes  are  distributed  among  the  various 
owners  at  $2,000  for  an  annual  lease. 

6665  (3)  A  corporation  owning  a  theater  gives  the  exclusive  right  to  the 
use  of  a  particular  box  for  a  year  to  all  stockholders  owning  1,000 

shares,  or  to  a  particular  seat  to  all  stockholders  owning  500  shares. 

6666  The  following  are  examples  of  agreements  which  are  not  leases: 

(4)  A  person  arranges  with  a  certain  theater  to  reserve  for  his  use  a 
certain  seat  in  the  orchestra  for  every  Monday  night  during  the  year.  The 
theater  is  a  vaudeville  house  which  has  two  performances  every  day,  the 
attractions  running  for  a  period  of  a  week.  Such  a  reservation,  being  for 
only  a  small  proportion  of  the  total  number  of  performances,  is  not  a  lease 
within  the  meaning  of  the  Act. 


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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6667  (5)  A  certain  grand-opera  company  which  owns  the  building  used 
by  it  has  a  regular  season  of  10  weeks  of  opera  every  winter,  per- 
formances being  given  every  night,  including  Sunday,  and  also  on  Saturday 
afternoons.  On  Sunday  afternoons  during  the  opera  season  concerts  are 
given  under  the  auspices  of  the  company  by  various  singers  of  the  company. 
Outside  of  the  opera  season  the  auditorium  in  which  the  opera  is  held  is 
rented  by  the  opera  company  for  various  public  meetings  and  theatrical 
attractions,  etc.,  in  order  to  secure  additional  income  for  the  support  of  the 
opera  company.  A  certain  person  reserves  a  box  for  every  performance  of 
the  opera  during  the  season,  this  reservation  not  including  the  Sunday  con- 
certs, nor,  of  course,  the  meetings  and  theatrical  attractions  outside  of  the 
opera  season.  This  reservation  does  not  constitute  a  "lease"  within  the 
meaning  of  the  Act,  because  it  does  not  give  the  holder  of  the  box  the  right 
to  use  the  same  whenever  an  attraction  of  any  kind  is  presented  in  the  place. 
Any  amounts  paid  for  admission  to  this  box  under  this  reservation  would, 
however,  be  taxable  under  section  800  (a)  (1)  unless  exempted  by  the  exemp- 
tion provisions  of  the  Act. 

666S    (6)  A  certain  choral  society  gives  a  series  of  10  concerts  every  winter. 

The  concerts  are  given  Sunday  nights  in  a  theatre,  the  use  of  which 
is  rented  for  these  occasions.  The  society  sells  subscription  tickets  which 
entitle  the  holder  to  the  use  of  a  particular  seat  for  all  10  of  the  concerts. 
Such  a  subscription  is  not  a  "lease"  within  the  meaning  of  the  Act. 


CHAPTER  THREE 


Roof  Gardens,  Cabarets,  or  Similar  Entertainments 

6669  Art.  8.  Basis,  rate,  and  computation  of  tax. — The  tax  imposed  under 
6505     the  above  provisions  of  the  act  applies  to  amounts  paid  for  admis- 
sion to  any  public  performance  for  profit  at  any  roof  garden,  cabaret, 

or  similar  entertainment,  to  which  the  charge  for  admission  is  wholly,  or  in 
part,  included  in  the  price  paid  for  refreshment,  service,  or  merchandise. 
If  the  admission  charge,  either  in  whole  or  in  part,  is  so  included,  20  per 
centum  of  the  total  amount  paid  for  refreshment,  service,  or  merchandise  is 
deemed  to  be  paid  for  admission. 

6670  Jf  a  fixed  admission  charge  is  imposed  and  it  is  fair  and  reasonable  in 
comparison  with  charges  made  for  similar  performances  or  entertain- 
ments under  different  circumstances,  such  charge  is  taxable  under  paragraph 
(1)  of  section  800  of  the  Act  and  the  tax  imposed  under  paragraph  (5)  above 
would  not  apply  to  amounts  peid  for  refreshment,  service,  or  merchandise. 
If  such  a-dmission  charge  is  inadequate  to  cover  the  cost  of  the  entertainment 
provided,  20  per  cent  of  the  charge  for  refreshment,  service,  or  merchandise 
is  taxable  under  paragraph  (5).  \\Tiere  a  specific,  and  apparently  adequate, 
admission  charge  is  made  but  the  prices  charged  for  refreshment,  service,  or 
merchandise  during  the  entertainment  are  higher  than  at  other  times,  the 
tax  under  paragraph  (5)  will  apply  to  the  amount  paid  for  refreshment,  etc., 
unless  it  is  shown  that  the  increase  is  due  to  other  causes. 

6671  The  fact  that  tax  is  paid  on  the  admission  charge  proper  under  para- 
graph (1)  will  not  operate  to  reduce  or  abate  the  tax  due  on  the 

price  paid  for  refreshment,  service,  or  merchandise.    Twenty  per  cent  of  the 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


amount  paid  for  the  latter  will  be  deemed  to  represent  a  charge  for  admission 
notwithstanding  the  payment  of  the  specific  but  inadequate  admission  charge. 
667  2  Charges  commonly  termed  cover  charges  are  not  considered  to  be 
charges  for  admission  within  the  provisions  of  paragraph  (1).  They 
represent  charges  for  service  and  should  be  included  in  the  total  charge  for 
refreshment,  service,  or  merchandise. 

6673  The  rate  of  this  tax  is  different  from  that  imposed  on  admissions 
proper  under  paragraph  (1).    However,  it  is  not  a  flat  3  per  cent  tax, 

but  is  at  the  rate  of  lj^  cents  for  each  10  cents  or  fraction  thereof  of  the 
proportion  (20  per  cent)  of  the  price  paid  for  refreshment,  service,  or  mer- 
chandise, which  represents  the  charge  for  admission.  In  practice  it  is  found 
more  convenient  to  compute  the  tax  on  the  basis  of  1 3^  cents  for  each  50 
cents  or  fraction  thereof  of  the  total  amount  paid  for  refreshment,  service, 
or  merchandise  in  connection  with  public  performances  or  entertainments 
at  roof  gardens,  cabarets,  etc.  The  process  is  simpler  and  the  result  is  always 
the  same. 

6674  Examples . —  (1)  A  certain  person  invites  four  of  his  friends  to  attend 
a  cabaret.    No  fixed  charge  is  made  for  admission.    His  check  for 

refreshments  for  the  party  amounts  to  $15.87.  As  50  cents  is  contained  in 
$15.87  thirty-one  and  a  fraction  times,  the  tax  in  this  case  is  48  cents  (32 
times  \}/2  cents). 

6675  (2)  A  certain  person  reserves  a  table  for  himself  and  three  friends  at  a 
roof-garden  entertainment  and  pays  $12  for  the  reservation,  this 

being  the  regular  price.  This  being  a  charge  for  admission,  and  apparently 
being  adequate,  there  is  no  tax  in  this  case  under  these  provision  of  the  Act, 
but  a  tax  of  $1.20  is  imposed  by  section  800  (a)  (1)  of  the  Act.  The  reser- 
vation of  each  seat  at  such  a  table  must  be  evidenced  by  a  ticket  (see  Article 
30)  and  this  ticket  must  comply  with  the  provisions  of  Article  31. 

6676  (3)  A  certain  restaurant  conducts  a  cabaret  in  its  main  dining  room 
every  evening  from  8  to  12  o'clock.    In  this  case  a  person  who  takes 

dinner  in  that  dining  room  and  leaves  the  room  before  8  o'clock  and  who 
therefore  does  not  witness  the  cabaret  at  all,  is  not  subject  to  any  tax  under 
these  provisions  of  the  Act. 

6677  (4)  In  this  same  restaurant  there  are  other  dining  rooms  so  entirely 
separate  from  the  main  dining  room  that  from  them  nothing  that  is 

going  on  in  the  main  dining  room  can  be  either  seen  or  heard.  Xo  cabaret 
performance  or  other  entertainment  is  furnished  in  these  other  rooms.  In  this 
case  no  person  dining  in  one  of  these  other  rooms,  even  during  the  time  that 
the  cabaret  performance  is  going  on  in  the  main  dining  room,  is  subject  to  any 
tax  under  these  provisions  of  the  Act. 

6678  (5)  A  hotel,  running  a  cabaret,  requires  every  person  entering  to 
purchase  a  50-cent  food  check.    This  check  is  later  accepted  as  50 

cents  in  payment  of  the  food  and  other  refreshments  consumed.  A  certain 
person  purchases  such  a  check  for  50  cents  and  spends  an  evening  at  the 
cabaret.  His  bill  at  the  end  of  the  evening  comes  to  $8.33,  and  he  pays  it  by 
handing  in  the  check  and  paying  $7.83  in  cash.  The  50  cents  so  paid  for  this 
check  is  not  "paid  for  admission"  within  the  meaning  of  the  Act.  The  tax  in 
this  case  is  based  on  the  $8.33  spent,  and  is  26  cents  (17  times  1^  cents). 

6679  (6)  A  certain  man  goes  to  a  cabaret  where  there  is  a  general  admis- 
sion charge  of  25  cents.    The  entertainment  provided  is  very  elab- 
orate, and  this  is  reflected  in  the  price  of  the  food.    His  bill  for  food  comes  to 
$12.37.    In  this  case  there  is  an  admission  tax  of  3  cents,  due  under  Article 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


1,  on  the  25  cents  paid  on  admission.  But  as  this  amount  is  clearly  inade- 
quate there  is  also  a  tax  of  38  cents  (25  times  \]/2  cents),  based  on  the  amount 
paid  for  food. 

6680  Art.  9.  Entertainments  included. — "Any  public  performance  for 
profit  at  any  roof  garden,  cabaret,  or  other  similar  entertainment" 

includes  every  public  vaudeville  or  other  performance  or  diversion  in  the 
way  of  acting,  singing,  declamation,  or  dancing,  either  with  or  without 
instrumental  or  other  music,  conducted  for  the  profit  of  the  management  by 
professionals,  amateurs,  or  patrons  under  the  auspices  of  the  management,  in 
connection  with  the  service  of  selling  of  food  or  other  refreshment  or  mer- 
chandise at  any  room  in  any  hotel,  restaurant,  hall,  or  other  public  place. 
Every  form  of  entertainment  so  conducted  is  included,  except  instrumental 
music  unaccompanied  by  any  other  form  of  entertainment. 

6681  Examples. — (1)  A  proprietor  of  a  dancing  establishment  provides 
for  the  serving  of  refreshments  to  his  patrons.    No  charge  is  made 

for  "admission"  or  for  dancing.  In  this  case  the  management  is  conducting 
an  entertainment  the  admission  charge  to  which  is  wholly  included  in  the 
price  paid  for  refreshments,  and  there  will  be  a  tax  under  these  provisions  of 
the  Act. 

6682  (2)  A  certain  hotel  provides  a  space  in  its  dining  room  for  dancing 
and  charges  50  cents  admission  to  everyone  entering  the  room.  The 

prices  charged  for  food  are  not  increased  to  cover  the  cost  of  the  entertain- 
ment furnished.  In  this  case  the  amount  paid  for  admission  is  not  included 
in  the  price  paid  for  refreshment  but  is  this  separate  50-cent  charge.  This 
charge,  therefore,  is  taxable  as  an  "amount  paid  for  admission"  under  section 
800  (a)  (1)  of  the  Act  and  the  tax  is  5  cents.    (See  Art.  1.) 

6683  (3)  A  certain  other  hotel  maintains  in  its  lobby  a  dancing  floor 
surrounded  by  tables  and  serves  refreshments  to  its  patrons  durin? 

the  dancing  hours.  No  charge  is  made  for  dancing.  This  is  a  case  of  a 
public  performance  for  profit  where  the  amount  paid  for  admission  is  wholly 
included  in  the  amount  paid  for  refreshment  and  there  will  be  a  tax,  therefore, 
under  these  provisions  of  the  Act. 

6684  (4)  A  certain  other  hotel  conducts  in  a  room  adjoining  its  dinine 
room,  during  tea  rime  and  in  the  evening,  an  entertainment  in  the 

form  of  dancing  for  its  patrons.  No  charge  is  made  to  those  desiring  to  dance. 
This  case,  as  the  one  mentioned  in  the  preceding  example,  is  a  case  where  the 
amount  paid  for  admission  to  a  public  performance  for  profit  is  wholly  included 
in  the  amount  paid  for  refreshment,  and  there  will,  therefore,  be  a  tax  under 
these  provisions  of  the  Act. 

6685  (5)  A  certain  college  alumni  association  gives  a  dinner  to  its  members 
and  invited  guests,  at  a  fixed  charge  per  plate,  at  a  certain  hotel. 

Entertainers  supplied  by  the  hotel  perform,  and  the  diners  themselves  dance 
in  an  open  space  provided  in  the  room.  In  this  case,  as  the  dinner  is  private, 
there  is  no  tax,  whether  the  cost  of  the  cabaret  performance  is  included  in 
the  charges  per  plate  or  is  paid  for  in  a  lump  sum  by  the  alumni  association. 

6686  (6)  A  certain  chamber  of  commerce  gives  a  dinner,  in  honor  of  a 
distinguished  man,  at  $5  a  plate.  Tickets  are  sold  to  anybody  desir- 
ing to  attend.  Entertainment  is  furnished  by  performers  supplied  by  ihe 
hotel  where  the  dinner  is  served.  In  this  case,  as  the  entertainment  is  sup- 
plied by  the  hotel,  it  is  clearly  for  profit,  and  as  the  affair  is  also  public  there 
is  a  tax  under  these  provisions  of  the  Act.    This  tax  applies  to  each  individual 

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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


payment  made  for  a  dinner  ticket  and  is  15  cents  (10  times  \}A  cents;  in  each 
case. 

6687  (7)  A  certain  social  club  gives  a  dance  at  a  hotel,  charging  $2  a  ticket 
to  both  men  and  women.  During  an  intermission  in  the  dancing 
a  light  buffet  supper  is  served.  In  this  case  the  $2  is  clearly  paid  for  admis- 
sion, and  there  is  a  tax  of  20  cents  under  section  800  (a)  (1)  of  the  Act  (see 
Art.  1). 


CHAPTER  FOUR 


Taxes  on  Charges  in  Excess  of  Established  Price 

6688  Art.  10.  Scope  and  basis  of  taxes. — While  two  distinct  taxes  are 

6502  imposed  under  the  provisions  of  the  Act  quoted  above — one  on  excess 

6503  charges  for  tickets  or  cards  of  admission  sold  at  places  other  than 
the  ticket  offices  of  the  theaters,  operas,  or  other  places  of  amuse- 
ment for  which  they  are  valid  for  admission,  and  the  other  on  excess  charges 
imposed  by  the  proprietors,  managers,  or  employees  of  such  places — they  are 
on  a  common  basis  and  the  scope  of  each  is  the  same.  Hence  there  are  certain 
rules  generally  applicable  to  both.  These  will  be  found  in  this  and  in  the 
succeeding  article. 

6689  The  tax  on  excess  charges,  whether  imposed  at  the  box  office  or  by 
brokers,  is  of  more  limited  application  than  the  tax  on  admissions 

proper.  The  former  attaches  only  to  excess  charges  on  tickets  or  cards  of 
admission  valid  for  admission  to  theaters,  operas,  or  other  places  of  amusement, 
whereas  the  tax  on  admissions  attaches  to  amounts  paid  for  admission  to 
any  place  (see  Art.  1).  Thus,  there  are  many  cases  where  an  admission  tax 
is  due  which  do  not  come  within  the  scope  of  the  excess-charge  taxes.  On 
the  other  hand,  all  cases  to  which  the  excess-charge  taxes  apply  do  not  neces- 
sarily fall  within  the  scope  of  Section  (a)  (1).  As  shown  in  Article  1,  the  full 
amount,  including  excess  charges,  paid  for  admission  to  the  theater  or  person 
controlling  the  same  is  subject  to  the  latter  tax,  which  must  be  paid  by  the 
person  paying  for  admission.  However,  excess  charges  paid  to  brokers  or 
persons  who  do  not  control  such  admission  are  not  regarded  as  payments  for 
admission  to  any  place  and  are  not  therefore  subject  to  such  tax.  The  taxes 
on  charges  in  excess  of  the  regular  or  established  price  (see  Art.  11),  whether 
the  ticket  or  card  of  admission  is  sold  at  the  box  office  or  elsewhere,  are  to  be 
paid  by  the  person  selling  such  ticket  or  card  of  admission.  These  taxes  are 
therefore  distinct  from  and  in  addition  to  the  admissions'  tax. 

6690  Art.  11.  Regular  or  established  price  defined. — By  the  "regular  or 
established  price"  of  admission  is  meant  the  full-rate  price  fixed  by 

the  person  controlling  such  price  at  the  beginning  of  the  first  sale  or  dis- 
tribution of  tickets  or  cards  valid  on  that  occasion  as  the  price  to  be  charged 
for  that  particular  class  of  admissions.  The  person  in  control  has,  of  course, 
the  power  to  fix  the  price  to  be  actually  charged  for  admission.  He  has, 
therefore,  the  power  to  determine  the  established  or  regular  price.  But  as 
an  established  price  is  a  matter  of  substance,  not  of  name,  the  mere  fact 
that  he  calls  a  price  an  "established  price"  does  not  make  it  such.  Nor  are 
the  prices  he  charges  for  particular  admissions  necessarily  the  established  or 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


regular  prices  of  such  admissions.  If  he  arbitrarily  sets  different  prices  on 
admissions,  under  similar  circumstances,  to  accommodations  in  all  substan- 
tial respects  similar,  these  different  prices  will  not  be  the  established  or  regular 
prices  of  the  respective  admissions  for  which  they  are  charged,  but  the  lowest 
price  among  them  will  be  the  established  or  regular  price  of  all  such  admissions. 
The  established  or  regular  price  of  admission  can,  of  course,  be  uniform  or  can 
vary  in  accordance  with  the  accommodations  to  which  admission  is  granted, 
increasing  from  the  price  of  a  mere  general  admission  through  the  various 
grades  of  accommodations  to  the  best  accommodations.  Any  scale  of  prices, 
adopted  in  good  faith,  in  which  the  prices  increase  regularly  with  the  increase 
of  accommodation,  will  be  considered  to  show  the  true  established  or  regular 
prices  of  admission  to  such  respective  accommodations;  but  the  variation  of 
prices  must  be  regular  and  based  on  a  real  difference  of  accommodation  and 
not  merely  arbitrary.  The  established  price  of  an  admission  need  not  be  the 
same  for  different  attractions  or  even  for  different  performances  of  the  same 
attraction;  but  when  tickets  have  once  been  put  on  sale  for  a  particular 
performance  or  attraction  the  price  of  admission  for  every  accommodation 
at  that  performance  or  attraction  has  been  established.  Established  prices 
of  admission  once  so  adopted  are  not  affected  by  the  mere  sale  of  admissions 
at  prices  different  from  the  ones  so  established.  Nor  can  established  prices 
once  so  adopted  for  any  occasion  be  increased  for  that  occasion.  If  sold 
at  a  higher  price  the  excess  charge  will  be  taxable.  Prices  once  established 
or  adopted  may  be  reduced,  but  in  such  case  liability  to  excess-charge  taxes 
with  respect  to  all  admissions  sold  at  the  original  established  prices  can  be 
avoided  only  by  complying  with  the  following  conditions: 

6691  (1)  Any  reduction  of  established  price  must  include  all  admissions 
of  that  particular  established  price  and  must  grant  an  equal  reduction 

in  the  case  of  each;  (2)  such  reduction  must  not  result  in  setting  a  lower  price 
on  admission  to  certain  accommodations  than  is  charged  on  that  occasion 
under  similar  circumstances  for  admission  to  accommodations  which  are  in 
all  substantial  respects  similar;  (3)  public  notice  must  be  promptly  given  of 
the  reduction  and  of  the  fact  that  every  person  having  paid  for  admission 
at  the  former  established  price  can  secure  a  refund  at  any  reasonable  time  of 
the  amount  he  paid  in  excess  of  the  new  established  price;  and  (4)  such  refunds 
must  be  actually  made  promptly  on  request. 

6692  The  foregoing  provisions  of  this  article  relate  to  single  admissions, 
but  they  also  control  in  the  case  of  season  tickets  and  subscriptions. 

A  season  ticket  may  be  denned  as  a  contract  which  entitles  the  holder  to 
admission  at  all  times  during  a  season,  or  at  regular  specified  times  during  the 
entire  season.  It  may  include  admission  to  all  performances  for  the  season 
or  at  specified  nights  or  performances  during  the  entire  season.  A  subscrip- 
tion ticket  is  one  which  is  issued  to  a  person  who  subscribes  a  sum  of  money 
to  the  expense  of  an  entertainment  or  who  agrees  to  bear  a  portion  of  the 
expense. thereof  when  the  amount  is  ascertained.  The  established  price  for 
such  ticket  or  subscription  is  the  amount  fixed  (at  the  beginning  of  the  sale  of 
such  ticket  or  subscription  by  the  person  controlling  the  price)  as  the  price  to 
be  charged  therefor. 

6693  The  price  (exclusive  of  the  tax  imposed  under  paragraph  (l)  of  section 
800  (a))  at  which  every  ticket  or  card  of  admission  is  sold  must  be 

conspicuously  and  indelibly  printed,  stamped,  or  written  on  the  portion 
thereof  which  is  to  be  taken  up  by  the  management  of  the  theater,  opera,  or 
other  place  of  amusement  for  which  it  is  valid  (see  Art.  31).    And  if  sold 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


at  a  place  other  than  the  ticket  office  of  the  theater,  opera,  or  other  place  of 
amusement  the  name  of  the  vendor  must  also  be  shown  (see  Art.  31). 

A— BOX-OFFICE  SALES 

6694  Art.  12.  Rate  and  computation  of  tax. — Where  a  proprietor,  manager, 
6503     or  employee  of  any  opera  house,  theater,  or  other  place  of  amusement 

sells  or  disposes  of  any  ticket  or  card  of  admission  for  an  amount 
in  excess  of  the  regular  or  established  price  or  charge  therefor,  as  outlined 
in  Article  11,  the  excess  portion  of  the  price  for  which  it  is  so  sold  or  disposed 
is  subject  to  the  tax  of  50  per  cent  imposed  under  paragraph  (3)  of  section 
800  of  the  Act.  The  rate  of  the  tax  is  always  50  per  cent  regardless  of  the 
amount  by  which  the  selling  price  exceeds  the  regular  or  established  price. 
This  tax  is  to  be  paid  by  the  person  selling  or  disposing  of  the  ticket,  and,  as 
shown  in  Article  10,  is  distinct  from,  and  in  addition  to,  the  admissions  tax 
(Art.  1),  which  is  to  be  paid  by  the  person  to  whom  the  ticket  is  sold. 

6695  The  fact  that  this  tax  is  on  a  percentage  basis  makes  possible  a  tax 
involving  a  fraction  of  a  cent.    As  the  tax  is  based  on  each  excess 

charge  imposed,  several  items  of  tax  each  involving  a  fractional  part  of  a  cent 
may  be  due  with  each  monthly  return.  These  several  fractions  should  be 
preserved  or  included  in  computing  the  total  tax  due  with  any  given  return. 
If  the  total  thus  obtained  involves  a  fraction  of  a  cent  equal  to  one-half  cent 
or  more,  it  shall  be  increased  to  1  cent;  otherwise  it  shall  be  disregarded. 

6696  Examples. — (1)  The  established  price  of  the  seats  in  the  orchestra 
of  a  certain  theater  is  $2.    These  seats  are  put  on  sale  three  weeks  in 

advance.  The  running  attraction  being  very  popular,  the  management 
decides  one  Friday  night  to  increase,  by  25  cents,  the  price  of  all  orchestra 
seats  for  the  next  week  still  unsold.  In  this  case,  as  an  increase  so  made  can 
not  affect  the  established  price,  that  price  remains  $2.  Therefore,  a  tax  of 
12J/2  cents  is  due  from  the  theater  in  the  case  of  each  ticket  for  one  of  these 
seats  sold  for  $2.25,  in  addition  to  the  23  cents  tax  payable  by  the  purchaser 
of  each  ticket.  In  making  its  return  at  the  end  of  the  month  the  theater 
should  add  together  all  of  these  12j^-cent  taxes,  and  if  the  total  sum  ends  in 
a  half  cent  (as,  for  example,  $227.37^),  then  the  tax  to  be  paid,  complying 
with  section  1306  of  the  Act,  will  be  one-half  cent  greater  than  this  amount 
(in  other  words,  $227.38). 

6697  (2)  If,  in  the  case  outlined  in  the  preceding  example,  the  attrac- 
tion had  proven  unpopular,  resulting  in  a  reduction  of  the  established 

price  to  $1.50,  the  management  would  be  liable  to  a  tax  of  25  cents  on  each 
ticket  or  card  of  admission  sold  at  the  original  established  price  of  $2,  unless 
the  conditions  enumerated  in  Article  11  were  complied  with. 

B— BROKERS  SALES 

6698  Art.  13.  Rate  and  computation  of  tax. — The  rate  of  the  excess-charge 
6502     tax  in  the  case  of  cards  or  tickets  of  admission  sold  at  news  stands, 

hotels,  and  places  other  than  the  ticket  offices  of  the  theaters,  operas, 
or  other  places  of  amusement,  unlike  that  imposed  on  the  proprietors,  mana- 
gers, or  employees  of  opera  houses,  theaters,  or  other  places  of  amusement 
(see  Art.  12),  depends  on  the  amount  by  which  the  selling  price  exceeds  the 
regular  or  established  price.  If  the  excess  charge  is  50  cents  or  less,  the  rate 
of  tax  is  5  per  cent  of  such  excess  charge;  if  more  than  50  cents,  the  rate  is 
50  per  cent  of  the  excess  charge. 

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3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6699  In  determining  the  amount  of  the  excess  charge,  the  amount  of  any 
tax  imposed  under  paragraph  (1)  of  section  800  (a)  is  taken  into 

consideration.  That  is  to  say,  such  tax  is  always  added  to  the  regular  or 
established  price  and  the  sum  so  obtained  is  subtracted  from  the  selling  price. 
The  remainder  represents  the  excess  charge,  and  the  5  per  cent  or  50  per  cent 
tax  applies  according  as  the  charge  amounts  to  50  cents  or  less  or  exceeds 
that  amount.  Where  the  excess  charge  is  more  than  50  cents,  the  whole 
amount  of  such  excess  charge  is  taxable  at  the  50  per  cent  rate.  Thus,  by 
way  of  illustration,  if  a  ticket  broker  sells  for  $2.50  a  ticket  or  card  of  admis- 
sion the  regular  or  established  price  of  which  is  $2,  the  excess  charge  is  not 
50  cents,  but  30  cents.    This  is  determined  in  the  following  manner: 

Established  price  $2.00 

Admission  tax  thereon  20 

Total   2.20 

Sale  price  $2.50 

Difference  representing  taxable  excess  charge  30 

Tax  due  (5  per  cent  rate)  015 

6700  Had  the  broker  sold  this  ticket  for  $3,  his  tax  liability  would  have 
been  as  shown  below: 

Established  price  $2.00 

Admission  tax  thereon  20 

Sale  price  $3.0Q  ^  a 

Difference,  representing  taxable  excess  charge  80 

Tax  due  (50  per  cent  rate)  40 

However,  should  the  broker  in  each  of  the  preceding  examples  reimburse 
himself  by  collecting  from  his  customer  the  amount  of  the  admission  tax 
imposed  under  section  800  (a)  (1),  the  total  sale  price  of  each  ticket  would 
then  be  $2.70  and  $3.20,  respectively,  and  the  tax  on  the  excess  charges  of 
$0.50  and  $1  would  be  $0,025  and  $0  50,  respectively. 

6701  No  admission  tax  is  due  or  collectible  by  the  broker  in  this  connection, 
since  such  tax  has  already  been  paid  to  and  collected  by  the  theater 

or  person  controlling  the  admission. 

6702  The  tax  on  excess  charges  applies  to  tickets  or  cards  of  admission 
to  theaters,  operas,  or  other  places  of  amusement  "sold  at  news 

stands,  hotels,  and  places  other  than  the  ticket  offices  of  such  theaters, 
operas,  or  other  places  of  amusement"  at  prices  in  excess  of  the  regular  or 
established  prices  at  such  ticket  offices.  Therefore,  any  person  who  in  his 
individual  capacity  and  not  as  an  employee  or  representative  of  a  theater, 
opera,  or  other  place  of  amusement,  sells  or  disposes  of  tickets  or  cards  of 
admission  at  prices  in  excess  of  the  regular  or  established  prices  at  the  ticket 
offices  of  such  theater,  opera,  or  other  place  of  amusement  is  liable  to  the 
payment  of  this  tax.  This  liability  attaches  whether  or  not  the  selling  or 
disposing  of  such  tickets  or  cards  of  admission  is  the  principal  business  or 
occupation  of  such  person. 

6703  As  this  is  a  percentage  tax,  like  that  imposed  on  excess  charges 
imposed  by  theaters,  operas,  or  other  places  of  amusement  (see 

Art.  12),  individual  transactions  will  frequently  result  in  a  tax  involving  a. 
fraction  of  a  cent.  These  fractional  parts  of  cents  should  be  preserved  in 
computing  the  monthly  total  of  tax  due.  If  the  grand  monthly  total  involves 
a  fraction  of  a  cent  equal  to  one-half  cent  or  more,  it  shall  be  increased  to  1 
cent;  otherwise  it  shall  be  disregarded. 

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3-2-22.  Reg.  43,  Rev.— Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 

6704  It  should  be  particularly  noted  that  this  tax  is  based  on  the  amount 
charged  in  excess  of  the  established  price,  not  in  excess  of  the  price 

the  broker  pays.  The  fact  that  the  broker  himself  may  have  paid  the  theater, 
opera,  or  other  place  of  amusement  more  than  the  established  price  for  a  ticket 
or  card  of  admission  sold  or  disposed  of  by  him  does  not  affect  the  tax  to  be 
paid  by  the  broker  on  an  excess  charge  made  by  him.  In  other  words,  if  a 
theater  makes  an  excess  charge  to  a  broker,  and  the  broker  in  turn  makes  an 
equal  or  greater  excess  charge  to  his  customer,  then  both  the  theater  and  the 
broker  must  pay  an  excess-charge  tax  on  the  amount  of  the  excess  charge 
over  the  established  price. 

6705  Where  a  ticket  is  sold  by  a  theater  to  a  broker  at  the  established 
price  and  it  thereafter  passes  through  the  hands  of  one  or  more  brokers 

before  being  sold  to  a  user,  each  broker  who  sells  the  ticket  for  an  amount 
in  excess  of  the  established  price  must  pay  the  tax  on  the  whole  amount  by 
which  his  selling  price  exceeds  the  amount  of  the  established  price  of  the 
ticket  at  the  ticket  office  of  the  theater,  opera,  or  other  place  of  amusement 
plus  the  tax  imposed  on  such  established  price  under  paragraph  (1)  of  section 
800  (a).  For  information  as  to  the  manner  in  which  returns  shall  be  made 
and  the  tax  paid  over  by  brokers,  and  as  to  how  they  may  reimburse  them- 
selves or  take  credit  for  taxes — both  admission  and  excess-charge — paid  by 
them,  see  Article  36. 

6706  Examples. — (1)  A  certain  ticket  broker  purchases  from  a  theater 
a  block  of  tickets  for  seats  in  the  orchestra,  the  established  price  of 

admission  to  which  is  $2,  and  resells  them  at  an  excess  charge  of  50  cents  per 
ticket.  The  taxes  to  be  collected  and  paid  by  the  theater  and  broker  in  this 
case  are  as  follows: 

Theater 

Receives  from  broker  Must  pay  to  collector 

Established  price  '   $2.00  which  it  retains. 

Admission  tax  20  which  it  must  pay  to  collector   $0.20 

Total   2.20  Total  20 

Broker 

Receives  from  customer  Must  pay  to  collector 

Established  price   $2.00  which  he  retains. 

Additional  charge  20  which  he  retains  as  refund  of  admis- 
sion tax  paid  to  theater. 

Excess  charge  50  of  which  he  must  pay  as  tax  to 

collector  $0,025 

Total   2.70  Total  025 

6707  (2)  In  the  preceding  example  had  the  theater  charged  the  broker 
* $2.25  for  the  tickets,  the  established  price  of  which  was  $2,  and  the 

broker  in  turn  had  increased  the  excess  charge  by  25  cents,  the  taxes  to  be 
collected  by  the  theater  and  broker  would  have  been  as  follows: 

Theater 

Receives  from  broker  Must  pay  to  collector 

Established  price   $2.00  which  it  retains. 

Excess  charge  25  of    which    it    must    pay    as    tax  to 

collector  $0,125 

Admission  tax  23  which  it  must  pay  to  collector  23 

Total   2.48  Total  355 


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WAR  TAX  1341  SERVICE 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 
Broker 

Receives  from  customer  Must  pay  to  collector 

Established  price   $2.00  which  he  retains. 

Additional  charge   .23  which  he  retains  as  refund  of  admis- 

sion tax  paid  to  theater. 

Excess  charge   .50  of   which   he   must   pay   as   tax  to 

collector. .       / . .     '\,     A  .   »  ...  $25 


Total   2.73  Total  025 

6708    (3)  Again,  had  the  theater  charged  the  broker  $2.50  for  the  $2  seats 
and  the  broker  in  reselling  them  had  increased  the  excess  charge  by 
$1.25,  the  tax  to  be  collected  and  paid  by  each  would  have  been  as  follows: 

Theater 

Receives  from  broker  Must  pay  to  collector 

Established  price   $2.00  which  it  retains. 

Excess  charge   .50  of   which   it   must   pay   as   tax  to 

collector   $0.25 

Admission  tax  25  which  it  must  pay  to  collector  25 


Total   2.75  Total   .50 

Broker 

Receives  from  customer  Must  pay  to  collector 

Established  price   $2.00  which  he  retains. 

Additional  charge  25  which  he  retains  as  refund  of  admis- 
sion tax  paid  to  theater. 

Excess  charge   1.75  of  which   he  must  pay  as  tax  to 

collector  $0,875 


Total   4.00  Total   0.875 

6709  (4)  A  ticket  broker  purchases  from  a  theater  a  block  of  tickets  for 
seats,  the  established  price  of  admission  to  which  is  $2,  and  resells 

them  at  an  excess  charge  of  50  cents  per  ticket.  He  has  an  arrangement 
with  the  theater,  however,  by  which  half  this  excess  charge  so  received  by  him 
is  to  be  paid  to  the  theater  as  a  rebate.  In  this  case  this  rebate  of  25  cents 
received  by  the  theater  is  in  fact  an  excess  charge  made  by  it.  The  theater, 
therefore,  will  be  subject  to  a  tax  of  50  per  cent  of  that  amount  (12j/£  cents) 
as  a  tax  on  an  excess  charge.  The  final  result  as  to  taxes,  etc.,  will  be  the 
same,  therefore,  as  that  shown  under  example  2  above. 

6710  (5)  A  theater-ticket  agency  procures  tickets  from  various  theaters 
with  the  privilege  of  returning  an  hour  before  the  performance  starts 

all  tickets  for  that  performance  then  unsold.  Such  agency  charges  for  each 
ticket  sold  10  cents  more  than  the  sum  of  the  established  price  and  the  amount 
paid  to  the  theater  as  an  admission  tax,  and  terms  this  10-cent  charge  a 
"service  charge."  In  this  case  it  is  clear  that  the  10-cent  advance  is  in  fact 
an  excess  charge  and  that  the  agency  is  liable  for  an  excess-charge  tax  of 
cent. 


CHAPTER  FIVE 


Exemptions 


6711    Art.  14.  Taxes  to  which  exemption  applies. — Two  classes  of  taxes 
6506     are  imposed  by  section  800  (a):  (1)  A  tax  on  admissions  proper, 
which  is  to  be  paid  by  the  person  paying  for  admission^(see  Chapter 


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3-2-22. 


Reg.  43,  Rev.- — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


One),  and  (2)  a  tax  on  charges  in  excess  of  the  regular  or  established  price, 
which  is  to  be  paid  by  the  person  selling  or  disposing  of  tickets  or  cards  of 
admission  at  prices  in  excess  of  the  regular  or  established  price  thereof  (see 
Chapter  Four). 

6712  One  of  the  conditions  on  which  the  exemption  herein  provided,  in 
the  case  of  organizations,  societies,  and  persons  coming  under  classi- 
fication (1),  (A),  (B),  and  (C),  is  predicated  is  that  all  the  proceeds  of  the  ad- 
missions must  inure  exclusively  to  the  benefit  of  such  organizations,  societies, 
or  persons. 

6713  This  exemption  was  clearly  intended  to  apply  to  both  classes  of  taxes. 
In  cases  where  both  taxes  are  applicable  it  frequently  happens  that 

the  proceeds  of  the  admissions  and  the  proceeds  of  the  excess  charges  will 
inure  to  the  benefit  of  different  persons;  that  is,  an  organization  entitled  to 
exemption  may  receive  all  the  proceeds  of  the  admission  proper,  while  the 
proceeds  of  the  excess  charges  may  accrue  to  the  benefit  of  an  organization  or 
persons  not  entitled  to  exemption. 

6714  In  such  cases  it  is  necessary,  in  order  to  put  into  effect  the  manifest 
intent  of  the  law,  to  construe  this  exemption  provision  as  applying 

separately  to  each  of  the  taxes.  So,  where  all  the  proceeds  of  admissions  proper 
inure  exclusively  to  the  benefit  of  organizations  or  persons  coming  within  this 
provision  of  the  Act  the  exemption  will  apply  with  respect  to  such  admis-- 
sions,  even  though  the  proceeds  of  the  excess  charges  go  to  the  benefit  of  non-. 
exempt  organizations  or  individuals.  Conversely,  if  all  the  proceeds  of  the 
excess  charges  inure  exclusively  to  the  benefit  of  exempt  organizations  or 
persons,  such  excess  charges  will  be  exempt  from  tax,  although  amounts 
paid  for  the  admissions  proper  are  taxable  under  paragraph  (1)  of  section, 
800(a). 

6715  The  term  "all  the  proceeds"  is  held  to  mean  all  the  proceeds  of  the 
admissions  and  excess  charges,  as  the  case  may  be,  after  the  payment 

of  reasonable  expenses.  These  expenses  need  not  necessarily  be  on  a  fixed 
or  guaranty  basis,  but  may  also  be  based  upon  a  certain  percentage  of  the 
receipts  or  the  number  of  admissions  sold,  provided  the  contingent  feature  of 
the  contract  is  reasonable  and  operates  solely  for  the  benefit  of  an  exempt 
organization  or  person.  Thus,  where  services,  property,  rentals,  and  other 
items  of  expense  are  engaged  on  a  percentage  basis,  or  the  amounts  to  be  paid 
therefor  are  dependent  in  whole  or  in  part  upon  the  amounts  received  from  the 
sale  of  admissions  or  from  excess  charges,  the  right  to  exemption  is  not  neces- 
sarily defeated,  unless  the  net  proceeds  after  the  deduction  of  all  reasonable 
expenses  do  not  inure  exclusively  to  the  benefit  of  an  organization  or  person 
entitled  to  exemption  under  section  800(b)  of  the  Act.  Where,  however,  by 
reason  of  a  contingent  agreement  as  above  described,  the  partial  guaranty 
plus  the  percentage  of  the  receipts  equal  an  amount  greater  than  the  regular 
fixed  price  charged  for  the  talent,  then  the  exemption  from  admissions  tax  is 
defeated  for  the  net  proceeds  of  admissions  do  not  inure  exclusively  to  an 
exempt  organization  or  person  unless,  of  course,  both  the  organization  fur- 
nishing the  talent  and  the  organization  giving  the  entertainment  qualify  as 
such. 

6716  The  essential  qualifications  of  exempt  organizations  and  persons  are 
discussed  in  Arts.  15-28,  infra.    As  to  the  procedure  to  be  followed 

in  securing  exemption,  see  Art.  29. 

6717  Examples. — (l)  A  woman's  auxiliary  of  a  charitable  hospital  in  a 
large  city  gives  an  entertainment  for  the  benefit  of  the  hospital.^  The 

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.'3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMiSSIONS  AND  DUES  REGULATIONS. 


established  price  of  admission  to  all  seats  is  $3.  This  organization,  which 
qualifies  as  exempt  under  section  800(b),  is  largely  made  up  of  society  women, 
and  seats  are  very  much  in  demand.  A  certain  ticket  broker  secures  a  large 
number  of  them  and  sells  them  at  $4  apiece.  In  this  case  the  admissions 
proper  are  exempt  from  the  Taxes  on  Admissions,  in  spite  of  the  fact  that  the 
proceeds  of  the  excess  charges  made  by  the  broker  go  into  his  pocket.  There- 
fore no  admission  tax  need  be  charged  to  the  broker  or  anyone  else  on  the 
original  sale  of  the  tickets.  However,  he  must  pay  an  excess-charge  tax  of 
50  cents  on  each  ticket  sold. 

67  18  (2)  A  certain  society  circus,  the  established  price  of  admission  to 
which  is  $5,  is  given  for  the  benefit  of  the  Salvation  Army.  Many  of 
the  tickets  to  this  circus  are  auctioned  off  by  the  management  at  a  large 
advance  in  price  and  the  proceeds  of  the  auction  also  given  the  Salvation 
Army.  In  this  case  no  taxes  are  imposed  on  either  the  admissions  proper 
or  the  excess  charges. 

6719  (3)  A  certain  charitable  organization,  which  qualifies  as  exempt 
under  section  800(b),  purchases  from  the  box  office  of  a  theater,  in 

the  regular  way  and  at  the  established  price,  fifty  $2  tickets.  It  sells  them  all 
for  $5  apiece  (exclusive  of  any  admission  tax)  for  the  benefit  of  the  charity. 
In  this  case  an  admission  tax  of  20  cents,  based  on  the  $2  paid  to  the  theater, 
must  be  paid  on  each  ticket  at  the  time  of  its  purchase.  (Of  course,  it  can 
if  it  desires  collect  20  cents  more  to  cover  the  admission  tax  it  paid  to  the 
theater.)  On  the  other  hand,  no  excess-charge  tax  is  due  from  the  charitable 
organization  on  account  of  the  sale  of  these  tickets  at  an  excess  charge. 

6720  Art.  15.  Basis  of  exemption. — It  is  to  be  noted  that  the  basis  on  which 
exemption  rests  in  the  case  of  organizations  and  persons  coming  within 

classification  or  subdivision  (1)  of  this  provision  of  the  Act  differs  from  that 
applicable  in  the  case  of  agricultural  fairs,  which  are  covered  by  classification 
or  subdivision  (2).  As  shown  in  the  preceding  Art.  (14),  in  the  case  of  the  first 
class  of  organizations  or  persons  the  right  to  exemption  depends  on  whether 
all  the  proceed  sol  the  admissions,  or  excess  charges,  as  the  case  may  be,  inure 
exclusively  to  the  benefit  of  such  organizations  or  persons.  Aside  from  this 
condition,  it  is  only  necessary,  in  order  to  secure  exemption,  to  establish  the 
character  of  the  beneficiary  organizations  or  persons.  It  is  not  necessary  that 
the  organization  or  persons  selling  the  admissions,  or  controlling  the  affair 
to  which  the  admissions  are  sold,  be  entitled  to  exemption  so  long  as  all  the 
proceeds  of  such  admissions  inure  to  the  benefit  of  an  organization  or  person 
that  qu1  alines  as  exempt.  In  other  words,  the  character  of  the  organization  or 
person  receiving  all  the  proceeds  of  the  admissions  or  excess  charges,  and  not 
the  character  of  the  organization  or  persons  selling  the  admissions,  determines 
whether  or  not  exemption  applies.  Admissions  to  any  place,  regardless  of 
the  nature  of  the  attraction  or  affair,  are  exempt  if  all  the  proceeds,  as  defined 
in  Art.  14,  inure  exclusively  to  the  benefit  of  an  organization  or  a  person  or 
persons  included  in  this  provision  of  the  Act. 

6721  On  the  other  hand,  in  the  case  of  agricultural  fairs,  exemption  applies 
only  in  respect  to  admissions  to  agricultural  fairs  as  such,  or  to  ex- 
hibits, entertainments,  or  other  pay  features  conducted  as  part  oi  such  fairs. 
Admissions  to  any  other  place  would  not  be  exempt  even  though  all  the  pro- 
ceeds thereof  inured  exclusively  to  the  benefit  of  an  agricultural  fair  associa- 
tion. 

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6722    On  account  of  the  different  bases  on  which  exemption  is  funded,  as 
herein  outlined,  the  two  classes  of  cases  will  be  dealt  with  separately 
in  the  following  articles.    First,  with  respect  to — 

ORGANIZATIONS  OTHER  THAN  AGRICULTURAL  FAIRS 

6  723  Art.  16.  Necessary  character  of  organization.— For  an  organization 
to  be  considered  a  religious,  education,  or  charitable  institution, 
society,  or  organization  within  the  meaning  of  the  Act:  (1)  It  must  have  a 
definite  organization,  with  officers,  directors,  or  trustees,  and  the  usual 
essential  features  (incorporation  not  being  essential)  of  an  association  of  its 
class;  (2)  it  must  have  a  purpose  which  as  put  into  practice  is  religious,  edu- 
cational, or  charitable;  and  (3)  its  funds  must  be  used  solely  in  furtherance 
of  such  purpose,  none  of  them  being  paid  or  otherwise  distributed  to  any  of 
its  members  except  as  charity  or  as  reasonable  compensation  for  services 
actually  rendered. 

6724  For  an  organization  to  be  considered  a  "  society  for  the  prevention 
of  cruelty  to  children  or  animals"  it  must  comply  with  conditions 
(1)  and  (3)  of  the  preceding  sentence,  and  also  with  condition  (2),  except  that 
in  its  case  the  purpose  to  be  expressed  and  put  into  practice  must  be  the 
specific  purpose  of  the  prevention  of  cruelty  to  children  or  animals,  or  both, 
and  not  one  of  the  three  general  purposes  mentioned  in  condition  (2). 
67  25  Societies  or  organizations  conducting  symphony  orchestras  must 
comply  with  conditions  (1)  and  (3).  Moreover,  before  exemption 
can  be  extended  to  such  a  society  or  organization  it  must  affirmatively  show 
(a)  that  the  conducting  of  a  symphony  orchestra  is  its  sole  purpose,  and  (b) 
that  it  receives  substantial  support  from  voluntary  contributions. 
6726  Societies  or  organizations  conducted  for  the  purpose  of  improving 
any  city,  town,  village,  or  other  municipality  must  likewise  comply 
with  conditions  (1)  and  (3),  and  must  furthermore  show  that  this  is  their  sole 
purpose.  The  same  rule  applies  to  societies  or  organizations  conducted  for 
the  purpose  of  maintaining  cooperative  or  community  center  moving-picture 
theaters. 

672?  It  should  be  carefully  noted  that,  while  exemption  is  granted  only 
to  organizations  operating  on  a  nonprofit  basis,  the  mere  fact  that  an 
organization  is  not  organized  or  operated  for  gain  or  profit  does  not  afford  a 
basis  for  exemption.  To  be  entitled  to  such  exemption  the  organization 
must  comply  with  the  other  conditions  herein  outlined.  There  is  no  require- 
ment, expressed  or  implied,  that  an  institution,  society,  or  organization  to  be 
included  within  these  exemption  provisions  must  be  organized  or  operating 
in  the  LTnited  States. 

6728  As  to  the  procedure  to  be  followed  in  securing  exemption,  see  Art.  29. 

6729  Art.  17.  Religious  organizations. — Admissions,  or  excess  charges, 
all  the  proceeds  of  which  (after  payment  of  reasonable  expenses) 

inure  exclusively  to  the  benefit  of  religious  institutions,  societies,  or  organiza- 
tions are  exempt  from  tax.  Churches  and  theological  seminaries  are  the 
commonest  cases  of  religious  institutions.  Missions  and  missionary  societies 
also  clearly  fall  within  the  exemption.  Church  societies  are  religious  societies 
only  if  they  share  in  the  religious  purpose  of  the  church.  Nation-wide 
organizations  which  are  not  church  organizations  but  which  have  as  their 
purpose  the  furtherance  of  religion  are  religious  societies. 

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6730  Examples. — (1)  The  members  of  a  certain  church  form  a  club  for 
social  and  athletic  purposes  and  hold  their  meetings  in  one  of  the 

church  buildings.  In  order  to  raise  money  for  club  purposes  they  give 
dances  and  other  entertainments.  In  this  case,  as  the  club  is  not  formed  or 
operated  for  religious  purposes,  but  purely  for  social  and  athletic  purposes, 
admission  to  these  dances  and  entertainments  are  not  exempt  on  the  ground 
that  the  club  is  a  religious  organization. 

6731  (2)  A  certain  church  organizes  a  men's  club  to  increase  community 
feeling,  and  while  the  meetings  are  opened  with  prayer  the  club  itself 

has  no  religious  purpose  and  members  of  all  religions  and  denominations  are 
entitled  to  membership.  This  club,  though  holding  its  meetings  in  the  church 
building  itself,  is  not  a  religious  organization  within  the  meaning  of  the  Act. 

6732  (3)  A  certain  church  organizes  a  men's  Bible  class,  which  meets 
every  Sunday  to  study  the  Bible.    This  class  holds  an  entertainment 

in  order  to  raise  money  to  buy  Bibles  and  maps  to  be  used  in  its  work.  Admis- 
sions to  the  entertainment  are  exempt  from  tax,  for  the  class  is  a  religious 
organization  within  the  meaning  of  the  Act. 

6733  (4)  A  club  organized  for  the  sole  purpose  of  raising  money  to  support 
a  missionary  is  a  religious  organization  within  the  meaning  of  the 

Act. 

6734  (5)  A  Young  Men's  Christian  Association  or  Young  Men's  Hebrew 
Association  is  a  religious  organization  within  the  meaning  of  the 

Act. 

6735  Art.  18.  Education  organizations. — Admissions,  or  excess  charges, 
all  the  proceeds  of  which  (after  payment  of  reasonable  expenses) 

inure  exclusively  to  the  benefit  of  institutions,  societies,  or  organizations 
that  are  educational  within  the  meaning  of  the  Act  as  stated  in  this  article 
and  Art.  16,  are  exempt  from  tax.  Schools,  colleges,  and  universities,  quali- 
fying under  Art.  16,  fall  within  this  exemption.  The  same  is  true  of  any 
organization  whose  dominant  purpose  is  the  education  of  its  members  or  of 
other  persons.  Education  here  includes  musical  education.  It  also  includes 
physical  education,  so  any  organization,  devoted  to  physical  education  pure 
and  simple,  and  complying  with  Art.  16,  is  educational  within  the  meaning 
of  the  Act;  but  if  the  element  of  sport  enters  into  its  purposes,  then  it  can  not 
be  considered  exempt  as  an  educational  society  or  organization.  Admissions, 
or  excess  charges,  are  not  exempt  merely  because  the  proceeds  are  to  be  used 
for  an  educational  purpose — the  character  of  the  organization  to  which^they 
will  inure  is  the  test,  not  the  purpose  merely.  Admissions,  or  excess  charges, 
to  contests  or  entertainments  are  exempt  from  tax  where  the  proceeds  are 
to  be  expended  for  athletic  or  other  school,  college,  or  university  purposes  by 
or  under  the  direct  supervision  of  the  authorities  of  a  school,  college,  or_uni- 
versity  which  qualifies  under  Art.  16. 

6736  Examples. — (1)  Admissions  charged  to  a  football  game  where  the 
net  proceeds  are  expended  for  athletic  purposes  under  the^ direct 

supervision  of  the  faculty  of  a  college  (neither  organized  nor  operated  for 
profit)  are  exempt  from  tax.  ^  P 

6737  (2)  Admissions  to  a  college  baseball  game  the  proceeds  ofjwnich 
inure  to  a  students'  athletic  association  to  be  spent  in  their  discre- 
tion, without  any  college  supervision,  for  the  support  of  athletic  teams  or 
other  interests  of  the  members  of  the  association,  are  taxable. 

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6738  (3)  A  private  school  run  for  the  profit  of  its  proprietors  (in  other 
words,  not  qualifying  under  condition  (3)  of  Art.  16)  is  not  an  edu- 
cational institution,  society,  or  organization  within  the  meaning  of  the  Act. 

6739  (4)  A  music-festival  association  is  organized  and  operates  in  a  city 
with  the  purpose  of  educating  the  community  up  to  good  music  and 

cultivating  its  musical  taste.  It  also  complies  with  conditions  (1)  and  (3) 
of  Art.  16.  This  association  is  an  educational  organization  within  the  mean- 
ing of  the  Act.  Admissions,  therefore,  to  a  music  festival  given  by  it  are 
exempt  from  tax. 

6740  (5)  Where  an  association  maintaining  a  zoological  park  is  a  cor- 
poration not  for  profit,  whose  purpose  is  to  exhibit  animals  and  give 

instruction  in  connection  therewith,  admissions  to  the  park  are  exempt  from 
tax  because  they  inure  to  an  educational  institution. 

6741  (6)  Where  the  pupils  in  a  certain  room  in  a  certain  school  form  an 
organization  for  pleasure  and  social  purposes  and  give  an  entertain- 
ment, the  proceeds  of  which  are  to  be  used  to  give  a  picnic,  the  admissions 
thereto  are  taxable,  for  such  organization  is  not  educational. 

6742  (7)  Admissions  to  an  entertainment  given  by  a  college  fraternity 
for  its  benefit  are  taxable,  for  such  a  fraternity  is  not  educational 

within  the  meaning  of  the  Act. 

6743  (8)  Admissions  charged  to  an  illustrated  lecture,  educational  in 
character,  where  the  net  proceeds  go  to  the  lecturer,  are  taxable. 

6744  (9)  A  Young  Men's  Christian  Association  or  Young  Men's  Hebrew 
Association  is  an  educational  organization  within  the  meaning  of 

the  Act. 

6745  (10)  The  activities  of  a  social  settlement,  incorporated  "not  for 
profit,"  consist  chiefly  of  classes  in  English,  mathematics,  modern 

languages,  manual  training,  sewing,  cooking,  etc.  Entertainments  are 
held  from  time  to  time  to.  raise  money  to  help  carry  on  these  activities.  Ad- 
missions to  such  entertainments  are  exempt  from  tax,  for  the  settlement  is 
clearly  educational  within  the  meaning  of  the  Act. 

6746  (11)  A  certain  class  in  a  county  high  school  gives  an  entertainment 
of  which  the  net  proceeds  are  to  be  used  to  buy  a  victrola  to  be  given 

to  the  school.  In  this  case,  if  the  principal  of  the  school  has  joined,  on  behalf 
of  the  school,  in  an  affidavit  for  exemption  (see  Art.  29),  a  certificate  of 
exemption  can  be  secured  which  makes  the  admissions  exempt  from  tax.  If, 
however,  the  victrola  was  to  become  the  property  of  the  class,  to  be  removed 
from  the  school  on  its  graduation,  the  exemption  would  not  apply. 

6747  (12)  The  Boy  Scouts  and  Girl  Scouts  of  America  are  educational 
organizations  within  the  meaning  of  the  Act. 

6748  (13)  A  football  game  played  between  a  college  team  and  a  team 
operating  for  profit,  under  an  agreement  whereby  the  receipts  are  to 

be  divided  on  a  percentage  basis.  The  college  team  turns  its  share  into  the 
college  treasury,  while  the  opposing  team's  share  is  only  sufficient  to  pay  its 
actual  expenses.  Admissions  to  the  game  are  taxable,  since  all  the  proceeds 
(see  Art.  14)  do  not  inure  to  the  benefit  of  the  college. 

6749  Art.  19.  Charitable  organizations. — Admissions,  or  excess  charges, 
all  the  proceeds  of  which  inure  exclusively  to  the  benefit  of  chari- 
table institutions,  societies,  or  organizations,  complying  with  the  conditions 
outlined  in  Art.  16,  are  exempt  from  tax.  Any  organization  the  primary 
purpose  of  which  is  benevolent  or  charitable  comes  within  the  meaning  of  the 

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term  "charitable"  as  used  in  the  Act.  An  organization  is  not  precluded  from 
exemption  merely  because  its  gratuities  are  limited  to  its  members  and /or 
their  dependents. 

6750  Examples. — (1)  Admissions  to  an  entertainment  given  by  a  fraternal 
organization,  the  net  proceeds  of  which  inure  to  the  exclusive  use 

of  a  home  for  indigent  and  aged  members  and  their  dependents  or  a  similar 
institution,  not  operated  for  profit,  are  exempt  from  tax. 

6751  (2)  An  organization  not  qualifying  as  exempt  under  the  provisions 
of  the  Act  gives  an  entertainment  and  distributes  the  proceeds  to 

certain  deserving  poor  people  whose  names  it  has  obtained  from  the  Associ- 
ated Charities.  In  this  case  the  admissions  are  taxable,  for  the  proceeds  do 
not  inure  to  a  charitable  organization.  If,  however,  the  net  proceeds  had 
been  turned  over  to  the  Associated  Charities  to  be  distributed  by  it  in  aid  of 
the  poor,  the  admissions  would  have  been  exempt  from  tax. 

6752  (3)  An  association  organized  and  operated  for  the  relief  of  war- 
stricken  people  abroad,  and  also  complying  with  conditions  (1)  and 

(3)  of  Art.  16  gives  an  entertainment  and  uses  the  proceeds  in  furtherance 
of  its  work.  Admissions  to  this  entertainment  are  exempt  from  tax,  for  it  is  a 
charitable  organization  within  the  meaning  of  the  Act. 

6753  (4)  A  relief  association,  organized  by  the  police  of  a  certain  city 
for  the  sole  purpose  of  providing  a  fund  for  the  relief  of  dependents 

of  deceased  policemen,  gives  a  baseball  game  and  turns  the  proceeds  into  its 
treasury.    Admissions  to  the  game  are  exempt  from  tax. 

6754  Art.  20.  The  American  Legion. — Admissions  or  excess  charges  all 
the  proceeds  of  which  inure  exclusively  to  the  benefit  of  any  post  of 

the  American  Legion,  or  any  women's  auxiliary  unit  of  the  American  Legion, 
are  not  taxable. 

6755  Art.  21.  Symphony  orchestra  organizations. — Admissions,  or  excess 
charges,  all  the  proceeds  of  which  inure  exclusively  to  the  benefit  of 

an  organization  conducted  for  the  sold  purpose  of  maintaining  a  symphony 
orchestra  and  receiving  substantial  support  from  voluntary  contributions — if 
no  part  of  the  net  earnings  thereof  inures  to  the  benefit  of  any  private  stock- 
holder or  individual — are  exempt  from  tax. 

6756  The  name  by  which  an  organized  group  of  musicians  is  called  is  not. 
the  test  of  whether  or  not  such  group  is  a  symphony  orchestra.  To 

be  a  symphony  orchestra  it  must  have  a  personnel  of  sufficient  size,  quality, 
and  ability  to  capably  render  symphonies,  and  must  make  them  a  regular 
part  of  its  program.  Bands  and  ordinary  orchestras  are  clearly  not  included 
in  the  exemption. 

6757  Art.  22.  Persons  in  the  military  or  naval  service. — Admissions,  or 
excess  charges,  all  the  proceeds  of  which  (after  payment  of  reasonable 

expenses)  inure  exclusively  to  the  benefit  of  a  person  or  persons  in  the  military 
or  naval  forces  of  the  United  States,  are  exempt  from  tax.  Soldiers  and 
sailors,  of  course,  constitute  the  chief  classes  of  persons  covered  by  this 
exemption,  but  it  also  includes  nurses,  male  or  female,  and  other  members 
of  such  military  or  naval  forces  not  ordinarily  included  within  the  term 
"soldiers  and  sailors."  It  does  not  include  persons  formerly  but  no  longer 
members  of  such  forces,  whether  in  uniform  or  not,  except  as  provided  in 
Art.  23,  nor  does  it  include  members  of  the  National  Guard  of  a  State,  even 

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though  the  National  Guard  Organization  is  recognized  by  the  Federal  Govern- 
ment under  the  Act  approved  June  4,  1920,  entitled  "An  Act  to  amend  an 
Act  entitled  £An  Act  for  making  further  and  more  effectual  provision  for  the 
national  defense,  and  for  other  purposes,''  approved  June  3,  1916,  and  to 
establish  military  justice,"  though  it  does  include  persons  in  the  United  States 
Military  or  Naval  Reserve.  It  applies  equally  whether  the  proceeds  inure 
exclusively  to  the  benefit  of  a  single  person  or  of  many  persons  if  they  are  in 
the  active  service.  An  individual  in  the  military  or  naval  reserve  engaged 
in  the  business  of  selling  admissions  for  gain  or  profit  would  not  be  entitled 
to  exemption. 

6758  Art.  23.  Persons  formerly  in  the  military  or  naval  service.— Admis- 
sions, or  excess  charges,  all  the  proceeds  of  which  inure  exclusively 

to  the  benefit  of  persons,  individually  or  collectively,  who  have  served  in  the 
military  or  naval  forces  of  the  United  States,  and  are  in  need,  are  exempt 
from  tax.  This  exemption  applies  to  persons  who  have  at  any  time  served 
in  any  of  the  arms  or  branches  of  service  specified  in  the  preceding  Article, 
and  who  are  in  need.  The  phrase  "are  in  need"  is  held  to  mean  in  need  of 
necessaries  of  life  which  such  persons  themselves  are  unable  to  provide  by 
reason  of  physical  or  mental  disability  or  other  legitimate  cause  beyond 
their  control.  It  includes  necessaries  for  the  personal  use  of  ex-service  men 
or  women  and  also  necessaries  for  members  of  their  families  who  are  legally 
dependent  on  them  for  support. 

6759  It  is  not  necessary  that  the  needy  condition  should  have  been  occas- 
ioned by  or  arisen  out  of  their  military  or  naval  service,  or  to  be 

in  any  way  connected  with  or  related  to  such  service.  Whether  a  person, 
or  group  of  persons,  is  in  need  is  a  question  of  fact,  and  when  exemption  is 
claimed  by  or  on  behalf  of  persons  coming  within  this  class  it  is  incumbent 
on  the  claimant  to  show  the  existence  of  the  need. 

6760  Art.  24.  Municipal  improvement  societies. — Exemption  is  accorded 
to  admissions,  and  excess  charges,  all  the  proceeds  of  which  inure 

exclusively  to  the  benefit  of  societies  or  organizations  conducted  for  the  sole 
purpose  of  improving  any  city,  town,  village,  or  other  municipality — if  no  part 
of  the  net  earnings  thereof  inures  to  the  benefit  of  any  private  stockholder 
or  individual. 

6761  It  is  to  be  noted  that  the  exemption  applies  only  to  societies  or  organi- 
zations the  sole  purpose  of  which  is  the  improvement  of  cities,  towns, 

villages,  or  other  municipalities.  It  would  not,  therefore,  include  a  municipal 
government  itself  (see  Art.  26),  for,  while  in  a  broad  sense  it  may  be  said  that 
such  governments  are  designed  for  the  improving  of  the  communities  they 
serve,  the  scope  of  their  activities  is  wider  than  that  of  the  organizations 
contemplated  by  this  provision  of  the  Act. 

6762  By  "improving"  is  obviously  meant  any  work  or  undertaking  looking 
to  the  introduction,  inauguration,  or  betterment  of  any  facility, 

agency,  or  other  service  or  thing  designed  or  maintained  for  the  common 
use  and  benefit  of  all  the  people  of  the  community.  Organizations  the 
purpose  of  which  is  to  improve  and  beautify  public  roads,  streets,  parks,  and 
other  public  utilities  or  services,  to  improve  educational  and  health  con- 
ditions, to  raise  funds  for  the  acquisition  and  care  of  apparatus  for  a  volunteer 
fire  company,  and  the  like,  would  come  within  the  exemption. 


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6763  Art.  25.  Cooperative  or  community-center  moving-picture  theater 
organizations. — No  tax  applies  to  admissions  or  excess  charges  all 

the  proceeds  of  which  inure  exclusively  to  the  benefit  of  societies  or  organiza- 
tions conducted  for  the  sole  purpose  of  maintaining  cooperative  or  com- 
munity-center moving-picture  theaters — if  no  part  of  the  net  earnings  thereof 
inures  to  the  benefit  of  any  private  stockholder  or  individual. 

6764  The  exemption  covers  not  only  admissions  to  cooperative  or  com- 
munity-center moving-picture  theaters  maintained  by  such  societies 

or  organizations,  but  also  to  any  admissions  all  the  proceeds  of  which  inure 
exclusively  to  the  benefit  of  such  organizations.  This  exemption  does  not 
include  community-center  organizations,  even  though  they  maintain  cooper- 
ative or  community-center  moving-picture  theaters,  if  their  purposes  and 
activities  extend  beyond  this  one  object. 

6765  Art.  26.  Admissions  by  or  for  the  benefit  of  Federal,  State,  or  Munici- 
pal governments.— The  fact  that  the  authority  charging  admissions 

or  receiving  the  proceeds  thereof  is  the  United  States  or  an  agency  thereof, 
or  a  State  or  Territory  or  political  subdivision  thereof,  such  as  a  county, 
city,  town,  or  other  municipality,  does  not  make  such  admissions  exempt. 
The  Act  specifically  provides  that  the  taxes  on  admission  (Chapter  One) 
shall  be  paid  by  the  person  paying  for  admission.  It  is  not,  therefore,  a  tax 
on  the  person  or  authority  selling  the  admissions  or  receiving  the  proceeds 
thereof. 

AGRICULTURAL  FAIRS 

6766  Art.  27.  Basis  of  exemption. — The  tax  on  charges  in  excess  of  the 
6506     regular  or  established  price  of  admission  has  no  application  in  the 

case  of  admissions  to  agricultural  fairs  (see  Art.  15).  Therefore,  it 
is  only  necessary  to  consider  under  this  head  the  tax  on  admissions  imposed 
by  paragraph  (1)  of  section  800  (a). 

6767  The  exemption  from  this  tax  in  this  instance  depends  (1)  on  the 
nature  of  the  place  or  exhibit  to  which  admissions  are  sold,  (2)  on 

whether  the  fair  or  exhibit  is  conducted  for  financial  profit,  and  (3),  in  the 
case  of  any  exhibit,  entertainment,  or  other  pay  feature,  the  disposition  made 
of  the  proceeds  therefrom. 

6768  Art.  28.  Fairs  and  exhibits  included.— The  exemption  includes  not 
only  agricultural  fairs  as  such,  but  also  "any  exhibit,  entertainment, 

or  other  pay  feature"  conducted  by  an  association  conducting  an  agricultural 
fair,  and  as  part  of  such  fair. 

6769  The  term  "agricultural  fairs"  includes,  in  general,  all  exhibitions  of 
farm  produce,  live  stock,  poultry,  flowers,  or  the  like,  held  for  the 

promotion  or  advancement  of  agriculture  (which  includes  horticulture).  It 
includes  within  its  meaning  any  exhibition  of  animals,  of  a  species  whose  chief 
utility  is  in  connection  with  agriculture,  held  by  an  association  organized  to 
improve  that  species  of  animal  and  to  disseminate  knowledge  concerning  its 
breeding. 

67  70  No  limitation  or  restriction  is  imposed  with  respect  to  the  character 
or  nature  of  the  exhibits,  entertainments,  or  other  pay  features, 
admissions  to  which  are  exempted.  It  is  only  necessary  that  such  exhibit, 
entertainment,  or  other  pay  feature  (a)  be  conducted  by  the  association 
conducting  the  agricultural  fair,  (b)  as  a  part  of  such  an  agricultural  fair, 

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and  (c)  that  the  proceeds  therefrom  be  used  exclusively  for  the  maintenance 
and  operation  of  such  agricultural  fairs.  If  these  conditions  are  satisfied,  it 
is  immaterial  whether  or  not  the  exhibit,  entertainment,  or  other  pay  feature 
is  designed  to  promote  or  advance  agriculture  or  its  allied  industries.  The 
exemption  #does  not  extend  to  admissions  to  exhibits,  or  features  operated  by 
concessionaires  in  connection  with  agricultural  fairs,  nor  to  admission  to  any 
place  other  than  an  agricultural  fair  or  an  exhibit  or  feature  held  in  conjunc- 
tion with  such  a  fair,  even  though  all  the  proceeds  inure  exclusively  to  the  benefit 
of  an  agricultural  fair  association. 

6771  Examples. — (1)  A  retail  grocers'  association  gives  a  food  show  lasting 
a  week  in  a  large  hall  in  a  city.  The  raw  food  products,  the  processes 
of  manufacture,  the  finished  food  products,  and  the  foods  prepared  for  the 
table  are  all  exhibited.  Such  an  exhibition  is  not  an  agricultural  fair  within 
the  meaning  of  the  Act. 

67  7  2  (2)  A  horse  show  held  in  a  large  city,  where  most  of  the  horses 
exhibited  are  fancy  riding  and  driving  horses  and  the  show  is  largely 

a  social  event,  is  not  an  agricultural  fair  within  the  meaning  of  the  Act. 

6773  (3)  A  horse  fair  held  by  a  society  organized  to  improve  the  quality 
of  farm  animals,  the  animals  exhibited  being  chiefly  of  that  class,  is 

an  agricultural  fair  within  the  meaning  of  the  Act. 

67  74    (4)  A  certain  dog  fanciers'  association  gives  a  dog  show  in  a  city. 

A  large  majority  of  the  dogs  exhibited  belong  to  fancy  and  house 
varieties.  Such  a  show  is  not  an  agricultural  fair  within  the  meaning  of  the 
Act. 

67  75    (5)  A  poultry  fanciers'  association  gives  a  poultry  show,  which  is 
held  with  a  particular  view  to  teaching  poultry  farmers  how  to  secure 
the  largest  possible  number  of  eggs.  Such  a  show  is  an  agricultural  fair  within 
the  meaning  of  the  Act. 

67  76  (6)  An  exhibition  of  articles  of  garden  produce  to  stimulate  a 
"garden  movement"  in  the  community  is  an  agricultural  fair  within 
the  meaning  of  the  Act,  and  admissions  to  same  are  not  taxable  if  no  part 
of  the  net  earnings  thereof  inures  to  the  benefit  of  any  stockholders  or  members 
of  the  organization  conducting  the  exhibition. 

67  7  7  Art.  29.  Claim  for  exemption. — The  benefit  of  exemption  from  Taxes 
on  Admissions  or  Taxes  on  Excess  Charges  can  only  be  secured  by 
executing  and  filing  an  affidavit,  on  Form  755  (Revised),  which  may  be 
obtained  from  any  Collector  of  Internal  Revenue.  On  this  form  must  be 
shown  the  place  and  the  occasion  with  respect  to  which  exemption  is  desired. 
It  must  in  every  case  be  executed  by  an  officer  or  duly  authorized  agent  of 
the  organization,  or  individual,  in  control  of  the  admissions  or  excess  charges 
involved.  And,  where  the  proceeds  of  the  admissions  or  excess  charges  are 
for  the  benefit  of  an  organization  or  of  a  person  or  persons  not  in  control 
thereof,  the  beneficiary,  whether  an  organization  or  individual,  must  join 
in  executing  the  claim  for  exemption,  space  therefor  being  provided  on 
Form  755  (Revised). 

6778  The  claim  should  be  filed  with  the  Collector  of  Internal  Revenue  for 
the  district  in  which  is  located  the  place  to  which  the  admissions  or 
excess  charges  covered  by  the  claim  are  to  be  sold.  It  should  be  filed  a  con- 
siderable length  of  time  prior  to  any  occasion  for  which  exemption  is  desired, 
and  should  be  accompanied  by  evidence  to  establish  the  beneficiary's  right  to 
exemption  under  subdivision  (b)  of  section  800.    In  the  case  of  organizations 

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claiming  exemption  thereunder,  copies  of  their  charters  or  constitutions  and 
by-laws  should  be  submitted  in  support  of  such  claims.  If  these  documents 
can  not  be  furnished  in  any  case  a  comprehensive  statement,  under  oath, 
outlining  the  objects  and  purposes  and  the  scope  of  the  activities  of  the  claim- 
ant organization  will  be  required.  Unless  a  claim  is  filed  long  enough  before 
any  given  occasion  to  permit  a  full  consideration  and  investigation  if  neces- 
sary and  the  rendering  of  a  decision,  and  unless  the  decision  is  favorable  to 
the  claim,  the  person  or  authority  in  control  of  the  admissions  will  be  liable 
to  the  penalty  prescribed  by  section  1302  ['18014]  of  the  Act  if  tax  due  on  the 
admissions  is  not  collected.    (See  Chapter  Nine.) 

67  79    Collectors  of  Internal  Revenue  will  notify  claimants  as  to  the  allow- 
ance or  disallowance  of  their  claims,  as  soon  as  circumstances  will 
permit,  on  Form  755-A. 

6780  Examples. — (1)  A  certain  social  club  gives  an  entertainment  at  which 
moving  pictures  are  exhibited  and  charges  $1  for  admission.  It 

contends  that  admissions  to  this  entertainment  are  exempt  from  tax  on  the 
ground  that  the  net  proceeds  are  to  be  given  to  the  local  chapter  of  the  Red 
Cross.  In  such  case  no  claim  for  exemption  can  be  considered  unless  the 
affidavit  claiming  such  exemption  is  joined  in,  on  behalf  of  the  Red  Cross 
chapter,  by  one  of  its  officers. 

6781  (2)  A  football  game  is  to  take  place  at  a  certain  college  between  its 
team  and  that  of  a  rival  college.  In  this  case,  if  an  exemption  certi- 
ficate is  sought,  the  president  of  the  college  where  the  game  is  to  be  held 
must  execute  the  affidavit  for  exemption.  If  the  proceeds  are  to  be  divided 
then  the  president  of  the  rival  college  must  join  in  the  affidavit. 

6782  (3)  The  pupils  in  a  certain  room  in  a  certain  school  give  an  enter- 
tainment the  proceeds  of  which  are  to  be  used  in  buying  a  victrola 

to  be  given  to  the  school.  In  this  case,  if  it  is  desired  to  claim  that  the  pro- 
ceeds are  exempt,  the  principal  of  the  school  must,  on  its  behalf,  join  in  the 
affidavit  for  exemption. 

6783  (4)  A  certain  lodge  gives  a  benefit  for  a  company  of  United  States 
soldiers.   In  this  case  the  claim  for  exemption  on  Form  755  (Revised) 

must  be  executed  by  an  officer  of  the  lodge  and  joined  in  by  an  officer  or  other 
duly  authorized  member  of  the  company  of  soldiers. 


CHAPTER  SIX 


Tickets  and  Signs 

6784  Art.  30.  Tickets  or  other  means  to  check  admissions  required.— 

6508  The  above  [^[6508]  is  the  only  provision  contained  in  the  Act  relating 
to  tickets  or  cards  of  admission.  It  is  not  held  to  mean  that  the  use 
of  tickets  or  cards  in  all  cases  is  mandatory;  but  where  tickets  or  cards  are 
not  used  some  other  method  or  system  must  be  provided  by  which  the  num- 
ber of  admissions  sold  and  the  tax  due  thereon  may  be  ascertained  and  checked. 
Therefore,  every  place  admission  to  which  is  taxable  must  provide  either — 

6785  (a)  Tickets  or  cards  of  admision  to  evidence  every  admission  which 
is  subject  to  tax;  or 

6786  (b)  A  mechanical  device  which  will  register  the  number  of  persons 
entering  the  place. 

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6787  Exception:    In  the  case  of  a  person  or  organization  who  or  which 
only  makes  charges  for  admission  irregularly  and  occasionally  and 

not  more  than  six  times  a  year,  compliance  with  the  foregoing  requirements 
will  not  be  necessary;  but  in  such  cases  a  correct  record  must  be  kept  in 
accordance  with  Art.  39  giving  all  information  necessary  to  enable  revenue 
officers  to  determine  the  amount  of  tax  due. 

6788  Art.  31.  Requirements  applicable  to  tickets. — Where  tickets  or  cards 
of  admission  are  used  they  must  comply  with  the  following  require- 
ments: 

6789  (1)  The  price  (exclusive  of  the  tax  to  be  paid  by  the  person  paying 
for  admission)  at  which  every  ticket  or  card  is  sold  must  be  conspicu- 
ously and  indelibly  printed,  stamped,  or  written  on  that  part  of  the  ticket 
which  is  to  be  taken  up  by  the  management  of  the  place  for  which  it  is  valid 
for  admission.  This  is  a  specific  requirement  of  the  Act  itself.  For  adminis- 
trative purposes  it  is  necessary  to  show  not  only  the  selling  price  but  also  (a) 
the  regular  or  established  price  (see  Art.  11),  (b)  the  tax,  and  (c)  the  total  of 
the  price  and  tax.  The  regular  or  established  price,  the  tax  based  thereon, 
and  total  shall  appear  on  the  face1  of  the  portion  of  the  ticket  which  is  to  be 
taken  up  by  the  management  in  the  following  or  an  equivalent  form: 

Sale  price  

Tax  paid.  

Total  

If  the  ticket  is  sold  at  a  price  other  than  the  regular  or  established  price,  the 
actual  selling  price,  the  tax  based  thereon,  and  the  total  shall  be  shown  on 
the  back  of  the  portion  of  the  ticket  to  be  taken  up  by  the  management  in 
the  following  or  an  equivalent  form: 

Sale  price  

Tax  paid  

Total  

1  In  the  case  of  strip  tickets,  the  back  may  be  used. 

6790  And  if  the  ticket  is  sold  other  than  at  the  ticket  office  of  the  theater, 
opera,  or  other  place  of  amusement,  the  name  and  address  of  the 

vendor  mujst  also  be  shown  on  the  back  of  the  same  portion  of  the  ticket.  For 
penalties  imposed  in  this  connection  see  Article  46. 

6791  The  foregoing  applies  primarily  to  taxable  admissions.    As  no  tax  is 
imposed  on  admissions  of  ten  cents  or  less,  it  is  only  necessary  that 

the  price  of  such  tickets  be  shown.  This  must  be  shown,  since  the  require- 
ments of  the  Act  in  this  matter  apply  to  "every  admission  ticket  or  card" 
without  regard  to  the  price  for  which  it  is  sold.  Where  admissions  are 
exempt  on  other  grounds,  the  tickets  should  show  that  fact.  This  may  be 
done  in  the  following  or  equivalent  form: 

Established  price  

Tax  free. 

6792  (2)  The  name  of  the  place  to  which  a  ticket  or  card  is  valid  for  ad- 
mission must  in  all  cases  be  shown  thereon.   Moreover,  tickets  must 

either  show  the  date  for  which  they  are  valid  or  must  be  serially  numbered. 
If  serially  numbered  tickets  are  used  there  must  be  a  separate  and  distinct 
series  for  each  established  price.    The  numbers  of  each  series  must  start 

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with  1  and  run  continuously  in  regular  order  until  500,000  is  reached,  after 
which  they  may  again  start  at  1  if  so  desired.  In  such  case,  however,  a  letter 
of  the  alphabet  must  precede  or  follow  the  serial  number  to  distinguish  the 
new  series  from  the  preceding  series,  and  such  letters  must  be  used  in  turn 
until  the  alphabet  is  exhausted  before  starting  again  with  the  letter  A.  No 
place  to  which  taxable  admissions  are  sold  shall  have,  or  permit  to  be,  at 
such  place  at  the  same  time  two  or  more  rolls  or  series  of  tickets  of  the  same 
established  price  bearing  identical  serial  numbers  which  are  not  distinguished 
by  different  letters  of  the  alphabet.  Serially  numbered  tickets  must  be  issued 
consecutively  in  the  order  of  the  serial  numbers,  and  the  letters  of  the  alpha- 
bet, if  any,  of  that  particular  series. 

6793  Exceptions . — (a)  Since  tickets  or  cards  of  admission  which  are  sold 
for  10  cents  or  less  are  not  taxable,  they  need  not  be  serially  num- 
bered or  dated. 

6794  (b)  In  a  limited  class  of  cases,  the  use  of  so-called  "hard  tickets,, 
used  for  repeated  performances  is  permitted  without  requiring  that 

they  be  serially  numbered  or  dated. 

6795  In  each  of  these  cases,  however,  the  tickets  or  cards  of  admission 
must  show  the  name  of  the  place  for  which  they  are  valid  and  the 

price. 

6796  (3)  In  the  case  of  bona  fide  season  or  subscription  tickets  a  single 
ticket  or  card  may  be  used  to  evidence  more  than  one  admission. 

In  every  other  case,  where  several  single  admissions  are  sold  or  disposed  of 
at  one  time,  there  must  be  separate  or  separable  coupons  to  evidence  each 
right  to  admission.  Thus,  in  the  case  of  combination  tickets,  issued  by  out- 
door amusement  parks,  which  entitle  the  holder  to  admission  to  a  number  of 
different  attractions,  there  must  be  a  separate  ticket  or  coupon  for  each  such 
attraction.  Furthermore,  each  separate  ticket  or  coupon  must  either  be 
dated  or  be  serially  numbered  in  accordance  with  requirements  (1)  and  (2). 
If  serial  numbers  are  used  on  such  combination  tickets,  each  coupon  thereof 
should  bear  the  same  serial  number  as  the  stub  or  cover  of  the  ticket  itself. 

6797  (4)  No  person  shall  be  admitted,  unless  admitted  free,  to  any  place 
admission  to  which  is  taxable,  and  which  uses  tickets  or  cards,  except 

upon  the  presentation  of  a  card  or  ticket  complying  with  the  preceding  re- 
quirements. The  ticket  or  card  so  presented  or  a  portion  thereof  must  be 
taken  up,  at  the  time  of  admission,  by  the  management  of  the  place,  except 
in  the  case  of  a  bona  fide  subscription  or  season  ticket  covering  two  or  more 
admissions.  Under  ordinary  circumstances  the  tickets  or  cards  or  portions 
thereof  so  taken  u'p  need  not  be  preserved  by  the  management  of  the  place, 
but  from  time  to  time,  on  short  notice  from  a  collector  of  internal  revenue  or 
a  revenue  agent,  the  management  must  carefully  preserve,  until  inspection 
by  such  officer,  all  tickets  or  cards  or  portions  thereof  taken  upon  the  occa- 
sions designated  in  such  notice. 

6798  (5)  In  the  case  of  roof  gardens,  cabarets,  and  places  affording  similar 
entertainment  (see  Chapter  Three),  the  proprietors  must  furnish  each 

guest  upon  payment  of  his  bill  for  refreshment,  service,  or  merchandise  with 
a  coupon  receipt  to  be  detached  from  such  bill.  All  such  bills  shall  be  serially 
numbered  and  the  coupon  receipt  in  each  case  shall  be  numbered  the  same  as 
its  bill.  The  bill  and  coupon  receipt  shall  each  bear  in  indelible  figures  the 
total  amount  of  the  charge  for  refreshment,  etc..  the  tax  thereon,  which 
on  the  receipt  shall  be  stated  as  "paid,"  and  the  sum  total  of  such  charge 

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and  tax.  No  such  receipt  shall  be  delivered  except  on  collecting  the  amount 
of  the  tax  so  shown  on  such  receipt  as  "paid." 

6799  Examples. — (1)  A  certain  theater  has  a  regular  charge  of  $2  for 
orchestra  seats.    It  prints  the  following  on  the  face  of  that  part  of 

the  ticket  which  is  taken  up  by  the  theater  upon  the  admission  of  the  ticket 
holder: 

Established  price   $2.00 

Tax  paid  20 

Total   2.20 

Two  hundred  of  these  tickets  are  sold  by  the  theater  to  a  certain  broker. 
On  selling  these  tickets  he  stamps  with  a  rubber  stamp  on  the  back  of  the  same 
part  of  the  ticket  the  following: 

This  ticket  sold  by  Sale  price   $2.50 

Jones  &  Co.  Tax  paid  20 

27  West  St.,  New  York  City.   

Total  sale  price. .  2.70 

6800  (2)  George  Nelson  purchases  from  Jones  &  Co.  one  of  the  tickets 
mentioned  in  the  preceding  example  and  finding  that  he  is  unable  to 

attend  the  performance  he  resells  this  ticket  to  a  friend  for  the  same  amount 
which  he  paid  for  it.  When  selling  the  ticket  George  Nelson  draws  two  lines 
in  the  form  of  a  cross  through  the  left-hand  portion  of  what  the  broker  had 
stamped  on  the  back  of  the  ticket  and  adds  his  name  and  address,  leaving  the 
inscription  on  the  back  of  the  ticket  as  follows: 

is  ticket  sokUby~~*~"~       Sale  price  $2.  50        Sold  by  Geo.  Nelson, 

j2^5~S357^  Tax  paid   20         505  West  122d  St. , 

mWl  NewYSat^         TqW  ^  pdce—0  New  York  City. 

6801  (3)  A  certain  theater  whose  established  prices  are  not  the  same 
for  all  attractions  desires  to  print  its  tickets  for  the  whole  year  in 

advance,  To  comply  with  the  provisions  of  this  Article  and  yet  make  it 
possible  to  change  the  established  price  for  various  attractions  it  has  tickets 
printed  in  the  following  form: 


AMERICAN  THEATRE 

I^l^'abli^dj>nc^ax^pa[djnd I  total  are  as  indicated  by  punch  below  

SATURDAY  EVENING 


ORCHESTRA 


Established J5  jj^  $j  ^  ^ 

.10     .15     .20  .25 


1922 


Tax  paid  .08 

Total  .T83 
★ 


$1.10  $1.65    $2.20  $2.75 
*      *        *  ★ 

Not  raiid  unless  one  star  is  punched  out 


t,cO 

INS 

1922 


>!  "-a 


RIGHT 

> 

I 

00 


Tickets  so  printed,  if  properly  punched  in  advance  of  the  opening  of  any  sale 
or  'distribution  of  tickets  for  the  performance  for  which  they  are  issued,  will 
fully  comply  with  the  requirements  of  Article  30,  as  well  as  with  those  of  this 
Article. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1355  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 
TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6802  (4)  Certain  society  women  form  an  organization  for  the  sole  pur- 
pose of  giving  a  single  ball  the  net  proceeds  from  which  are  to  be 

given  to  a  charity  hospital.  In  this  case,  if  it  is  decided  to  use  tickets,  the 
tickets  must  be  marked  with  the  "established  price"  in  accordance  with  the 
provisions  of  this  Article.  No  "tax  paid"  or  "total"  need  be  printed  on  the 
tickets,  however,  because  the  admissions  are  clearly  exempt  from  tax,  but 
"tax  free"  or  its  equivalent  must  appear  in  its  stead. 

6803  (5)  A  broker  on  reselling  a  ticket  finds  that  by  reason  of  the  fact  that 
it  has  previously  passed  through  the  hands  of  several  other  brokers 

and  has  been  stamped  by  them,  there -is  not  sufficient  space  on  it  for  him  to 
stamp  the  information  required  by  the  law  and  regulations.  He  may  enlarge 
the  ticket  by  pasting  on  to  that  part  which  will  be  taken  up  by  the  theater 
a  slip  of  paper  and  stamp  the  required  information  on  the  same,  but  this 
must  be  done  in  such  a  way  that  the  information  placed  on  the  ticket  by 
former  vendors  will  not  be  obscured. 

6804  (6)  A  college  procures  tickets  to  be  sold  for  admission  to  a  foot- 
ball game,  on  admissions  to  which  it  has  secured  exemption  from 

tax.  The  tickets  must  show  the  established  price  of  admission  and  bear 
the  words  "Tax  free." 

6805  Art.  32.    Printing  of  tickets — Notice  to  be  Given. — Where  tickets  or 
cards  of  admission  to  any  place  for  admission  to  which  a  charge  is 

made  are  printed,  manufactured,  or  sold  by  any  person,  it  shall  be  the  duty 
of  that  person  to  give  prompt  notice  to  the  collector  of  internal  revenue 
of  the  district  in  which  is  located  the  place  to  which  admission  is  to  be  charged. 
Such  notice  shall  state  (1)  the  name  and  address  of  the  person  to  whom  the 
tickets  are  furnished  and  (2)  the  number  of  tickets  furnished,  and  shall  be 
accompanied  by  proofs  or  sample  copies  of  the  tickets  themselves.  If  the 
tickets  are  serially  numbered,  the  notice  must  also  contain  a  statement  as  to 
such  serial  numbers. 

680  6  Art.  33.  Mechanical  devices. — If  a  mechanical  device  is  used  instead 
of  tickets  or  cards  of  admission,  such  device  may  be  placed  at  the 
entrance  or  exit,  or  at  any  point  en  route  through  the  place,  but  must  be  so 
arranged  that  every  person  admitted  must  himself  cause  it  to  register  an 
admission  and  be  so  constructed  that  no  change  can  be  made  in  the  record 
of  admissions  until  at  least  99,999  admissions  are  recorded,  and  then  the 
only  change  possible  must  be  the  returning  of  the  record  to  "0". 

6807  Art.  34.  Signs  to  be  posted. — In  the  case  of  every  place,  admission 
to  which  is  subject  to  tax,  the  proprietor  or  manager  must  keep  con- 
spicuously posted  at  the  outer  entrance  and  near  the  box  office  one  or  more 
signs  accurately  stating  each  of  the  established  prices  of  admission,  and  in  the 
case  of  each  such  price  the  tax  due  and  the  sum  total  of  the  established  price 
and  the  tax. 

6808  Examples:  The  following  are  examples  of  such  signs: 
(1)  In  the  case  of  a  "legitimate"  theater: 


Admission 

Tax 
$0.20 
.15 

Total 

$2.20 

  $2.00 

1.65 

>*v*c\Vh-  -VU.  .-vv"v  nvl.60 

.10 

l.ltf 

........ ... ..... :  .So 

25 

.08 

.05 

.03 

.S5 
.55 
.28 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1356  SERVK1 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS . 


6809    (2)  In  the  case  of  a  moving-picture  theater: 


Balcony 

Admission   13c  Admission 

Tax   2c  Tax  


Orchestra 


27c 
3c 


Total 


15c 


Total 


30c 


CHAPTER  SEVEN 


Collection,  Return,  and  Payment  of  Tax. 
Law  H5506,  H5508-9,  H6512,  1J8009-10 


6810  Art.  35.  Duty  to  collect,  return,  and  pay  tax — Taxes  on  Admissions. 

6512  — Every  individual, corporation,  partnership,  or  association  (1)  receiv- 
ing any  taxable  payment  for  admission  must  collect  the  tax  from  the 
person  making  such  payment  at  the  time  such  payment  is  made;  (2)  being 
the  proprietor  or  manager  of  an  opera  house  or  any  other  place  of  amusement 
in  a  case  where  any  person  has  the  permanent  use  or  a  lease  for  the  use  of  a 
box  or  seat  therein  which  is  subject  to  tax  must  collect  the  tax  from  the  owner 
or  lessee  of  such  box  or  seat;  or  (3)  receiving  payment  for  refreshment,  service, 
or  merchandise,  which  is  taxable  because  including  therein  a  charge  for  ad- 
mission to  a  public  performance  for  profit,  at  any  roof  garden,  cabaret,  or 
other  similar  entertainment,  must  collect  the  tax  from  the  person  making 
such  payment  at  the  time  of  such  payment. 

681 1  A  ticket  broker  or  other  person  reselling  a  ticket  at  an  advance  over 
the  former  sale  price  may  collect,  and  retain  as  a  refund  to  him,  the 

amount  of  admission  tax  already  paid  on  that  admission  by  him  A  theater 
issuing  a  ticket  in  exchange  for  a  less  expensive  ticket  and  a  cash  balance  must 
collect  the  admission  tax  due  on  the  cash  balance 

68 1 2  If  the  permanent  use  or  lease  for  the  use  of  a  box  or  seat  is  paid  for, 
then  the  time  for  the  collection  of  the  tax  is  the  same  as  that  in  the 

case  of  any  other  paid  admission.  If  the  right  to  use  is  granted  free  or  is 
otherwise  enjoyed  without  being  directly  paid  for,  then  the  tax  must  be 
collected  at  the  time  the  right  is  granted.  If  these  rules  prove  insufficient 
by  reason  of  attempts  at  evasion  or  otherwise,  to  provide  for  the  collection  of 
the  full  tax  due  in  any  such  case,  then  the  proprietor  or  manager  of  the  opera 
house  or  other  place  of  amusement  in  which  such  box  or  seat  is  located  shall 
collect  each  month,  from  the  person  entitled  to  the  use  of  such  box  or  seat, 
any  balance  of  tax  due  from  such  person  for  the  right  to  the  use  of  such  box 
or  seat  during  the  preceding  month. 

6813  In  the  rare  cases  where  payment  for  refreshment,  service,  or  mer- 
chandise is  not  made  before  or  at  the  time  of  leaving  the  roof  garden, 

cabaret,  or  other  place  of  entertainment,  payment  must  be  treated  as  having 
been  made  and  the  tax  must  be  then  collected.  Credit  can  be  given  for  the 
amount  paid  for  refreshment,  service,  or  merchandise,  if  desired,  but  not  for 
the  tax.  The  tax  must  be  collected  not  later  than  the  departure  of  the 
person  from  the  place  of  the  performance  at  the  conclusion  of  such  perform- 
ance. 

6814  In  each  case  there  rests  on  the  respective  person  from  whom  the 
tax  is  to  be  collected  the  corresponding  duty  of  then  paying  such 

tax.  A  monthly  return  and  payment  of  all  such  collections  must  be  made  in 
accordance  with  the  provisions  of  Art.  41. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1357  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


681 5  Art.  36.  Duty  to  return  and  pay  tax — Taxes  on  Charges  in  Excess  of 
Established  Price. — Every  individual,  corporation,  partnership,  or 

association  selling  or  disposing  of  a  ticket  or  card  of  admission  at  a  price  in 
excess  of  the  established  price  of  the  admission  for  which  such  ticket  or  card 
is  valid  in  a  case  where  such  excess  is  taxable  shall  make  a  monthly  return  and 
pay  the  tax  due  in  accordance  with  the  provisions  of  Art.  41.  For  penalties 
see  Art.  46. 

6816  A  broker  may  reimburse  himself  in  an  amount  equal  to  a  tax  im- 
posed under  the  provisions  of  section  800  (a),  paragraph  (1)  of  the 

Act,  which  he  has  paid  to  the  vendor  from  whom  he  purchased  the  ticket, 
providing  the  selling  price  and  tax  imposed  thereon  under  section  800  (a), 
paragraph  (1),  are  properly  stamped,  printed,  or  written  on  the  ticket  in 
accordance  with  the  provisions  of  section  800  (d)  of  the  Act  and  Art.  31  of 
these  Regulations.  No  credit  can  be  taken,  however,  for  any  tax  imposed 
under  section  800  (a),  paragraph  (2)  or  (3),  on  excess  charges  and  paid  by 
the  vendor  from  whom  the  broker  purchased  the  ticket  unless  the  broker 
claiming  such  credit  obtains  from  the  vendor  a  written  statement  that  such 
vendor  has  paid  or  will  pay  the  amount  of  tax  on  excess  charges  for  which 
the  purchasing  broker  claims  credit.  The  statement  must  be  preserved  by 
the  broker  claiming  credit  in  such  a  way  as  to  be  readily  accessible  for  inspec- 
tion by  internal  revenue  officers.    (See  Arts.  12  and  13.) 

6817  Art.  37.  Application  for  and  certificate  of  registry. — Every  individ- 
ual, corporation,  partnership,  or  association  (1)  required  by  the 

provisions  of  the  Act  to  collect  any  tax  on  admissions  (see  Art.  35)  or  (2) 
being  the  owner  or  lessee  of  any  place  which  is  ordinarily  or  at  times  leased 
to  other  persons  who  impose  charges  for  admissions  to  it  (see  Art.  42)  or 
(3)  required  to  pay  any  tax  on  charges  in  excess  of  established  price  (see  Art. 
36)  shall  annually,  on  or  before  the  first  day  of  July,  make  an  application  for 
registry,  by  filling  out  Form  752  (Revised),  with  all  information  there  called 
for,  and  duly  executing  it  under  oath.  In  cases  falling  within  the  first  of  the 
above  classes  (except  such  as  are  considered  in  Art.  38)  such  an  application 
must  be  filed  in  the  office  of  the  collector  of  internal  revenue  of  each  district 
in  which  is  located  a  place  to  which  admissions  are  charged  on  account  of 
which  a  duty  to  collect  admissions  taxes  is  imposed  on  the  person  making  such 
application.  In  cases  falling  within  class  (2)  the  application  must  be  filed  in 
the  office  of  the  collector  of  internal  revenue  of  each  district  in  which  such  a 
place  is  owned  or  leased.  In  cases  falling  within  class  (3)  the  application 
must  be  filed  in  the  office  of  the  collector  of  internal  revenue  of  the  district 
in  which  is  located  the  principal  place  of  business  of  the  person  making  the 
application,  or  in  which  is  located  his  residence,  if  he  have  no  fixed  place  of 
business.  The  collector,  if  satisfied  that  all  the  statements  made  in  the 
application  for  registry  are  correct,  will  issue  a  certificate  of  registry  on  Form 
753  (Revised)  to  the  person  who  made  such  application.  This  certificate 
must  be  kept  conspicuously  posted  in  the  principal  place  of  business  of  such 
person,  or  be  carried  about  with  him,  if  he  has  no  fixed  place  of  business. 

6818  Example. — A  certain  hotel  has  a  number  of  rooms  which  it  rents 
from  time  to  time  for  dances  and  other  parties.  This  hotel  falls 
within  class  (2)  of  Art.  37  and  must  annually  make  application  for 

registry. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1358  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6819  Art.  38.  Traveling  shows. — The  proprietor   or  manager  of  every 
show,  circus,  exhibition,  Chautauqua,  or  other  amusement  enterprise, 

which  is  traveling  or  itinerant,  shall  file  the  application  for  registry  required 
by  Art.  37  with  the  collector  of  internal  revenue  of  the  district  in  which  the 
headquarters  of  such  show  is  located,  if  it  have  an  established  headquarters. 
If  it  have  no  established  headquarters,  then  the  application  shall  be  filed 
with  the  collector  of  the  district  in  which  such  proprietor  or  manager  resides. 
The  certificate  of  registry,  the  daily  record  required  by  Art.  39,  and  a  copy 
of  each  monthly  return  (see  Art.  41)  must  be  carried  along  with  the  show 
and  exhibited  on  request  to  collectors  of  other  districts  or  to  internal  revenue 
agents. 

6820  This  article  applies  only  to  shows,  etc.,  which  control  the  sale  of 
tickets  to  their  performances  and  the  collection  of  tax  on  the  same. 

It  does  not  include,  therefore,  traveling  theatrical  attractions,  lyceum  enter- 
tainers, or  the  like,  who  perform  in  theaters  or  other  places  where  the  local 
management  controls  the  sale  of  tickets  and  the  collection  of  the  tax. 
'  6821  Examples. — (1)  A  certain  Chautauqua  has  its  main  office  in  a  cer- 
tain city.  The  lectures,  entertainments,  and  other  attractions  which 
it  furnishes  constantly  tour  the  country,  moving  from  State  to  State.  In  this 
case  the  application  for  registry  must  be  made  with  the  collector  of  internal 
revenue  of  the  district  in  which  its  main  office  is  located. 

6822  (2)  A  certain  theatrical  company,  acting  in  a  farce  comedy,  tours 
the  country,  playing  in  various  theaters.    All  of  these  theaters  .have 

certificates  of  registry,  and  they  take  care  of  all  matters  connected  with  the 
sale  of  tickets,  collection  of  tax,  etc.  Such  a  company  does  not  fall  within 
the  provisions  of  Art.  37  or  38  and  is  not  required  to  apply  for  a  certificate 
of  registry  at  all. 

6823  Art.  39.  Records — Taxes  on  Admissions. — Every  individual,  corpora- 
tion, partnership,  or  association  required  by  the  provisions  of  the 

Act  to  collect  any  tax  on  admissions  must  keep  or  cause  to  be  kept  an  accurate 
daily  record  showing  (1)  in  the  case  of  each  class  of  Taxes  on  Admissions  (a) 
all  figures  and  other  information  necessary  to  determine  the  amount  of  tax 
due  for  that  day,  and  (b)  the  amount  of  tax  due  for  that  day,  and  (2)  the  total 
amount  due  as  Taxes  on  Admissions  for  that  day.  The  proprietor  or  manager 
of  the  business  must  certify,  over  his  signature,  to  the  correctness  of  the 
daily  record,  and  if  any  other  person  is  directly  interested  in  the  proceeds  of 
the  amounts  received  for  admission,  he  or  his  agent  must  also  so  certify  it. 
Whenever  in  the  course  of  the  business  a  report  is  prepared  daily  or  at  some 
other  regular  interval  or  at  any  time  by  a  treasurer  or  manager  for  the  benefit 
of  the  proprietor,  or  by  the  proprietor,  treasurer,  or  manager  for  the  benefit 
of  some  other  interested  party,  a  sworn  copy  of  such  report  must  be  attached 
to  and  made  a  part  of  such  daily  record.  Indeed,  if  such  a  report  contains 
all  the  information  required  above,  no  daily  record  other  than  the  sworn  copy 
of  the  report  need  be  kept.  But  whatever  information  such  a  report  may 
contain,  a  sworn  copy  of  it  must  be  made  and  kept.  Such  daily  records, 
including  such  sworn  copies  of  reports,  must  be  kept  on  file  at  the  box  office 
of  the  place  or  at  some  other  convenient  location  for  a  period  of  two  years, 
in  such  a  manner  as  to  be  readily  accessible  on  request  to  internal  revenue 
officers. 


Copyright  1922,  by  1  he  Corporation  Trust  Company. 
WAR  TAX  1359  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6824    The  records  should  be  kept  in  substantially  the  following  form: 

Page — 

MONTHLY  RECORD  OF  ADMISSION  TAX. 

Class  of  admissions,  $  


Month  of  

Day  of 
month 

Tickets  sold 

Price 

Tax 

1 

,2 
3 
4 
5 
6 
7 

To  

From  

To  

Total  

Tax  due  for  s«ven  days  ending  ,  19....,  $  

NOTE  —Under  column  "Tickets  sold"  show  after  (From)  the  number  of  the  first  ticket  sold,  and  after  (to) 
show  the  number  of  the  last  ticket  sold.    A  separate  record  must  be  kept  for  each  class  of  admissions. 

[Similar  page  for  the  2nd,  3rd,  and  4th  seven-days  of  the  month.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1360  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 
TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


Page— 

MONTHLY  RECORD  OF  ADMISSION  TAX. 

Class  of  admission,  $  


Month  of 


Day  of 
month 

Tickets  sold 

Price 

Tax 

29 

30 

To  

31 

To  

To  

Taxes  due  for  the  first  seven  days  of  the  month   $ 

Taxes  due  for  the  second  seven  days  of  the  month   $ 

Taxes  due  for  the  third  seven  days  of  the  month   $ 

Taxes  due  for  the  fourth  seven  days  of  the  month   $ 

Taxes  due  for  last  days  of  the  month   $ 


Total  taxes  due  for  the  month   $ 


See  that  each  page  is  properly  numbered,  consecutively,  for  the  entire  year.  When  a 
year's  records  are  complete,  file  away  for  reference  and  refill  your  book  for  another  year. 

6825    Art.  40.  Records — Taxes  on  charges  in  excess  of  established  price. — 

Every  individual,  corporation,  partnership,  or  association  required 
by  the  provisions  of  the  Act  to  pay  any  tax  on  charges  in  excess  of  established 
price,  must  keep  or  cause  to  be  kept  a  daily  record  which  classifies  all  sales  of 
tickets  into  classes  in  each  of  which  all  the  tickets  are  identical  in  respect  to  (1) 
the  place  to  which  admission  is  granted  by  the  ticket,  (2)  the  established  price 
(exclusive  of  admission  tax)  of  the  admission  granted  by  the  ticket,  and  (3) 
the  actual  price  (exclusive  of  any  amount  representing  an  admission  tax)  at 
which  that  sale  of  the  ticket  is  made.  This  daily  record  must  show  (1)  in 
the  case  of  each  such  class  (a)  all  figures  and  other  information  necessary 
to  determine  the  amount  of  tax  due  for  that  day,  and  (b)  the  amount  of  tax  due 
for^that  day,  and  (2)  the  total  amount  due  as  Taxes  on  Charges  in  Excess  of 
Established  Price  for  that  day.  Whenever  in  the  course  of  the  business  a 
report  is  prepared  daily  or  at  some  other  regular  interval  or  at  any  time  by  a 
treasurer  or  manager  for  the  benefit  of  the  proprietor,  or  by  the  proprietor, 
treasurer,  or  manager  for  the  benefit  of  some  other  interested  party,  a  sworn 
copy  of  such  report  must  be  attached  to  and  made  a  part  of  such  daily  record. 
Indeed,  if  such  a  report  contains  all  the  information  required  above,  no  daily 
record  other  than  the  sworn  copy  of  the  report  need  be  kept.  But  whatever 
information  such  a  report  may  contain,  a  sworn  copy  of  it  must  be  made  and 
kept.  Such  daily  records,  including  such  sworn  copies  of  reports,  must  be 
kept  on  file  at  the  place  of  business,  or  at  some  other  convenient  location, 
for  a  period  of  two  years,  in  such  a  manner  as  to  be  readily  accessible  on  request 
tojnternal-revenue  officers. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1361  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  L — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6826  Art.  41.  Returns  and  payments. — Every  individual,  corporation,  part- 
nership, or  association  required  under  the  provisions  of  Article  13  of  these 

regulations  to  pay  any  tax  on  excess  charges  shall  make  up  each  month  from  the 
daily  record,  required  by  Art.  40,  a  return  in  duplicate  on  Form  729A,  in 
accordance  with  the  instructions  printed  on  the  back  of  that  form.  Every 
other  individual,  corporation,  partnership,  or  association  required  by  the 
provisions  of  the  Act  to  collect  any  tax  on  admissions  (see  Art.  35)  or  to  pay 
any  tax  on  charges  in  excess  of  established  price  (see  Art.  36)  shall  make  up 
each  month  from  the  daily  record,  required  by  Art.  39  or  40,  as  the  case  may 
be,  a  return  in  duplicate  on  Form  729  (revised),  in  accordance  with  the 
instructions  printed  on  the  back  of  that  form.  In  addition  thereto,  pro- 
prietors of  places  who  sell  admission  tickets  to  or  through  brokers  must  make 
up  for  each  month  from  the  daily  record  a  return  in  duplicate  on  Form  729B 
in  accordance  with  the  instructions  printed  on  that  form.  These  returns 
must  be  made  under  oath,  and  must  be  verified  before  an  officer  duly  authorized 
to  administer  oaths,  either  by  the  laws  of  the  United  States  or  by  the  laws  of 
the  State  or  Territory  where  such  officer  resides.  Persons  in  the  military  or 
naval  service  of  the  United  States  may  verify  their  returns  before  any  official 
authorized  to  administer  oaths  for  the  purpose  of  those  services.  Such  return 
or  returns,  together  with  the  amount  of  the  tax,  must  be  in  the  hands  of  the 
collector  of  internal  revenue  who  issued  the  certificate  of  registry  for  the  place 
or  business  for  which  such  return  and  payment  is  being  made,  on  or  before 
the  last  day  of  the  month  following  that  for  which  it  is  made.1  (For  penalties 
see  Art.  46.)  A  copy  of  the  proper  form  (or  forms)  will,  as  far  as  possible,  be 
mailed  each  month  to  every  person  that  filed  a  return  during  the  preceding 
month,  but  should  any  person  who  is  liable  to  tax  fail  to  receive  a  blank 
return  he  should  take  the  necessary  steps  to  secure  a  form  and  make  return 
within  the  time  prescribed  by  law,  as  a  failure  to  receive  such  copy  from  the 
collector  will  not,  of  course,  excuse  a  failure  to  return  and  pay  the  tax,  or 
relieve  the  taxpayer  from  the  penalties  for  delinquency. 

6827  Art.  42.  Leases  of  places. — Whenever  a  theater,  hall,  park,  ball- 
room, or  other  place  is  leased  2  for  any  occasion,  there  is  imposed  on 

the  lessee,  by  the  provisions  of  the  Act,  the  duty  of  collecting  any  taxes  due 
on  admissions  to  such  place  on  that  occasion.  However,  for  the  convenience 
of  the  parties  and  the  safeguarding  of  the  revenue,  the  lessor  will  be  permitted, 
if  properly  registered  in  accordance  with  Art.  37,  to  assume  the  responsi- 
bility for  the  collection  of  the  tax  in  such  cases.  If  the  lessor  assumes  such 
responsibility  his  tickets  shall  be  used  3  and  the  daily  record  required  by 
Art.  39  shall  be  kept  as  a  part  of  the  daily  records  of  the  lessor  in  the  same 
manner  and  form  as  if  there  had  been  no  lease  of  the  place  on  that  occasion; 
with  the  exception,  however,  that  the  name  of  the  lessee  must  also  appear  on 
the  daily  record  and  that  he  must  also  certify  to  the  correctness  of  such  record. 
If  the  lessor,  however,  does  not  assume  responsibility  for  the  collection  of 
the  tax,  the  lessee,  precisely  like  any  other  person  collecting  taxable  admis- 
sions, must  comply  in  all  respects  with  these  regulations,  more  particularly 

1  "To  the  collector  of  the  district  in  which  the  principal  off;ce  or  place  of  business  is  located,"  in  Section  502 
of  the  Act,  means  (1)  if  there  is  a  definitely  located  place  to  which  admission  is  charged,  to  the  collector  of  the  district 
in  which  such  place  of  business  is  located;  or  (2)  if  the  business  is  not  definitely  located  but  traveling  or  itinerant,  to  the 
collector  of  the  district  in  which  is  located  the  principal  effee  of  such  business  or,  if  it  has  no  offce,  the  residence  of  its 
proprietor. 

'Where  a  person,  society,  or  organization  acquires  the  right  to  dispose  of  all  the  admissions  to  any  place  for 
one  or  more  occasions  the  transaction  amounts  to  a  lease  of  such  place  within  the  meaning  of  this  article. 

•If  the  lessee  issues  general  admission  tickets  these  tickets  must  not  entitle  to  admission  but  be  merely  ex- 
changeable for  tickets  of  the  lessor  entitling  to  admission. 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  1362  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


with  Art.  35,  36,  39,  40  and  41.  Every  lessee  or  person  who  rents  any 
theater,  hall,  park,  ballroom,  or  other  place  for  a  term  or  period  not  exceed- 
ing 10  days,  and  who  assumes  responsibility  for  collecting  and  making  return 
on  Form  729  of  taxable  admission  charges,  shall  furnish  immediately  after 
each  performance  or  occasion  for  which  admission  charges  are  collected,  to 
the  collector  of  the  district  in  which  such  theater,  hall,  ballroom,  or  other 
place  is  located,  a  sworn  statement  on  Form  827  showing  the  number  of 
persons  admitted,  the  amount  paid  for  admission  by  each,  the  amount  of 
tax  collected,  and  the  permanent  address  of  the  person  responsible  for  making 
return  on  Form  729.  It  shall  be  the  duty  of  every  lessor  or  person  who  rents 
out  any  theater,  hall,  park,  ballroom,  or  other  place  to  furnish  to  the  person 
leasing  or  renting  the  same  a  sufficient  number  of  copies  of  Form  827  at  the 
time  of  such  lease  or  rental.  Moreover,  in  such  case  the  lessor,  before  or  at 
the  time  of  making  the  lease,  must  notify  the  collector  of  internal  revenue  of 
the  district  in  which  the  place  is  located  on  Form  754  (Revised)  that  such  lease 
is  being  made.  The  lessor  of  any  such  place,  whenever  he  makes  a  lease, 
shall  furnish  the  lessee  with  a  copy  of  Form  755  (Revised),  in  order  that  the 
lessee  mav  promptlv  claim  any  exemption  to  which  he  mav  be  entitled.  (See 
Art.  29.) 


CHAPTER  EIGHT 


Credits  and  Refunds 
Law  ^8018,  118023,  ^8057 

6828  Art.   43.  Credit  for  overpayment. — Any   individual,  corporation, 
partnership,  or  association  that  has  paid  to  the  collector  of  internal 

revenue,  as  a  tax  under  section  800  of  the  Act,  any  amount  in  excess  of  the 
amount  of  the  tax  actually  imposed  by  that  section  for  the  month  covered  by 
that  payment,  is  authorized  under  section  1304  of  the  Act  to  claim  credit 
for  such  overpayment  against  the  amount  of  the  tax  imposed  by  section  800 
which  is  due  upon  any  other  monthly  return  thereafter  made  in  the  same  behalf 
on  Form  729  (Revised)  or  on  Form  729A  (Revised). 

6829  In  case  a  credit  is  claimed  a  statement  shall  be  attached  to  the  return 
setting  forth  fully  the  facts  regarding  the  alleged  overpayment  or 

overcollection.  In  the  case*of  the  overcollection  of  a  tax  no  credit  for  the 
amount  overcollected  shall  be  allowed  until  the  individual,  corporation, 
partnership,  or  association  making  the  overcollection  submits  a  sworn  state- 
ment that  the  tax  in  each  case  so  overcollected  has  been  returned  to  the  person 
making  the  overpayment. 

6830  It  should  be  noted  that  the  right  to  claim  a  credit  exists  only  in  the 
case  of  "overpayment  or  overcollection."    These  words  are  confined 

in  general  to  cases  where  as  the  result  of  some  clerical  or  mechanical  error, 
an  excess  amount  has  been  collected  or  paid. 

6831  Art.  44.  Refund  of  erroneous  or  illegal  collections. — In  all  cases 

where  tax  has  been  collected  and  such  collections  are  alleged  to  be 
illegal  or  erroneous  it  will  be  necessary  for  the  person  so  paying  the  tax  to  file 
claim  for  refund  on  Treasury  Department  Form  46.  Section  1304  of  the 
Act  does  not  authorize  the  individuals,  corporations,  partnerships,  or  associa- 
tions receiving  such  tax  to  make  refund  nor  to  adjust  the  claim;  the  only  ad- 
justment authorized  under  this  section  of  the  Act  being  limited  to  cases  of 
overpayment  or  overcollection  of  tax. 


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TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


6832  Art.  45.  Refund  of  overcollection. — Every  individual,  corporation, 
partnership,  or  association  that  has  collected  from  any  person,  as  a 
tax  under  section  800  of  the  Act,  any  amount  in  excess  of  the  amount  of  the 
tax  imposed  by  that  section  actually  due  from  such  person,  shall  upon  proper 
application  promptly  refund  such  amount  to  the  person  entitled  thereto, 
even  though  such  amount  has  already  been  paid  over  to  the  collector  of  in- 
ternal revenue  and  no  corresponding  credit  (see  Art.  43)  has  yet  been  secured. 
As  the  tax  on  admissions  is  based  on  the  payment  not  the  admission,  no  refund 
of  any  part  of  such  a  tax  is  authorized  merely  because  the  person  paying  for 
admission  does  not  actually  make  use  of  his  right  to  admission.  Where, 
however,  an  amount  paid  for  admission  is  refunded  it  will  be  treated,  as  far 
as  the  liability  to  the  tax  is  concerned,  as  not  having  been  paid,  and  the 
amount  of  any  tax  collected  at  the  time  of  the  payment  should  itself  be  re- 
funded to  the  taxpayer  by  the  person  refunding  the  payment,  at  the  same  time 
the  payment  is  refunded  As  the  tax  on  the  permanent  use  or  a  lease  for  the 
use  of  a  box  or  seat  is  based  on  the  right  to  use  (see  Art.  6),  it  is  entirely  imma- 
terial whether  the  box  or  seat  is  ever  used  or  not,  and,  therefore,  no  refund 
can  ever  be  granted  on  the  ground  that  there  was  no  actual  use  of  the  box  or 
seat. 


CHAPTER  NINE 


Penalties 

Law  H5509,  1f6508,  H8014-17,  H8073-74 


6833    Analysis  of  above  provision  of  Revenue  Act  of  1921. 


Act  or  default  penalized 

Penalty.,  applicable 

Section  of 
Revenue  Act 
of  1921 

Sale  of  "admission  ticket  or  card  on" 
the  "face  or  back"  of  "which  the 
name  of  the  vendor"  ("if  sold  other 
than  at  the  ticket  office  of  the  theater, 
opera,  or  other  place  of  amusement") 
and  the  "price  (exclusive  of  the  tax 
to  be  paid  by  the  person  paying  for 
admission)  at  which"  the  "ticket  or 
card  is  sold"  is  not  "conspicuously 
and  indelibly  printed,  stamped,  or 

L  written";  or  sale  of   an  admission 
ticket  or  card  "at  a  price  in  excess  of 

X   the  price  so  printed,  stamped,  or 

P  written  thereon." 

Fine  of  not  more  than  $100  

800  (d). 

[Continued  on  page  1365.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1364  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 
TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


Analysis  of  above  Provision  of  Revenue  Act  of  1921 — Continued. 


Act  or  default  penalized 


Penalty"  applicable 


Section  of 
Revenue  Act 
of  1921 


'Failure  to  make  and  file"  return 
"within  the  time  prescribed"  (when 
return  not  filed  later  and  reasonable 
cause  shown  for  failure  to  file  in  time). 


Willfully  making  "false  or  fraudulent 
return." 

Failure  to  pay  tax  when  due  , 


Failure  by  any  "person"1  to  "pay, 
collect,  or  truly  account  for  and  pay 
over  any  such  tax,  make  any  such 
return,  or  supply  any  such  information 
at  the  time  or  times  required  by  law 
or  regulation." 

Willful  refusal  by  any  "person"1  to 
"pay,  collect,  or  truly  account  for 
and  pay  over  any  such  tax,  make 
such  return  or  supply  such  informa- 
tion at  the  time  or  times  required  by 
law  or  regulation,"  or  willful  attempt 
"in  any  manner  to  evade  such  tax." 

Willful  refusal  by  any  "person"1  to 
"pay,  collect,  or  truly  account  for 
and  pay  over  any  such  tax." 


Embezzlement 
States. 


of    money    of  United 


25  per  cent  addition  to  tax  (to 
be  collected  as  part  of  tax,  or 
if  tax  already  collected  then 
in  same  manner  as  tax). 


50  per  cent  addition  to  tax  (to 
be  collected  as  above). 

5  per  cent  addition  to  tax  

and 

1  per  cent  interest  for  each  full 

month  from  time  tax  due. 
Penalty  of  not  more  than  $1,000 


Fine  of  not  more  than  $10,000.  . 
or 

Imprisonment  for  not  more  than 
one  year,  or  both. 


100  per  cent  addition  to  tax5.  .  . 


Fine  of  not  more  than  $5,000.  .  , 
or 

Imprisonment  for  not  more  than 
5  years. 


Section  3176 
U.  S.  Re- 
vised Stat- 
utes, as  re- 
enacted  by 
section 
1311. 
Do. 


502  or  903. 


1302  (a). 


1302  (b). 


1302  (c). 


Section  47 
U.  S.  Crim 
inal  Code. 


1  "Person"  includes  "an  officer  or  employee  of  a  corporation  or  a  member  or  employee  of  a  partnership,  who- 
as  such  officer,  employee,  or  member  is  under  a  duty  to  perform  the  act  in  respect  of  which  the  violation  occurs." 
(Section  1302  (d).) 

2  "No  penalty  shall  be  assessed  under  this  subdivision  for  any  offense  for  which  a  penalty  may  be  assessed  under 
authority  of  section  3176  of  the  Revised  Statutes,  as  amended."   (Section  1302  (c).) 

6834  Art.  46.  Penalties. — The  scope  of  the  penalties  applicable  to  the 
Tax  on  Admissions  is  so  broad  that  reference  will  be  made  only  to 
their  most  common  applications.  Every  individual,  corporation,  partner- 
ship, or  association,  on  which  there  rests  a  duty  to  file  a  monthly  return  on 
Form  729  (Revised),  that  fails  to  file  such  return,  and  to  pay  over  the  tax  due 
thereon,  during  the  month  which  follows  that  for  which  such  return  should  be 
made,  is  subject  to  certain  penalties.  A  mere  failure  to  file  the  return  within 
that  following  month  causes  to  accrue  the  25  per  cent  penalty  imposed  by 
section  3176  of  the  Revised  Statutes,  as  amended.  If  the  failure  be  willful 
the  penalty  is  50  per  cent  instead  of  25  per  cent.  A  mere  failure  to  pay  to  the 
collector  during  the  month  which  follows  that  for  which  such  return  should  be 
made,  all  taxes  due  under  that  return,  causes  to  accrue,  under  section  502 
of  the  Revenue  Act  of  1921,  a  penalty  of  5  per  cent,  and  of  interest  at  1  per 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1365  SERVICE 


3-2-22. 


Reg.  43,  Rev. — Part  I. — Admissions. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


cent  per  month  for  each  full  month  of  delay.  Every  person  who  fails  to  pay 
at  the  proper  time  the  amount  of  the  taxes  due  is  also  subject,  under  section 
1302  of  the  Revenue  Act  of  1921,  to  a  penalty  of  not  more  than  $1,000.  If 
this  failure  amounts  to  a  willful  refusal  to  pay,  or  an  attempt  to  evade  the 
tax,  he  is  guilty  of  a  misdemeanor  and  subject  to  a  fine  of  not  more  than 
$10,000,  or  imprisonment  for  not  more  than  one  year,  or  both,  and  he  is, 
moreover,  liable  to  a  penalty  of  100  per  cent  of  the  amount  of  the  tax.  These 
penalties  apply  as  well  to  an  officer  or  employee  of  a  place,  or  attraction,  or 
ticket-selling  business,  who  fails  to  perform  a  duty  with  regard  to  the  Tax  on 
Admissions,  as  to  a  person  who  fails  or  refuses  to  pay  his  tax.  A  willful 
conversion  to  one's  own  use  of  any  tax  collected  under  this  act  constitutes 
embezzlement,  which  is  punishable  by  fine  of  not  more  than  $5,000  or  im- 
prisonment for  not  more  than  five  years,  or  both. 

6835  Example. — A  certain  theater  which  sells  about  $1,000  worth  of 
taxable  admission  tickets  each  month,  regularly  collects  the  taxes 
due  on  such  admissions,  but  the  treasurer  carelessly  fails  to  file  a  return  and 
pay  over  the  taxes  for  April,  May,  and  June,  1922,  until  September  2,  1922. 
The  taxes  collected  in  April  are  $1 10,  in  May  $100,  and  in  June  $120.  In  this 
case  the  penalties  are  as  follows: 

April: 

Taxes  collected   $110.00 

25  per  cent  penalty   $27.50 

5  per  cent  penalty   5.50 

3  months'  interest  at  1  per  cent   4.29 


$37.29 


May: 

'  Taxes  collected   100.00 

25  per  cent  penalty   25.00 

5  per  cent  penalty   5.00 

2  months'  interest  at  1  per  cent   2.60 


32.60 


Forward   69.89 

Brought  forward   69.89 

June: 

Taxes  collected   $120.00 

25  per  cent  penalty   $30.00 

5  per  cent  penalty   6.00 

1  month's  interest  at  1  per  cent   1.56 

 $37.56 

Total  penalties   107.45 

In  addition  the  theater  treasurer  is  liable  to  a  penalty  of  not  more  than  $1 ,000. 

AUTHORITY  FOR  REGULATIONS 

6836    Art.  47.  Promulgation  of  regulations. — In  pursuance  of  this  provision 
fl[8009]  of  the  Act  the  foregoing  regulations  are  hereby  made  and 
promulgated  and  all  rulings  inconsistent  with  them  are  hereby  revoked. 

D.  H.  BLAIR, 

Commissioner  of  Internal  Revenue. 

Approved  February  16,  1922   [Released  for  publication  February  28,  1922.] 

A.  \V.  MELLON. 

Secretary  of  the  Treasury 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1366  SERVICE 


9-25-22. 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


(T.  D.  3394.) 

6837  Article  37,  Regulations  43.    Part  I,  (Revised,  1922),  amended.*— 

6817  Article  37,  Regulations  43,  Part  I,  (Revised  1922)  is  hereby  changed* 
to  read  as  follows: 

6838  "Art.  37.    Application    for    and    certificate    of    registry. — Every 
individual,  corporation,  partnership,  or  association  (1)  required  by 

the  provisions  of  the  Act  to  collect  any  tax  on  admissions  (see  Art.  35)  or  (2) 
being  the  owner  or  lessee  of  any  place  which  is  ordinarily  or  at  times  leased  to 
other  persons  who  impose  charges  for  admissions  to  it  (see  Art.  42),  or  (3) 
required  to  pay  any  tax  on  charges  in  excess  of  established  price  (see  Art.  36), 
shall  annually,  on  or  before  the  first  day  of  July,  (and  if  not  on  that  date  en- 
gaged in  business,  then  within  ten  days  after  engaging  in  business  and 
annually  thereafter  on  or  before  the  first  day  of  July)  make  an  application 
for  registry,  by  filling  out  Form  752  (Revised),  with  all  information  there 
called  for  and  duly  executing  it  under  oath.  In  cases  falling  within  the  first 
of  the  above  classes  (except  such  as  are  considered  in  Art.  38)  such  an  appli- 
cation must  be  filed  in  the  office  of  the  collector  of  internal  revenue  of  each 
district  in  which  is  located  a  place  to  which  admissions  are  charged  on  account 
of  which  a  duty  to  collect  admissions  taxes  is  imposed  on  the  person  making 
such  application.  In  cases  falling  within  class  (2)  the  application  must  be 
filed  in  the  office  of  the  collector  of  internal  revenue  of  each  district  in  which 
such  a  place  is  owned  or  leased.  In  cases  falling  within  class  (3)  the  applica- 
tion must  be  filed  in  the  office  of  the  collector  of  internal  revenue  of  the  district 
in  which  is  located  the  principal  place  of  business  of  the  person  making  the 
application,  or  in  which  is  located  his  residence,  if  he  has  no  fixed  place  of 
business.  The  collector,  if  satisfied  that  all  the  statements  made  in  the 
application  for  registry  arc  correct,  will  issue  a  certificate  of  registry  on  Form 
753  (Revised)  to  the  person  who  made  such  application.  This  certificate  must 
be  kept  conspicuously  posted  in  the  principal  place  of  business  of  such  person, 
or  be  carried  about  with  him,  if  he  has  no  fixed  place  of  business. 

6839  Example. — A  certain  hotel  has  a  number  of  rooms  which  it  rents  from 

6818  time  to  time  for  dances  and  other  parties.    This  hotel  falls  within 
class  (2)  of  Art.  37  and  must  annually  make  application  for  registry." 

(T.  D.  3394,  signed  by  Commissioner  D.  H.  Blair,  and  dated  September  21, 
1922.) 

*[Note:  The  only  change  made  in  Article  37  by  the  foregoing  T.  D. 
3394  is  the  addition  of  the  matter  in  parenthesis  following  the  word  "July." — ■ 
The  Corporation  Trust  Company.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1367  SERVICE 


3  c.  83 


9-25-22. 

ADMISSIONS  AND  DUES  TAX.— RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Admissions  and  Dues  Tax  Law  Provisions  of  the  Revenue  Act  of  1921. 

(The  Law  appears  at  paragraphs  6500  to  6512.) 

Giving  Treasury  Decision  Number  or  other  Designation,  Date  of  Issue,  and  General 

Subject  Content. 


T.  D.  Subject  Paragraph 

Law  Provisions   6500 

Reg.  43  )  Dues  Regulations  (revision  of  January  11,  1922)  under  the  Revenue 

Pt.  2    )  Act  of  1921.    (Fully  indexed  on  the  blue  index, 

following)   6513 

3282  Revenue  Act  of  1918. — Amendment  to  Art.  12,  Reg. 

43,  Part  II  (February  11,  1922)   6583 

3285  Arts.  9,  10,  11,  and  12,  Reg.  43,  Pt.  II  amended  (February  11,  1922)  6584 

Reg.  43  )  Admissions  Regulations  (revision  of  February  15,  1922).  (Fully 

Pt.  1     \  indexed  on  the  blue  sheets  following)   6589 

The  matters  listed  above  are  indexed. 


The  matters  listed  below  are  not  indexed. 
3394  Art.  37,  Reg.  43,  Pt.  %  amended  (September  21,  1922)   6837 


Insert  this  page  immediately  before  the  blue  Dues  Tax  Index. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Admissions  and  Dues  Taxes  Supplementary  Page  1. 


( 


I 


3-2-22. 

INDEX  TO  ADMISSIONS  REGULATIONS. 


INDEX  TO  REGULATIONS  43,  REVISED  PART  1,  ADMISSIONS. 

[Government  index  with  references  changed  from  "  Articles"  to  "Paragraphs. 


Additional  charges  for  rental  or  service  as  charge  for  admission.  .6608 

Tax,  charges  in  excess  of  established  price.  .6688-6710 

Time,  charge  for,  as  charge  for  admission.  .6602 
"Admission"  denned.  .6601 

"Admissions  to  agricultural  fairs,"  definition.  .6768 
Affidavits,  claim  of  exemption.  .6777 

Daily  records,  etc.,  of  taxes  collected.  .  6823-6825 

Returns.  .6826 
"Agricultural  fairs,"  definition.  .6768 

Exemptions.  .6766-6776 

Organizations  other  than,  exemption.  .6723-6765 
Airplane,  amounts  paid  for  rides,  not  admissions.  .6598 
"All  the  proceeds"  defined.  .6715 
American  Legion,  exemption.  .6754 
"Amount  paid  for  admission"  defined.  .6601-6656 
Amusement  park  as  "place"  to  which  admissions  are  taxable.  .6594 
Animal  exhibition,  exemptions.  .6769 

Application  for  registry  by  persons  collecting  tax,  etc.  .6817 

Athletic  purposes,  exemptions  where  proceeds  are  to  be  expended  for.  .6735 

Authority  for  regulations.  .  6836 

Auxiliary  units,  American  Legion  exemption.  .6754 

Bands,  exemptions.  .6756 

Baseball  park.  .6656,  6658-6660, 

Basis  of  exemptions.  .6720,  6766 

Basis  of  tax.  .6589 

Box-office  sales  in  excess  of  established  price.  .  6688,  6694 
Brokers'  sales  in  excess  of  established  price.  .6688,  6698 
Cabaret.  .  6669 

Leases  of  boxes  or  seats.  .6657 

Roof  gardens.  .  6669 
Bathing  beaches.  .6625 
Bible  classes,  exemptions.  .6732 
Bills,  roof  gardens  and  cabarets.  .6798 

Box-office  sales  in  excess  of  established  price,  basis  and  rate  of  tax.  .6688,  6694 

Box,  opera,  lease  of,  defined.  .  6662 

Boy  Scouts,  exempt  as  educational  organization.  .6747 

Brokers'  sales  in  excess  of  established  price,  basis  and  rate  of  tax.  .  6688,  6698 
Bump-the-bumps  as  "place'  to  which  admissions  are  taxable.  .6594 
Cabarets,  basis  of  tax.  .6669 

Bills  and  coupon  receipts.  .6798 

Computation  of  tax.  .  6669 

Rate  of  tax.  .  6669 
Cards  of  admissions  established  price  to  be  printed  on.  .  6789 

Issuing,  prerequisites.  .  6788 

Marking.  .  6784,  6788 

Name  of  place  to  be  printed  on.  .  6792 

Name  of  seller  to  be  printed  on.  .  6790 

Necessity  for.  .  6784 

Printing.  .  6788,  6805 

Serial  numbers.  .6792 

Taking  up  and  preservation.  .  6797 
Cave  as  "place"  to  which  admissions  are  taxable.  .6594 
Certificate  of  registry,  persons  collecting  tax,  etc.  .6817 
Charitable  organizations,  exemption.  .6723,  6749 
Children,  exemption  of  society  for  prevention  of  cruelty  to.  .  6724 
Churches,  exemptions.  .  6729 
Circuses,  application  for  registry.  .6819 

Separate  charge  for  admission  and  seats.  .6591 
City  improvement  societies,  exemption.  .  6726,  6760 
Claims,  credit  for  overpayment.  .  6828 

Exemptions.  .6777 

Refund  of  overpayment.  .  6832 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Index  Page  1. — Admissions. 


3-2-22. 


INDEX  TO  ADMISSIONS  REGULATIONS 


The  references  are  to  paragraph  numbers. 

Club  membership,  amount  paid  for,  as  "amount  paid  for  admission".  .6649 
Collection,  Taxes  on  Admissions.  .6810 
Colleges,  exemption.  .6735 

Community-center  moving-picture  theaters,  exemption.  .6726,  6763 
Computation  of  tax.  .  6589 

Cabarets.  .  6669 

Leases  of  boxes  or  seats.  .  6657 

Roof  gradens.  .  6669 
Contributions  as  "amount  paid  for  admission".  .  6653 
Cooperative  parties,  "amount  paid  for  admission".  .6638 
Cooperative  moving-picture  theaters,  exemption.  .  6726,  6763 
Coupon  receipts,  roof  gardens  and  cabarets.  .  6798 
Credits,  overpayments.  .6828 

Cruelty  to  children  or  animals  exemption  of  society  for  prevention  of.  .  6724 
Daily  records,  taxes  on  admissions.  .6823 

Taxes  on  charges  in  excess  of  established  price.  .  6825 
Dance  hall  or  pavilion  as  "place"  to  which  admissions  are  taxable.  .6594,  6596 
Dancing  schools.  .6627-6630 
Definitions: 

"Admissions".  .6601 

"Admissions  to  agricultural  fairs".  .  6766 

"Agricultural  fairs".  .6768 

"All  the  proceeds".  .6715 

"Amount  paid  for  admission".  .  6608 

"Entertainment".  .6680 

"Established  price  of  an  admission".  .6690 

"In  need".  .6758 

"Lease".  .  6662 

"Persons  in  military  or  naval  forces".  .6757 

"Place".  .6593 

"To  any  place".  .6593 
Devices,  mechanical,  to  record  admissions.  .6806 
Dip-the-dips  as  "place"  to  which  admissions  are  taxable.  .  6594 
Discharged  soldiers  and  sailors,  exemptions.  .  6826 
Dog  shows,  exemptions.  .6774 

Educational  organizations,  exemption.  .  6723,  6735 
"Entertainment,"  definition.  .6680 

Established  price  of  admission,  computation  of  tax  at.  .  6589 

Definition.  .6690 

Increase.  .  6690 

Printing  on  tickets.  .6788 

Season  tickets  or  subscriptions  defined.  .6692 
Excess  of  established  price,  box  office  sales  in.  .6694 

Brokers'  sales  in.  .6698 

Exemptions  as  to  charges  in.  .6713 

Persons  liable  for  tax  on  charges  in.  .6688,  6698 

Records  as  to  taxes  on  charges  in.  .6825 

Registry  by  persons  required  to  pay  tax  on  charges  in.  .6817 
Return  and  payment  of  tax  on  charge  in.  .6815 
Scope  of  tax  where  charge  is  in.  .  6689 
Exemptions,  admissions  tax.  .6711 
Affidavit  claiming.  .6777 
Agricultural  fairs.  .6766,  2768 
Animal  exhibition.  .  6769 
Bands.  .6756 
Basis.  .6720,  6766 
Bible  classes.  .  6732 
Boy  Scouts.  .  6747 
Certificate  of.  .  6777 

Character  of  organization  claiming.  .6723 
Charges  in  excess  of  established  price  tax  on.  .6713 
Charitable  organizations.  .6723,  6749 
College  fraternity.  .6742 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Index  Page  2. — Admissions. 


3-2-22. 


INDEX  TO  ADMISSIONS  REGULATIONS. 


The  references  are  to  paragraph  numbers. 

Exemptions,  admissions  tax — Continued. 

Cooperative  or  community-center  moving-picture  theaters.  .6726,  6763 
Dog  shows.  .  6774 

Educational  organizations.  .6723,  6735 
Fairs.  .6766,  6768 

Organizations  other  than  agricultural  fairs.  .6711-6765 

Farm-produce  exhibition.  .  6769 

Flower  exhibition.  .6769 

Food  exhibition.  .  6769 

Fraternal  organizations.  .6750 

Garden-produce  exhibition.  .  6769 

Girl  Scouts.  .  6747 

FTorse  shows.  .6772,  6773 

Horticultural  exhibition.  .6769 

Live-stock  exhibition.  .  6769 

Men's  club  of  church.  .6731 

Municipal  corporations.  .6765 

Municipal  improvement  societies.  .  6726,  6760 

Music-festival  association.  .6739 

National  Guard  Organizations.  .6757 

Orchestral  organizations.  .6755 

Persons  formerly  in  military  or  naval  service  who  are  in  need.  .6758 

Police  relief  association.  .6753 

Political  subdivisions  of  State.  .  6765 

Poultry  exhibition.  .6769 

Prepared  or  preserved  food  exhibition.  .6770 

Private  schools.  .6738 

Religious  organizations.  .6723,  6729 

Sailors.  .  6757 

Society  for  prevention  of  cruelty  to  children  or  animals.  .6724 
Soldiers.  .  6757 
States.  .6765 

Symphony  orchestra  organizations.  .6755 
United  States.  .  6765 

War-stricken  people  abroad,  entertainment  for  benefit  of.  .  6752 

Zoological  park  association.  .  6740 
Ex-service  men  and  women  who  are  in  need,  exemption.  .6758 
Fairs,  exemptions.  .6766-6776 

Organizations  other  than  agricultural  fairs,  exemptions.  .  6723-6765 
Farm  produce  exhibition,  exemptions.  .  6769 
Ferris  wheel  as  "place"  to  which  admissions  are  taxable.  .6594 
Filing  application  for  registry  by  persons  collecting  tax,  etc.  .6817 
Fishing  piers.  .  6626 

Floating  theater  as  "place"  to  which  admissions  are  taxable.  .6594 
Flower  exhibition,  exemptions.  .6769 

Food,  public  performance  in  connection  with  service  of.  .  6669 
Food  exhibition,  exemptions.  .  6769 

Forms  on  which  records  of  admissions  are  to  be  kept.  .  6823 

Fraternal  organizations,  exemption.  .  6750 

Fraternity,  college,  exemption.  .6742 

Garden  produce  exhibition,  exemptions.  .  6766-6776 

Girl  Scouts,  exempt  as  educational  organization.  .  6747 

Grandstand  as  "place"  to  which  admissions  are  taxable.  .6594 

"Green"  fees.  .  6623 

Hat-checking  fees.  .6628,  6635 

Hilarity  hall  as  "place"  to  which  admissions  are  taxable  .  .  6594 
Horse  shows,  exemption.  .6772-6773 
Horticultural  exhibition,  exemptions.  .6769 
Imposition  of  tax.  .6589 

Improvement  societies,  municipal,  exemption.  .6726,  6760 
Increase  of  established  price  once  adopted.  .  6690 
"In  need"  defined.  .  6758 

Instrumental  music,  exclusion  from  "other  similar  entertainment".  .6680 
Issuing  tickets  or  cards  of  admission,  prerequisites.  .6788 

Copyright  1922,  bg,  The  .Corporation  Trust  Company. 

WAR  TAX  SERVICE 

Tndex  Page  3.-—  Admission; . 


3-2-22. 


INDEX  TO  ADMISSIONS  REGULATIONS . 


The  references  are  to  paragraph  numbers. 

"Lease,"  definition.  .  6662 

Leases  of  boxes  or  seats,  basis  of  tax.  .6657 

Computation  of  tax.  .  6657 

Rate  of  tax.  .6657 
Leases  of  places,  collection  of  tax.  .6827 

Registry.  .6817 
Legion,  American,  exemption.  .6754 

Women's  auxiliary  units  of.  .6754 
Live-stock  exhibitions,  exemptions.  .6766,  6768 
Lodges,  exemption.  .  6750 
Marking  tickets.  .6784,  6788 
Mechanical  device  to  register  admissions.  .  6806 
Medicated  baths,  admissions  to.  .6636 

Membership  club,  amount  paid  for,  as  "amount  paid  for  admission".  .664  0 
Men's  club  of  church,  exemption.  .6731 

Merry-go-round  as  "place"  to  which  admissions  are  taxable.  .6594 

Method  of  securing  exemption.  .6777 

Military  service,  exemptions  as  to  persons  in.  .6757 

As  to  persons  formerly  in,  who  are  in  need.  .6758 
Missions  and  missionary  societies,  exemptions.  .  6729 
Monthly  returns.  .6826 

Moving-picture  theaters,  cooperative  or  community-center  exemption.  .  67 ?6  f-7( 

Municipal  corporations,  exemption.  .6765 

Municipal  improvement  societies,  exemption.  .  6726,  6760 

Music,  instrumental,  exclusion  from  "other  similar  entertainment".  .  6680 

Musical-festival  association,  exemption.  .  6739 

Musical  education,  exemption  of  organization  devoted  to.  .6735 

Name  of  place,  printing  on  tickets  or  cards  of  admission.  .6792 

Seller,  printing  on  tickets  or  cards  of  admission.  .6790 
National  Guard  organizations,  not  exempt.  .6757 
Naval  service,  exemptions  as  to  persons  in.  .6757 

As  to  persons  formerly  in  who  are  in  need.  .6758 
Nonpayment  of  tax,  penalty.  .6834 
Notice,  leases  of  places.  .6827 

Preservation  of  tickets  taken  up.  .  6797 

Printing,  etc.,  of  tickets  or  cards  of  admission.  .6805 

Reduction  of  established  price.  .6691 
Numbering  roof-garden  and  cabaret  bills  and  receipts.  .6798 

Tickets  or  cards  of  admission.  .  6792 
Nurses  in  military  or  naval  service,  exemptions.  .  6757 
Observation  tower  as  "place"  to  which  admissions  are  taxable.  .  6594 
"Old  Mill"  as  a  '/place".  .6599 
Orchestral  organizations,  exemption.  .6755 
Organizations  exempt.  .6711-6776 

Outdoor  amusement  park  as  "place"  to  which  admissions  are  taxable.  .6594 
Overcollection,  refund.  .  6832 
Overpayment,  credit.  .6828 

Refund.  .6831^ 
Payment  of  admission  tax: 

Duty  to  make.  .6810 

Penalty  for  delinquency.  .  6834 
Penalties.  .6834 

"Persons  in  military  or  naval  forces"  defined.  .6757 
Personal  services,  charge  for,  as  charge  for  admission.  .6608 
Physical  education,  exemption  of  organization  devoted  to.  .  6735 
"Place,"  definition.  .  6593 

Operation  of  organization  as  affecting  exemption  from  tax.  .6727 
Police  relief  association,  exemption.  .6753 
Political  subdivision  of  State,  exemption.  .6765 
Pony  rides.  .  6632 

Posting  certificate  of  registry.  .6817 

Signs  stating  established  price,  tax  due,  and  sum  total.  .6807 
Poultry  exhibition,  exemptions.  .6769 

Copyright  1922,  by  The  Corporation  T rust  Company. 
WAR  TAX  SERVICE 

Indcx'Pagc  4.-*-Ad missions. 


3-2-22. 


INDEX  TO  ADMISSIONS  REGULATIONS. 


The  rejerences  are  to  paragraph  numbers. 

Prepared  or  preserved  food  exhibition,  exemptions.  .6770 

Prevention  of  cruelty  to  children  or  animals,  exemption  of  society  for.  .  6724 

Price,  printing  on  tickets  or  cards  of  admissions.  .6789 

Printing  tickets.  .  6784-6805 

Private  schools,  exemption.  .6738 

Promulgation  of  regulations.  .  6836 

Purchase  of  property,  amount  paid  as  "amount  paid  for  admission".  .6610 
Railway  car  or  train  as  "place"  to  which  admissions  are  taxable.  .6595 
Rate  of  tax.  .6589 

Box-office  sales  in  excess  of  established  price.  .6694 

Brokers'  sales  in  excess  of  established  price.  .  6698 

Cabaret.  .6669 

Leases  of  boxes  or  seats.  .6657 

Roof  gardens.  .  6669 
Receipts,  roof  gardens  and  cabarets.  .  6798 
Records,  taxes  on  admissions.  .  6823 

Taxes  on  charges  in  excess  of  established  price.  .  6825 

Form  on  which  to  be  kept.  .  6824 

Mechanical  devices  to  record  admissions.  .  6806 
Refreshments,  cabaret  performances.  .  6669 

Public  performance  in  connection  with  service  of.  .  6680 
Refunds  of  admissions,  reduction  of  established  price.  .6691 

Overcollections.  .  6832 

Tax  erroneously  or  illegally  collected.  .6831 
Registers,  mechanical,  to  record  admissions.  .6806 
Registry,  persons  collecting  tax,  etc.  .6817,  6819 
Religious  organizations,  exemption.  .  6723,  6729 
Rental,  charge  for,  as  charge  for  admission.  .6608 
Report  of  taxes  collected.  .  6823 
Resale  of  tickets.  .6698 

Reserved  seats,  charge  for  use  of,  as  charge  for  admission.  .6601 
Returns,  penalty  for  delinquency.  .6834 

Taxes  on  admissions.  .6810 

Charges  in  excess  of  established  price.  .6815 
Revenue  act  of  1921: 

Authority  for  regulations  in.  .6836 

Charges  in  excess  of  established  price.  .6688-6710 

Collection,  return,  and  payment  of  tax.  .6810-6827 

Credits  and  refunds.  .6828-6832 

Exemptions.  .6711-6783 

Leases  of  boxes  or  seats.  .6657,  6662 

Penalties.  .  6834 

Roof  gardens,  cabarets,  or  similar  entertainments.  .  6669,  6680 

Tickets  and  signs.  .  3784-6809 
Roller  coaster  as  "place"  to  which  admissions  are  taxable.  .6594 
Rolling  chairs.  .  6606 
Roof  gardens,  basis  of  tax.  .6669 

Bills  and  coupon  receipts.  .6798 

Computation  of  tax.  .  6669 

Rate  of  tax.  .  6669 
Rowboats.  .6631 
Sailors,  exemption.  .6757 

"Persons  in  military  or  naval  forces"  defined.  .6757 
Sale  price,  printing  on  tickets  or  cards  of  admission.  .6789 
Salvation  Army,  exemption  of  entertainment  for  benefit  of.  .6718 
Scenic  railway  as  "place"  to  which  admissions  are  taxable.  .  6594 
Schools,  exemption.  .  6735 

Scope  of  Taxes  on  Charges  in  Excess  of  Established  Price.  .  6689 
Season  tickets,  "established  price  of"  defined.  .6692 
Seats,  charge  for  use  of,  as  charge  for  admission.  .6601 

Lease  of,  defined.  .  6662 
Serial  numbers,  printing  on  tickets  or  cards  of  admission.  .  6792 

Roof  garden  and  cabaret  bills  and  receipts.  .  6798 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Index  Page  5.-rAdmisskm5. 


3-2-22. 


INDEX  TO  ADMISSIONS  REGULATIONS. 


The  references  are  to  paragraph  numbers. 

Services,  charge  for,  as  charge  for  admission.  .6608 

Several  admissions  paid  for  at  once,  computation  of  tax.  .  6590 

"Shoot-the-chutcs"  as  a  "place".  .6599 

Sight-seeing  automobile  as  "place"  to  which  admissions  are  taxable.  .  659.S 
Signs  stating  established  price,  tax  due,  and  sum  total.  .6807 
Skating  rinks.  .6617 

Social  settlement  entertainments.  .6745 

Societies  for  municipal  improvement,  exemption.  .6726,  6760 

Societies  maintaining  cooperative  moving-picture  theaters,  exemption.  .6726,  6763 
Society  for  prevention  of  cruelty  to  children  or  animals,  exemption.  .6724 
Soldiers,  exemption.  .6757 

"Persons  in  military  or  naval  forces"  defined.  .6757 
Specd-o-plane  as  "place"  to  which  admissions  are  taxable.  .  6594 
Sport  as  element  of  purpose  of  organization,  effect  as  to  exemptions  from  tax.  .  67.3 S 
States,  exemption.  .6765 

Steamboat  as  "place"  to  which  admissions  are  taxable.  .6595 
Street  car  as  "place"  to  which  admissions  are  taxable.  .6595 
Subscription  as  "lease".  .6666,  6667,  6668 

Computation  of  tax.  .6657 
Swimming  pools.  .6625 
Swinging  beach  chairs.  .6605 

Symphony  orchestra  organizations,  exemptions.  .6755 

Tables,  charge  for  use  of,  as  charge  for  admission.  .6601 

Tennis  tournament  as  "place"  to  which  admissions  are  taxable.  .6597 

Theaters,  cooperative  or  community-center,  exemption.  .  6726,  6763 

Theological  seminaries,  exemption.  .6729 

Thrift  stamps,  purchase  as  prerequisite  to  admission.  .6647 

Tickets,  established  price  to  be  printed  on.  .  6789 

Issuing,  prerequisites.  .6788 

Marking.  .  6784,  6788 

Mechanical  device  or  register  may  be  used  in  lieu  of.  .6806 
Name  of  place  to  be  printed  on.  .6792 

Seller  to  be  printed  on.  .  6790 
Necessity  for.  .  6784 
Printing.  .6788-6805 
Serial  numbers.  .6792 
Taking  up  and  preservation.  .  6797 
"To  any  place"  defined.  .  6593 

Toboggan  slide  as  "place"  to  which  admissions  are  taxable.  .6594 

Town  improvement  societies,  exemption.  .6726,  6760 

Traveling  shows,  application  for  registry.  .  6S 1 9 

Turkish  baths.  .6633 

United  States,  exemptions.  .6765 

Units,  women's  auxiliary  of  American  Legion,  exemption.  .  6754 
Universities,  exemptions.  .6735 

Vaudeville  in  connection  with  service  of  food.  .6680 

Village  improvement  societies,  exemption.  .  6726,  6760 

Voluntary  contributions  as  "amount  paid  for  admission".  .  6653 

War-stricken  people  abroad,  exemption  of  entertainment  for  beneiit  of.  .  675  2 

Whip  as  "place"  to  which  admissions  are  taxable.  .6594 

Window,  rental  of.  .6601 

Words  and  phrases.    See  Definitions,  ante. 

Women's  auxiliary  units  of  American  Legion,  exemption.  .  6754 

Young  Men's  Christian  Association,  exemption  as  educational  organization.  .  6744 

Exemption  as  religious  organization.  .  6734 
Young  Men's  Hebrew  Association  exemption  as  educational  organization.  .  674  1 

Exemption  as  religious  organization.  .6734 
Zoological  park  association,  exemption.  .  6740 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Index  Page  6. — Admissions, 


1-2S-22. 

INDEX  TO  DUES  REGULATIONS. 


INDEX  TO  REGULATIONS  43,  REVISED— PART  2,  DOTS. 

[Government  index  with  references  changed  from  "pages"  U)  "pawgrpphs 

"Active  resident  annual  member"  defined.  .6534 
Admissions,  tax  on  (see  Part  1  of  Regulations.) 
Assessments  by  club  .6535 

Associations  of  athletic  clubs.  .  6524  .)»..,'../' 
Athletic  clubs  (see  also  "Clubs  and  organizations").  .6524 
Authority  for  making  regulations.  .6582  , 
Automobile  Dealers  Association.  .  6523 
Basis  of  tax.    See  "Tax  on  dues." 

Boating  clubs  (see  also  "Clubs  and  organizations").  .6524 
Boxing  clubs  (see  also  "Clubs  and  organizations").  .6524 
Business  organizations  (see  also  "Clubs  and  organizations").  .  652,0 
Canoe  clubs  (see  also  "Clubs  and  organizations").  .6524 
Chambers  of  commerce  (see  also  "Clubs  and  organizations").  ,6520 
Chapters,  fraternity.  .6529 
Character  of  club,  determination  of.  .6519 
Claim  for  refund.    See  "Refund." 
Claim  that  club  is  not  within  scope  of  tax.  .6519 
Clubs  and  organizations: 

"Active  resident  annual  member"  defined.  .6534 

Assessments  by  club.  .6535 

Associations  of  athletic  clubs.  .  6524 

Athletic  clubs.  .6524 

Basis  of  tax.    See  "Tax  on  dues." 

Boating  clubs.  .6524 

Boxing  clubs.  .  6524 

Business  organizations.  .6520 

Canoe  clubs.  .  6524 

Chambers  of  commerce.  .  6520 

Chapters,  fraternity.  .6529 

Character,  determination  of.  .6519 

Claim  that  club  is  not  within  scope  of  tax.  .6519 

Collection  of  tax  from  member.  .6569 

College  fraternities.  .6529 

Commercial  clubs.  .6520 

Credit  to  club  for  overpayment.  .6575 

Curling  club.  .  6544 

Dues  or  membership  fees.    See  "Dues  or  membership  fees." 
Duty  to — 

Collect,  return,  and  pay  over  tax.  .6569,  6572 
Keep  records,  .6572 

Report  member  refusing  to  pay  tax.  .6579 
Exempt  organizations.  .6527 
Fines  imposed  by  club  not  taxable.  .6536 
Fishing  clubs.  .  6524 
Foreign  clubs.  .6533 
Fraternal  organizations.  .6520,  6527 
Golf  clubs.  .6524 
"Green"  fees.  .6536,  6543 
Hunting  clubs.  .6524 
Included  within  scope  of  tax.  .6518 
Intercollegiate  athletic  associations.  .  6525 
Labor  unions.  .6530 

Life  memberships.    See  "Life  memberships." 
Lodges.  .6527 
Musical  clubs.  .6520 
Officer  subject  to  penalties.  .  6579 
"Operating  under  the  lodge  system"  defined.  .6527 
Paying  tax  to  collector.  .  6569,  6572 

Payments  within  time  scope  of  Revenue  Act  of  1921.  .6513. 

Penalties  to  which  subject.  .6578 


WAR  TAX  SERVICE 

Index  Page  1. — Dues. 


INDEX  TO  DUES  REGULATIONS, 


Ctub«  and  organizations' -Concluded. 

Presumption  as  to  character  of  club.  .6519 

Records  to  be  kept.  .6572 

Refund- 
By  club  for  overcollection.  .6519,  6577 
To  club  for  overpayment.  .6519,  6576 

Religious  organizations.  .  6520 

Return,  monthly.  .6569,  6572 

Revenue  Act  of  1921 — 

Basis  of  tax  under.    See  "Tax  on  dues.'* 
Clubs  within  scope  of.  .6518 
Payments  within  time  scope  of.  .6513 
Text  of.  .6509 

■Revenue  Act  of  19 In- 
payments taxable  under.  .  6514 

Scope  of  tax,  clubs  within.  .6518 

Singing  societies.  .6520 

Social  clubs.  .6520 

Social  settlements.  .6522 

Sporting  clubs.  .6524 

Tax.    See  "Tax  on  dues." 

Tennis  clubs.  .  6524 

Trade  organizations.  .6520 

Treasurer  subject  to  penalties.  .6579 

Within  scope  of  tax.  .6513 

Young  Men's  Christian  Associations.  .6521,  6526 

Young  Men's  Hebrew  Associations.  .6521,  6526 
Collection  of  tax  by  club: 

Duty  to  collect.  .6569 

Penalties  for  failure  to  collect.  .6578 
College  fraternities.  .6529 

Commercial  clubs  (see  also  "Clubs  and  organizations").  .6520 
Credit  to  club  for  overpayment.  .6575 
Curling  club.  .  6544 

Decisions,  Treasury,  inconsistent  with  regulations,  revoked.  .  6582 
Definitions: 

"Active  resident  annual  member".  .6534 

"Athletic  or  sporting  club".  .  6524 

"Initiation  fees".  .6552 

"Operating  under  the  lodge  system.  .6527 

"Social  club".  ,6520 
Delegate  organizations.  .6524 
Determination  of  character  of  club.  .6519 
Dues  or  membership  fees: 

"Active  resident  annual  member"  defined.  .6534 

Assessments  by  club.  .6535 

Extraordinary  dues.  .6534 

foreign  club,  paid  to.  .  6533 

Include,  what  they.  .6534 

Payments  within  time  scope  of  Revenue  Act  of  1921.  .6513 
Penalties  for  failure  to  pay  dues  promptly.  .6534 
Penalties  imposed  by  Revenue  Act  of  1921.  .6578 
Rate  of  tax.  .6515,  6534 
Records  to  be  kept  by  club.  .  6572 
When  tax  due.  .6569 
Duty  of: 

Club  to  collect,  return,  and  pay  over  tax.  .  6569 
Club  to  keep  records.  .6572 

Club  officer  to  report  member  refusing  to  pay  tax.  .657^ 

Club — enforced  by  penalties.  .6579 

Member  to  pay  tax.  .6569 

Member — enforced  by  penalties.  .6579 
Effective  date  of  Act.  .6513 
Exempt  organizations.  .6527 


WAR  TAX  SERVICE 

Index  Page  2. — Dues. 


1-23-22. 


INDEX  TO  DUES  REGULATIONS. 


l  ine  imposed  by  club.  .6536 

Fishing  club  {see  also  "Clubs  and  organizations").  .6524 
Foreign  clubs.  .  6533 

Form  46  (revised)  used  for  claim  for  refund.  .6519,  6576 
Form  729  (revised)  used  for  monthly  return.  .6572 

Fraternal  organizations  {see  also  "Clubs  and  organizations").  .6520,  6527 
Fraternities,  college.  .6529 

Golf  clubs  {see  also  "Clubs  and  organizations").  .6524 
"Green"  fees.  .6536,  6543 

Hunting  clubs  {see  also  "Clubs  and  organizations").  .6524 
Initiation  fees: 

"Active  resident  annual  member"  defined.  .6534 

Foreign  club,  paid  to.  .6533 

Include,  what  they.  .6552 

Payments  within  time  scope  of  Revenue  Act  of  1921.  .6513 

Penalties  imposed  by  Revenue  Act  of  1921.  .6579 

Rate  of  tax.  .6515,  6552 

Records  to  be  kept  by  club.  .6572 

When  tax  due.  .  6569 
Intercollegiate  athletic  associations.  .6525 
Labor  unions.  .6530 
Life  memberships: 

Foreign  club.  .  6533 

Payments  within  time  scope  of  Revenue  Act  of  1921.  .6513 

Penalties  imposed  by  Revenue  Act  of  1921.  .6579 

Rate  of  tax.  .  6561 

Records  to  be  kept  by  club.  .6572 

When  tax  due.  .  6569 
"Lodge  system,  operating  under  the,"  defined.  .6527 
Lodges.  .6527 
Member: 

Duty  to  pay  tax  to  club.  .  6569 

Penalties  for  failure  to  pay  tax.  .6579 

Refund  by  club  of  overcollection.  .6519,  6577 

Refusal  to  pay  tax  to  be  reported.  .6579 
Military  service,  free  membership  granted  account  of,  not  taxable.  .6549 
Musical  clubs  {see  also  "Clubs  and  organizations").  .6520 
Oath,  return  for  over  $10  to  be  under.  .6572 
Officer  of  club  subject  to  penalties.  .6579 
"Operating  under  the  lodge  system"  defined.  .6527 
Organizations.    See  "Clubs  and  organizations." 
Overcollection  by  club,  refund  to  member  of.  .6519,  6577 
Overpayment  bv  club: 

Credit  for.  '.6575 

Refund  of.  .6576 
Payment  of  tax.    See  "Tax  on  dues." 

Payments  within  time  scope  of  Revenue  Act  of  1921  .6513 

Dues  or  membership  fees.  .6534 

Initiation  fees.  .6552 

Life  membership  fees.  .6561 
Penalties  for  failure  to  pay  dues  promptly.  .6534 
Penalties  imposed  by  Revenue  Act  of  1921.  .6578 
Presumption  of  character  of  club.  .6519 

Rate  of  tax.    See  "Dues  or  membership  fees,"  "Initiation  fees,"  and  "Life  memberships." 

Records  to  be  kept  by  club.  .  6572 

Records  by  collectors  of  internal  revenue.  .6519 

Refund: 

By  club  of  overcollection.  .6519,  6577 

To  club  of  overpayment.  .6519,  6576 
Regulations  43,  Part  2: 

Authority  for  making.  .6582 

Promulgation  of.  .  6582 
Religious  organizations.  .6520 
Return  of  tax.    See  "Tax  on  dues." 


WAR  TAX  SERVICE 

Index  Page  3. — Dues. 


INDEX  TO  DUES  REGULATIONS. 


Revenue  Act  of  1921: 

Authority  for  regulations  in.  .  6582 

Basis  of  tax  under.    See  "Tax  on  dues." 

Clubs  within  scope  of  tax  under  .6518 

Collection,  return,  and  payment  of  tax  under  .6569,  6572 

Credits  and  refund  under.  .6575-6577 

Effective  date  of  Act.  .6513 

Payments  within  time  scope  of.  .6513 

Penalties  imposed  by  .6578 
Revenue  Act  of  1918: 

Payments  taxable  under.  .6514 
Rulings,  Treasury,  inconsistent  with  regulations,  revoked.  .  6582 
Singing  societies  {see  also  "Clubs  and  organizations")  .6520 
Social  clubs  {see  also  "Clubs  and  organizations").  .6520 
Social  settlements  {see  also  "Clubs  and  organizations").  .6522 
Sporting  clubs  {see  also  "Clubs  and  organizations")  .  6524 
Subscriptions  taxable.  .6547 
Stock,  payments  for,  taxable.  .6555 
Tax  on  Admissions.    See  Part  1  of  Regulations  43. 
Tax  on  dues: 

Basis  of  tax.  .  6515 

Dues  or  membership  fees.  .  6534 
Initiation  fees.  .6552 
Life  memberships.  .6561 

Clubs  within  scope  of  tax  {see  also  "Clubs  and  organizations").  .6518 

Collection  of  tax  from  member.  .  6569 

Credit  to  club  for  overpayment.  .6575 

Foreign  club,  payments  of  dues  or  fees  to  .6533 

Payment  of  tax — 

Club  to  collector  of  internal  revenue.  .6569,  6572 
Member  to  club.  .  6569 
Penalties  for  failure.  .6578 
When  due  .6569 

Payments  within  time  scope  of  Revenue  Act  of  1921.  .6513 

Penalties.  .6578 

Kate  of  tax.    See  "Tax  on  dues:  Basis  of  tax." 

Refund- 
By  club  of  overcollection.  .  6519,  6577 
To  club  of  overpayment.  .6519,  6576 

Return  of  tax — 

Duty  to  make  return  .  6569 
Monthly  return  .  6572 
Penalty  for  failure  to  make  return.  .6579 
Taxability  of  pavmcnts  as  to  time.    See  "Payments  within  time  scope  of  Revenue  Act 

of  1921." 

Tennis  clubs  {see  also  "Clubs  and  organizations").  .6524 
Time: 

Penalties  for  failure  to  act  on  time.  .  6579 

Returns  due  when.  .6569,  6572 

Tax  payments  due  when.  .6569,  6572 

Taxability  of  payments  as  to  time.    See  "Pavmcnts  within  time  score  of  Revenue 
Act  of  1921." 

Trade  organizations  {see  also  "Clubs  and  organizations").  .6520 
Treasurer  of  club  subject  to  penalties.  .6579 
Treasury  Decisions  inconsistent  with  regulations,  revoked.  .  6582 
Unions,  labor  .6530 

Witnesses  instead  of  oath  where  return  for  less  than  $10.  .6572 
Young  Men's  Christian  Associations.  .6521,  6526 
Young  Men's  Hebrew  Associations.  .6521,  6526 


WAR  TAX  SERVICE 
Index  Page  4. — Dues. 


> 

) 
) 


c 
a 

c 


1-2-22.    (2)  8-2-22. 


SPECIAL  TAXES  ON  OCCUPATIONS. 

Differences  between  Reg.  59  (1918  Act)  and  Reg.  59  (1921  Act). 

The  general  subject  content  of  Regulations  59,  relating  to  the  1921  Act, 
promulgated  July  20,  1922,  released  for  publication  August  2,  1922,  and 
reproduced  beginning  on  page  1513,  is  the  same  as  of  Regulations  59,  relat- 
ing to  the  1918  Act,  but  the  Article  numbers  differ  throughout,  beginning 
with  Article  5  of  the  present  regulations,  because  of  the  omission  of  the  two 
Articles  of  the  1918  regulations  referring  to  credit  (under  the  1918  Act)  for 
taxes  paid  under  the  1916  Act — no  such  credit  arising  under  the  1921  Act 
which,  as  to  taxes  on  occupations  and  boats,  became  effective  at  the  begin- 
ning of  the  regular  taxable  year,  i.e.,  on  July  1,  1922. 

Otherwise,  and  aside  from  one  or  two  inconsequential  verbal  changes, 
and  the  necessary  changes  in  dates,  differences  between  the  old  and  new 
regulations  are  as  follows: 

1f7546.    Brokers;  banks. — The  "or"  in  the  last  line  was  "and." 

1(7554  and  1(7580c  (exempt).  Brokers;  auctioneers. — Expanded  to  re- 
flect the  rule  stated  in  1(7557.    (See  also  1(7556.) 

1(7556.    Brokers;  tobacco  warehousemen. — This  is  new. 

1(7584.    Pawnbrokers.— "among  others"  instead  of  "persons." 

1(7593a.    Theaters,  etc. — This  is  new. 

1(7596.  Theaters,  etc.- — -The  sentence  beginning  "A  person  failing  to 
pay"  is  new. 

1(7614.    Bowling  alleys. — The  last  sentence  is  new. 

1(7617.  Riding  academies. — The  last  two  sentences  are  new  (the  last 
reflecting  the  change  in  the  law). 

1(7618.  Passenger  automobiles  for  hire. — The  next  to  the  last  sentence- 
is  new.  Otherwise  clarifying  rearrangement  of  matter,  merely,  without 
apparent  change  in  substance. 

1(7619.  Passenger  automobiles  for  hire.— The  sentence  beginning  "Pay- 
ment of  such  additional  special  tax"  is  new. 

(Over.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Special  Taxes  on  Occupations  Fore-Page. 


1-2-22.    (2)  8-2-22. 


SPECIAL  TAXES  ON  OCCUPATIONS. 

Differences  between  Reg.  59  (1918  Act)  and  Reg.  59  (1921  Act). — Concluded. 

1J7624  and  1f7625.  Boats  taxable  and  not  subject  to  tax.— (c)  and  (d) 
of  H7624  and  (c)  of  ^[7625  are  new.  Rest  of  matter  rearranged,  but  no  sub- 
stantial change  other  than  that  necessary  to  reflect  the  change  in  the  law. 
(See  H7625  at  (d)  and  at  (g).) 

1f7627.  Boats;  rate  and  computation  of  tax. — Reflects  change  in  law, 
merely  (over  32  feet  and  motor  boats  placed  within  general  classification). 

1[7628.    Boats. — Last  sentence  is  new. 

1(7630.  Boats.— The  words  "the  boat  is  over  32  feet  in  length  and" 
following  "If,"  at  the  beginning,  are  new.  Differences  of  interest  to  collec- 
tors only,  are  reflected  in  changes  made  in  the  second  and  third  sentences 
from  the  end. 

1J7632.  Boats;  return  and  payment  of  tax. — Return  may  now  be  made 
to  a  deputy  collector.  The  second  and  last  sentences  are  new.  The  state- 
ment that  if  the  tax  is  not  more  than  $10  the  return  need  not  be  under 
oath  does  not  appear. 

117633.  Boats;  return  and  payment  of  tax. — The  last  two  sentences  are 
new. 

1[7634.    Boats. — The  last  sentence  is  new. 

If 764 1 .  Returns. — Corrected  to  state  that  returns  may  be  made  to  "the 
collector"  as  well  as  to  a  deputy  collector. 

1|7659.    Claims  for  refund  of  special  taxes. — All  of  Article  64  is  new,  here 

THE  CORPORATION  TKI  ST  COMftfcNY, 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 

Special  Taxes  on  Occupations  Fore-Page. 


1-2-22.  (2)  8-2-22. 

SPECIAL  TAXES.  1921  ACT. 

BEING  TITLE  X  OF  THE  REVENUE  ACT  OF  1921. 
In  effect  July  1,  1922. 

TITLE  X.— SPECIAL  TAXES. 
[SPECIAL  EXCISE  TAX  ON  CORPORATIONS.] 

7500  Sec.  1000. — [For  this  law  provision  and  the  regulations  thereunder 
see  special  section  "Capital  Stock  Tax  on  Corporations"  at  1f3000.] 

MISCELLANEOUS  OCCUPATIONAL  TAXES. 
CALENDAR. 

Returns;  During  July  each  year,  or  during  the  month  of  commencing 
business,  or  at  the  time  of  the  original  purchase  of  a  new  boat  by  a  user,  for 
the  fiscal  year  ending  June  30,  next  following. 

Tax;  During  July  each  year,  or  during  the  month  of  commencing  business*! 
or  at  the  time  of  buying  a  new  boat. 

The  tax  should  be  paid  at  the  same  time  the  return  is  filed.  However,  the 
5%  penalty  does  not  accrue  and  the  1%  interest  .does  not  begin  to  run  until 
after  ten  days'  notice  and  demand. 

The  specific  penalty  applies  if  the  tax  is  not  paid  on  or  before  July  31 
or  during  the  month  of  commencing  business. 

In  the  case  of  commencing  business,  or  in  the  case  of  the  purchase  of  a  new 
boat  by  a  user  in  any  month  other  than  July,  the  amount  of  tax  to  be  paid  is 
the  same  proportion  of  the  amount  provided  by  law  for  a  full  year  as  the 
number  of  months  to  the  succeeding  June  30,  including  the  month  of  com- 
mencing business  or  of  the  purchase  of  the  new  boat,  bears  to  twelve  months. 

7501  Sec.  1001.    That  on  and  after  July  1,  1922,  there  shall  be  levied, 
collected,  and  paid  annually  the  following  special  taxes — 

[Brokers.] 

7502  (1)  Brokers  shall  pay  $50.    Every  person  whose  business  it  is  to 
negotiate  purchases  or  sales  of  stocks,  bonds,  exchange,  bullion, 

coined  money,  bank  notes,  promissory  notes,  other  securities,  produce  or 
merchandise,  for  others,  shall  be  regarded  as  a  broker.  If  a  broker  is  a 
member  of  a  stock  exchange,  or  if  he  is  a  member  of  any  produce  exchange, 
board  of  trade,  or  similar  organization,  where  produce  or  merchandise  is  sold, 
he  shall  pay  an  additional  amount  as  follows:  If  the  average  value,  during  the 
preceding  year  ending  June  30,  of  a  seat  or  membership  in  such  exchange  or 
organization  was  $2,000  or  more  but  not  more  than  $5,000,  $100;  if  such 
value  was  more  than  $5,000,  $150. 

[Pawn  Brokers.] 

7503  (2)  Pawn  brokers  shall  pay  $100.    Every  person  whose  business  or 
occupation  it  is  to  take  or  receive,  by  way  of  pledge,  pawn,  or  ex- 
change, any  goods,  wares,  or  merchandise,  or  any  kind  of  personal  property 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  1501  SERVICE 


1-2-22.     (2)  8-2-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  LAW. — 1921  ACT. 


whatever,  as  security  for  the  repayment  of  money  loaned  thereon,  shall  be 
regarded  as  a  pawnbroker. 

[Ship  Brokers.] 

7504  (3)  Ship  brokers  shall  pay  $50.   Every  person  whose  business  it  is  as 
a  broker  to  negotiate  freights  and  other  business  for  the  owners  of 

vessels  or  for  the  shippers  or  consignors  or  consignees  of  freight  carried  by 
vessels,  shall  be  regarded  as  a  ship  broker. 

[Custom  House  Brokers.] 

7505  (4)  Custom  house  brokers  shall  pay  $50.   Every  person  whose  occupa- 
tion it  is,  as  the  agent  of  others,  to  arrange  entries  and  other  custom 

house  papers,  or  transact  business  at  any  port  of  entry  relating  to  the  im- 
portation or  exportation  of  goods,  wares,  or  merchandise,  shall  be  regarded 
as  a  custom  house^broker. 

[Theaters,  Museums,  and  Concert  Halls.] 

7506  (5)  Proprietors  of  theaters,  museums,  and  concert  halls,  where  a 
charge  for  admission  is  made,  having  a  seating  capacity  of  not  more 

than  two  hundred  and  fifty,  shall  pay  $50;  having  a  seating  capacity  of 
more  than  two  hundred  and  fifty  and  not  exceeding  five  hundred,  shall  pay 
$100;  having  a  seating  capacity  exceeding  five  hundred  and  not  exceeding 
eight  hundred,  shall  pay  $150;  having  a  seating  capacity  of  more  than  eight 
hundred,  shall  pay  $200.  Every  edifice  used  for  the  purpose  of  dramatic  or 
operatic  or  other  representations,  plays,  or  performances,  for  admission  to 
which  entrance  money  is  received,  not  including  halls  or  armories  rented 
or  used  occasionally  for  concerts  or  theatrical  representations,  and  not  in- 
cluding edifices  owned  by  religious,  educational  or  charitable  institutions, 
societies  or  organizations  where  all  the  proceeds  from  admissions  inure  ex- 
clusively to  the  benefit  of  such  institutions,  societies  or  organizations  or  ex- 
clusively to  the  benefit  of  persons  in  the  military  or  naval  forces  of  the  United 
States,  shall  be  regarded  as  a  theater:  Provided,  That  in  cities,  towns,  or 
villages  of  five  thousand  inhabitants  or  less  the  amount  of  such  payment 
shall  be  one-half  of  that  above  stated:  Provided  further,  That  whenever  any 
such  edifice  is  under  lease  at  the  time  the  tax  is  due,  the  tax  shall  be  paid  by 
the  lessee,  unless  otherwise  stipulated  between  the  parties  to  the  lease. 

[Circuses.] 

7507  (6)  The  proprietor  or  proprietors  of  circuses  shall  pay  $100.  Every 
building,  space,  tent,  or  area,  where  feats  of  horsemanship  or  acro- 
batic sports  or  theatrical  performances  not  otherwise  provided  for  in  this 
section  are  exhibited  shall  be  regarded  as  a  circus:  Provided,  That  no  special 
tax  paid  in  one  State,  Territory,  or  the  District  of  Columbia,  shall  exempt 
exhibitions  from  the  tax  in  another  State,  Territory,  or  the  District  of  Colum- 
bia, and  but  one  special  tax  shall  be  imposed  for  exhibitions  within  any  one 
State,  Territory,  or  District. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1502  SERVICE 


1  2  22       (2)  8-2-22 

SPECIAL  TAXES  ON  OCCUPATIONS  LAW. — 1921  ACT 


[Other  Public  Exhibitions  or  Shows.] 

7503  (7)  Proprietors  or  agents  of  all  other  public  exhibitions  or  shows  for 
money  not  enumerated  in  this  section  shall  pay  $15:  Provided,  That 
a  special  tax  paid  in  one  State,  Territory,  or  the  District  of  Columbia  shall 
not  exempt  exhibitions  from  the  tax  in  another  State,  *  Territory,  or  ^  the 
District  of  Columbia,  and  but  one  special  tax  shall  be  required  for  exhibitions 
within  any  one  State,  Territory,  or  the  District  of  Columbia:  Provided  further. 
That  this  paragraph  shall  not  apply  to  Chautauquas,  lecture  lyceums, 
agricultural  or  industrial  fairs,  or  exhibitions  held  under  the  auspices  of 
religious  or  charitable  associations:  Provided  further.  That  an  aggregation 
of  entertainments,  known  as  a  street  fair,  shall  not  pay  a  larger  tax  than 
$100  in  any  State,  Territory,  or  in  the  District  of  Columbia. 

[Bowling  Alleys  and  Billiard  Rooms.] 

7509  (8)  Proprietors  of  bowling  alleys  and  billiard  rooms  shall  pay  $10  for 
each  alley  or  table.   Every  building  or  place  where  bowls  are  thrown 

or  where  games  of  billiards  or  pool  are  played,  except  in  private  homes, 
shall  be  regarded  as  a  bowling  alley  or  a  billiard  room,  respectively. 

[Shooting  Galleries.] 

7510  (9)  Proprietors  of  shooting  galleries  shall  pay  $20.    Every  building, 
space,  tent,  or  area,  where  a  charge  is  made  for  the  discharge  of 

firearms  at  any  form  of  target  shall  be  regarded  as  a  shooting  gallery. 

[Riding  Academies.] 

751  1  (10)  Proprietors  of  riding  academies  shall  pay  $100.  Every  building, 
space,  tent,  or  area,  where  a  charge  is  made  for  instruction  in  horse- 
manship or  for  facilities  for  the  practice  of  horsemanship  shall  be  regarded 
as  a  riding  academy:  Provided,  That  this  tax  shall  not  be  collected  from  asso- 
ciations composed  exclusively  of  members  of  units  of  the  Federalized  National 
Guard  or  the  Organized  Reserve  and  whose  receipts  are  used  exclusively  for 
the  benefit  of  such  units. 

[Passenger  Automobiles  for  Hire.] 

7512  (11)  Persons  carrying  on  the  business  of  operating  or  renting  pas- 
senger automobiles  for  hire  shall  pay  $10  for  each  such  automobile 

having  a  seating  capacity  of  more  than  two  and  not  more  than  seven,  and 
$20  for  each  such  automobile  having  a  seating  capacity  of  more  than  seven. 

[Brewers,  Distillers,  Liquor  Dealers,  etc.] 

7513  (12)  Every  person  carrying  on  the  business  of  a  bfewer,  distiller, 
wholesale  liquor  dealer,  retail  liquor  dealer,  wholesale  dealer  in  malt 

liquor,  retail  dealer  in  malt  liquor,  or  manufacturer  of  stills,  as  defined  in 
section  3244  as  amended  and  section  3247  of  the  Revised  Statutes,  in  any 
State,  Territory,  or  District  of  the  United  States  contrary  to  the  laws  of 
such  State,  Territory,  or  District,  or  in  any  place  therein  in  which  carrying 
on  such  business  is  prohibited  by  local  or  municipal  law,  shall  pay,  in  addition 
to  all  other  taxes,  special  or  otherwise,  imposed  by  existing  law  or  by  this  Act, 
$1,000. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1503  SERVICE 


1-2-22.    [(2)  8-2-22. 

^SPECIAL  TAXES  ON  OCCUPATIONS  LAW. — 1921  ACT. 


7514  The  payment  of  the  tax  imposed  by  this  subdivision  shall  not  be 
held  to  exempt  any  person  from  any  penalty  or  punishment  provided 

for  by  the  laws  of  any  State,  Territory,  or  District  for  carrying  on  such 
business  in  such  State,  Territory,  or  District,  or  in  any  manner  to  authorize 
the  commencement  or  continuance  of  such  business  contrary  to  the  laws  of 
such  State,  Territory,  or  district,  or  in  places  prohibited  by  locai  or  municipal 
law. 

[Taxes  herein  specified  are  in  Lieu  of  the  Similar  Taxes 
Imposed  by  Section  1001  of  the  Revenue  Act  of  1918.] 

7515  The  taxes  imposed  by  this  section" shall,  in  the  case  of  persons  upon 
whom  a  corresponding  tax  is  imposed  by  section  1001  of  the  Revenue 

Act  of  1918,  be  in  lieu  of  such  tax. 

Special  Tobacco  Manufacturers'  Tax. 

751  6  Sec.  1002.  That  on  and  after  July  1,  1922,  there  shall  be  levied,  col- 
lected, and  paid  annually,  in  lieu  of  the  taxes  imposed  by  section 
1002  of  the  Revenue  Act  of  1918,  the  following  special  taxes,  the  amount  of 
such  taxes  to  be  computed  on  the  basis  of  the  sales  for  the  preceding  year 
ending  June  30 — 

75 1 7  Manufacturers  of  tobacco  whose  annual  sales  do  not  exceed  fifty 
thousand  pounds  shall  each  pay  $6; 

75 1 8  Manufacturers  of  tobacco  whose  annual  sales  exceeded  fifty  thousand 
and  do  not  exceed  one  hundred  thousand  pounds  shall  each  pay  $12; 

7519  Manufacturers  of  tobacco  whose  annual  sales  exceed  one]  hundred 
thousand  and  do  not  exceed  two  hundred  thousand  pounds  shall  each 

pay  $24; 

7520  Manufacturers  of  tobacco  whose  annual  sales  exceed  two  hundred 
thousand  pounds  shall  each  pay  $24,  and  at  the  rate  of  16  cents  per 

thousand  pounds,  or  fraction  thereof,  in  respect  to  the  excess  over  two  hundred 
thousand  pounds; 

7521  Manufacturers  of  cigars  whose  annual  sales  do  not  exceed  fifty 
thousand  cigars  shall  each  pay  $4; 

7522  Manufacturers  of  cigars  whose  annual  sales  exceed  fifty  thousand 
and  do  not  exceed  one  hundred  thousand  cigars  shall  each  pay  $6; 

7523  Manufacturers  of  cigars  whose  annual  sales  exceed  one  hundred 
thousand  and  do  not  exceed  two  hundred  thousand  cigars  shall  each 

pay  $12; 

7524  Manufacturers  of  cigars  whose  annual  sales  exceed  two,  hundred 
thousand  and  do  not  exceed  four  hundred  thousand  cigars  shall  each 

pay  $24; 

7525  Manufacturers  of  cigars  whose  annual  sales  exceed  four  hundred 

thousand  cigars  shall  each  pay  $24,  and  at  the  rate  of  10  cents  per 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1504  SERVICE 


1-2-22.    (2)  3-22-22.    (3)  5-19-22.     (4)  8-2-22. 

SPECIAL  TAXES  OPT  OCClTPATIONS  LAW. — 1921  ACT. 


thousand  cigars,  or  fraction  thereof,  in  respect  to  the  excess  over  four  hundred 
thousand  cigars; 

7526  Manufacturers  of  cigarettes,  including  small  cigars  weighing  not 
more  than  three  pounds  per  thousand,  shall  each  pay  at  the  rate  of 

6  cents  for  every  ten  thousand  cigarettes,  or  fraction  thereof. 

7527  In  arriving  at  the  amount  of  special  tax  to  be  paid  under  this  section, 
and  in  the  levy  and  collection  of  such  tax,  each  person  engaged  in  the 

manufacture  of  more  than  one  of  the  classes  of  articles  specified  in  this 
section  shall  be  considered  and  deemed  a  manufacturer  of  each  class  separately. 

7527a  In  computing  under  this  section  the  amount  of  annual  sales  no 
account  shall  be  taken  of  tobacco,  cigars,  or  cigarettes,  sold  for  export 
and  in  due  course  so  exported. 

Special  Tax  on  Use  of  Boats. 

7528  Sec.  1003.   That  on  and  after  July  1,  1922,  and  thereafter  on  July  I 
in  each  year,  and  also  at  the  time  of  the  original  purchase  of  a  new 

boat  by  a  user,  if  on  any  other  date  than  July  1,  there  shall  be  levied,  assessed, 
collected,  and  paid,  in  lieu  of  the  tax  imposed  by  section  1003  of  the  Revenue 
Act  of  1918,  upon  the  use  of  yachts,  pleasure  boats,  power  boats,  sailing  boats, 
and  motor  boats  with  fixed  engines,  of  over  five  net  tons  and  over  thirty-two 
feet  in  length,  not  used  exclusively  for  trade,  fishing,  or  national  defense,  or  not 
built  according  to  plans  and  specifications  approved  by  the  Navy  Depart- 
ment, a  special  excise  tax  to  be  based  on  each  yacht  or  boat,  at  rates  as 
follows:  Yachts,  pleasure  boats,  power  boats,  motor  boats  with  fixed  engines, 
and  sailing  boats,  of  over  five  net  tons,  length  over  thirty-two  feet  and  not 
over  fifty  feet,  $1  for  each  foot;  length  over  fifty  feet,  and  not  over  one 
hundred  feet,  $2  for  each  foot;  length  over  one  hundred  feet,  $4  for  each  foot. 

7529  In  determining  the  length  of  such  yachts,  pleasure  boats,  power 
boats,  motor  boats  with  fixed  engines,  and  sailing  boats,  the  measure- 
ment of  over-all  length  shall  govern. 

7530  In  the  case  of  a  tax  imposed  at  the  time  of  the  original  purchase 
of  a  new  boat  on  any  other  date  than  July  1,  the  amount  to  be  paid 

shall  be  the  same  number  of  twelfths  of  the  amount  of  the  tax  as  the  number 
of  calendar  months  (including  the  month  of  sale)  remaining  prior  to  the 
following  July  1. 

7531-3This  section  shall  not  apply  to  vessels  or  boats  used  without  profit 
by  any  benevolent,  charitable,  or  religious  organizations,  exclusively 
for  furnishing  aid,  comfort,  or  relief  to  seamen. 

Penalty  for  Nonpayment  of  Special  Taxes. 

7534  Sec.  1004.  That  any  person  who  carries  on  any  business  or  occupa- 
tion for  which  a  special  tax  is  imposed  by  sections  1000,  1001  or  1002, 
without  having  paid  the  special  tax  therein  provided,  shall,  besides  being 
liable  for  the  payment  of  such  special  tax,  be  subject  to  a  penalty  of  not  more 
than  $1,000  or  to  imprisonment  for  not  more  than  one  year,  or  both. 

7535-6  [General  Administrative  Law  Provisions.] 

[Read  at  "Miscellaneous  Matters"  at  back  of  the  book.] 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1505  SERVICE 


In  blank. 


WAR  TAX  1506  SERVICE 


8-7-22. 

  SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1921  ACT. 


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INSTRUCTIONS 


PLEASURE  BOATS 


1.  What  Is  Taxed. — Subject  to  exemptions  noted  hereunder,  a  special  tax  is  imposed  upon  the  use 
of  yachts,  pleasure  boats,  power  boats;  motor  boats  with  fixed  engines,  and  sailing  boats,  of  over  five  net 
tons,  length  over  32  feet,  at  the  following  rates: 

(a)  Over  five  net  tons,  length  over  32  feet  and  not  over  50  feet   $1.00  each  foot 


6)  Over  five  net  tons,  length  over  50  feet  and  not  over  100  feet   $2.00  each  foot 

c)  Over  five  net  tons,  length  over  100  feet._  _  _  $4.00  each  foot 

2.  Exemptions.— Tho  law  exempts  from  tax— 
(c)  Boats  used  exclusively  for  trade.  ("Trade"  is  held  to. be  any  serious  activity  which  consti- 
tutes the  means  of  livelihood  of  the  owner,  lessee,  or  charterer.) 

(5)  Boats  used  exclusively  for  fishing.  (This  refers  to  commercial  fishing  and  not  fishing  for 
pleasure.) 

c)  Boats  used  exclusively  for  national  defense. 

d)  Boats  built  according  to  plans  and  specifications  approved  by  the  Navy  Department. 

e)  Boats  used  without  profit  by  benevolent,  charitable,  or  religious  organizations  exclusively  for 
furnishing  aid,  comfort,  or  relief  to  seamen. 

3.  Persons  Liable  foe  Return  and  Payment  of  Tax. — Tho  owner,  lessee,  or  charterer  of  every 
boat  described  in  par.  1  is  required  to  file  return,  irrespective  of  whether  its  use  is  exempt  from  tho 
tax  under  par.  2,  and,  unless  the  boat  is  exempt,  is  also  required  to  pay  the  tax  (see  also  par.  '4(d)  below. 
No  return  is  required  on  boats  fallin?  below  the  tonnage  and  footage  specifications  mentioned  in  par.  1. 

4.  How. to  Estimate  Net  Tonnage.— To  estimate  roughly  the  net  tonnage  of  a  vessel  the  following 
rules"  may  be  used:  <' 

(a)  By  the  word  "ton"  is  meant  100  cubic  feet  of  space. 

(b)  Multiply  the  extreme  length  of  the  vessel  by  the  extreme  breadth  and  that  product  by  the 

depth  from  the  underside  of  the  deck  to  the  frame  in  the  hold  taken  amidships.  The  result 
obtained  should  be  multiplied  by  six-tenths.  To  this  result  should  be  added  the  cubical 
contents  of  any  closed-in  structure  above  the  upper  deck.  The  sum  should  be  divided  by 
100,  which  will  give  tho  approximate  gross  tonnage  of  the  boat. 

(c)  From  this  gross  tonnage  may  be  deducted  all  spaces  used  exclusively  in  connection  with  the 

navigation  of  the  boat  or  for  the  exclusive  use  of  the  crew,  such  as  a  reasonable  amount  for 
machinery  space,  space  for  officers  and  crew  but  not  for  passengers  (who  include  all  persona 
not  actual  members  of  the  crew),  storage  of  sails,  navigation  instruments,  boatswain'3 
stores,  etc.  The  result  will  be  the  approximate  net  tonnage  of  the  boat. 

(d)  If  the  net  tonnage  estimated  is  more  than  four  net  tons,  and  the  length  over  32feet,  application 

should  be  made  to  the  nearest  customs  officer  for  official  measurement.  If  an  official  meas- 
urement is  not  completed  before  tho  date  on  which  a  return  is  required,  a  return  should  be 
rendered;  and  if  the  estimate  of  net  tonnage,  made  as  above  directed,  is  over  five  net  tons, 
the  tax  should  be  paid.  If  the  official  measurement  should  later  snow  that  no  tax  was 
due,  a  claim  should  be  made  for  the  refund  of  the  tax. 

5.  How  to  Ascertain  the  Over-All  Length.— Over-all  length  is  defined  as  the  extreme  length  of 
the  structure,  i.  e.,  from  the  forward  side  of  the  stem  outside  the  planking  orplating  to  the  aftermost  side 
of  the  stern  planking  or  plating,  whether  above  or  below  the  water  line.  The  measurement  should  be 
to  the  outside  of  any  planking  or  plating  extending  above  the  deck,  constituting  bulwarks,  and  to  the 
outside  of  any  forecastle  deck,  quarter  deck,  or  poop  deck  ex  tending  beyond  the  main  deck.  The  length 
should  be  taken  in  a  straight  line,  excluding  any  sheer  there  may  be  to  the  deck. 

6.  How  to  Compote  Tax.— In  the  case  of  a  boat  over  five  net  tons,  multiply  the  rate  of  the  class  in 
•which  the  boat  is  included  by  the  number  representing  the  length  over  all  in  full  feet.  For  example,  a 
boat  49.5  feet  in  length  is  taxable  at  the  rate  of  $1  for  each  foot,  or  $49;  a  boat  50.5  feet  in  lengthis  in  the 
same  class  and  taxable  at  $1  per  foot,  or  $50. 

AUTOMOBILES 

7.  Persons  Liable  for  Return  and  Patmenp  of  Tax.— Persons  carrying  on  the  business  of  oper- 
ating or  renting  passenger  automobiles  for  hire  are  required  to  file  return  and  pay  special  tax  on  each 
automobile  as  follows: 

Annual  Monthly 
rate.  rate. 

Seating  capacity  over  2  but  not  over  7—  —    $10     $0. 83* 

Seating  capacity  more  than  7     -   $20  $1.66} 

GENERAL 

8.  When  Return  and  Payment  op  Tax  Must  Be  Made.— These  taxes  become  due  on  the  first 

day  of  July  in  each  year,  or  on  commencing  the  business  on  which  a  tax  is  imposed  or  placing  a  boat  in 
use.  In  the  former  case  the  tax  shall  be  reckoned  for  one  year  and  in  the  latter  case  it  shall  be  reckoned 

Eroportionately  from  the  first  day  of  the  month  in  which  the  liability  to  special  tax  commenced  to  the 
rst  day  of  July  following.  Returns  with  proper  amount  of  tax  due  must  be  filed  with  tho  collector  not 
later  than.the  last  day  oi  the  month  in  whieo  specie!  tax  liability  commenced.  A  separate  return  must 
be  filed  for  each  automobile  operated  or  rented  for  hire,  and  for  each  boat  whether  or  not  exempt  from 
tax.  Where  exemption  is  claimed  in  the  case  of  a  boat,  the  return  should  be  filed  and  the  notation 
"exemption  claimed"  made  across  the  face  of  the  form.  If  exemption  is  allowed,  the  collector  willissue 
an  exemption  certificate. 

9.  If  tax  liability,  as  shown  bv  the  return,  is  more  than  $10,  applicant  must  appear  in  person  before 
an  officer  qualified  to  administer  oaths  and  swear  to  the  correctness  of  the  information  given  on  the  appli- 
cation. Ii  the  tax  is  $10  or  less,  return  may  be  signed  or  acknowledged  before  two  witnesses,  who  will 
affix  their  signatures. 

Follow  instructions  carefully  and  file  promptly  in  order  to  avoid  penalties  imposed  for  delinquency 
in  filing  return  and  paying  tax,  or  making  false  or  fraudulent  return. 


2 


OOVKHMMENT  HUNTDTO  05T1CS 


WAR  TAX  1512  SERVICE 


8-2-22.  Reg.  59—1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


REGULATIONS  59. 

[Approved  July  20,  1922.] 
[Compiled  with  certain  supplementary  matters,  as  cited.] 
Relating  to  the 

SPECIAL  TAXES  UPON  BUSINESSES  AND  OCCUPATIONS 

and  upon 
THE  [USE  OF  BOATS 
under 

SECTIONS  1001  (SUBDIVISIONS  (1)  TO  (11)  INCLUSIVE) 
AND  1003  OF  THE  REVENUE  ACT  OF  1921 


CONTENTS. 

Paragraph 

Article    1.  Scope  of  regulations   7537 

Section  1001.  Special  taxes  upon  businesses  and  occupations   7501 

Article   2.  Effective  date   7538 

3.  Use  of  terms   7539 

4.  Basis  of  tax   7543 

Section  1001  (1).  Brokers   7502 

Article   5.  Persons  liable   7544 

6.  Persons  not  liable   7559 

7.  Secondary  tax   7581 

8.  Branch  offices   7582 

Section  1001  (2).  Pawnbrokers   7503 

Article    9.  Delivery  ,   7583 

10.  Persons  liable   7584 

11.  Persons  not  liable   7587 

Section  1001  (3).  Ship  brokers   7504 

Article  12.  Persons  liable   7588 

Section  1001  (4).  Customhouse  brokers   7505 

Article  13.  Persons  liable   7589 

Section  1001  (5).  Theaters,  museums,  and  concert  halb   7506 

Article  14.  Persons  liable   7590 

15.  "Charge  for  admission"   7591 

16.  Theater  defined.   7592 

17.  Exemptions   7593 

18.  Theaters  open  for  part  of  year  only   7594 

19.  Seating  capacity   7595 

20.  Transfer  of  stamp   7597 

21.  Population   7598 

Section  1001  (6).  Circuses  t   7507 

Article  22.  Persons  liable   7599 

23.  Payment  in  different  States   7600 

Section  1001  (7).  Other  public  exhibitions  or  shows   7508 

Article  24.  Other  public  exhibitions  or  shows  for  money:  Taxable  exhibitions  7601 

25.  Exhibitions  not  taxable   7612 

26.  Aggregation  of  entertainments   7613 

Section  1001  (8).  Bowling  alleys  ,   7509 

Article  27.  Scope  of  tax   7614 

28.  Transfer  of  special  tax  stamp   7615 

Section  1001  (9).  Shooting  galleries   7510 

Article  29.  Persons  liable   7616 

Section  1001  (10).  Riding  academies   7511 

Article  30.  Liability  to  tax.   761  7 

Copyright  1922,  by  The  Corporation  Trwt  Company. 
WAR  TAX  1513  SERVICE 


8-2-22.  Reg.  59.-1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


Paragraph 


Section  1001  (11).  Passenger  automobiles   7512 

Article  31.  Basis  of  tax   7618 

32.  Special  tax  stamp   7619 

Section  1003.  Special  taxes  upon  the  use  of  boats   7528 

Article  33.  Effective  date   7620 

34.  Taxable  period   7621 

35.  Basis  of  tax   7622 

36.  Persons  liable   7623 

37.  Boats  taxable   7624 

38.  Boats  not  subject  to  tax   7625 

39.  Purchase  or  use  of  second-hand  boats   7626 

40.  Rate  and  computation  of  tax   7627 

41.  Tonnage  !   7629 

42.  Over-all  length   7631 

43.  Return  and  payment  of  tax.   7632 

44.  Stamp  or  card  certificates     _   7634 

Provisions  of  law  and  regulations  pertaining  to  special  taxes 

Article  45.  Special  taxes   7635 

46.  Business  to  be  registered   7636 

47.  Partnerships   7637 

48.  Payment    of  one  special  tax  not  to  cover  several  places  of  business  7638 

49.  More  than  one  pursuit  carried  on  in  the  same  place  of  business.. .  .  7639 

50.  When  special  tax  becomes  due   7640 

51.  Returns   7641 

52.  Stamps  for  special  taxes   7644 

53.  Special  tax  stamps  "at  large"   7646 

54.  Special  tax  stamp  to  be  posted  in  place  of  business   7647 

55.  List  of  special  taxpayers   7648 

56.  Death  or  removal  after  paying  tax   7650 

57.  Transfer  of  place  of  business   7652 

58.  Change  in  membership  of  firm   7653 

59.  Change  from  partnership  to  corporation   7654 

60.  Who  may  carry  on  business  without  new  stamp  '  *   7655 

61.  Changes  to  be  registered   7656 

General  Administrative  Provisions   8000 

Article  62.  Aid  to  collection  of  tax,   7657 

Section  1317.  Penalties   8071 

Article  63.  Penalties    .   7658 

64.  Claims  for  refund  of  special  taxes   7659 

Section  1309.  Authority  for  regulations   8009 

Article  65.  Promulgation  of  regulations   7662 


f 537    Art.  1.    Scops  of  regulations. — These  regulations  relate   to  the 

7501     special  taxes  upon  businesses  and  occupations,  imposed   by  sub- 
divisions (1)  to  (11),  inclusive,  of  section  1001,  and  upon  the  use 

of  boats,  imposed  by  section  1003,  of  the  Revenue  Act  of  1921. 

SPECIAL  TAXES  UPON  BUSINESSES  AND  OCCUPATIONS. 
7538    Art.  2.   Effective  date. — The  effective  date  of  the  special  tax  on  oc- 

cupations'enumerated  in  section  1001  of  the  act  is  July  1,  1922. 

7539.  Art.  3.   Use  of  terms. — In  these  regulations — for  convenience  unless 
obviously  inapplicable — 

7540  The  term  "person"  shall  include  partnerships,  corporations,  and 
associations  as  well  as  individuals; 

7541  The  term  "secondary  tax"  shall  mean  the  tax  imposed  on  brokers 
by  reason  of  their  ownership  of  a  membership  or  seat,  valued  at 

$2,000  or  more,  in  a  stock  or  produce  exchange,  board  of  trade,  or  similar 
organization; 

7642    The  term  "fiscal  year"  shall  mean  the  period  from  July  1  of  each 
calendar  year  to  June  30,  inclusive  of  the  following  calendar  year. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1514  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


7643  Art.  4.  Basis  of  tax. — The  tax  is  upon  the  engaging  in  or  carrying 
on  of  a  business  or  occupation.  If  a  person  does  not  engage  in  or 
carry  on  any  of  the  businesses  or  occupations  specified  in  section  1001  during 
the  taxable  period,  no  special  tax  liability  is  incurred.  If,  however,  he  does 
carry  on  a  business  upon  which  a  tax  is  imposed  during  any  portion  of  the 
taxable  year,  he  is  liable  to  tax  from  the  first  of  the  month  during  which  he 
begins  business  to  the  end  of  the  taxable  period.  (See  sec.  3237,  R.  S.,  a? 
amended  by  sec.  53,  act  of  Oct.  1,  1890  [26  Stat.,  567].) 

BROKERS. 

7544  Art.  5.  Brokers;  Persons  liable. — Only  those  persons  who  have  a 
7502  business  of  their  own  as  distinguished  from  that  of  their  employer  or 
employers  are  liable  to  special  tax  as  brokers.  Any  person  who  holds 
himself  out  as  a  broker  and  is  engaged  in  the  business  of  negotiating  purchases 
or  sales  of  any  of  the  articles  enumerated  is  liable  to  tax.  It  is  not  necessary 
that  the  brokerage  business  shall  be  the  sole  business  of  a  person  in  order  that 
liability  to  tax  shall  attach.  Any  person  who,  in  connection  with  his  pro- 
fession or  occupation,  makes  it  a  regular  part  of  his  business  to  negotiate 
purchases  or  sales  for  others  of  articles  enumerated  is  liable  to  tax.  Mere 
casual  or  incidental  negotiation  of  purchases  or  sales  for  others  of  articles 
enumerated  does  not  constitute  a  business  for  the  purpose  of  the  tax.  The 
following  among  others  are  subject  to  special  tax  as  brokers: 
7646  (a)  A  bucket-shop  proprietor  giving  memoranda  of  transactions  to 
customers.  By  a  "bucket -shop"  is  meant  a  place,  other  than  a 
board  of  trade  or  exchange,  where  the  parties  who  agree  to  buy  and  sell 
stocks  do  not  ordinarily  contemplate  the  receiving  or  delivering  of  any 
certificates  therefor  by  the  buyer  or  seller  either  at  the  time  or  in  the  future; 

7546  (b)  A  bank  which  sells  checks  drawn  by  any  person  or  concern  in 
which  it  has  no  property  interest,  if  such  transactions  are  engaged 

in  with  such  frequency  or  in  such  a  way  as  to  constitute  a  business; 

7547  (c)  An  agent  occupying  an  independent  status  and  not  that  of  an 
employee  who  negotiates  the  sale  of  foreign  money  orders  for  a  steam- 
ship company;  the  fact  that  he  maintains  a  place  where  the  money  orders 
are  issued  is  evidence  of  an  independent  status; 

7548  (d)  A  person  who,  under  an  agreement  previously  made  with  dealers, 
engages  in  the  business  of  issuing  orders  upon  those  dealers  for  certain 

articles  or  commodities  to  parties  who  desire  to  purchase  such  articles  or 
commodities; 

7549  (e)  One  who  holds  himself  out  as  dealing  in  exchange  and  in  the 
regular  course  of  business  accepts  orders  and  takes  them  to  a  bank  for 

execution  by  the  latter,  receiving  substantial  remuneration -for  his  services; 

7550  (f)  An  express  company  engaged  in  the  business  ot  buying  or  selling 
foreign  money  orders  or  bills  of  exchange  for  others; 

7551  (g)  A  real  estate  or  business  broker  who  lists  and  negotiates  pur- 
chases or  sales  of  produce  or  merchandise  independently  of  pur- 
chases or  sales  of  real  estate  or  businesses,  or  holds  himself  out  as  being  en- 
gaged in  the  business  of  negotiating,  for  others,  purchases  or  sales  of  produce 
or  merchandise; 

7552  (h)  A  commission   merchant  receiving   produce  or  merchandise 
on  consignment  to  sell  for  the  account  of  the  consignors; 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1515  SERVICE 


8-2-22.  Reg.  59—1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


7553  (i)  A  dealer  in  securities  of  a  given  kind  for  the  account  of  an  under- 
writer or  other  broker; 

7554  (j)  An  auctioneer  who  maintains  auction  rooms  or  other  place  of 
business  to  which  produce  or  merchandise  is  sent  to  be  sold  for  the 

account  of  the  consignor; 

7555  (k)  A  factor  who  advances  money  to  farmers  on  crops  which  are 
to  be  placed  with  him  to  be  sold  on  commission. 

7556  (1)  A  tobacco  warehouseman  whose  business  it  is  to  arrange  that 
tobacco  growers  shall  bring  their  produce  to  the  warehouse  to  be 

sold  at  auction  and  that  tobacco  buyers  shall  attend  such  auction  sales  and 
bid  for  the  tobacco. 

7567  Auctioneers  as  brokers. — Reference  is  made  to  an  inquiry  received 
in  this  office  in  regard  to  the  applicability  of  tax  under  section  1001, 

paragraph  (1),  of  the  Revenue  Act  of  1918,  on  brokers.    You  are  advised 

that  this  office  confirms  its  previous  ruling  as  follows: 

"Auctioneers  making  sales  on  a  farm  ar  premises  of  the  owner 
of  goods  are  not  subject  to  the  broker's  tax  for  the  reason  that  they 
are  only  agents  of  their  employers.  An  auctioneer,  however,  who 
has  auction  rooms,  or  other  places  of  business,  to  which  persons 
send  goods  or  merchandise  to  be  sold,  is  held  to  be  carrying  on  a 
brokerage  business  and  is  amenable  to  the  special  tax  under  sec- 
tion 1001  of  the  Revenue  Act  of  1918."  [Applies  to  1921  Act  as  well. 
See  1f7580c]  [ 

7558  A  distinction  is  made  between  an  auctioneer  who  has  a  place  of  busi- 
ness of  his  own  and  occupies  an  independent  status,  and  an  agent  of 

another  negotiating  the  sale  of  goods  at  another's  place  of  business.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Deputy  Commissioner  James 
M.  Baker,  and  dated  July  28,  19200 

7559  Art.  6.  Persons  not  liable. — The  following  persons  are  not  subject 
to  special  tax  as  brokers  where  the  business  mentioned  herein  is  the 

only  business  conducted  by  such  persons.  If,  however,  coupled  with  a 
business  mentioned  in  this  article  any  such  person  engages  in  any  of  the 
occupations  mentioned  in  Article  5,  or  other  brokerage  transactions,  to  such 
an  extent  as  to  constitute  a  business,  such  person  must  pay  the  tax,  although 
at  the  same  time  he  engages  in  other  occupations,  not  in  themselves  such  as 
to  subject  such  person  to  liability  for  special  tax  as  a  broker: 

7560  (a)  Any  persons  who  only  occasionally  or  incidentally  engages  in 
brokerage  transactions; 

7561  (b)  A  person  loaning  money  for  himself  or  for  others,  on  commission; 

7562  (c)  A  bank  which  does  not  engage  in  the  negotiating  of  purchases 
or  sales  of  stocks  or  bonds  as  a  business,  but  merely  negotiates  the 
purchase  and  sale  thereof  for  depositors  and  other  patrons  without 

remuneration  and  for  their  accommodation  only; 

7563  (d)  A  bank  which  sells  its  own  drafts  upon  the  foreign  correspondent 
7567     of  another  institution,  if  it  has  at  the  time  of  the  drawing  of  such  drafts 

1  credit  with  such  correspondent,  or  if  the  drafts  are  drawn  on  credit 
which  it  is  the  intent  to  obtain.  Such  a  bank  acts  as  a  principal  and  not  as  a 
broker.  A  bank  which  sells  drafts  or  orders  drawn  by  others,  if  the  drafts 
or  orders  are  sold  by  the  bank  as  its  own  property,  whether  or  not  it  paid 
cash  for  them  or  obtained  them  under  a  credit  arrangement,  likewise  acts 
as  a  principal  and  not  as  a  broker; 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1516  SERVICE 


8-2-22.  Reg.  59.-1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


7564  (e)  A  bank  which  effects  a  financial  arrangement  to  carry  out  the  terms 
of  a  sale  where  the  purchaser  and  seller  of  merchandise  have  previously 

agreed  upon  the  kind  and  quantity  of  the  merchandise  to  be  sold  and  upon  the 
terms  of  the  sale; 

7565  (f)  A  person  selling  securities  which  he  has  purchased  prior  to  the 
sale  thereof  and  which  he  sells  for  his  own  account; 

7566  (g)  A  person  dealing  in  oil  leases  only; 

7567  (h)  A  person  holding  a  seat  in  a  stock  exchange  but  transacting  no 
business  for  others; 

7568  (i)  A  person  negotiating  purchases  and  sales  of  real  estate; 

7569  (j)  A  person  who  receives  and  negotiates  the  transmission  of  money 
abroad  where  there  are  neither  purchases  nor  sales  of  any  money 

orders,  drafts, bills  of  exchange,  or  any  other  instruments  constituting  exchange; 

7570  (k)  A  person  negotiating  loans  and  requiring  the  borrowers  to 
pay  a  commission  to  the  person  securing  the  loan,  drawing  papers, 
or  examining  titles; 

7571  (1)  A  railway  agent  who  exchanges  foreign  money  for  American 
money  and  vice  versa,  merely  in  the  transaction  of  the  frieght  and 

passenger  business  of  his  company; 

7572  (m)  A  loan  and  mortgage  company  which  loans  its  own  funds 
upon  notes  or  bonds  secured  by  mortgage  or  trust  deed  of  real  estate 

and  which  subsequently  sells  such  notes  or  bonds  so  taken,  on  its  own 
account  and  for  its  own  profit  or  loss; 

7573  (n)  A  person  employed  by  a  coal  company,  as  agent  to  negotiate 
sales  of  coal  for  the  company  on  a  commission  basis; 

7574  (o)  A  traveling  or  other  salesman  who  has  no  business  of  his  own  but 
is  an  employee  of  the  firm  or  firms  which  he  represents; 

7575  (p)  A  person  who  buys  or  sells  Liberty  bonds  or  other  securities 
for  himself,  purchasing  them  with  his  own  money,  title  to  the  securi- 
ties actually  passing  to  or  being  in  such  person; 

7576  (q)  A  person  engaged  in  the  business  of  placing  loans  secured  by 
notes  and  mortgages  upon  real  estate,  acting  only  as  agent  and  re- 
ceiving a  commission  for  his  services; 

7577  (r)  An  agent  of  a  mill  or  factory  who  is  in  fact  a  part  of  the  sales 
department  of  such  mill  or  factory,  and  performs  such  services  as 

selling  the  goods,  determining  what  fabrics  or  products  the  mill  or  factory 
can  best  make,  designing  fabrics,  indorsing  notes  of  the  mill  or  factory, 
and  otherwise  financing  the  mill  or  factory,  or  providing  expert  advice  to  it. 

7578  (s)  A  person  having  territorial  rights  for  the  sale  of  articles  placed 
in  his  possession,  when  sold  in  his  own  name; 

7579  (t)  A  corporation  selling  its  own  stock  through  its  own  employees 
who  are  acting  under  its  exclusive  supervision  and  control; 

7580  (u)  A  person  engaged  in  the  business  of  buying  and  selling  tickets; 
7580a  (v)  Live  stock  brokers  and  live  stock  commission  merchants. 
7580b  (w)  A  person  negotiating  purchases  or  sales  of  businesses; 
7580C  (x)  An  auctioneer  who  makes  sales  of  produce  or  merchandise  on 

the  farm  or  premises  of  the  owner. 

7681    Art.  7.    Secondary  tax. — A  broker  who  owns  seats  in  different  ex- 
changes is  liable  to  the  secondary  tax  upon  the  value  of  a  seat  (valued 
at  $2,000  or  more)  in  each  exchange.    A  broker  who  owns  a  number  of 

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SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


scats  in  the  same  exchange  is  liable  to  the  secondary  tax  upon  only  the 
value  of  a  single  seat.  A  partnership  or  corporation  doing  a  brokerage 
business  is  liable  to  both  the  primary  and  secondary  tax  to  the  same  extent 
as  an  individual.  It  is  immaterial  that  the  seat  in  the  exchange  through 
which  the  partnership  transacts  business  is  held  in  the  name  of  an  individual. 
Where  two  or  more  members  of  a  partnership  doing  a  brokerage  business 
own  seats  in  the  same  exchange  and  all  the  business  transacted  by  such 
partners  is  for  the  partnership,  the  partnership  is  liable  to  the  secondary 
tax  upon  the  value  of  only  a  single  seat  in  the  exchange.  Where  all  the 
trading  done  by  the  members  of  a  firm  or  partnership  is  for  the  firm  or  part- 
nership but  one  payment  of  special  tax  is  required.  If,  however,  at  any 
time  purchases  or  sales  of  securities  are  made  for  others  upon  a  commission 
basis  by  any  member  of  the  firm  or  partnership  for  his  own  account  and  not 
for  the  account  of  the  firm  or  partnership  special  tax  liability  is  incurred  by 
the  individual;  secondary  tax  liability  is  also  incurred  provided  the  individual 
owns  a  membership  or  seat  (valued  at  $2,000  or  more)  in  a  stock  or  produce 
exchange,  board  of  trade,  or  similar  organization.  For  example,  A,  B,  and  C. 
members  of  a  partnership,  each  own  a  membership  in  the  same  exchange; 
but  one  special  tax  and  one  secondary  tax  are  due  so  long  as  all  the  trading 
is  done  for  the  partnership;  but  if  any  one  of  the  members  accepts  ^dividual 
commissions  then  such  member  is  individually  liable  to  special  tax  and  second- 
ary tax  in  addition  to  the  tax  imposed  on  the  partnership.  Where  the  pos- 
session of  a  share  of  stock  is  a  prerequisite  to  membership  in  a  stock  exchange 
a  lessee  of  a  share  of  stock  in  such  exchange  actually  carrying  on  a  brokerage 
business  is  liable  to  the  secondary  tax  and  not  the  lessor  of  the  share.  The 
secondary  tax  on  a  membership  in  a  stock  or  produce  exchange  should  be 
paid  in  the  district  where  special  tax  as  a  broker  is  paid;  for  example,  a 
broker  in  Boston  is  a  member  of  the  New  York  Stock  Exchange  and  subject 
to  secondary  tax  by  reason  of  such  membership.  Such  secondary  tax 
should  be  paid  to  the  collector  of  the  district  in  which  Boston  is  located  and 
not  to  the  collector  of  the  district  in  which  the  New  York  Stock  Exchange  is 
located,  unless  such  broker  maintains  a  branch  office  in  New  York  and  pays 
special  tax  therefor. 

7582  Art.  8.  Branch  offices. — Inasmuch  as  the  payment  of  one  special 
tax  cannot  cover  the  doing  of  business  by  a  broker  in  branch  offices, 
a  broker  who  maintains  such  branch  offices  is  required  to  pay  a  special  tax 
in  respect  of  the  main  office  and  of  each  branch  office  where  a  brokerage 
business  is  conducted.  The  special  tax  is  not  required  in  the  case  of  a  branch 
office  similar  to  the  smaller  offices  frequently  located  in  hotels,  where  the 
duties  of  the  clerks  employed  are  restricted  to  the  taking  of  orders  and  their 
transmission  to  the  main  office  without  transacting  any  other  business. 
The  special  tax  must  be  paid,  however,  with  respect  to  branch  offices  or 
brokers  that  are  equipped  to  do  and  who  actually  do  a  brokerage  business.  A 
branch  office,  organized  for  the  transaction  of  business,  which  receives  orders, 
disburses  funds  and  renders  statements  to  its  customers,  must  pay  the  special 
tax  provided.  The  distinction  to  be  drawn  is  whether  a  brokerage  business  is 
transacted  at  the  branch  office.  It  is  considered  that  business  is  so  transacted 
unless  the  activities  of  the  branch  house  are  restricted  to  the  receipt  of  orders 
and  money  for  transmission  to  the  parent  house  and  to  the  disbursement  of 
such  funds  only  as  are  received  from  the  parent  house  with  specific,  detailed 
instructions  as  to  their  disposition. 


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WAR  TAX  1518  SERVICE 


8-2-22.  Reg.  59—1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


PAWNBROKERS. 

7683    Art.  9.    Pawnbrokers:  Delivery. — Delivery  of  personal  property  a; 

7503  security  for  the  repayment  of  money  loaned  thereon  is  necessary  tc 
incur  liability  to  special  tax  as  a  pawnbroker.    By  agreement  of  th< 

parties  the  pledge  may  be  deposited  in  the  hands  of  a  third  person  insteac 
of  being  delivered  to  the  pawnbroker. 

7584    Art.  10.  Persons  liable. — The  following,  among  others,  are  liable  to 
tax  as  pawnbrokers: 

7685  (a)  A  person  using  no  tickets  in  his  business,  but  making  a  pretense 
of  buying  articles  which  are  brought  to  him  which  he  holds  under  a 

verbal  agreement  that  the  articles  can  be  bought  back  again  by  the  persoi 
selling  them  upon  the  payment  of  a  specified  bonus; 

7686  (b)  A  concern  though  called  a  bank  which  has  practically  no  de- 
posits and  almost  its  entire  business  is  the  loaning  of  money  on  auto- 
mobiles secured  by  warehouse  receipts. 

7587  Art.  11.    Persons  not  liable. — A  person  is  not  required  to  pay  t 
special  tax  as  a  pawnbroker  for  occasional  or  incidental  acts  whicb 

can  not  be  regarded  as  constituting  his  business  or  occupation.  Bank? 
doing  a  bona  fide  banking  business  are  not  required  to  pay  tax  as  pawn- 
brokers in  cases  where  they  accept  diamonds  or  jewelry  or  other  persona! 
property  as  collateral  security  for  the  making  or  extension  of  loans  if  such 
loans  are  made  on  the  same  conditions  and  at  the  same  rate  of  interest  at 
other  loans,  provided  such  loans  comprise  the  smaller  portion  of  the  loar 
business  of  the  bank.  Bankers  who  are  able  to  show  that  they  did  not  invite 
or  cater  to  persons  desiring  to  borrow  money  on  articles  of  personal  property, 
but  merely  made  such  loans  upon  request  of  and  to  oblige  persons  doing  other 
business  with  them  or  who  have  taken  such  property  as  security  only  to 
save  themselves  from  loss  in  connection  with  loans  previously  made  are  not 
liable  to  the  special  tax.  The  special  tax  on  pawnbrokers  is  not  required 
to  be  paid  for  making  loans  on  chattel  mortgages  or  in  any  case  where  chattels 
or  personal  property  are  not  taken  or  received  by  way  of  pledge,  pawn,  oi 
exchange. 

SHIP  BROKERS. 

7588  Art.  12.    Ship  brokers:   Persons  liable. — Persons  engaged  in  the 

7504  business  of  negotiating  freights  and  business  of  a  similar  kind  and 
character  for  the  owners  of  vessels  or  for  th  shippers  or  consignors  or 

consignees  of  freight  carried  by  vessels  are  subject  to  tax  as  ship  brokers. 
Liability  to  tax  is  not  incurred  unless  the  work  performed  is  of  the  same 
general  character  as  the  negotiation  of  freights.  Persons  acting  as  agenti 
for  ship  owners  in  finding  charterers  for  their  ships  or  as  agents  for  charterer! 
in  finding  ships  available  for  charter  are  ship  brokers.  A  person  whose  busi- 
ness it  is  to  furnish  sailors  on  a  commission  basis  or  for  a  flat  rate  for  each 
sailor  furnished  is  not  a  ship  broker.  An  express  company  which  undertakes 
for  a  lump  sum  to  deliver  freight  at  some  foreign  port  and  makes  arrangement 
with  various  railroad  and  steamship  lines  on  its  own  account  and  not  as  the 
agent  of  the  shippers  for  the  transportation  of  such  freight  i*  not  a  ship 
broker.    A  person  who  as  an  agent  of  the  consignee  attends  to  the  propei 

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8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


forwarding  of  goods  consigned  to  domestic  or  foreign  ports,  sees  that  proper 
inspection  is  made  and  manifests  issued  is  not  a  ship  broker,  but  a  customhouse 
broker.  A  person  performing  both  the  duties  of  a  ship  broker  and  a  custom- 
bouse  broker  is  subject  to  the  special  tax  of  both  a  ship  broker  and  a  custom- 
house broker. 

CUSTOMHOUSE  BROKERS. 

F589  Art.  13.  Customhouse  brokers:  Persons  liable. — A  person  or  firm 
7505  holding  himself  or  itself  out  to  the  public  as  engaged  in  the  occupa- 
tion of  customhouse  broker  either  by  maintaining  an  office  or  sending 
out  literature  or  advertising  matter  is  required  to  pay  special  tax  as  a  custom- 
house broker.  If  the  business  of  such  a  person  is  transacted  by  employees 
at  offices  at  different  ports,  a  separate  and  distinct  special  tax  must  be  paid 
for  each  office.  A  special  tax  stamp  taken  out  by  a  person  in  his  own  name 
as  a  customhouse  broker  is  sufficient  to  cover  the  business  done  by  him  in 
bis  own  name  at  the  place  of  business  stated  therein  whether  such  business 
is  done  by  him  on  his  own  account  or  as  an  agent  for  other  persons.  Persons 
whose  occupation  it  is  as  agents  of  others  to  enter  and  clear  vessels  in  the 
customhouse  are  not  relieved  from  special  tax  as  customhouse  brokers 
on  the  ground  that  they  have  paid  special  tax  as  ship  brokers.  A  railroad 
or  other  corporation  operated  by  the  United  States  and  acting  as  the  agent 
of  others  to  arrange  entries  and  other  customhouse  papers  acts  in  a  govern- 
mental capacity  and  is  not  liable  to  tax. 

THEATERS,  MUSEUMS,  AND  CONCERT  HALLS. 

7690  Art.  14.  Theaters,  museums,  and  concert  halls:  Persons  liable.— 
.7506  The  tax  is  upon  the  business  of  operating  a  theater,  museum,  or  con- 
cert hall  where  a  charge  for  admission  is  made.  A  person  owning  a 
theater  which  is  not  used  at  any  time  during  the  taxable  year  is  not  liable  to 
tax.  A  "proprietor"  of  a  theater,  museum,  or  concert  hall  is  the  owner 
of  such  a  building,  or  the  lessee  or  tenant  if  the  building  is  leased  or  rented. 
The  owner  is  liable  for  the  special  tax  unless  the  building  is  under  lease  at 
the  time  the  tax  is  due,  in  which  case  the  tax  shall  be  paid  by  the  lessee  unless 
otherwise  stipulated  between  the  parties  to  the  lease.  (See  art.  20.)  The  tax 
is  upon  each  theater  operated  by  the  proprietor.  If  the  same  proprietor 
has  theaters  in  different  internal-revenue  districts,  the  tax  due  upon  each 
theater  must  be  paid  in  the  district  in  which  such  theater  is  located. 

7591  Art.  15.  "Charge  for  admission," — By  a  "charge  or  admission"  is 
meant  a  charge  for  the  right  or  privilege  to  enter  or  remain  in  a 
theater,  museum,  or  concert  hall  for  a  limited  time.  No  liability  to  tax  is 
incurred  by  a  proprietor  on  account  of  the  giving  of  moving  picture  exhibi- 
tions or  concerts  where  no  admission  fee  is  charged  and  only  collections  arc 
taken  up,  persons  in  the  audience  contributing  if  they  see  fit. 

7692  Art.  16.  Theater  defined. — Only  an  "edifice"  (a  building  or  struc- 
ture of  a  permanent  character)  used  for  the  purpose  of  dramatic  or 
operatic  or  other  representations,  plays,  or  performances  for  admission  to 
which  entrance  money  is  received  is  to  be  regarded  as  a  theater.  A  railroad 
car  or  a  boat  fitted  up  is  a  theater  and  traveling  about  from  place  to  place 
is  to  be  regarded  as  an  edifice.    An  open-air  theater  with  a  permanent  roof 

Copyright  1922,  by  The  Corporation  Trurt  Company. 
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8-2-22.  Reg.  59.-1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


over  the  audience  or  the  stage  is  an  edifice,  but  an  airdome  or  tent  is  not. 
Where  the  proprietor  of  a  theater  operates  a  theater  at  one  location  and  an 
airdome  at  another  location  he  is  subject  to  tax  under  this  subdivision  with 
respect  to  the  operation  of  the  theater  and  under  subdivision  (7)  upon  the 
operation  of  the  airdome.  Where  an  airdome  is  operated  in  connection 
with  a  theater,  the  same  ticket  admitting  a  patron  to  either  the  theater  or 
airdome,  a  special  tax  stamp  under  this  subdivision  is  required  for  the  theatre 
and  one  under  subdivision  (7)  for  the  airdome. 

7593  Art.  17.    Exemptions. — (a).    Halls  or  armories  rented  occasionally 
for  the  purpose  of  dramatic  or  operatic  or  other  representations, 

plays,  or  performances  for  admission  to  which  a  charge  is  made  are  exempt 
from  tax.  Liability  to  tax  is  not  determined  by  the  average  number  of  times 
per  month  that  such  hall  or  armory  may  be  rented  for  dramatic  representa- 
tions, but  upon  the  primary  usage  of  the  hall  or  armory  for  such  representa- 
tions. The  proprietor  of  an  exhibition  or  show  for  money  renting  the  hall 
or  armory  is  liable  to  tax  under  subdivision  (7). 

7593a  (b)  Edifices  owned  by  religious,  educational  or  charitable  institutions, 
societies  or  organizations  where  the  proceeds  from  admissions  inure 
exclusively  to  the  benefit  of  such  institutions,  societies,  or  organizations  or 
exclusively  to  the  benefit  of  persons  in  the  military  or  naval  forces  of  the 
United  States,  are  exempt  from  tax.  To  qualify  for  exemption  the  institution, 
society  or  organization  must  be  the  owner  of  the  edifice;  and  (1)  it  must  have 
a  definite  organization,  with  officers,  directors,  or  trustees,  and  the  usual 
essential  features  (incorporation  not  being  essential)  of  an  association  of  its 
class;  (2)  it  must  have  a  purpose  which,  as  put  into  practice,  is  religious, 
educational,  or  charitable;  and  (3)  its  funds  must  be  used  exclusively  in 
furtherance  of  such  purpose,  none  of  them  being  paid  or  otherwise  being 
distributed  to  any  of  its  members  except  as  charity  or  as  reasonable  com- 
pensation for  services  actually  rendered. 

7594  Art.  18.   Theaters  open  for  part  of  year  only. — Where  theaters  are 
entirely  closed  to  performances  during  the  months  of  July  and 

August  and  open  in  the  month  of  September  the  special  tax  is  to  be  reckoned 
from  the  first  day  of  September  to  the  last  day  of  June  following  at  the 
specified  annual  rate — that  is,  for  10  months.  Where  a  theater  is  closed 
before  the  end  of  a  fiscal  year,  the  stamp  issued  has  no  redeemable  value. 

7595  Art.  19.  Seating  capacity. — Where  seats  consist  of  boards  or  benches, 
seating  capacity  should  be  ascertained  by  allowing  space  for  each 

spectator  of  the  same  width  as  the  inside  measurement  of  the  average  or 
standard  theater  chair.  Where,  after  payment  of  special  tax  at  a  certain 
rate,  the  seating  capacity  of  a  theater  is  increased  beyond  that  which  the  tax 
previously  paid  is  sufficient  to  cover,  an  additional  amount  must  be  paid  as 
special  tax  equal  to  the  difference  between  the  amount  of  tax  due  upon  the 
enlarged  theater  and  the  value  of  the  old  special  tax  stamp,  computed  from 
the  first  day  of  the  month  in  which  the  seating  capacity  of  the  theater  was 
increased  to  June  30  following.   For  example: 

Special  tax  due  and  paid  July  1,  1922   $50.00 

Seating  capacity  increased  Oct.  10,  1922  (new  rate)   100.00 

Difference   $50  00 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1521  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


7596  Since  nine  months  are  remaining  in  the  fiscal  year  from  the  date  of 
October  1,  the  additional  tax  due  is  nine-twelfths  of  $50,  or  $37.50, 

which  amount  must  be  paid  to  the  collector  and  evidenced  by  receipt  on 
Form  1.  This  receipt  must  be  posted  with  the  special  tax  stamp  in  the  place 
of  business  of  the  holder  until  the  close  of  the  fiscal  year,  when  a  new  special 
tax  stamp  for  the  succeeding  fiscal  year  must  be  procured.  A  person  failing 
to  pay  special  tax  covering  increased  seating  capacity  within  the  month 
during  which  liability  begins,  incurs  liability  to  the  penalty  imposed  by 
Section  1004  of  the  Revenue  Act  of  1921.  Where  a  special  tax  stamp  "at 
large"  is  issued  to  a  proprietor  of  a  traveling  theater  having  a  seating  capacity 
of  more  than  250  and  not  exceeding  500  the  stamp  is  good  for  any  theater 
having  a  seating  capacity  of  not  exceeding  500.  No  new  liability  is  created 
when  the  proprietor  gives  a  performance  in  a  theater  with  a  seating  capacity 
of  less  than  250.  If,  however,  he  gives  a  performance  in  a  theater  having  a 
seating  capacity  of  more  than  500,  liability  at  the  increased  rate  of  tax  is 
incurred. 

7597  Art.  20.   Transfer  of  stamp. — A  special  tax  stamp  taken  out  by  the 

proprietor  of  a  theater  who  transfers  his  interest  to  another  person 
can  not  be  transferred  and  made  to  answer  for  such  other  person  in  con- 
ducting the  theater.  A  special  tax  stamp  is  personal  to  the  one  to  whom 
issued.  Upon  request  to  the  collector  he  may  have  the  stamp  transferred 
from  one  place  of  business  to  another.  Thus,  if  a  proprietor  of  a  theater 
closes  it  during  the  summer  season  he  may  have  his  stamp  transferred  to  a 
summer  theater,  provided  the  seating  capacity  of  such  theater  is  not  greater 
than  that  of  his  other  theater;  if  the  seating  capacity  of  the  summer  theater 
is  greater  than  that  of  his  other  theater,  the  proprietor  will  be  required  to 
pay  an  additional  tax,  measured  by  the  difference  in  seating  capacity.  The 
proprietor  of  a  summer  theater  who  operates  another  theater  during  the 
winter  season  may  likewise  have  his  special  tax  stamp  transferred  from  his 
summer  theater  to  his  other  theater. 

7598  Art.  21.    Population. — In  determining  population  of  cities,  towns,  or 
villages  latest  United  States  census  figures  are  to  be  used,  unless  a 

State  census  has  been  taken  more  recently,  in  which  case  the  State  census 
figures  shall  be  used.  However,  in  case  of  a  sudden  and  considerable  increase 
or  decrease  in  population  since  the  last  United  States  or  State  census,  the 
collector  of  the  district  in  which  the  particular  city,  town,  or  village  is  located 
shall  determine  the  population  from  the  best  evidence  available,  which  may 
be  common  knowledge,  and  the  tax  shall  be  paid  accordingly. 

CIRCUSES. 

7699  Art.  22.  Circuses:  Persons  liable. — Exhibitions  or  feats  of  horse- 
7507     manship  which  occur  on  race  tracks  are  subject  to  a  special  tax  of  $100; 

but  mere  tests  of  speed  of  horses  in  racing  or  jumping  contests  are  not 
regarded  as  feats  of  horsemanship  within  the  meaning  of  the  statute.  The 
"theatrical  performances"  contemplated  by  this  subdivision  are  only  those 
which  are  given  in  connection  with  a  circus.  A  show  under  canvas  exhibit- 
ing among  other  things  acrobatic  and  athletic  exercises,  but  no  feats  of 
horsemanship,  and  having  no  menagerie,  is  not  subject  to  special  tax  as  a 
circus  if  these  exercises  arc  few  and  simple,  but  is  taxable  under  subdivision 

Copyright  1Q22.  by  The  Corporation  Trust  Company. 
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8-2-22.  Reg.  59—1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


(7).  A  small  wagon  show  having  no  "circus  feats,"  but  only  trapeze  per- 
forming, wire  walking,  trained  ponies,  singing,  and  dancing,  is  not  to  be 
regarded  as  a  circus,  but  is  taxable  under  subdivision  (7).  A  "round-up" 
and  like  contests  in  which  the  contestants  are  from  the  locality,  sponsored 
and  financed  by  citizens  of  the  community,  are  not  circuses  even  though 
feats  of  horsemanship  are  shown  and  no  tax  liability  as  a  circus  is  incurred. 
A  Wild  West  show  is  taxable  as  a  circus.  Side  shows  at  circuses  are  liable 
to  tax  under  subdivision  (7). 

7600  Art.  23.   Payment  in  different  States. — Where  a  circus  is  exhibiting 
in  any  State  in  the  month  of  July  the  special  tax  of  $100  is  required 

to  be  paid  for  the  year  beginning  July  1.  If  in  the  following  month  the  cir- 
cus goes  into  another  State  the  special  tax  at  the  rate  of  $100  for  the  year 
is  to  be  reckoned  from  the  first  day  of  August  to  the  last  day  of  June  fol- 
lowing, and  a  separate  special  tax  stamp  must  be  taken  out  for  that  State, 
and  for  every  other  State,  Territory,  or  District  in  which  performances  are 
given.  If  a  circus,  after  leaving  a  State  in  which  special  tax  has  been  paid, 
returns  before  the  close  of  the  fiscal  year,  no  further  special  tax  is  due. 

OTHER  PUBLIC  EXHIBITIONS  OR  SHOWS. 

7601  Art.  24.  Other  public  exhibitions  or  shows  for  money:  Taxable  ex- 
7508     hibitions. — Proprietors  or  agents  of  all  public  exhibitions  or  shows 

for  money  not  enumerated  in  the  two  previous  subdivisions  are  liable  to  tax 
under  this  subdivision.  The  proprietors  of  the  following  exhibitions  or 
shows  are  liable  to  tax  under  this  subdivision: 

7602  (a)  An  airdrome  or  summer  theater  which  has  no  roof  over  the 
auditorium  or  stage; 

7603  (b)  A  theatrical  troupe  traveling  around  the  country  and  giving 
performances  in  halls  or  auditoriums  for  which  special  taxes  have 

not  been  paid  by  the  owners  or  lessees  thereof; 

7604  (c)  An  open-air  picture  exhibition  for  admission  to  which  a  charge 
is  made; 

7605  (d)  „An  exhibition  or  show  given  on  fair  grounds  but  not  under  the 
management  of  the  fair  association; 

7606  (e)  A  side  show  at  a  carnival  or  circus  to  which  an  admission  fee  is 
charged; 

7607  (/)  A  dancing  pavilion  upon  a  pier  where  a  charge  is  made  for  the 
privilege  of  going  upon  the  pier  as  spectators; 

7608  (g)  A  public  dance  hall,  if  a  charge  is  made  to  persons  who  attend 
as  spectators; 

7609  (h)  An  illustrated  lecture  to  which  an  admission  fee  is  charged; 

7610  (i)  Baseball  games  by  professionals  or  semiprofessionals  to  which 
an  admission  fee  is  charged; 

7611  (/)  Concert  gardens  where  no  admission  fee  is  charged  but  where 
drinks  are  sold  and  stage  and  other  entertainments  are  given. 

7612  Art.  25.   Exhibitions  not  taxable. — Subdivision  (7)  specifically  pro- 
vides "that  this  paragraph  shall  not  apply  to  Chautauquas,  lecture 

lyceums,  agricultural  or  industrial  fairs,  or  exhibitions  held  under  the  au- 
spices of  religious  or  charitable  associations."  Illustrated  lectures  or  other 
exhibitions  given  by  bona  fide  lecture  lyceums  or  Chautauquas  in  a  tent  or 
other  place  during  the  usual  Chautauqua  or  lecture  lyceum  season  are  exempt 
from  tax.    Exhibitions  or  shows  given  by  an  agricultural  or  industrial  fair 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1523  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


association  in  connection  with  the  conduct  of  a  fair  are  likewise  exempt  from 
tax.  It  is  immaterial  whether  a'separate  charge  is  made  for  admission  to 
such  exhibitions  or  shows.  Where,  however,  an  exhibition  or  show,  for  ad- 
mission to  which  a  charge  is  made,  is  conducted  on  the  fair  grounds,  but  is 
not  given  by  the  fair  association,  the  proprietor  of  such  exhibition  or  show 
is  liable  to  special  tax.  Special  tax  is  not  required  to  be  paid  by  proprietors 
of  restaurants  or  cafes  employing^orchestras  during  the  meal  hours  for  the 
entertainment  of  patrons.  Amateur  theatrical  exhibitions  either  in  private 
houses  or  in  licensed  public  halls  to  which  an  admission  fee  is  charged  to 
cover  expenses  incurred  in  giving  the  exhibition,  and  not  for  the  pecuniary 
profit  of  the  performers  or  the  manager,  are  not  such  performances  as  are 
subject  to  special  tax.  Owners  or  agents  of  theatrical  troupes  giving  per- 
formances only  in  halls  or  auditoriums  for  which  special  taxes  have  been 
paid  by  the  owner  or  lessee  thereof  are  not  subject  to  tax.  Persons  conduct- 
ing stands  and  raffling  devices  at  beaches,  summer  resorts,  and  similar 
places,  at  which  no  charge  is  made  for  admission  but  only  a  charge  for  taking 
a  chance,  are  not  subject  to  the  tax.  This  is  also  true  of  merry-go-rounds, 
shoot-the-chutes,  and  similar  amusement  devices. 

7613  Art.  26.   Aggregation  of  entertainments. — An  aggregation  of  enter- 
tainments known  as  a  street  fair  is  not  subject  to  a  larger  tax  than 

$100  in  any  State,  Territory,  or  the  District  of  Columbia.  When  seven  or 
more  separate  entertainments  are  under  the  same  management  and  are  con- 
ducted in  connection  with  a  street  fair,  the  total  amount  of  tax  payable 
shall  not  exceed  $100.  These  aggregations  usually  include  such  exhibitions 
or  shows  as  "pit  shows,"  "rides,"  "dare-devil  entertainments,"  imitation 
Wild  West  shows,  or  trained  animals.  A  special  tax  stamp  has  been  pro- 
vided for  such  aggregations. 

BOWLING  ALLEYS. 

7614  Art.  27.  Bowling  alleys:  Scope  of  tax. — In  every  building  or  place 
7509     where  bowls  are  thrown  each  division  or  track  is  a  separate  alley, 

for  which  a  special  tax  must  be  paid.  Proprietors  of  bowling  alleys 
and  billiard  and  pool  tables  in  clubs,  Y.  M.  C.  A.  buildings,  hotels,  fraternity 
houses,  lodge  rooms,  State  armories,  fire  houses,  and  similar  places  are  sub- 
ject to  special  tax  unless  the  bowling  alley  or  billiard  and  pool  tables  are 
supported  out  of  funds  contributed  by  a  State  or  a  subdivision  of  a  State. 
The  Italian  game  of  "Boccie"  is  taxable  under  this  subdivision.  Bagatelle 
and  tivoli  tables  and  Japanese  rolling  ball  games  are  not  subject  to  tax.  No 
liability  is  incurred  where  tables  or  alleys  are  not  actually  used,  in  which  case 
pins  and  bowls  should  be  removed  from  the  alleys  and  cushions  from  tables. 
The  person  for  the  time  being  in  possession  or  control  of  a  billiard  table  or 
bowling  alley  is  prima  facie  the  proprietor  of  the  alley  or  table  and  liable  to 
the  special  tax  even  if  the  property  and  ultimate  control  of  the  table  and 
place  where  it  is  located  are  in  some  one  else.  A  "private  home"  is  held 
to  be  an  individual  or  family  residence.  The  mere  fact  that  no  charge  is  made 
for  use  of  the  tables  or  alleys,  or  that  they  are  not  operated  for  profit,  does 
not  relieve  the  proprietor  from  payment  of  the  special  tax. 

7616    Art.  28.~3  Transfer  of  special  tax  stamp. — When  a  person  who  has 
taken  out  a  special  tax  stamp  for  a  bowling  alley  closes  the  alley  and 
thereafter  opens  another  the  stamp  may  be  transferred  to  the  latter. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1524  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


SHOOTING  GALLERIES. 

7616  Art.  29.   Shooting  galleries:   Persons  liable. — Every  person  who  is 

7510  in  possession  and  control  of  any  building,  space,  tent,  or  area  where 
a  charge  is  made  for  the  discharge  of  firearms  at  any  form  of  target  is 

liable  to  tax.  A  club  which  charges  annual  dues  and  in  addition  makes  a 
charge  to  cover  operating  expenses  of  a  shooting  range  is  liable  to  tax.  The 
tax  attaches  in  the  case  of  a  gun  club  where  the  membership  dues  specifically 
cover  participation  in  shoots  or  tournaments. 

wmrfoBm  Bid  lb  V  alfoasH  vifcinoVi  nl    .vrifidBii  IbJo*  M  §rtfi3vob  ?3niffo*m 

RIDING  ACADEMIES. 

7617  Art.  30.  Riding  academies:  Liability  to  tax. — Only  a  proprietor  of 

7511  a  riding  academy  who  maintains  a  building,  space,  tent,  or  area 
where  a  charge  is  made  for  instruction  in  horsemanship  or  for  facili- 
ties for  the  practice  of  horsemanship  is  liable  to  tax.  Persons  who  are  en- 
gaged merely  in  letting  saddle  horses  are  not  liable  to  tax.  A  highway  or 
other  place,  the  use  of  which  is  open  to  the  public  generally,  that  is  not  re- 
stricted by  concession  or  otherwise  to  a  person  giving  instruction  in  horse- 
manship, is  not  a  "building,  space,  tent,  or  area"  within  the  meaning  of  this 
section  and  subdivision  of  law.  Associations  composed  exclusively  of  mem- 
bers of  units  of  the  Federalized  National  Guard  or  the  Organized  Reserve 
and  whose  receipts  are  used  exclusively  for  the  benefit  of  such  units,  are 
exempt  from  tax. 


PASSENGER  AUTOMOBILES. 

7618   Art.  31.   Passenger  automobiles:    Basis  of  tax. — The  tax  is  upon 
7512    the  business  of  operating  or  renting  passenger  automobiles  for  hire, 
and  is  based  upon  the  number  of  cars  operated  or  rented  and  the 
seating  capacity  of  each  car.    It  is  upon  the  total  number  of  cars  operated 

and  not  upon  the  average  number  operated.  Liability  is  not  incurred 
through  the  occasional  carrying  of  a  passenger  in  an  automobile  for  hire 
provided  the  owner  or  operator  does  not  hold  himself  out  to  the  public  as 
engaged  in  the  business  of  carrying  passengers.  A  person,  however,  who 
habitually  carries  passengers  for  hire  whenever  the  opportunity  presents  or 
the  capacity  of  his  car  permits  is  liable  to  tax.  In  computing  seating  capacity 
the  driver's  seat  is  to  be  included.  The  tax  should  be  paid  for  automobiles 
used  for  carrying  passengers,  based  upon  the  seating  capacity  of  the  whole 
car,  unless  a  portion  of  it  is  set  off  and  is  of  such  design  that  it  can  not  readily 
be  used  for  passengers.  HThe  tax  attaches  to  a  person  operating  a  hotel 
bus  for  the  carriage  of  passengers  between  railroad  stations  and  hotels,  pro- 
vided a  separate  charge  is  made  for  the  service.  Motor  trucks  used  for  car- 
rying passengers  for  hire  are  liable  to  tax,  and  unless  evidence  is  furnished 
which  conclusively  shows  that  such  trucks  can  not  accommodate  more  than 
seven  persons  the  owners  are  liable  to  the  special  tax  of  $20  for  each.  Persons 
operating  or  renting  passenger  automobiles  for  hire  during  a  strike  of  street- 
railway  employees  are  liable  to  the  tax.  A  company  operating  automobile 
stages  or  motor  busses  on  fixed  schedule  over  established  routes  in  cities  or 
between  cities  and  carrying  passengers  at  a  fixed  charge  is  subject  to  tax 
even  though  it  operates  under  rules  and  regulations  of  a  state  railroad  com- 
mission or  similar  body.  ^Automobile  ambulances  and  automobile  hearses 
are  not  considered  passenger  automobiles  within  the  purview  of  this  sub- 
division, 

Copyright.  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1525  SERVICE 


8-2-22.  Reg.  59.-1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


7619  Art  32.  Special  tax  stamp. — The  special-tax  stamp  or  stamps 
issued  must  cover  the  total  tax  liability  of  the  taxpayer  at  the  time 
the  stamp  or  stamps  are  taken  out.  He  must  secure  a  stamp  for  each  car 
operated.  A  taxpayer  does  not  incur  an  increased  liability  to  tax  by  reasoc 
of  replacing  a  car  with  a  new  car  unless  the  new  car  is  of  a  seating  capacity 
subject  to  a  higher  rate  of  tax  than  the  car  replaced.  For  example:  A 
person  engaged  in  the  business  of  operating  passenger  automobiles  foi 
hire  owns  40  machines,  each  of  them  carrying  more  than  two  but  not  more  than 
seven  passengers.  He  takes  out  a  special-tax  stamp  on  each  of  the  4C 
machines  covering  his  total  liability.  In  February  he  sells  7  of  his  machine? 
and  purchases  new  ones  of  the  same  seating  capacity  or  of  a  seating  capacity 
of  not  more  than  seven.  In  such  case  no  additional  special-tax  liability  U 
incurred.  If,  however,  in  February  he  should  replace  7  of  his  old  machine* 
with  the  same  number  of  new  machines  each  carrying  more  than  seven 
passengers,  an  additional  amount  must  be  paid  as  special  tax  equal  to  the 
difference  between  the  amount  of  tax  due  upon  the  operation  of  the  ne* 
machines  and  the  value  of  the  old  special-tax  stamps  paid  upon  the  operatior 
of  the  replaced  machines,  computed  from  the  first  day  of  the  month  in  whict 
additional  liability  was  incurred  and  ending  with  the  following  June  30, 
Thus,  since  five  months  are  remaining  in  the  fiscal  year  from  the  date  oi 
February  1,  the  additional  tax  due  is  five-twelfth  of  $70,  or  $29.17.  Pay- 
ment of  such  additional  special  tax  will  be  evidenced  by  a  receipt  on  Form  1, 
which  must  be  kept  posted  with  the  special  tax  stamp  until  the  close  of  the 
fiscal  year.  A  person  failing  to  pay  special  tax  covering  increased  seating 
capacity  within  the  month  during  which  liability  begins  incurs  liability  to 
the  penalty  imposed  by  section  1004  of  the  Revenue  Act  of  1921.  IjThc 
purchaser  of  a  passenger  automobile  for  the  operation  of  which  special  tax 
has  been  paid  by  the  previous  owner  does  not  acquire  the  right  to  operate 
the  automobile  under  the  special-tax  stamp  which  was  issued  to  the  previous 
owner.  The  special-tax  stamp  or  stamps  issued  must  be  conspicuously 
posted  in  the  place  of  business  of  the  person  operating  or  renting  passengej 
automobiles.  IfAutomobiles  in  respect  of  which  special  tax  has  been  paid  may- 
be operated  at  any  place  in  the  United  States  without  the  payment  of  addi 
tional  tax  so  long  as  the  owner  remains  the  same.  When  a  special-tax  8tam? 
is  issued,  the  engine  number  of  the  car  covered  by  the  stamp  shall  be  regit 
tered  with  the  collector  issuing  the  stamp,  who,  in  addition  to  the  stamp- 
will  issue  a  receipt  card  for  each  car  which  will  bear  the  number  correspond^ 
to  that  on  the  engine  of  the  car  for  which  issued,  and  this  receipt  shall  b< 
carried  by  the  operator  at  all  times.  The  operation  of  a  car  without  i 
receipt  card  or  with  a  receipt  card  bearing  a  different  engine  number  than  that 
on  the  engine  of  the  car  operated  shall  be  prima  facie  evidence  of  evasion  01 
tax.  Any  replacement  of  a  car  must  be  likewise  registered  with  the  collectoi 
and  a  new  receipt  card  will  be  issued  in  lieu  of  the  card  originally  issued  for 
the  car  which  the  new  car  replaces.  %lt  is  not  considered  necessary  nor  is  it 
desirable  to  put  the  license-tag  number  on  the  receipt  card  issued  with  the 
stamp,  owing  to  the  fact  that  the  stamp  shows  payment  of  tax  for  a  fiscal 
year,  while  auto  license  tags  usually  cover  a  calendar  year.  The  engine  num- 
ber on  the  card  will  be  sufficient.  This  will  obviate  the  necessity  of  obtaining 
a  new  card  when  the  tag  is  changed.  However,  it  will  be  necessary  to  obtain 
a  new  card  in  all  cases  where,  for  any  reason,  a  different  car  is  replacing  an 
old  one.   (As  amended  by  T.  D.  3184,  June  24,  1921.) 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  J526  SERVICE 


8-2-22.  Reg.  59.-1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


SPECIAL  TAXES  UPON  THE  USE  OF  BOATS. 

7820  Art.  33.  Effective  date. — The  effective  date  of  the  tax  on  boats  is 
7528     July  1,  1922.   This  tax  is  in  lieu  of  a  similar  tax  imposed  by  section 

1003  of  the  Revenue  Act  of  1918. 

7821  Art.  34,    Taxable  period. — The  first  taxable  period  is  from  July  1, 
1922,  or  from  the  date  of  the  original  purchase  of  a  new  boat  by  a 

user,  to  June  30,  1923,  inclusive.  Succeeding  taxable  periods  cover  the  fis- 
cal year  beginning  July  1  and  ending  June  30  of  the  succeeding  year. 

7622  Art,  35.    Basis  of  tax. — The  tax  is  based  on  use  and  not  on  mere 
possession  or  ownership.    Liability  to  tax  begins  from  the  first  day 

of  the  month  in  which  the  boat  is  used.  Thus,  if  the  first  use  of  a  boat  is  on 
April  27,  1923,  the  liability  to  tax  begins  on  April  1,  1923.  A  boat  which  is 
not  used  at  all  during  a  fiscal  year  is  not  subject  to  tax  for  that  period  not- 
withstanding the  fact  that  it  might  have  been  liable  to  tax  in  the  preceding 
fiscal  year.  A  boat  which  is  not  placed  in  use  during  the  first  part  of  the 
fiscal  year  is  not  liable  to  the  tax  for  the  period  during  which  it  was  not  in 
use,  except  to  the  extent  of  becoming  liable  from  the  first  of  the  month 
during  which  it  was  placed  in  use.  Once  liability  has  been  incurred  at  some 
time  during  a  fiscal  year  the  tax  must  be  paid  from  the  first  of  the  month 
during  which  the  boat  was  first  placed  in  use  until  the  close  of  the  fiscal  year, 
and  no  refund  will  be  made  notwithstanding  the  fact  that  during  some 
lubsequent  period  of  such  fiscal  year  the  boat  may  not  be  in  use. 

7623  Art.  36.  Persons  liable.— The  owner,  lessee,  or  charterer  of  a  boat  is 
liable  for  the  tax. 

7  824  Art.  37.  Boats  taxable. — Subject  to  the  exemptions  provided  for  in 
Article  38,  the  tax  is  imposed  upon  the  use  of  yachts,  pleasure  boats, 
powerboats,  motor  boats  with  fixed  engines,  and  sailing  boats  of  over  5  net 
tons,  length  over  32  feet.  The  use  of  the  following  boats,  among  others,  is 
subject  to  tax: 

(a)  Boats  of  foreign  register  used  in  the  United  States; 

(b)  Boats  owned  by  nonresident  aliens  navigating  United  States  waters; 

(c)  Boats  built  according  to  plans  and  specifications  approved  by  the 
Navy  Department  but  subsequently  converted  or  remodeled  according  to 
plans  not  approved  by  the  Navy  Department; 

(d)  Boats  built  without  prior  approval  of  the  plans  and  specifications  by 
the  Navy  Department. 

7  625  Art.  38.  Boats  not  subject  to  tax. — (a)  Boats  used  exclusively  for 
trade  are  specifically  exempt  from  tax.  (Any  boat 'which  is  used 
exclusively  in  connection  with  any  serious  activity  which  constitutes  a  per- 
son's business,  occupation,  profession,  or  means  of  livelihood  is  exempt  from 
tax.  Casual  employment  at  irregular  intervals  for  the  convenience  of  the 
owner  or  his  family,  not  exceeding  such  casual  employment  as  is  usual  for 
boats  maintained  or  employed  in  trade,  will  not  cause  the  tax  to  attach  to  a 
boat  which  is  entirely  devoted  to  trade  except  for  such  limited  casual  use.) 

(b)  Boats  used  exclusively  for  fishing  are  specifically  exempt  from  tax. 
(The  term  "fishing"  as  used  in  the  statute  has  reference  to  commercial  fishing 
and  not  fishing  for  pleasure.) 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1527  SERVICE 


8-2-22.  Reg.  59  —1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


(c)  Boats  built  according  to  plans  and  specifications  approved  by  the 
Navy  Department  are  specifically  exempt  from  tax.  (In  order  to  be  exempt 
the  plans  and  specifications  must  receive  approval  by  the  Navy  Department 
prior  to  the  building  of  the  boat.) 

(d)  Vessels  or  boats  used  without  profit  by  an)'  benevolent,  charitable  or 
rcligious  organizations  exclusively  for  furnishing  aid,  comfort,  or  relief  to 
seamen  arc  specifically  exempt  from  tax. 

(e)  Boats  owned  by  nonresident  aliens  and  operated  only  occasionally  in 
American  waters  are  not  subject  to  tax. 

(f)  A  houseboat  without  means  of  propulsion  is  not  subject  to  tax. 

(g)  Boats  of  over  5  net  tons  but  less  than  32  feet  in  length,  and  boats  of 
over  32  feet  in  length  but  less  than  5  net  tons,  do  not  fall  within  the  purview 
of  the  act  and  are  not  subject  to  tax. 

(h)  A  boat  used  by  a  physician  in  calling  upon  patients  is  exempt  from 
tax. 

(i)  A  boat  used  by  a  farmer  to  take  produce  to  market,  farming  con- 
stituting the  means  of  livelihood  of  the  owner  of  the  boat,  is  exempt  from  tax. 

(j)  A  boat  used  by  an  owner  in  the  course  of  his  employment  to  tend 
channel  lights  on  a  barge  canal  is  exempt  from  tax. 

(k)  A  boat  regularly  in  service  in  the  carriage  of  the  public  is  exempt  from 

tax. 

(1)  A  boat  used  by  a  marine-engine  manufacturer  in  transporting  sales- 
men on  their  business  trips  or  in  taking  out  prospective  customers  purely 
for  demonstrating  purposes  is  exempt  from  tax. 

(m)  A  boat  used  in  towing  disabled  boats  and  furnishing  repair  service 
to  customers  is  exempt  from  tax. 

7626  Art.  39.    Purchase  or  use  of  secondhand  boats. — If  a  person  pur- 
chases a  secondhand  boat  on  which  special  tax  has  already  been  paid, 

he  is  not  liable  to  special  tax  upon  the  use  of  the  boat  during  the  balance  of 
the  fiscal  year.  The  tax  is  on  the  use  of  the  boat  and  the  special  tax  stamp 
passes  with  it.  The  adjustment  of  the  tax  between  the  vendor  and  the  ven- 
dee is  a  matter  of  individual  contract  in  which  the  Government  has  no  con- 
cern. If  a  person  leases  or  charters  a  boat  upon  which  the  tax  has  been 
paid,  the  lessee  or  charterer  is  exempt  from  tax  on  the  use  of  the  boat  dur- 
ing the  remainder  of  the  fiscal  year. 

7627  Art.  40.  Rate  and  computation  of  tax. — The  boats  enumerated  in  the 

act  are  divided  into  three  classes  with  respect  to  length,  and  a  separate 
rate  of  tax  is  provided  for  each  class,  as  follows: 

(a)  Over  5  net  tons,  length  over  32  feet  and  not  over  50  feet,  $1  for  each 
foot. 

(b)  Over  5  net  tons,  length  over  50  feet  but  not  over  100  feet,  $2  for 
each  foot. 

(c)  Over  5  net  tons,  length  over  100  feet,  $4  for  each  foot. 

7628  To  compute  the  amount  of  tax  in  any  given  instance  multiply  the 
rate  of  the  class  in  which  the  boat  is  included  by  the  number  repre- 
senting the  length  over  all  in  full  feet.    For  example:    A  boat  49.5  feet  in 

length  would  be  included  in  class  (a)  and  would  be  taxed  at  the  rate  of  $1  for 
each  foot,  or  $49;  a  boat  50.5  feet  in  length  would  also  be  included  in  class  (a) 
and  would  be  taxed  at  the  rate  of  $1  for  each  foot,  or  $50.  A  boat  must  be 
at  least  33  feet  in  length  in  order  to  be  taxable. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
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SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


7629    Art.  41.  Tonnage. — To  estimate  the  net  tonnage  of  a  vessel,  the  fol- 
lowing rules  may  be  used: 

(a)  By  the  word  "ton"  is  meant  100  cubic  feet  of  space. 

(b)  Multiply  the  extreme  length  of  the  vessel  by  the  extreme  breadth  and  that  product 
by  the  depth  from  the  underside  of  the  deck  to  the  frame  in  the  hold  taken  amidship3. 
The  result  should  be  multiplied  by  six-tenths.  To  this  result  should  be  added  the  cubical 
contents  of  any  closed-in  structure  above  the  upper  deck.  The  sum  should  be  divided  by 
100,  which  will  give  the  approximate  gross  tonnage  of  the  boat. 

A  closed-in  superstructure  is  any  space  inclosed  with  wood  or  glass,  whether  stationary 
or  removable,  but  does  not  include  awnings  or  canvas  shelters. 

(c)  From  this  gross  tonnage  may  be  deducted  all  spaces  used  exclusively  in  connection 
with  the  navigation  of  the  boat  or  for  machinery  space,  space  for  officers  and  crew  but  not 
for  passengers  (who  include  all  persons  not  actual  members  of  the  crew),  storage  of  sails, 
navigation  instruments,  boatswain's  stores,  etc.  The  result  will  be  the  approximate  net 
tonnage  of  the  boat. 

(d)  For  the  purpose  of  determining  the  tonnage  of  open  boats  the  space  within  the  boat 
level  with  the  outer  rails  will  be  considered,  and  no  deductions  for  machinery  or  crew  will 
be  made. 

7  630  If  the  boat  is  over  32  feet  in  length  and  the  net  tonnage  thus  esti- 
mated is  more  than  4  net  tons,  application  should  be  made  to 
the  nearest  customs  officer  for  official  admeasurement.  If  an  official 
admeasurement  is  not  completed  before  the  date  on  which  a  return 
is  required,  a  return  should  be  rendered;  and  if  the  estimate  of  net  ton- 
nage, made  as  above  directed,  is  over  5  net  tons,  the  tax  should  be  paid. 
If  an  official  admeasurement  is  being  made  or  has  been  requested  but  not 
completed  on  the  date  set  for  filing  return,  the  taxpayer  should  file  his  return 
on  the  date  set  by  the  law  and  regulations,  accompanied  by  a  remittance  in 
an  amount  which  he  has  determined  is  due.  The  collector  will,  upon  receipt 
of  such  return  and  remittance,  deposit  the  remittance  as  an  advance  collec- 
tion in  his  stamp  account,  but  will  not  order  an  improvised  stamp  for  the 
taxpayer  until  the  official  admeasurement  has  been  completed.  If  the  tax 
due  as  shown  by  such  official  admeasurement  is  greater  than  that  already 
paid  by  the  taxpayer  such  taxpayer  should  be  called  upon  for  an  additional 
amount  sufficient  to  cover  his  total  liability.  When  this  additional  amount 
is  received  the  collector  will  then  order  an  improvised  stamp  of  the  proper 
denomination.  If  the  amount  of  tax  is  found  to  be  the  same  as  or  less  than 
the  amount  remitted  by  the  taxpayer  the  collector  will  order  an  improvised 
stamp  of  the  proper  denomination,  take  credit  in  his  stamp  account  for  any 
excess  remittance,  and  transfer  the  balance  to  account  9e.  The  collector 
will  then  place  the  item  covering  the  excess  payment  on  his  Schedule  of 
Refunds,  Form  7777a.  By  this  method  the  taxpayer  will  not  be  burdened 
with  the  necessity  of  purchasing  a  new  special  tax  stamp  in  the  proper  amount 
and  returning  the  original  stamp  for  redemption,  but  will  receive  a  stamp  in 
the  proper  denomination  in  the  first  instance. 

7631  Art.  42.  Over-all  length. — Over-all  length  is  defined  as  the  extreme 
length  of  the  structure — i.  e.,  from  the  forward  side  of  the  stem  out- 
Bide  the  planking  or  plating  to  the  aftermost  side  of  the  stern  planking  or 
plating,  whether  above  or  below  the  water  line.  The  measurement  should 
be  to  the  outside  of  any  planking  or  plating  extending  above  the  deck,  con- 
stituting bulwarks,  and  to  the  outside  of  any  forecastle  deck,  quarter  deck, 
or  poop  deck  extending  beyond  the  main  deck.  The  length  should  be  taken 
in  a  straight  line,  excluding  any  sheer  there  may  be  to  the  deck. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1529  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


7632    Art.  43.  Return  and  payment  of  tax. — Every  person  liable  to  special 
tax  must,  during  the  month  in  which  his  liability  begins,  file  with 

the  collector  or  a  deputy  collector  of  the  district  in  which  he  is  located  s(Wprn 
return  on  Form  732  (Revised)  which  shall  show  the  amount  of  tax  due. 
This  return  shall  also  be  filed  by  persons  claiming  exemption  from  tax  on 
boats  falling  within  the  purview  of  the  Act.  Instructions  for  filling  out 
Form  732  (Revised)  will  be  found  on  the  back  of  the  form.  The  return 
due  for  the  fiscal  year  ending  June  30,  1923,  must  be  filed  during  the  month 
of  July,  1922,  provided  the  boat  is  used  during  the  month  of  July,  1922. 
If  the  boat  is  placed  in  use  during  a  month  subsequent  to  July,  return  must 
be  filed  during  such  month. 

7  633  If  exemption  is  claimed  the  return  must  be  executed  in  full  and 
"exemption  claimed"  noted  across  the  face  of  the  return.  Failure 
to  file  Form  732  in  the  case  of  a  tax-exempt  boat  renders  a  person  liable 
to  a  penalty  of  not  more  than  $1,000  (sec.  1302  (a)  of  the  act).  Return  is 
not  required  with  respect  to  boats  of  not  over  5  net  tons  and  not  over  32  feet 
in  length. 

7  634  Art.  44.  Stamp  or  card  certificates. — When  tax  is  paid  a  special  tax 
stamp  indicating  payment  and  a  card  certificate  showing  the  name 
or  other  description  of  the  boat  will  be  issued.  If  exemption  is  allowed,  an 
exemption  card  (Form  725)  will  be  issued.  The  card  certificate  or  exemption 
card  issued  must  be  kept  on  board  whenever  the  boat  is  in  use,  and  must  be 
shown  on  demand  to  any  officer  or  agent  of  the  interna!  revenue  or  naviga- 
tion service.  No  exemption  certificate  is  required  for  a  boat  falling  below  the 
tonnage  and  footage  specifications  mentioned  in  the  Act. 

PROVISIONS  OF  LAW  AND  REGULATIONS  PERTAINING  TO 

SPECIAL  TAXES. 

7635  Art.  45.    Special  taxes. — The  taxes  imposed  by  sections  1001  and 
7501      1003  of  the  Revenue  Act  of  1921  are  "special  taxes,"  and  taxpayers 

are  subject,  under  these  sections,  to  ail  applicable  provision*  of  the 
internal-revenue  laws  now  in  force  and  effect. 

7636  Art.  46=    Business  to  be  registered. — Every  person  engaged  in  any 
trade  or  business  on  which  a  special  tax  is  imposed  by  law  shall 

register  with  the  collector  of  the  district  his  name  or  style,  place  of  rest 
dence,  trade  or  business,  and  the  place  where  such  trade  or  business  is  to  be 
carried  on.    In  case  of  a  firm  or  company,  the  names  of  the  several  persons 
constituting  the  same,  and  their  places  of  residence,  shall  be  so  registered, 
i  Sec.  3233.  R.  S.) 

7637  Art.  47.    Partnerships. — Any  number  of  persons  doing  business  in 
copartnership  at  any  one  place  shall  be  required  to  pay  but  one 

special  tax.    (Sec.  3234,  R.  S.) 

7638  Art.  48.    Payment  of  one  special  tax  not  to  cover  several  places  of 
business. — The  payment  of  the  special  tax  imposed  does  not  exempt 

a  person  carrying  on  a  trade  or  business  in  any  other  place  than  that  stated 
in  the  collector's  register  from  the  payment  of  an  additional  special  tax  on 
the  doing  of  such  business;  but  a  special  tax  is  not  required  for  the  storage 
of  goods,  wares,  or  merchandise  in  other  places  than  the  place  of  business, 
nor  for  the  sale  by  manufacturers  or  producers  of  their  own  goods,  wares, 
and  merchandise  at  the  place  of  production  or  manufacture,  and  at  their 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1530  SERVICE 


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SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


principal  office  or  place  of  business,  provided  no  goods,  wares,  or  merchandise 
shall  be  kept  except  as  samples  at  said  office  or  place  of  business.  (See  sec. 
3235,  R.  S.) 

7639  Art.  49.   More  than  one  pursuit  carried  on  in  the  same  place  of 
business. — Whenever  more  than  one  of  the  pursuits  or  occupations 

subject  to  special  taxes  are  carried  on  in  the  same  place  by  the  same  person 
at  the  same  time,  the  tax  shall  be  paid  for  each  according  to  the  rates  sever- 
ally prescribed.   (See  sec.  3236,  R.  S.) 

7640  Art.  50.   When  special  tax  becomes  due. — All  special  taxes  shall  be- 
come due  on  the  1st  day  of  July  in  each  year,  or  on  commencing  any 

trade  or  business  on  which  such  tax  is  imposed.  In  the  former  case  the  tax 
shall  be  reckoned  for  one  year;  and  in  the  latter  case  it  shall  be  reckoned 
proportionately  from  the  1st  day  of  the  month  in  which  the  liability  to  a 
special  tax  commenced  to  the  1st  day  of  July  following.  (See  sec.  3237,  R. 
S.,  as  amended  by  sec.  53,  act  of  Oct.  1,  1890;  26  Stat.,  567.)  An  applicant 
for  a  special-tax  stamp  for  a  fractional  part  of  a  year  must  calculate  from 
the  1st  day  of  the  month  in  which  he  commences  business  and  must  pay 
until  the  end  of  the  fiscal  year.  A  special  tax  payer,  even  though  he  makes  a 
sworn  return  within  the  calendar  month  of  his  liability,  is  liable  to  criminal 
prosecution  if  he  fails  to  pay  the  tax  within  that  month  or  to  post  the  stamp 
in  his  place  of  business,  although  he  is  not  liable  to  the  additional  tax  im- 
posed by  section  3176,  Revised  Statutes,  as  amended. 

7641  Art.  51.    Returns. — It  shall  be  the  duty  of  special  tax  payers  to 

render  their  returns  to  the  collector  or  a  deputy  collector  at  such 
times  within  the  calendar  month  in  which  the  special  tax  liability  commenced 
as  shall  enable  him  to  receive  such  returns,  duly  signed  and  verified,  not  later 
than  the  last  day  of  the  month,  except  in  cases  of  sickness  or  absence,  as  pro- 
vided for  in  section  3176  of  the  Revised  Statutes  as  amended.  (See  sec.  3237, 
R.  S.,  as  amended  by  sec.  53,  act  of  Oct.  1,  1890;  26  Stat.,  567.)  For  failure  to 
make  a  sworn  return  within  the  time  prescribed  by  law,  without  a  reasonable 
cause  for  delinquency,  the  Commissioner  of  Internal  Revenue  is  required  to 
add  to  the  special  tax  25  per  cent,  of  its  amount.  In  case  a  false  or  fraudulent 
return  or  list  is  willfully  made,  the  Commissioner  of  Internal  Revenue  is 
required  to  add  to  the  special  tax  50  per  cent,  of  its  amount.   (See  art.  64.) 

7642  Return  and  tax  due  during  July,  generally. — [Comment:  The 
following  letter  may  be  of  interest,  to  be  read  in  connection  with  the 

"calendar"  on  page  1501.]  Reference  is  made  to  your  letter  of  the  6th  inst. 
in  which  you  refer  to  Form  11  and  inquire  by  what  authority  this  form 
calls  for  the  filing  of  the  return  betore  July  1st  of  each  yeaf.  You  state  you 
have  been  unable  to  find  anything  in  the  Revised  Statutes  or  in  the  Revenue 
Act  of  1918  that  warrants  the  statement  printed  in  bold  face  type  at  the 
bottom  of  the  return  form. 

7643  In  reply  you  are  advised  that  there  is  no  requirement  of  law  that 
the  return  must  be  filed  on  or  before  July  1st.    The  statement 

printed  on  the  form,  and  referred  to  by  you,  is  to  be  eliminated.  Section  53 
of  the  Act  of  October  1,  1890  (26  Stat.,  567)  amends  Section  3237,  Revised 
Statutes,  and  distinctly  provides  that  special  taxpayers  shall  render  their 
returns  at  such  times  within  the  calendar  month  in  which  the  special  tax 
liability  commenced  as  shall  enable  the  collector  to  receive  such  returns 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1531  SERVICE 


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SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


duly  signed  and  verified  not  later  than  the  last  day  of  the  month.  (Letter 
to  The  Corporation  Trust  Company,  signed  by  Deputy  Commissioner 
James  M.  Baker,  and  dated  December  27,  1919.) 

7644  Art.  52.  Stamps  for  special  taxes. — All  special  taxes  imposed  by  law 
shall  be  paid  by  stamps  denoting  the  tax,  and  the  Commissioner  of 
Internal  Revenue  is  required  to  procure  appropriate  stamps  for  the  payment 
of  such  taxes;  and  the  provisions  of  sections  3312  and  3446,  Revised  Statutes, 
and  all  other  provisions  of  law  relating  to  the  preparation  and  issue  of  stamps 
for  distilled  spirits,  fermented  liquors,  tobacco,  and  cigars  shall,  so  far  as 
applicable,  extend  to  and  include  stamps  for  special  taxes;  and  the  Commis- 
sioner of  Internal  Revenue  shall  have  authority  to  make  all  needful  regula- 
tions relative  thereto.   (See  sec.  3238,  R.  S.) 

7 ©45  A  special  tax  stamp  issued  is  not  a  license,  but  merely  a  receipt  for 
the  tax.  It  puts  the  United  States  under  no  obligation  whatever  to 
the  holder  beyond  assuring  him  against  prosecution  under  the  special  tax 
laws.  The  firm  name  is  the  only  name  that  is  necessary  in  a  special  tax 
stamp  issued  to  a  partnership.  Collectors  or  their  deputies  are  forbidden  to 
issue  receipts  for  moneys  received  for  taxes  which  are  payable  by  stamps. 

7646  Art.  53.   Special  tax  stamps  "at  large." — Any  special  tax  payer  ex- 
cept those  liable  to  tax  under  subdivisions  (6)  and  (7)  of  section 

1001,  whose  business  is  such  as  to  require  him  to  travel  from  place  to  place 
in  different  States  of  the  United  States,  such  as  proprietors  of  traveling  thea- 
ters, proprietors  of  shooting  galleries  traveling  with  circuses,  etc.,  may  pro- 
cure a  special  tax  stamp  "at  large"  covering,  with  the  payment  of  but  one 
special  tax,  the  activities  of  such  special  tax  payer  throughout  the  United 
States.  Collectors  of  internal  revenue  are  instructed  to  issue  such  special 
tax  stamps  "at  large"  upon  receipt  of  application  and  remittance  covering 
the  amount  of  tax  due. 

7647  Art.  54.    Special  tax  stamp  to  be  posted  in  place  of  business. — 

Every  person  engaged  in  any  business,  vocation,  or  employment  who 
is  thereby  made  liable  to  a  special  tax  shall  place  and  keep  conspicuously  in 
his  establishment  or  place  of  business  all  stamps  denoting  the  payment  of 
said  special  tax;  and  any  person  who  shall,  through  negligence,  fail  to  so 
place  and  keep  said  stamps,  shall  be  liable  to  a  penalty  equal  to  the  special 
tax  for  which  his  business  renders  him  liable,  and  the  costs  of  prosecution; 
but  in  no  case  shall  said  penalty  be  less  than  $10.  And  where  the  failure  to 
comply  with  the  foregoing  provision  of  law  shall  be  through  willful  neglect 
or  refusal,  then  the  penalty  shall  be  double  the  amount  above  prescribed: 
Provided,  That  nothing  in  this  section  shall  in  any  »vay  affect  the  liability  of 
any  person  for  exercising  or  carrying  on  any  trade,  business,  or  profession, 
or  doing  any  act  for  the  exercising,  carrying  on,  or  doing  of  which  a  special 
tax  is  imposed  by  law,  without  the  payment  thereof.    (See  sec.  3239,  R.  S.) 

7848  Art.  55.  List  of  special  taxpayers. — Each  collector  of  internal  reve- 
nue shall,  under  regulations  of  the  Commissioner  of  Internal  Reve- 
nue, place  and  keep  conspicuously  in  his  office,  for  public  inspection,  an 
alphabetical  list  of  the  names  of  all  persons  who  shall  have  paid  special  taxes 
within  his  district,  and  shall  state  thereon  the  time,  place,  and  business  for 
which  each  such  special  tax  has  been  paid;  and  upon  application  of  any 
prosecuting  officer  of  any  State,  county,  or  municipality  he  shall  furnish  a 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1532  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


certified  copy  thereof,  as  of  a  public  record,  for  which  a  fee  of  one  dollar  for 
each  one  hundred  words  or  fraction  thereof  in  the  copy  or  copies  so  requested 
may  be  chnrged.  (Sec.  3240,  R.  S.,  as  amended  by  the  act  of  June  21,  1906; 
34  Stat.,  337.) 

7649  Records  in  the  collectors'  offices  relating  to  special  tax  payers  are 
based  on  returns  made  by  these  persons  under  compulsion  of  law  for 

the  sole  purpose  of  raising  revenue  for  the  United  States.  Collectors  are  not 
permitted  to  send  out  these  records  or  copies  thereof  for  use  against  the 
special  tax  payers  in  cases  not  arising  under  the  laws  of  the  United  States. 
This  restriction  does  not  apply  to  copies  of  record  10,  which  the  collector  is 
required  by  the  act  of  June  21,  1906,  to  furnish  to  prosecuting  officers  upon 
payment  of  the  prescribed  fee. 

7650  Art.  56.  Death  or  removal  after  paying  tax— When  any  person  who 
has  paid  the  special  tax  for  any  trade  or  business  dies,  his  wife  or 

child,  or  executors  or  administrators  or  other  legal  representatives,  may 
occupy  the  house  or  premises,  and  in  like  manner  carry  on,  for  the  residue 
of  the  term  for  which  the  tax  is  paid,  the  same  trade  or  business  as  the  de- 
ceased before  carried  on,  in  the  same  house,  and  upon  the  same  premises, 
without  the  payment  of  any  additional  tax.  And  when  any  person  removes 
from  the  house  or  premises  for  which  any  trade  or  business  was  taxed  to  any 
other  place,  he  may  carry  on  the  trade  or  business  specified  in  the  collec- 
tor's register  at  the  place  to  which  he  removes,  without  the  payment  of  any 
additional  tax:  Provided,  That  all  cases  of  death,  change,  or  removal,  as 
aforesaid,  with  the  name  of  the  successor  to  any  person  deceased,  or  of  the 
person  making  such  change  or  removal,  shall  be  registered  with  the  collector, 
under  regulations  to  be  prescribed  by  the  Commissioner  of  .nternal  Reve- 
nue.  (Sec.  3241,  R.  S.) 

7651  Under  the  law  and  rulings  of  this  office  an  executor,  receiver,  or 
referee  in  bankruptcy  may  continue  the  business  under  the  stamp  is- 
sued to  the  deceased  or  bankrupt  taxpayer  at  the  place  and  for  the  period 
for  which  the  tax  was  paid.  An  assignee  may  continue  business  under  his 
assignor's  special  tax  stamp  without  incurring  special  tax  liability. 

7652  Art.  57.  Transfer  of  place  of  business. — Whenever  the  special  tax 
payer  desires  to  remove  his  business  to  a  place  other  than  that  speci- 
fied in  his  original  return  and  stated  in  his  special  tax  stamp  he  shall,  during 
the  calendar  month  in  which  such  transfer  is  made,  register  such  fact  by 
filing  under  oath  an  additional  return  on  the  prescribed  form,  properly  modi- 
fied, setting  forth  the  time  and  place  where  he  intends  to  engage  in  the  busi- 
ness described;  and  if  such  taxpayer  is  a  firm  or  corporation,  the  names  and 
residences  of  all  the  members  or  principal  officers  thereof  shall  again  be  re- 
corded. He  shall  also  forward  the  special  tax  stamp  to  the  collector  in  order 
that  proper  notation  of  the  transfer  may  be  made  thereon,  after  which  it  will 
be  returned  to  the  owner.  Should  the  transfer  be  made  to  a  location  in  an- 
other collection  district,  the  stamp  will  be  forwarded  to  the  collector  who 
issued  it,  who  will  make  proper  notation  on  his  record  10  and  make  notation 
on  the  stamp  as  to  transfer.  This  collector  will  then  forward  the  stamp  to 
the  colled  or  of  the  district  to  which  the  taxpayer  will  transfer,  who  will 
make  out  a  proper  record  10  card  and  sign  the  stamp  under  the  signature  of 
the  transferring  collector,  and  forward  the  stamp  to  the  taxpayer.  Unless 
such  transfer  notice  is  filed  within  the  time  specified  a  new  special  tax  liabil- 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1533  SERVICE 


P-2r22,  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  OJNf  OCCUPATIONS  REGULATIONS. — 1922. 


ity  will  be  incurred  and  a  new  special  tax  stamp  will  be  required  for  the  car- 
rying on  of  the  busines3. 

7653  Art.  58.  Change  in  membership  of  firm.-- When  one  or  more  mem- 
bers of  a  firm  or  partnership  withdraw  the  business  may  be  contin- 
ued by  the  remaining  partner  or  partners  under  the  same  special  tax  stamp, 
but  where  new  partners  are  taken  into  a  firm  the  new  firm  can  not  carry  on 
business  under  the  special  tax  stamp  of  the  old  firm.  It  must  make  return 
and  pay  its  own  special  tax  reckoned  from  the  first  day  of  the  month  in 
which  it  began  business,  even  though  the  name  of  the  new  firm  be  the  same 
as  that  of  the  old. 

7854    Art.  59.  Change  from  partnership  to  corporation. — Where  a  partner* 
ship  paying  special  tax  incorporates  a  special  tax  stamp  must  be 

taken  out  in  the  name  of  the  corporation. 

7655  Art.  60.  Who  may  carry  on  business  without  new  stamp. — A  cor- 
poration may,  upon  application  to  the  collector,  change  its  name 
vrithout  creating  new  special  tax  liability,  provided  its  charter  permits  such 
&  change.  A  copy  of  the  charter  must  be  filed  with  the  application  and  the 
stamp  forwarded  to  the  collector  for  proper  notation.  Additional  special 
tax  stamp  is  not  required  by  reason  of  an  increase  of  capital  stock  of  a  cor- 
poration if  State  laws  creating  the  corporation  provide  for  such  changes 
without  the  formation  of  a  new  corporation.  Additional  tax  stamp  is  not 
required  of  an  unincorporated  club  by  reason  of  changes  of  membership 
where  such  changes  do  not  result  in  a  dissolution  and  formation  of  a  new 
club. 

7©5©  Art.  61.  Changes  to  be  registered. — Whenever  such  a  person  as  is 
permitted  under  article  60  to  carry  on  the  business  of  one  who  has 
paid  the  required  special  tax  succeeds  to  such  business  he  shall  register  with 
the  collector  under  oath  the  name  of  the  original  taxpayer  and  the  names  of 
such  successors  and  their  residences  together  with  all  the  data  required. 
Any  person  succeeding  to  and  carrying  on  the  business  for  which  special  tax 
is  required  to  be  paid  on  removing  to  and  carrying  on  such  business  at  a 
place  other  than  that  for  which  the  special  tax  was  paid  without  registering 
such  change  on  removal  will  be  regarded  as  carrying  on  the  business  in  vio 
lation  of  law,  and  will  be  liable  to  a  fine  of  not  less  than  $10  nor  more  than 
$500,  in  addition  to  his  liability  for  the  tax.    (See  sec.  3242,  R.  S.) 

General  Administrative  Provisions. 
7 ©57    Art.  62.  Aid  to  collection  of  tax. — In  collecting  the  special  taxes  the 
8000     Commissioner  has  the  benefit  of  all  existing  internal-revenue  laws. 

In  aid  of  the  enforcement  of  the  statute  the  Commissioner  may  re 
quire  any  person  to  keep  specified  records,  to  render  returns  and  statements 
as  directed,  to  submit  himself  and  his  books  to  examination,  and  to  comply 
with  such  regulations  as  may  be  prescribed. 

PENALTIES. 

Sec.  1311.  (Sec.  3176  Rev.  Stats.)  H8071. 
Sec.  1004.    H  7534. 
Sec.  1302.  1F8014. 

Sec.  3184,  R.  S.    Where  it  is  net  otherwise  provided,  the  collector  shall  in  person  or 
by  deputy,  within  ten  days  after  receiving  any  list  of  taxes  from  the  Commissioner  of  In- 
Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1534  SERVICE 


8-2-22.  Reg.  59.— 1922  Edition. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


ternal  Revenue,  give  notice  to  each  person  liable  to  pay  any  taxes  stated  therein,  to  be 
left  at  his  dwelling  or  usual  place  of  business,  or  to  be  sent  by  mail,  stating  the  amount  of 
tuch  taxes  and  demanding  payment  thereof.  If  such  person  does  not  pay  the  taxes  within 
ten  days  after  the  service  or  the  sending  by  mail  of  such  notice,  it  shall  be  the  duty  of  the 
collector  or  his  deputy  to  collect  the  said  taxes  with  a  penalty  of  five  per  centum  additional 
upon  the  amount  of  taxes,  and  interest  at  the  rate  of  one  per  centum  a  month. 

7668  Art.  63.  Penalties. — Any  person  who  fails  to  file  a  return  of  tax  due 
8071  within  the  time  prescribed  by  law  or  regulations  made  pursuant  to 
law  is  liable  to  an  additional  amount  equal  to  25  per  cent,  of  the 
total  tax  due  except  when  it  is  shown  that  the  failure  to  file  the  return  within 
the  prescribed  time  was  due  to  a  reasonable  cause  and  not  to  willful  neglect. 
If  a  false  or  fraudulent  return  is  filed  the  taxpayer  is  liable  to  an  additional 
amount  equal  to  50  per  cent,  of  the  total  tax.  A  person  who  fails  to  pay  or 
truly  to  account  for  any  tax  or  to  make  any  return  prescribed  by  law  is  in 
addition  to  the  increased  tax  as  set  forth  above  liable  to  a  penalty  of  not 
more  than  $1,000.  If  he  willfully  refuses  to  pay  or  account  for  any  tax  or 
make  any  return  required  by  law,  or  willfully  attempts  in  any  manner  to 
evade  the  tax  he  is  guilty  of  a  misdemeanor  and  in  addition  to  the  increased 
taxes  provided  for  he  is  liable  to  a  fine  of  $10,000,  or  imprisonment  for  not 
more  than  one  year,  or  both,  together  with  the  costs  of  prosecution.  Where 
a  false  or  fraudulent  return  is  filed  it  is  considered  prima  facie  evidence  of  a 
willful  attempt  to  evade  tax  and  the  penalties  provided  by  law  for  such  of- 
fense will  be  invoked.  Under  section  3184,  Revised  Statutes,  a  taxpayer 
who  does  not  pay  a  special  tax  assessed  within  10  days  from  the  date  of  the 
mailing  by  the  collector  of  a  notice  and  demand  for  payment  is  liable  to  a 
5  per  cent,  penalty  and  interest  at  the  rate  of  1  per  centum  per  month. 

7659  Art.  64.   Claims  for  refund  of  special  taxes. — (a)  In  all  cases  where 
special  tax  has  been  collected  and  such  collection  is  alleged  to  be 

illegal  or  erroneous,  it  will  be  necessary  for  the  person  so  paying  the  tax  tc 
file  claim  for  refund  on  Treasury  Department  Form  843,  obtainable  at  the 
office  of  the  collector.  The  completed  claim  should  be  filed  with  the  collector 
and  should  be  accompanied  by  the  special-tax  stamp,  or  receipt,  representing 
payment  of  the  amount  claimed. 

7660  (b)  No  claim  for  the  redemption  of  or  allowance  for  special-tax 
stamps  shall  be  allowed  unless  presented  within  two  years  after  the 

purchase  of  said  stamps  from  the  Government.  The  authority  for  such 
redemption  or  allowance  is  the  act  of  May  12,  1900  (31  Stat.  177),  as  amended 
by  the  act  of  June  30,  1902  (32  Stat.  506)  [see  U8024  herein]. 

7661  (c)  Where  taxes  are  paid  pursuant  to  an  assessment  and  not  by  the 
issuance  of  stamps,  claims  for  the  refund  of  amounts  so  paid  are 

governed  by  sections  3220  to  3228  R.  S.,  as  amended,  and  must  be  presented 
within  four  years  next  after  payment  of  such  taxes,  as  provided  in  section 
1316  of  the  Revenue  Act  of  1921. 

AUTHORITY  FOR  REGULATIONS. 

[Sec.  1309,  ^8009.] 

7662  Art.  65.  Promulgation  of  regulations. — In  pursuance  of  the  statute 
8009     the  foregoing  regulations  are  hereby  made  and  promulgated,  and  all 

rulings  inconsistent  herewith  are  hereby  revoked. 

D.  H.  BLAIR, 
Commissioner  of  Internal  Revenue. 
Approved:    July  20,  1922.  |  [Released  for  publication  Aug.  2,  1922.] 
A.  W.  MELLON, 

Secretary  of  the  Treasury. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1535  SERVICE 


3-22-22.    (2)  5-19-22.    (3)  8-2-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


(T.  D.  3309.)* 

7  663    Theatre   special  tax — Determination  of  population. — Article  22 

of  Regulations  59  (Revised  January,  1921)  is  amended  to  read  as 

follows: 

7664  Art.  22.  Population. — In  determining  population  of  cities,  towns  or 
villages  latest  United  States  census  figures  are  to  be  used,  unless  a 
State  census  has  been  taken  more  recently,  in  which  case  the  State  census 
figures  shall  be  used.  However,  in  the  case  of  a  sudden  and  considerable 
increase  or  decrease  in  population  since  the  last  United  States  or  State  cencus, 
the  collector  of  the  district  in  which  the  particular  city,  town  or  village  is 
located  shall  determine  the  population  from  the  best  evidence  available, 
which  may  be  by  common  knowledge,  and  the  tax  shall  be  paid  accordingly. 
(T.  D.  3309,  signed  by  Commissioner  D.  H.  Blair,  and  dated  March  20,  1922.) 


(T.  D.  3331.)* 

7665    Brokers:  Persons  Table  and  not  liable  to  tax. — Article  6(g)  of  Regu- 
lat'ons  59  (Revised  January,  1921)  is  hereby  amended  to  read  as 

follows: 

A  real  estate  or  business  broker  who  lists  and  negotiates  purchases  or 
sales  of  produce  or  merchandise  independently  of  purchases  or  sales  of 
real  estate  or  businesses,  or  holds  himself  out  as  being  engaged  in  "he 
business  of  negotiating  for  others  purchases  or  sales  of  produce  or  mer- 
chandise. 

7  666    Article  7  of  Regulations  59  (Revised  January,    1921)  is  hereby 
amended  by  adding  a  new  paragraph  (w)  as  follows; 
A  person  negotiating  purchases  or  sales  of  business. 

(T.  D.  3331,  signed  by  Commissioner  D.  H.  Blair,  and  dated  May  13, 
1922.) 


*T.  D.  3309  and  T.  Di  3331,  above,  amend  Regulations  59,  relating  to  the  1918  Act. 
The  amendments  have  been  embodied  in  Regulations  59,  lelating  to  the  1921  Act,  pro- 
mulgated July  20,  1922. — The  Corporation  Trust  Company, 


Copyright  JQ22,  by  The  Corporation  Trust  Company. 
WAR  TAX  1536  SERVICE 


10-30-22.    (2)  11-29-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


(Decision.) 

Revenue  Act  of  1918. 

(October  21,  1922.) 

Tobacco  Warehousemen  as  Brokers. 

United  States  Circuit  Court  of  Appeals 
Fourth  Circuit. 


Cothran  &  Connally,  Plaintiffs  in  Error, 
versus 

The  United  States  of  America,  Defendant  in  Error. 


In  Error  to  the  District  Court  of  the  United  States  for  the 
Western  District  of  Virginia,  at  Lynchburg. 


7  667  Woods,  Circuit  Judge:  A^statement  of  the  case  will  demonstrate 
7556     the  correctness  of  the  judgment  of  the  District  Court. 

7668  The  petitioners,  Cothran  &  Connally,  tobacco  warehousemen,  brought 
this  proceeding  under  paragraph  20,  sec.  24  of  Judicial  Code  to  recover 

$52.05,  tax  and  penalty  collected  from  them  under  the  following  section  of 
the  Act  of  February  24,  1919,  (40  Stat.  1126): 

"Sec.  1001.  That  on  and  after  January  1,  1919,  there  shall  be  levied, 
collected  and  paid  annually  the  following  special  taxes:  (1)  Brokers  shall 
pay  fifty  dollars.  Every  person  whose  business  it  is  to  negotiate  purchases 
or  sales  of  stocks,  bonds,  exchange,  bullion,  coined  money,  bank  notes,  prom- 
issory notes,  other  securities,  produce  or  merchandise,  for  others,  shall  be 
regarded  as  a  broker." 

7669  The  petitioners  conduct  a  tobacco  warehouse  in  the  town  of  Brook- 
neal,  Virginia.   Producers  sold  their  tobacco  through  the  warehouse. 

The  tobacco  was  placed  in  piles  on  the  warehouse  floor,  ticketed  with  the 
owner's  name,  lot  number  and  weight.  Periodically  sales  were  conducted 
by  the  auctioneer  of  the  proprietors  of  the  warehouse.  The  owners  of  the 
tobacco  usually  attended  the  sale.  If  the  highest  bid  was  not  satisfactory 
to  the  owner  he  had  the  privilege  of  refusing  it.  If  accepted  the  warehouse- 
men paid  the  owner  the  amount  of  price  offered,  less  3%  commission.  The 
warehousemen  afterwards  invoiced  the  tobacco  in  their  own  name  and  at 
their  own  risk  to  the  buyer,  who  paid  the  price  to  them.  There  was  no  direct 
contractural  relation  between  the  buyer  and  the  owner  of  the  tobacco. 
7  670  It  is  too  plain  for  discussion  that  tobacco  is  produce,  and  that  the 
petitioners  were  engaged  in  negotiating  the  sale  of  it  as  brokers,  under 
the  controlling  definition  of  the  statute. 

7  671  In  earlier  statutes,  enacted  at  different  times  from  1864  to  1914,  a 
tax  was  levied  on  brokers  negotiating  the  sale  of  goods,  wares,  pro- 
duce or  merchandise,  and  on  commission  merchants  receiving  into  possession 
for  sale,  goods,  wares  or  merchandise.  In  these  same  statutes  dealers  in 
tobacco  were  distinguished  and  a  special  and  different  tax  levied  on  them. 
This  special  tax  on  dealers  in  tobacco  was  repealed  in  the  statute  of  1916. 
(39  Stat.  790.)  The  argument  of  petitioners'  counsel  is  that  this  course  of 
past  legislation  imposing  the  special  tax  on  dealers  in  tobacco  indicated 
an  intention  to  maintain  a  distinction  between  tobacco  and  other  produce 
and  merchandise  in  future  legislation,  however  broad  in  terms;  and  that, 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1537  SERVICE 


10-30-22.   (2)  11-29-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


too,  although  such  future  tax  legislation  repealed  the  special  tax  on  dealers 
in  tobacco. 

7  672  We  think  the  true  view  is  that  by  the  Acts  of  1916  and  1919  the 
Congress  expressed  as  clearly  as  possible  the  intention  to  abolish 
the  distinction  in  tax  legislation  between  dealings  in  tobacco  and  other 
produce  and  merchandise  by  omitting  the  tax  on  dealers  in  tobacco  as  such; 
and  by  the  Act  of  1919  to  put  tobacco  in  the  same  class  with  other  produce 
and  merchandise  by  exacting  a  tax  on  brokers,  that  is  all  persons  who  nego- 
tiate the  sale  of  any  produce  or  merchandise,  including  tobacco. 
7 67 3  We  can  see  no  ground  whatever  for  holding  that  the  Congress  meant 
to  make  persons  who  negotiated  the  sale  of  tobacco  a  privileged 
class,  exempt  from  the  tax  imposed  on  those  who  negotiated  the  sale  of  wheat, 
corn  or  other  produce. 

Affirmed. 


(T.  D.  3413.) 

7  674    [This  Treasury  Decision,  dated  November  24,  1922,  reproduces  the 
7667      Cothran  &  Connally  opinoin  above,  beginning  at  1J7667. — The  Cor- 
poration Trust  Company.] 


(  opyri&Ut  1942,  by  1  /»*  C'vrpotation  Trust  Lompauy 
WAR  TAX  1538  SERVICE 


J^l*!!2*    ^^^^^^-M^^^^^fej^g  OF  CONTENTS,  

Rulings,  Regulations,  Opinions  and  Decisions 

under  the 

Occupations  Tax  Law  Provisions. 

living  Treasury  decision .  Number  or  other  Designation,, .  General   Subject  Content; 
Date  of  Issue,  arid  Paragraph  References. 

T:  t>.  Subject  Paragraph 

Law  provisions : ; ; ; ; .'. ; '. " '. i ; ', '. .  7500 

Meg.  59  Regulation^  Under  1921  jaw  (issue  of  July  20,  1922)  relating  to 

the:  special  taxes  on  businesses  and  occupations 
and  on  the  use  of  boats.   .(See  exhaustive  Table  7537 
of  Contents  beginning  on  page  15  13.) ...........  ..-  7537 

5309  Art.  22,  Reg.  59  (1918  &qt)j  amended;— theater  ; 

.,  .   ,  special  tax:  population  (March  20,  1922)  .  .. 7663 

S33T  Arts.  6(g)  and  7,  Reg.  59,  (1918  Act),  amended,^ 

Brokers:  Persons  liable  and  not  liable  to  tax  -  , 
,    (Nfay  13,  I9;22). ..j.... 7665 

Decision1  tothran  &  Conn  ally.  vs.  JJ . ,  S.04th  Circuit  Cour-t 

of.A'ppeals, — Tobacco  warehousemen  as  brokers 
jOict.  :2I,  1 922),    ;;.,4, ........  .  .  .  .  ........  7667 

3443  TV  D.  desjgnationTor-tlve;  Cothran  &  (ponnally  de- 

cision above/  (Nov.'  24,  1922)  .'.'.  .'.  .  ..'.'.'.  7674 


> 


iteeti^his^'^in^e^ately  before  "the  yeuow  guide  card"  "Miscellaneous "  Matter^. 


Copyright  mi.  by  The  Corporation  Trust  Company  i 


9 


I 

( 

0 


1-2-22. 

MISCELLANEOUS  MATTERS 

HAVING  A 
GENERAL  APPLICATION 
BEING  IN  THE  MAIN  MISCELLANEOUS  SECTIONS  OF  TITLE  XIII  AND  TITLE 
XIV  OF  THE  REVENUE  ACT  OF  1921. 


General  Administrative,  Special,  and  Stamp  Tax  Provisions  of  Law  Extended 
to  Apply  to  Revenue  Act  of  1921. 

8000  (Law.)    Sec.  1300  [of  the  Revenue  Act  of  1921].   That  all  adminis- 
trative, special,  or  stamp  provisions  of  law,  including  the  law  relating 

to  the  assessment  of  taxes,  so  far  as  applicable,  are  hereby  extended  to  and 
made  a  part  of  this  Act,  and  every  person  liable  to  any  tax  imposed  by  this 
Act,  or  for  the  collection  thereof,  shall  keep  such  records  and  render,  under 
oath,  such  statements  and  returns,  and  shall  comply  with  such  regulations  as 
the  Commissioner,  with  the  approval  of  the  Secretary,  may  from  time  to 
time  prescribe. 

Statements  May  be  Required  of  any  Person. 

i3YJ*qx£}  on  JbHT    .[I£QI  \o  JdA  sunsvsJI  oih  \o]  (?0fcl  (.wbJ)  8008 

8001  (Law.)    Sec.  1307  [of  the  Revenue  Act  of  1921].    That  whenever  in 
the  judgment  of  the  Commissioner  necessary  he  may  require  any 

person,  by  notice  served  upon  him,  to  make  a  return  or  such  statements  as 
he  deems  sufficient  to  show  whether  or  not  such  person  is  liable  to  tax. 


Examination  of  Books  and  Witnesses. 


8002  (Law.)    Sec.  1308  [of  the  Revenue  Act  of  1921].    That  the  Com- 
missioner, for  the  purpose  of  ascertaining  the  correctness  of  any 

return  or  for  the  purpose  of  making  a  return  where  none  has  been  made,  is 
hereby  authorized,  by  any  revenue  agent  or  inspector  designated  by  him  for 
that  purpose,  to  examine  any  books,  papers,  records,  or  memoranda  bearing 
upon  the  matters  required  to  be  included  in  the  return,  and  may  require  the 
attendance  of  the  person  rendering  the  return  or  of  any  officer  or  employee 
of  such  person,  or  the  attendance  of  any  other  person  having  knowledge  in 
the  premises,  and  may  take  his  testimony  with  reference  to  the  matter 
required  by  law  to  be  included  in  such  return,  with  power  to  administer  oaths 
to  such  person  or  persons. 

Jurisdiction  of  Courts. 

8003  (Law.)    Sec.  1310  [of  the  Revenue  Act  of  1921].    (a)  That  if  any 
person  is  summoned  under  this  Act  to  appear,  to  testify,  or  to 

produce  books,  papers  or  other  data,  the  district  court  of  the  United  States 
for  the  district  in  which  such  person  resides  shall  have  jurisdiction  by  appro- 
priate process  to  compel  such  attendance,  testimony,  or  production  of  books, 
papers,  or  other  data. 


S004    (b)^The  district  courts  of  the  United  States  at  the  instance  of  the 
United  States  are  hereby  invested  with  such  jurisdiction  to  make  and 
issue,  both  in  actions  at  law  and  suits  in  equity,  writs  and  orders  of  injunction, 
and  of  ne  exeat  republica,  orders  appointing  receivers,  and  such  other  orders 

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Ml 

SCELLANEOI 

iS  LAW  PROVISIONS  AND  REGULATIONS. 

and  process,  and  to  render  such  judgments  and  decrees,  granting  in  proper 
cases  both  legal  and  equitable  relief  together,  as  may  be  necessary  or  appro- 
priate for  the  enforcement  of  the  provisions  of  this  Act.  The  remedies  hereby 
provided  are  in  addition  to  and  not  exclusive  of  any  and  all  other  remedies 
of  the  United  States  in  such  courts  or  otherwise  to  enforce  such  provisions. 


SC05    (c)  Paragraph  Twentieth  of  section  24  of  the  Judicial  Code  is  amended 
by  adding  at  the  end  thereof  the  following  new  paragraph: 

"Concurrent  with  the  Court  of  Claims,  of  any  suit  or  proceeding,  com- 
menced after  the  passage  of  the  Revenue  Act  of  1921,  for  the  recovery  of  any 
internal-revenue  tax  alleged  to  have  been  erroneously  or  illegally  assessed  or 
collected,  or  of  any  penalty  claimed  to  have  been  collected  without  authority 
or  any  sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully 
collected,  under  the  internal-revenue  laws,  even  if  the  claim  exceeds  $10,000, 
if  the  collector  of  internal-revenue  by  whom  such  tax,  penalty,  or  sum  was 
collected  is  dead  at  the  time  such  suit  or  proceeding  is  commenced." 

Unnecessary  Examinations. 

800@  (Law.)  Sec.  1309  [of  the  Revenue  Act  of  1921].  That  no  taxpayer 
shall  be  subjected  to  unnecessary  examinations  or  investigations,  and 
only  one  inspection  of  a  taxpayer's  books  of  account  shall  be  made  for  each 
taxable  year  unless  the  taxpayer  requests  otherwise  or  unless  the  Com- 
missioner, after  investigation,  notifies  the  taxpayer  in  writing  that  an  ad- 
ditional inspection  is  necessary. 

.39329iijiW^  DfiB  gjfooS  io  noil£nimBx3 

Final  Determinations  and  Assessments. 

8007  (Law.)    Sec.  1312  [of  the  Revenue  Act  of  1921].    That  if  after  a 
determination  and  assessment  in  any  case  the  taxpayer  has  without 

protest  paid  in  whole  any  tax  or  penalty,  or  accepted  any  abatement,  credit, 
or  refund  based  on  such  determination  and  assessment,  and  an  agreement  is 
made  in  writing  between  the  taxpayer  and  the  Commissioner,  with  the 
approval  of  the  Secretary,  that  such  determination  and  assessment  shall  be 
final  and  conclusive,  then  (except  upon  a  showing  of  fraud  or  malfeasance  or 
misrepresentation  of  fact  materially  affecting  the  determination  or  assess- 
ment thus  made)  (1)  the  case  shall  not  be  reopened  or  the  determination  and 
assessment  modified  by  any  officer,  employee,  or  agent  of  the  United  States, 
and  (2)  no  suit,  action,  or  proceeding  to  annul,  modify,  or  set  aside  such 
determination  or  assessment  shall  be  entertained  by  any  court  of  the  United 

StateS*  [IS#1   tO  SoA  3UfI3/y^  sdt  ) 

Administrative  Review. 

8008  (Law.)    Sec.  1313  [of  the  Revenue  Act  of  1921].   That  in  the  absence 
of  fraud  or  mistake  in  mathematical  calculation,  the  findings  of 

facts  in  and  the  decision  of  the  Commissioner  upon  (or  in  case  the  Secretary 
is  authorized  to  approve  the  same,  then  after  such  approval)  the  merits  of 
any  claim  presented  under  or  authorized  by  the  internal-revenue  laws  shall 
not  be  subject  to  review  by  any  other  administrative  officer,  employee,  or 
agent  of  the  United  States. 


Copyright  1922,  by  The  Corporation  Trust  Company. 

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MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


Rules  and  Regulations  to  be  Made  by  the  Commissioner. 

8009  (Law.)    Sec.  1303  [of  the  Revenue  Act  of  1921].    That  the  Com- 
missioner, with  the  approval  of  the  Secretary,  is  hereby  authorized 

to  make  all  needful  rules  and  regulations  for  the  enforcement  of  the  pro- 
visions of  this  Act. 

Swearing  to  Certain  Returns  May  be  Waived. 

8010  The  Commissioner,  with  such  approval  may  by  regulation  provide 
that  any  return  required  by  Titles*  V,  VI,  VII,  VIII,  IX,  or  X  to  be 

under  oath  may,  if  the  amount  of  the  tax  covered  thereby  is  not  in  excess 
of  $10,  be  signed  or  acknowledged  before  two  witnesses  instead  of  under  oath. 

*Titie  V.  Facilities. 

Title  VI.  Beverages. 

Title  VII.  Tobacco. 

Title  VIII.    Admissions  and  Dues. 

Title  IX.    Excise  Taxes. 

Title  X.    Special  Taxes. 

Retroactive  Regulations. 

8011  (Law.)    Sec.  1314  [of  the  Revenue  Act  of  1921].    That  in  case  a 
regulation  or  Treasury  decision  relating  to  the  internal-revenue  laws 

made  by  the  Commissioner  or  the  Secretary,  or  by  the  Commissioner  with 
the  approval  of  the  Secretary,  is  reversed  by  a  subsequent  regulation  or 
Treasury  decision,  and  such  reversal  is  not  immediately  occasioned  or  required 
by  a  decision  of  a  court  of  competent  jurisdiction,  such  subsequent  regulation 
or  Treasury  decision  may,  in  the  discretion  of  the  Commissioner,  with  the 
approval  of  the  Secretary,  be  applied  without  retroactive  effect. 

Method  of  Collecting  Tax. 

tO  fD9DJiV3  XfiJ'SIU'  IO  jflUOfttfi  3X1}  TO  /JlBfWq  B  0J  -Slid  Jill  30  Wfil  vd  bobivoiq- 

8012  (Law.)    Sec.  1301  [of  the  Revenue  Act  of  1921].    That  whether  or 
not  the  method  of  collecting  any  tax  imposed  by  Titles  *V,  VI,  VII, 

VIII,  IX,  or  X  of  this  Act  is  specifically  provided  therein,  any  such  tax  may, 
under  regulations  prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary,  be  collected  by  stamp,  coupon,  serial-numbered  ticket,  or  such 
other  reasonable  device  or  method  as  may  be  necessary  or  helpful  in  securing 
a  complete  and  prompt  collection  of  the  tax.  All  administrative  and  penalty 
provisions  of  Title  XI  [Stamp  Taxes],  in  so  far  as  applicable,  shall  apply  to 
the  collection  of  any  tax  which  the  Commissioner  determines  or  prescribes 
shall  be  collected  in  such  manner. 

"Title  V.  Facilities. 

Title  VI.  Beverages. 

Title  VII.  Tobacco. 

Title  VIII.    Admissions  and  Dues. 

Title  IX.    Excise  Taxes. 

Title  X.    Special  Taxes. 


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Assessments. 

8013  (Law.)    Sec.  1322  [of  the  Revenue  Act  of  1921].    That  all  internal 

revenue  taxes,  except  as  provided  in  section  250  [Income  and  Excess- 
Profits  Taxes]  of  this  Act,  shall,  notwithstanding  the  provisions  of  section 
3182  of  the  Revised  Statutes  or  any  other  provision  of  law,  be  assessed 
within  four  years  after  such  taxes  became  due,  but  in  the  case  of  fraud  with 
intent  to  evade  tax  or  willful  attempt  in  any  manner  to  defeat  or  evade  tax, 
such  tax  may  be  assessed  at  any  time. 

sbivoiq  jnofjjslugsi  ycF  YJ>rn  IjsvoiqqB  douz  rfjiw  .i^noiggifrixnoO  3rIT    Of 08 
Penalty  for  Failure  to  Pay,  Collect,  Account  for  or  Pay  over  any  Tax, 
or  for  Failure  to  Make  a  Return. 

8014  (Law.)    Sec.  1302  [of  the  Revenue  Act  of  1921].    (a)  That  any 
person  required  under  Titles  *V,  VI,  VII,  VIII,  IX,  X,  or  XII,  to 

pay,  or  to  collect,  account  for  and  pay  over  any  tax,  or  required  by  law  or 
regulations  made  under  authority  thereof  to  make  a  return  or  supply  any 
information  for  the  purposes  of  the  computation,  assessment,  or  collection 
of  any  such  tax,  who  fails  to  pay,  collect,  or  truly  account  for  and  pay  over 
any  such  tax,  make  any  such  return  or  supply  any  such  information  at  the 
time  or  times  required  by  law  or  regulations  shall  in  addition  to  other  penalties 
provided  by  law  be  subject  to  a  penalty  of  not  more  than  $1,000. 

801 5  (b)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account 
for  and  pay  over  any  such  tax,  make  such  return  or  supply  such 

information  at  the  time  or  times  required  by  law  or  regulation,  or  who 
willfully  attempts  in  any  manner  to  evade  such  tax,  shall  be  guilty  of  a  mis- 
demeanor and  in  addition  to  other  penalties  provided  by  law  shall  be  fined 
not  more  than  $10,000  or  imprisoned  for  not  more  than  one  year,  or  both, 
together  with  the  costs  of  prosecution. 

801  6  (c)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account 
for  and  pay  over  any  such  tax  shall  in  addition  to  other  penalties 
provided  by  law  be  liable  to  a  penalty  of  the  amount  of  the  tax  evaded,  or 
not  paid,  collected,  or  accounted  for  and  paid  over,  to  be  assessed  and  col- 
lected in  the  same  manner  as  taxes  are  assessed  and  collected:  Provided, 
however,  That  no  penalty  shall  be  assessed  under  this  subdivision  for  any 
offense  for  which  a  penalty  may  be  assessed  under  authority  of  section  3176 
[^[8071]  of  the  Revised  Statutes,  as  amended,  or  for  any  offense  for  which  a 
penalty  has  been  recovered  under  section  3256  [Distilled  Spirits]  of  the 
Revised  Statutes. 

8017    (d)  The  term  "person"  as  used  in  this  section  includes  an  officer  or 
employee  of  a  corporation  or  a  member  or  employee  of  a  partnership, 
who  as  such  officer,  employee,  or  member  is  under  a  duty  to  perform  the  act 
in  respect  of  which  the  violation  occurs. 

♦Title  V.  Facilities. 

Title  VI.  Beverages. 

Title  VII.  Tobacco. 

Title  VIII.    Admissions  and  Dues. 

Title  IX.    Excise  Taxes. 

Title  X.    Special  Taxes. 

Title  XII.    Child  Labor. 

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Overpayments  and  Overcollections  of  Taxes. 

8013  (Law.)  Sec.  1304  [of  the  Revenue  Act  of  1921].  That  in  the  case 
of  any  overpayment  or  overcollection  of  any  tax  imposed  by  section 
602  [Cereal  beverages,  etc.]  or  by  Title  V  [Facilities],  Title  VIII  [Admissions 
and  Dues],  or  Title  IX  [Excise  or  sales  taxes],  the  person  making  such  over- 
payment or  overcollection  may  take  credit  therefor  against  taxes  due  upon 
any  monthly  return,  and  shall  make  refund  of  any  excessive  amount  collected 
by  him  upon  proper  application  by  the  person  entitled  thereto. 

Fractional  Parts  of  a  Cent  in  Payment  of  Tax. 

8019  (Law.)    Sec.  1306  [of  the  Revenue  Act  of  1921].    That  in  the  pay- 
ment of  any  tax  under  this  Act  not  payable  by  stamp  a  fractional 

part  of  a  cent  shall  be  disregarded  unless  it  amounts  to  one-half  cent  or  more, 
in  which  case  it  shall  be  increased  to  1  cent. 

Payment  of  Taxes  by  Check  or  United  States  Securities. 

8020  (Law.)    Sec.  1325  [of  the  Revenue  Act  of  1921].    That  collectors 
may  receive,  at  par  with  an  adjustment  for  accrued  interest,  notes 

or  certificates  of  indebtedness  issued  by  the  United  States  and  uncertified 
checks  in  payment  of  income,  war-profits  and  excess-profits  taxes  and  any 
other  taxes  payable  other  than  by  stamp,  during  such  time  and  under  such 
regulations  as  the  Commissioner,  with  the  approval  of  the  Secretary,  shall 
prescribe;  but  if  a  check  so  received  is  not  paid  by  the  bank  on  which  it  is 
drawn  the  person  by  whom  such  check  has  been  tendered  shall  remain  liable 
for  the  payment  of  the  tax  and  for  all  legal  penalties  and  additions  the  same 
as  if  such  check  had  not  been  tendered. 

Articles  Exported. 

8021  (Law.)    Sec.  1305  [of  the  Revenue  Act  of  1921].    That  under  such 
rules  and  regulations  as  the  Commissioner  with  the  approval  of  the 

Secretary  may  prescribe,  the  taxes  imposed  under  the  provisions  of  Titles 
VI,  VII  or  IX  shall  not  apply  in  respect  to  articles  sold  or  leased  for  export 
and  in  due  course  so  exported.  Under  such  rules  and  regulations  the  amount 
of  any  internal-revenue  tax  erroneously  or  illegally  collected  in  respect  to 
exported  articles  may  be  refunded  to  the  exporter  of  the  article,  instead  of 
to  the  manufacturer,  if  the  manufacturer  waives  any  claim  for  the  amount 
so  to  be  refunded. 

Claims  for  Refund  and  Abatement  of  Taxes. 

8022  (Law.)    Sec.  1315  [of  the  Revenue  Act  of  1921].   That  section  3220 
of  the  Revised  Statutes,  as  amended,  is  reenacted*  without  change. 

as  follows: 

Section  3220  of  the  Revised  Statutes. 

8023  "Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to 
regulations  prescribed  by  the  Secretary  of  the  Treasury,  is  author- 
ized to  remit,  refund,  and  pay  back  all  taxes  erroneously  or  illegally  as- 
sessed or  collected,  all  penalties  collected  without  authority,  and  all  taxes 
that  appear  to  be  unjustly  assessed  or  excessive  in  amount,  or  in  any  man- 

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MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


ner  wrongfully  collected;  also  to  repay  to  any  collector  or  deputy  collector 
the  full  amount  of  such  sums  of  money  as  may  be  recovered  against  him 
in  any  court,  for  any  internal  revenue  taxes  collected  by  him,  with  the 
cost  and  expenses  of  suit;  also  all  damages  and  costs  recovered  against 
any  assessor,  assistant  assessor,  collector,  deputy  collector,  agent,  or 
inspector,  in  any  suit  brought  against  him  by  reason  of  anything  done  in 
the  due  performance  of  his  official  duty,  and  shall  make  report  to  Con- 
gress at  the  beginning  of  each  regular  session  of  Congress  of  all  transac- 
tions under  this  section. " 

8024  Allowance  for  and  redemption  of  Internal  Revenue  Stamps. — Form 

46. — The  Act  entitled  "An  Act  authorizing  the  Commissioner  of 
Internal  Revenue  to  redeem  or  make  allowance  for  internal  revenue  stamps," 
approved  IVlay  12,  1900,  (as  amended  by  the  act  of  June  30,  1902  [32  stat., 
506])  provides: 

That  the  Commissioner  of  Internal  Revenue,  subject  to  regulations  prescribed 
by  the  Secretary  of  the  Treasury,  may,  upon  receipt  of  satisfactory  evidence 
of  the  facts,  make  allowance  for  or  redeem  such  of  the  stamps,  issued  under 
authority  of  law,  to  denote  the  payment  of  any  internal-revenue  tax,  as  may 
have  been  spoiled,  destroyed,  or  rendered  useless  or  unfit  for  the  purpose 
intended,  or  for  which  the  owner  may  have  no  use,  or  which  through  mis- 
take may  have  been  improperly  or  unnecessarily  used,  or  where  the  rates 
or  duties  represented  thereby  have  been  excessive  in  amount,  paid  in  error, 
or  in  any  manner  wrongfully  collected.  Such  allowance  or  redemption  may 
be  made,  either  by  giving  other  stamps  in  lieu  of  the  stamps  so  allowed  for 
or  redeemed,  or  by  refunding  the  amount  or  value  to  the  owner  thereof 
deducting  therefrom,  in  case  of  repayment,  the  percentage,  if  any,  allowed 
to  the  purchaser  thereof;  but  no  allowance  or  redemption  shall  be  made  in 
any  case  until  the  stamps  so  spoiled  or  rendered  useless  shall  have  been  re- 
turned to  the  Commissioner  of  Internal  Revenue,  or  until  satisfactory  proof 
has  been  made  showing  the  reason  why  the  same  cannot  be  returned;  or, 
if  so  required  by  the  said  Commissioner,  when  the  person  presenting  the  same 
can  not  satisfactorily  trace  the  history  of  said  stamps  from  their  issuance 
to  the  presentation  of  his  claim  as  aforesaid. 

*  *  * 

8025  Provided  further J  That  no  claim  for  the  redemption  of  or  allowance 
for  stamps  shall  be  allowed  unless  presented  within  two  years  after 

he  purchase  of  said  stamps  from  the  government. 

*  *  * 

8026  Sec.  2.    That  the  finding  of  facts  in  and  the  decision  of  the  Com- 
missioner of  Internal  Revenue  upon  the  merits  of  any  claim  presented 

under  or  authorized  by  this  Act  shall,  in  the  absence  of  fraud  or  mistake  in 
mathematical  calculation,  be  final  and  not  subject  to  revision  by  any  account- 

ng  officer. 

8027  Sec.  3.    That  all  laws  and  parts  of  laws  in  conflict  with  any  of  the 
provisions  of  this  Act  are  hereby  repealed. 

8028  Redemption  of  stamps  not  affixed  to  documents  or  articles. — Claims 

for  the  allowance  for  or  redemption  of  unused  stamps  must  be  made 
on  Form  46,  and  the  facts  relied  upon  in  support  of  the  claim  should  be  clearly 

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set  forth  under  oath.  The  claim  should  be  made  by  the  bona  fide  owner  of 
the  stamps  presented  for  allowance  or  redemption  or  an  agent  or  representa- 
tive of  such  owner.  [For  copy  of  Form  46,  see  page  1609. J 
8029  The  claim  should  be  supported  by  the  certificate  of  the  deputy 
collector  who  personally  investigated  the  statements  made  by  the 
claimant,  setting  forth,  after  careful  inquiry,  his  belief  as  to  the  statements 
therein  made,  and  by  the  certificate  of  the  collector  from  whom  the  stamps 
were  purchased,  setting  forth  the  date  of  purchase,  by  whom  pur- 
chased, kind  of  stamps,  denomination,  number  and  amount,  and  his  certi- 
ficate that  the  facts  set  forth  in  the  affidavit  of  the  claimant  have  been 
carefully  investigated  under  his  direction,  and  his  opinion  as  to  the  truth 
or  falsity  of  said  statements,  together  with  such  recommendation  as  to  the 
allowance  or  disallowance  of  said  claim  as  in  his  opinion  seems  just  and 
proper. 

803©  All  claims  shall  be  forwarded  to  the  Commissioner  of  Internal  Revenue 
for  examination,  and  he  may,  when  he  deems  it  necessary  to  complete 
the  evidence  of  the  facts  set  forth  in  any  claim,  require  additional  state- 
ments, certificates,  or  affidavits  from  the  claimant,  collector,  or  any  other 
person,  and  may  cause  such  investigation  to  be  made  and  such  instructions 
complied  with  as  in  his  opinion  are  necessary  to  a  proper  adjustment  of  the 
claim. 

\o  injjoni£  fnslsvhipa  ri£  aworl?,  rtairlw  sDfwbr/s  lo  noiaa^oq  ni  g'r  lanoiaeira 

8031  Redemption  of  stamps  affixed  to  documents  or  articles.— In  cases 
v/here  documentary  or  proprietary  stamps  have  been  affixed  to 

instruments  or  articles  not  requiring  them,  and  canceled,  or  where,  by  error, 
stamps  of  greater  value  than  that  required  by  law  have  been  used,  claims 
for  the  amounts  paid  in  error  or  in  excess  should  be  made  on  Form  46,  accom- 
panied by  the  stamps,  and,  where  practicable,  by  the  instruments  to  which 
the  stamps  have  been  erroneously  attached,  or  certified  copies  thereof. 
[For  copy  of  Form  46,  see  page  1609.]  These  instructions  as  to  the  use  of 
Form  46  will  also  apply  to  cases  where  an  instrument  is  duly  stamped  and  is 
accidentally  injured  or  found  to  be  defective,  and  a  substitute  is  prepared  and 
duly  stamped,  or  where  the  instrument  is  not  used.  (Extract  from  Regula- 
tions No.  14,  Revised,  published  January  25,  1916.) 

8032  Forms  46  and  47  on  which  to  present  Claims  for  refund  and  abate- 
ment of  taxes. —  [For  copy  of  Form  46,  see  page  1609  and  for  copy 

of  Form  47,  see  page  1611.]  Claims  for  the  refunding  of  assessed  taxes  and 
penalties  must  be  made  out  upon  Form  46.  In  this  case,  as  in  that  of  claims 
for  abatement  upon  Form  47,  the  burden  of  proof  rests  upon  the  claimant. 
All  the  facts  relied  upon  in  support  of  the  claim  should  be  clearly  set  forth 
under  oath.  The  claim  should  be  still  further  supported  by  an  affidavit 
of  the  deputy  collector  of  the  proper  division,  and  by  the  certificate  of  the 
collector.  (Extract  from  Regulation  No.  14,  Revised,  published  Tanuarv  25, 
1916.) 

8033  Claims  for  abatement  abatement  of  taxes  penalties  erroneously  or 
illegally  assessed  or  which  are  abatable  under  remedial  acts,  etc., 

must  be  made  out  upon  Form  47,  and  must  be  sustained  by  the  affidavits 
of  the  parties  against  whom  the  taxes  are  assessed,  or  of  other  parties  cog- 
nizant of  the  facts,  and  must  be  accompanied  by  affidavits  of  the  deputy 
collectors  of  the  divisions  in  which  the  claims  arise.  (Extract  from  Regulation 
No.  14,  Revised,  published  January  25,  1916.) 

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8034  Claim  for  abatement  stays  5%  penalty  until  claim  is  rejected. — 

"When  an  assessment  is  made  for  a  tax  or  penalty  and  demand  made 
for  payment,  if  a  claim  for  abatement  (Form  47)  is  filed  within  ten  days 
after  such  demand,  and  accepted  by  the  collector,  the  time  ceases  to  run 
against  the  claimant  as  to  five  per  cent,  penalty  until  the  claim  is  rejected. 
Upon  receipt  of  the  notice  of  rejection  of  the  claim,  the  collector  should 
immediately  notify  the  party  assessed  and  demand  the  payment  of  the  tax; 
if  the  tax  is  not  then  paid  within  ten  days  after  mailing  of  the  notice  to  the 
claimant  by  the  collector  of  the  rejection  of  the  claim,  the  five  per  cent,  penalty 
accrues.  Interest  at  one  per  cent,  per  month  continues  to  run  and  should 
be  collected  with  the  tax  at  the  time  of  payment  for  the  full  number  of  calendar 
months  which  intervene  between  the  date  of  the  expiration  of  the  first  ten 
days'  notice  and  the  date  of  the  payment  of  the  tax,  notwithstanding  the  fact 
that  a  claim  for  abatement  has  been  filed."  (Paragraph  from  Regulation 
No.  14,  dated  January  25,  1916.) 

8035  Abatement  of  assessments  as  erroneous  or  illegal  when  an  equiva- 
lent amount  of  tax  is  properly  due. — The  validity  of  an  assessment 

depends  upon  the  law  and  actual  facts  existing.  Therefore,  an  assessment 
made  upon  an  erroneous  theory  or  by  mistake  may  not  be  remitted  or 
abated  because  so  made  if,  at  the  time  its  validity  is  passed  upon,  the  Com- 
missioner is  in  possession  of  evidence  which  shows  an  equivalent  amount  of 
tax  is  properly  due  in  connection  with  the  income,  transaction  or  matter 
upon  which  the  assessment  is  predicated.  (T.  D.  3251,  signed  by  Commis- 
sioner D.  H.  Blair,  and  dated  November  25,  1921.) 

Interest  on  Refunds  and  Judgments. 

8036  (Law.)    Sec.  1324  [of  the  Revenue  Act  of  1921].    (a)  That  upon  the 
allowance  of  a  claim  for  the  refund  of  or  credit  for  internal  revenue 

taxes  paid,  interest  shall  be  allowed  and  paid  upon  the  total  amount  of 
such  refund  or  credit  at  the  rate  of  one-half  of  1  per  centum  per  month  to  the 
date  of  such  allowance,  as  follows:  (1)  if  such  amount  was  paid  under  a 
specific  protest  setting  forth  in  detail  the  basis  of  and  reasons  for  such 
protest,  from  the  time  when  such  tax  was  paid,  or  (2)  if  such  amount  was  not 
paid  under  protest  but  pursuant  to  an  additional  assessment,  from  the  time 
such  additional  assessment  was  paid,  or  (3)  if  no  protest  was  made  and  the 
tax  was  not  paid  pursuant  to  an  additional  assessment,  from  six  months 
after  the  date  of  filing  of  such  claim  for  refund  or  credit.  The  term  "ad- 
ditional assessment"  as  used  in  this  section  means  a  further  assessment  for 
a^tax  of  the  same  character  previously  paid  in  part. 

8037  (b)  Section  177  of  the  Judicial  Code  is  amended  to  read  as  follows: 

"Sec.  177.  No  interest  shall  be  allowed  on  any  claim  up  to  the  time  of 
the  rendition  of  judgment  by  the  Court  of  Claims,  unless  upon  a  contract 
expressly  stipulating  for  the  payment  of  interest,  except  that  interest  may 
be  allowed  in  any  judgment  of  any  court  rendered  after  the  passage  of  the 
Revenue  Act  of  1921  against  the  United  States  for  any  internal-revenue  tax 
erroneously  or  illegally  assessed  or  collected,  or  for  any  penalty  collected  with- 
out authority  or  any  sum  which  was  excessive  or  in  any  manner^wrongfully 
collected,  under  the  internal-revenue  laws." 


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MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


TREASURY  DEPARITiEtfT 

iNTFRNAl  RFVEWL  SFEV1CK 

Form  3«S-J»n  ,  193 
Coicrtrollcr  Ocacr:il  V.  S. 
January  IS,  1952 


IMfORT.VNT 
File  Uith  Collector  of  Internal 
Revenue  inhere  nssessmcrd  veos 
made.     Not  acceptable  unless 
completely  filled  in. 


CLAIM  FOR 

]  ABATEMENT  OF  TAX  ASSESSED 

J  CREDIT  AGAINST  OUTSTANDING  ASSESSMENTS 

j  REFUND  OF  TAXES  ILLEGALLY  COLLECTED 

J  REFUND  OF  AMOUNTS  PAID  FOR  STAMPS 
USED  IN  ERROR  OR  EXCESS 


*T  COtT-FCTOTVS  NOTATION 


^:au  cy  ... 
Courdy  cf 


AJ3i:tu!f»t,vii  Unit 


DlsbM 


Account  number 


TYPE 

OR 
PRINT 


axpayer  or  purciii 


(Residence— give  St 


veil  as  ci!y  or  town  and  State.) 


(Easiness  address., 


This  deponent,  bc;T)<»  duly  sworn' according  to  law,  deposes  ?nd  saya  that  this  statement  is  made  on  behalf  of  the  taxpayer  named,  and 
it  the  facts  given  beiovT  with  reference  to  aiid  statement  are  true  and  complete:   pehioo — ;  YEAR 


1.  Business  ir.  which  engaged  

2.  Character  of  assessment  or  tax. 
3. 
4. 


(Sty!"  fir  or  upon  ' 


he  tax  vrzs  assessed  or  the  stamps  affixed.) 


•flxjouiii.  ui  aascA*meui  or  hi 
Reduction  of  T?.n  Liabiiit> 

requested  "'Income  and  Prof 

t3  Tax) 

    $  

Amount  to  be  abated  

fi.  Amount  to  be  refunded  (or  such  greater  amount  as  is  legally  refundable)  

7.  Dates  of  payment  (see  Collector'.!  receipts  or  indorsements  oi  canceled  checks) 

(If  statement  covers  income  tax  liability,  items  8-11,  inclusive,  must  be  an 

8.  District  in  which  return  (if  any)  was  filed  

S.  District  in  which  unpaid  asses-'n-ent  appears  

10.  Amount  of  overpayment  claimed  as  credit  

11.  Unpaid  aFsesrmcnt  against  which  credit  is  asked;  period  from  

Deponent  verily  believes  that  this  application  should  be  allowed  for  the  following  r 


(At tarn  additions]  sheets  U  necessary.; 
Sworn  to  and  subscribed  before  me  this  «  day 

Signed: 

oi  ii.  ,  19  


i  lo 


m.ia  r.ffidaTit  may  be  toji  lo  before  s  deputy  Collector  of  Interna]  Sevccae  u  K«v«nu«  Agent  without  charge.)  t2-H7pt  , 

[Page  1  of  Form  843.] 


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MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


CERTIFICATES 

I  certify  that  an  examination  of  the  records  o."  the  Bureau  of  Internal  Revenue  shows  the  following  facts  as  tr 
the  assessment  and  payment  of  the  tax: 


NAKE  or  TAXPAYER. 

Character  of  csossmcnt 
and  period  covered. 

List. 

Year. 

Month. 

Page. 

Line. 

Amount. 

Date  paid. 

Dlstri-t  In  ? 
wh.cb  paid 

$  



  : 



•  <■  ■ 

 |  

Collector  of  Internal  Revenue. 


Assessment  Clerk,  Commission^' s  Office. 


I  certify  that  the  records  of  my  office  show  the  following  facts  as  to  the  purchase  of  stamps: 


TO  WHOM  SOLD  OE  ISSUED 

Kind. 

Number 

Denomination 

Date  of  sale 
or  issue. 

Amount. 

If  special  tax  stamp,  state: 

Serial  numbT 

rcriod 
commencing  - 

$  

1 

 District... 


Schedule  Number  

Allowed  or  Rejected  Number. 

Claimant  

Address  


District. 


(Nature  of  Uje.) 


Examined  und  submitted  for  action  . 


uwm  cxar 

inel  oy— 

Claim  approved  by— 


C.V/n//>li>uion. 


Amount  claimed--.  $. 
Amount  allowed...  $. 
Amount  rejected...  %. 


COMMITTEE  ON  CLAIMS 


[Page  2  of  Form  843-1 


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This  page  and  page  1612  formerly  carried  Form  47. 


Old  Form  46. — Claim  for  refund, 
Old  Form  47. — Claim  for  abatement, 
Old  Form  47A.-  Claim  for  credit, 
have  been  superseded  by 
Form  843 
For  which  see  pages  1609-1610. 


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This  page  is  blank. 


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1-2-22 

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Suits  to  Restrain  Assessment  or  Collection  of  Taxes. 

Section  3224  of  the  Revised  Statutes 
8038    "No  suit  for  the  purpose  of  restraining  the  assessment  or  collection 
of  any  tax  shall  be  maintained  in  any  court." 


Decision. 
(February  21,  1916.) 

Supreme  Court  of  the  United  States. 

John  F.  Dodge  and  Horace  E.  Dodge,  Appellants 

vs. 

W.  H.  Osborn,  Commissioner  of  Internal  Revenue. 
(240  U.  S.  118.) 
Mr.  Chief  Justice  White  delivered  the  opinion  of  the  Court. 

8039  The  appellants  filed  their  bill  in  the  Supreme  Court  of  the  District 
of  Columbia  against  the  Commissioner  of  Internal  Revenue  to  en- 
join the  assessment  and  collection  of  the  taxes  imposed  by  the  Income  Tax 
section  of  the  Tariff  Act  of  October  3,  1913  (38  Stat.  166,  181),  and  especially 
the  surtaxes  therein  provided  for  on  the  ground  that  the  statute  was  void 
for  repugnancy  to  the  Constitution  of  the  United  States.  The  case  is  here 
on  appeal  from  the  judgment  of  the  court  below  affirming  the  action  of  the 
trial  court  in  sustaining  a  motion  to  dismiss  the  complaint  for  want  of  juris- 
diction because  the  complainants  had  an  adequate  remedy  at  law  and  because 
of  the  provision  of  section  3224  Revised  Statute  that  "No  suit  for  the  purpose 
of  restraining  the  assessment  or  collection  of  any  tax  shall  be  maintained  in 
any  court." 

8040  We  at  once  put  our  of  view  a  contention  that  section  3224  is  not 
applicable  to  taxes  imposed  by  the  Income  Tax  Law  since  we  are 

clearly  of  the  opinion  that  it  is  within  the  contemplation  of  paragraph  L 
of  the  act  which  provides: 

8041  "That  all  administrative,  special  and  general  provisions  of  law, 
including  the  laws  in  relation  to  the  assessment,  remission,  collection, 

and  refund  of  internal-revenue  taxes  not  heretofore  specifically  repealed  and 
not  inconsistent  with  the  provisions  of  this  section,  are  hereby  extended  and 
made  applicable  to  all  the  provisions  of  this  section  and  to  the  tax  herein 
imposed." 

And  for  the  same  reason  we  do  not  further  notice  a  contention  as  to  the 
inapplicability  of  sections  3220  [1J8021],  3226  [H8048]  and  3227  [H8049], 
to  which  effect  was  given  by  the  court  below  requiring  an  appeal  to  the 
Commissioner  of  Internal  Revenue  after  payment  of  a  tax  claimed  to  have 
been  erroneously  and  illegally  assessed  and  collected  and  upon  his  refusal 
to  return  the  sum  paid  giving  a  right  to  sue  for  its  recovery. 

8042  The  question  for  decision  therefore  is  whether  the  sections  of  the 
Revised  Statutes  referred  to  are  controlling  as  to  the  case  in  hand. 

The  plain  purpose  and  scope  of  the  sections  are  thus  stated  in  Snyder  v. 
Marks,  109  U.  S.  189,  193-194,  a  suit  brought  to  enjoin  the  collection  of  a 
revenue  tax  on  tobacco: 

"The  inhibition  of  Section  3224  applies  to  all  assessments  of  taxes,  made 
under  color  of  their  offices,  by  internal  revenue  officers  charged  with  general 
jurisdiction  of  the  subject  of  assessing  taxes  against  tobacco  manufacturers. 

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The  remedy  of  a  suit  to  recover  back  the  tax  after  it  is  paid  is  provided  by 
statute,  and  a  suit  to  restrain  its  collection  is  forbidden.  The  remedy  so 
given  is  exclusive,  and  no  other  remedy  can  be  substituted  for  it.  Cheatham 
v.  United  States,  92  U.  S.  85,  88,  and  again  in  State  Railroad  Tax  Cases, 
92  U.  S.  575,  613,  it  was  said  by  this  court,  that  the  system  prescribed  by 
the  United  States  in  regard  to  both  customs  duties  and  internal  revenue 
taxes,  of  stringent  measures,  not  judicial,  to  collect  them,  with  appeals  to 
specified  tribunals,  and  suits  to  recover  back  moneys  illegally  exacted  was  a 
system  of  corrective  justice  intended  to  be  complete,  and  enacted  under  the 
right  belonging  to  the  government  to  prescribe  the  conditions  on  which  it 
would  subject  itself  to  the  judgment  of  the  courts  in  the  collection  of  its 
revenues.  In  the  exercise  of  that  right,  it  declares,  by  section  3224,  that  its 
officers  shall  not  be  enjoined  from  collecting  the  tax  claimed  to  have  been 
unjustly  assessed,  when  those  officers,  in  the  course  of  general  jurisdiction 
over  the  subject  matter  in  question,  have  made  the  assignment  (assessment) 
and  claim  that  it  is  valid." 

And  this  doctrine  has  been  repeatedly  applied  until  it  is  no  longer  open  to 
question  that  a  suit  may  not  be  brought  to  enjoin  the  assessment  or  col- 
lection of  a  tax  because  of  the  alleged  unconstitutionality  of  the  statute 
imposing  it.  Shelton  v.  Piatt,  139  U.  S.  591;  Pittsburgh,  etc.,  Ry.  v.  Board 
of  Public  Works,  172  U.  S.  32;  Pacific  Whaling  Company  v.  United  States, 
187  U.  S.  447,  451,452. 

8043  But  it  is  contended  that  this  doctrine  has  no  application  to  a  case 
where  wholly  independent  of  any  claim  of  the  constitutionalty 

of  the  tax  sought  to  be  enjoined,  additional  equities  sufficient  to  sustain 
jurisdiction  are  alleged,  and  this,  it  is  asserted,  being  such  a  case,  falls  within 
the  exception  to  the  general  rule.  But  conceding  for  argument's  sake  only 
the  legal  premise  upon  which  the  contention  rests,  we  think  the  conclusion 
that  this  case  falls  within  such  exception  is  wholly  without  merit,  since 
after  an  examination  of  the  complaint  we  are  of  the  opinion  that  no  ground 
for  equitable  jurisdiction  is  alleged.  It  is  true  the  complaint  contains  aver- 
ments that  unless  the  taxes  are  enjoined  many  suits  by  other  persons  will 
be  brought  for  the  recovery  of  the  taxes  paid  by  them,  and  also  that  by  reason 
of  section  3187  Rev.  Stat,  making  the  tax  a  lien  on  plaintiffs'  property  the 
assessment  of  the  taxes  would  constitute  a  cloud  on  plaintiffs'  title.  But 
these  allegations  are  wholly  inadequate  under  the  hypothesis  which  we  have 
assumed  solely  for  the  sake  of  the  argument,  to  sustain  jurisdiction,  since  it 
is  apparent  on  their  face  they  allege  no  ground  for  equitable  relief  independent 
of  the  mere  complaint  that  the  tax  is  illegal  and  unconstitutional  and  should 
not  be  enforced — allegations  which  if  recognized  as  a  basis  for  equitable 
jurisdiction  would  take  every  case  where  a  tax  assailed  because  of  its  uncon- 
stitutionality out  of  the  provisions  of  the  statute  and  thus  render  it  nugatory, 
while  it  is  obvious  that  the  statute  plainly  forbids  the  enjoining  of  a  tax 
unless  by  some  extraordinary  and  entirely  exceptional  circumstance  its 
provisions  are  not  applicable. 

8044  There  is  a  contention  that  the  provisions  requiring  the  appeal  to 
the  Commissioner  of  Internal  Revenue  after  payment  of  the  taxes 

and  giving  a  right  to  sue  in  case  of  his  refusal  to  refund  are  wanting  in  due 
process  and  therefore  there  is  jurisdiction.  But  we  think  it  suffices  to  state 
that  contention  to  demonstrate  its  entire  want  of  merit. 

AFFIRMED.    [240  U.  S.  118] 


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Decision. 
(January  31,  1917.) 
Suit  to  Enjoin  Collection  of  Penalties. 


District  Court,  N.  D.    Illinois,  E.  D. 

Kohlhamer  vs.  Smietanka,  Collector. 
(239  Fed.  408.) 


iU2  11)6 


8045  While  Section  3224  R.  S.  [1(8038]  which  prohibits  suits  to  enjoin 
the  collection  of  internal  revenue  taxes,  does  not  specifically  include 

"penalties"  as  such,  yet  where  penalties  are  authorized  by  statute  to  be 
added  to  the  tax  and  collected  as  a  part  of  the  tax,  the  court  will  hold  that  the 
penalty  is  a  part  of  the  tax,  the  assessment  and  collection  of  which  are  governed 
by  Section  3224.    (239  Fed.  408.) 

Fraudulent  Returns. 

8046  (Law.)    Sec.  1323  [of  the  Revenue  Act  of  1921].   That  section  3225 
of  the  Revised  Statutes  of  the  United  States,  as  amended,  is  re- 
enacted  without  change  as  follows: 

c     .-. .         .anobnaaaot^  LsniinhO  no  nohaJiraiJ 

Section  3225  of  the  Revised  Statutes. 

8047  "Sec.  3225.    When  a  second  assessment  is  made  in  case  of 
any  list,  statement,  or  return,  which  in  the  opinion  of  the  collector 

or  deputy  collector  was  false  or  fradulent,  or  contained  any  understatement 
or  undervaluation,  such  assessment  shall  not  be  remitted,  nor  shall  taxes 
collected  under  such  assessment  be  refunded,  or  paid  back,  or  recovered  by 
any  suit,  unless  it  is  proved  that  such  list,  statement,  or  return  was  not 
willfully  false  or  fradulent  and  did  not  contain  any  willful  understatement 
©^undervaluation." 

Limitations  Upon  Suits  and  Prosecutions. 

8048  (Law.)    Sec.  1318  [of  the  Revenue  Act  of  1921].   That  section  3226 
of  the  Revised  Statutes  is  amended  to  read  as  follows: 

Section  3226  of  the  Revised  Statutes. 

8049  "Sec.  3226.    No  suit  or  proceeding  shall  be  maintained  in  any  court 
for  the  recovery  of  any  internal-revenue  tax  alleged  to  have  been 

erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty  claimed  to 
have  been  collected  without  authority,  or  of  any  sum  alleged  to  have  been 
excessive  or  in  any  manner  wrongfully  collected,  until  a  claim  for  refund  or 
credit  has  been  duly  filed  with  the  Commissioner  of  Internal  Revenue, 
according  to  the  provisions  of  law  in  that  regard,  and  the  regulations  of  the 
Secretary  of  the  Treasury  established  in  pursuance  thereof.  No  such  suit 
or  proceeding  shall  be  begun  before  the  expiration  of  six  months  from  the 
date  of  filing  such  claim  unless  the  Commissioner  renders  a  decision  thereon 
within  that  time,  nor  after  the  expiration  of  five  years  from  the  date  of  the 
payment  of  such  tax,  penalty,  or  sum." 

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8050  This  section  shall  not  affect  any  suit  or  proceeding  instituted  prior 
to  the  passage  of  this  Act,  but  shall  apply  to  all  suits  and  proceedings 

instituted  after  the  passage  of  this  Act,  whether  or  not  barred  by  prior  Acts 
of  Congress. 

Section  3227  of  the  Revised  Statutes  Repealed. 

8051  (Law.)    Sec.  1319  [of  the  Revenue  Act  of  1921].   That  section  3227 
of  the  Revised  Statutes  is  hereby  repealed  but  such  repeal  shall  not 

affect  any  suit  or  proceeding  instituted  prior  to  the  passage  of  this  Act. 

Five-Year  Limitation  on  Suits. 

8052  (Law.)    Sec.  1320  [of  the  Revenue  Act  of  1921].    That  no  suit  or 
proceeding  for  the  collection  of  any  internal  revenue  tax  shall  be 

begun  after  the  expiration  of  five  years  from  the  time  such  tax  was  due, 
except  in  the  case  of  fraud  with  intent  to  evade  tax,  or  willful  attempt  in  any 
manner  to  defeat  or  evade  tax.  This  section  shall  not  apply  to  suits  or  pro- 
ceedings for  the  collection  of  taxes  under  section  250  [Income  and  Excess- 
Profits  Taxes]  of  this  Act,  nor  to  suits  or  proceedings  begun  at  the  time  of 
the  passage  of  this  Act. 

Limitation  on  Criminal  Prosecutions. 

8053  (Law.)    Sec.  1321  [of  the  Revenue  Act  of  1921].    (a)  That  the  Act 
entitled  "An  Act  to  limit  the  time  within  which  prosecutions  may  be 

instituted  against  persons  charged  with  violating  internal-revenue  laws," 
approved  July  5,  1884,  is  amended  to  read  as  follows: 

8054  "That  no  person  shall  be  prosecuted,  tried,  or  punished  for  any 
of  the  various  offenses  arising  under  the  internal-revenue  laws  of  the 

United  States  unless  the  indictment  is  found  or  the  information  instituted 
within  three  years  next  after  the  commission  of  the  offense:  Provided,  That 
the  time  during  which  the  person  committing  the  offense  is  absent  from  the 
district  wherein  the  same  is  committed  shall  not  be  taken  as  any  part  of  the 
time  limited  by  law  for  the  commencement  of  such  proceedings:  Provided 
further,  That  the  provisions  of  this  Act  shall  not  apply  to  offenses  committed 
prior  to  its  passage:  Provided  further,  That  where  a  complaint  shall  be 
instituted  before  a  commissioner  of  the  United  States  within  the  period 
above  limited,  the  time  shall  be  extended  until  the  discharge  of  the  grand 
jury  at  its  next  session  within  the  district:  And  provided  further,  That  this 
Act  shall  not  apply  to  offenses  committed  by  officers  of  the  United  States." 

8055  (b)  Any  prosecution  or  proceeding  under  an  indictment  found  or 
information  instituted  prior  to  the  passage  of  this  Act  shall  not  be 

affected  in  any  manner  by  this  amendment,  but  such  prosecution  or  pro- 
ceeding shall  be  subject  to  the  limitations  imposed  by  law  prior  to  the 
passage  of  this  Act. 

Limitation  on  Claims  for  Refund  or  Credit. 

8056  (Law.)    Sec.  1316  [of  the  Revenue  Act  of  1921].    That^section  3228 
of  the  Revised  Statutes  is  amended  to  read  as  follows : 

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Section  3228  of  the  Revised  Statutes. 

8057  "Sec.  3228.   All  claims  for  the  refunding  or  crediting  of  any  internal 
revenue  tax  alleged  to  have  been  erroneously  or  illegally  assessed  or 

collected,  or  of  any  penalty  alleged  to  have  been  collected  without  authority, 
or  of  any  sum  alleged  to  have  been  excessive  or  in  any  manner  wrongfully 
collected,  must  be  presented  to  the  Commissioner  of  Internal  Revenue 
within  four  years  next  after  payment  of  such  tax,  penalty,  or  sum." 

8058  This  section,  except  as  modified  by  section  252  [Income  and  Excess- 
Profits  Taxes],  shall  apply  retroactively  to  claims  for  refund  under 

the  Revenue  Act  of  1916,  the  Revenue  Act  of  1917,  and  the  Revenue  Act  of 
1918. 

Compromises. 
Section  3229  of  the  Revised  Statutes. 

8059  "The  Commissioner  of  Internal  Revenue,  with  the  advice  and 
consent  of  the  Secretary  of  the  Treasury,  may  compromise  any  civil 

or  criminal  case  arising  under  the  internal-revenue  laws  instead  of  commenc- 
ing suit  thereon;  and,  with  the  advice  and  consent  of  the  said  Secretary  and 
the  recommendation  of  the  Attorney  General,  he  may  compromise  any 
such  case  after  a  suit  thereon  has  been  commenced.  Whenever  a  compromise 
is  made  in  any  case  there  shall  be  placed  on  file  in  the  office  of  the  Commis- 
sioner the  opinion  of  the  Solicitor  of  Internal  Revenue,  or  of  the  officer 
acting  as  such,  with  his  reasons  therefor,  with  a  statement  of  the  amount 
of  tax  assessed,  the  amount  of  additional  tax  or  penalty  imposed  by  law 
in  consequence  of  the  neglect  or  delinquency  of  the  person  against  whom  the 
tax  is  assessed,  and  the  amount  actually  paid  in  accordance  with  the  terms 
of  the  compromise." 

Amendments  to  Revised  Statutes. 

8060  (Law.)   Sec.  1311  [of  the  Revenue  Act  of  1921].   That  sections  3164, 
3165,  3167,  3172,  3173,  and  3176  of  the  Revised  Statutes,  as  amended, 

are  reenacted,  without  change,  as  follows: 

Duty  of  Collector  to  Report  Violations  of  Law  to  District  Attorney. 
Section  3164  of  the  Revised  Statutes. 

8061  "Sec.  3164.    It  shall  be  the  duty  of  every  collector  of  internal 
revenue  having  knowledge  of  any  willful  violation  of  any  law  of  the 

United  States  relating  to  the  revenue,  within  thirty  days  after  coming  into 
possession  of  such  knowledge,  to  file  with  the  district  attorney  of  the  district 
in  which  any  fine,  penalty,  or  forfeiture  may  be  incurred,  a  statement  of  all 
the  facts  and  circumstances  of  the  case  within  his  knowledge,  together  with 
the  names  of  the  witnesses,  setting  forth  the  provisions  of  law  believed  to 
be  so  violated  on  which  reliance  may  be  had  for  condemnation  or  conviction." 

Revenue  Officers  Who  May  Administer  Oaths. 
Section  3165  of  the  Revised  Statutes. 

8062  "Sec.  3165.    Every  collector,  deputy  collector,  internal-revenue 
agent,  and  internal-revenue  officer  assigned  to  duty  under  an 

internal-revenue  agent,  is  authorized  to  administer  oaths  and  to  take 

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evidence  touching  any  part  of  the  administration  of  the  internal-revenue 
laws  with  which  he  is  charged,  or  where  such  oaths  and  evidence  are  author- 
ized by  law  or  regulation  authorized  by  law  to  be  taken." 

Disclosure  of  Information  in  Returns. 

8063  "Sec.  3167.    It  shall  be  unlawful  for  any  collector,  deputy  collector, 
agent,  clerk,  or  other  officer  or  employee  of  the  United  States  to 

divulge  or  to  make  known  in  any  manner  whatever  not  provided  by  law 
to  any  person  the  operations,  style  of  work,  or  apparatus  of  any  manufacturer 
or  producer  visited  by  him  in  the  discharge  of  his  official  duties,  or  the  amount 
or  source  of  income,  profits,  losses,  expenditures,  or  any  particular  thereof, 
set  forth  or  disclosed  in  any  income  return,  or  to  permit  any  income  return  or 
copy  thereof  or  any  book  containing  any  abstract  or  particulars  thereof  to 
be  seen  or  examined  by  any  person  except  as  provided  by  law;  and  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner  whatever  not  pro- 
vided by  law  any  income  return,  or  any  part  thereof  or  source  of  income, 
profits,  losses,  or  expenditures  appearing  in  any  income  return;  and  any 
offense  against  the  foregoing  provision  shall  be  a  misdemeanor  and  be  pun- 
ished by  a  fine  not  exceeding  $1,000  or  by  imprisonment  not  exceeding  one 
year,  or  both,  at  the  discretion  of  the  court;  and  if  the  offender  be  an  officer 
or  employee  of  the  United  States  he  shall  be  dismissed  from  office  or  dis- 
charged from  employment. 

wrfio  3xL)  )o  to  ^unsvsil  {fcrnojnl Jto  ioibiloS  sdJ  lo  noinjqo  adl  ignore 
Canvass  of  Districts  for  Objects  of  Taxation. 
Section  3172  of  the  Revised  Statutes. 

8064  "Sec.  3172.    Every  collector  shall,  from  time  to  time,  cause  his 
deputies  to  proceed  through  every  part  of  his  district  and  inquire 

after  and  concerning  all  persons  therein  who  are  liable  to  pay  any  internal 
revenue  tax,  and  all  persons  owning  or  having  the  care  and  management 
of  any  objects  liable  to  pay  any  tax,  and  to  make  a  list  of  such  persons  and 
enumerate  said  objects. 

Annual  and  Other  Returns. 
Section  3173  of  the  Revised  Statutes. 

8065  "Sec.  3173.    It  shall  be  the  duty  of  any  person,  partnership, 

firm,  association,  or  corporation,  made  liable  to  any  duty,  special 
tax,  or  other  tax  imposed  by  law,  when  not  otherwise  provided  for,  (1) 
in  case  of  a  special  tax,  on  or  before  the  thirty-first  day  of  July  in  each  year, 
and  (2)  in  other  cases  before  the  day  on  which  the  taxes  accrue,  to  make  a 
list  or  return,  verified  by  oath,  to  the  collector  or  a  deputy  collector  of  the 
district  where  located,  of  the  articles  or  objects,  including  the  quantity  of 
goods,  wares,  and  merchandise,  made  or  sold  and  charged  with  a  tax,  the 
several  rates  and  aggregate  amount,  according  to  the  forms  and  regulations 
to  be  prescribed  by  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  for  which  such  person,  partnership, 
firm,  a  ssociation,  or  corporation  is  liable: 

8066  "Provided,  That  if  any  person  liable  to  pay  any  duty  or  tax,  or 
owning,  possessing,  or  having  the  care  or  management  of  property, 

goods,  wares,  and  merchandise,  ai tides  or  objects  liable  to  pay  any  duty 
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tax,  or  license,  shall  fail  to  make  and  exhibit  a  list  or  return  required  by  law, 
but  shall  consent  to  disclose  the  particulars  of  any  and  all  the  property, 
goods,  wares,  and  merchandise,  articles,  and  objects  liable  to  pay  any  duty 
or  tax,  or  any  business  or  occupation  liable  to  pay  any  tax  as  aforesaid,  then, 
and  in  that  case,  it  shall  be  the  duty  of  the  collector  or  deputy  collector  to 
make  such  list  or  return,  which  being  distinctly  read,  consented  to,  and 
signed  and  verified  by  oath  by  the  person  so  owning,  possessing,  or  having 
the  care  and  management  as  aforesaid,  may  be  received  as  the  list  of  such 
person: 

8067  "Provided  further,  That  in  case  no  annual  list  or  return  has  been 
rendered  by  such  person  to  the  collector  or  deputy  collector  as 

required  by  law,  and  the  person  shall  be  absent  from  his  or  her  residence  or 
place  of  business  at  the  time  the  collector  or  a  deputy  collector  shall  call 
for  the  annual  list  or  return,  it  shall  be  the  duty  of  such  collector  or  deputy 
collector  to  leave  at  such  place  of  residence  or  business,  with  some  one  of 
suitable  age  and  discretion,  if  such  be  present,  otherwise  to  deposit  in  the 
nearest  post  office,  a  note  or  memorandum  addressed  to  such  person,  requir- 
ing him  or  her  to  render  to  such  collector  or  deputy  collector  the  list  or 
return  required  by  law  within  ten  days  from  the  date  of  such  note  or 
memorandum,  verified  by  oath. 

8068  "And  if  any  person,  on  being  notified  or  required  as  aforesaid,  shall 
refuse  or  neglect  to  render  such  list  or  return  within  the  time  re- 
quired as  aforesaid,  or  whenever  any  person  who  is  required  to  deliver  a 
monthly  or  other  return  of  objects  subject  to  tax  fails  to  do  so  at  theme  it 
required,  or  delivers  any  return  which,  in  the  opinion  of  the  collector,  is 
erroneous,  false,  or  fraudulent,  or  contains  any  undervaluation  or  under- 
statement, or  refuses  to  allow  any  regularly  authorized  Government  officer 
to  examine  the  books  of  such  person,  firm,  or  corporation,  it  shall  be  lawful 
for  the  collector  to  summon  such  person,  or  any  other  person  having  posses- 
sion, custody,  or  care  of  books  of  account  containing  entries  relating  to  the 
business  of  such  person  or  any  other  person  he  may  deem  proper,  to  appear 
before  him  and  produce  such  books  at  any  time  and  place  named  in  the  sum- 
mons, and  to  give  testimony  or  answer  interrogatories,  under  oath,  respect- 
ing any  objects  or  income  liable  to  tax  or  the  returns  thereof. 

8069  "The  collector  may  summon  any  person  residing  or  found  within  the 
State  or  Territory  in  which  his  district  lies;  and  when  the  person 

intended  to  be  summoned  does  not  reside  and  can  not  be  found  within  such 
State  or  Territory,  he  may  enter  any  collection  district  where  such  person 
may  be  found  and  there  make  the  examination  herein  authorized.  And  to 
this  end  he  may  there  exercise  all  the  authority  which  he  might  lawfully 
exercise  in  the  district  for  which  he  was  commissioned: 

8070  "Provided,  That  'person,'  as  used  in  this  section,  shall  be  construed 
to  include  any  corporation,  joint-stock  company  or  association, 

orjinsurance  company  when  such  construction  is  necessary  to  carry  out 
its  provisions." 

Proceedings  When  No  Return  or  a  False  Return  is  Made. 
Section  3176  of  the  Revised  Statutes. 

8071  "Sec.  3176.    If  any  person,  corporation,  company,  or  associa- 
tion fails  to  make  and  file  a  return  or  list  at  the  time  prescribed  by 

law  or  by  regulation  made  under  authority  of  law,  or  makes,  willfully  or 

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otherwise,  a  false  or  fraudulent  return  or  list,  the  collector  or  deputy  collector 
shall  make  the  return  or  list  from  his  own  knowledge  and  from  such  informa- 
tion as  he  can  obtain  through  testimony  or  otherwise.  In  any  such  case  the 
Commissioner  may,  from  his  own  knowledge  and  from  such  information 
as  he  can  obtain  through  testimony  or  otherwise,  make  a  return  or  amend 
any  return  made  by  a  collector  or  deputy  collector.  Any  return  or  list  so 
made  and  subscribed  by  the  Commissioner,  or  by  a  collector  or  deputy 
collector  and  approved  by  the  Commissioner,  shall  be  prima  facie  good  and 
sufficient  for  all  legal  purposes. 

8072  "If  the  failure  to  file  a  return  or  list  is  due  to  sickness  or  absence, 
the  collector  may  allow  such  further  time,  not  exceeding  thirty 

days,  for  making  and  filing  the  return  or  list  as  he  deems  proper. 

8073  "The  Commissioner  of  Internal  Revenue  shall  determine  and  assess 
all  taxes,  other  than  stamp  taxes,  as  to  which  returns  or  lists  are 

so  made  under  the  provisions  of  this  section.  In  case  of  any  failure  to  make 
and  file  a  return  or  list  within  the  time  prescribed  by  law,  or  prescribed  by 
the  Commissioner  of  Internal  Revenue  or  the  collector  in  pursuance  of  law, 
the  Commissioner  of  Internal  Revenue  shall  add  to  the  tax  25  per  centum 
of  its  amount,  except  that  when  a  return  is  filed  after  such  time  and  it  is 
shown  that  the  failure  to  file  it  was  due  to  a  reasonable  cause  and  not  to 
willful  neglect,  no  such  addition  shall  be  made  to  the  tax.  In  case  a  false 
or  fraudulent  return  or  list  is  willfully  made,  the  Commissioner  of  Internal 
Revenue  shall  add  to  the  tax  50  per  centum  of  its  amount. 

8074  "The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  time 
and  in  the  same  manner  and  as  part  of  the  tax  unless  the  tax  has 

been  paid  before  the  discovery  of  the  neglect,  falsity,  or  fraud,  in  which  case 
the  amount  so  added  shall  be  collected  in  the  same  manner  as  the  tax." 

Deposit  of  United  States  Bonds  or  Notes  in  Lieu  of  Surety. 

8075  (Law.)    Sec.  1329  [of  the  Revenue  Act  of  1921].   That  wherever  by 
the  laws  of  the  United  States  or  regulations  made  pursuant  thereto, 

any  person  is  required  to  furnish  any  recognizance,  stipulation,  bond,  guar- 
anty, or  undertaking,  hereinafter  called  "penal  bond,"  with  surety  or  sureties, 
such  person  may,  in  lieu  of  such  surety  or  sureties,  deposit  as  security  with 
the  official  having  authority  to  approve  such  penal  bond,  United  States 
Liberty  bonds  or  other  bonds  or  notes  of  the  United  States  in  a  sum  equal  at 
their  par  value  to  the  amount  of  such  penal  bond  required  to  be  furnished, 
together  with  an  agreement  authorizing  such  official  to  collect  or  sell  such 
bonds  or  notes  so  deposited  in  case  of  any  default  in  the  performance  of  any 
of  the  conditions  or  stipulations  of  such  penal  bond.  The  acceptance  of  such 
United  States  bonds  or  notes  in  lieu  of  surety  or  sureties  required  by  law 
shall  have  the  same  force  and  effect  as  individual  or  corporate  sureties,  or 
certified  checks,  bank  drafts,  post-office  money  orders,  or  cash,  for  the 
penalty  or  amount  of  such  penal  bond.  The  bonds  or  notes  deposited  here- 
under and  such  other  United  States  bonds  or  notes  as  may  be  substituted 
therefor  from  time  to  time  as  such  security,  may  be  deposited  with  the 
Treasurer  of  the  United  States,  a  Federal  reserve  bank,  or  other  depositary 
duly  designated  for  that  purpose  by  the  Secretary,  which  shall  issue  receipt 
therefor,  describing  such  bonds  or  notes  so  deposited.  As  soon  as  security 
for  the  perfomance  of  such  penal  bond  is  no  longer  necessary,  such  bonds  or 
notes  so  deposited,  shall  be  returned  to  the  depositor:  Provided,  That  in  case 

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a  person  or  persons  supplying  a  contractor  with  labor  or  material  as  provided 
by  the  Act  of  Congress,  approved  February  24,  1905  (33  Stat.  811),  entitled 
"An  Act  to  amend  an  Act  approved  August  thirteenth,  eighteen  hundred  and 
ninety-four,  entitled  'An  Act  for  the  protection  of  persons  furnishing  materials 
and  labor  for  the  construction  of  public  works/  "  shall  file  with  the  obligee, 
at  any  time  after  a  default  in  the  performance  of  any  contract  subject  to  said 
Acts,  the  application  and  affidavit  therein  provided,  the  obligee  shall  not  de- 
liver to  the  obligor  the  deposited  bonds  or  notes  nor  any  surplus  proceeds 
thereof  until  the  expiration  of  the  time  limited  by  said  Acts  for  the  institution 
of  suit  by  such  person  or  persons,  and,  in  case  suit  shall  be  instituted  within 
such  time,  shall  hold  said  bonds  or  notes  or  proceeds  subject  to  the  order  of 
the  court  having  jurisdiction  thereof:  Provided  further ,  That  nothing  herein 
contained  shall  affect  or  impair  the  priority  of  the  claim  of  the  United  States 
against  the  bonds  or  notes  deposited  or  any  right  or  remedy  granted  by  said 
Acts  or  by  this  section  to  the  United  States  for  default  upon  any  obligation 
of  said  penal  bond:  Provided  further,  That  all  laws  inconsistent  with  this 
section  are  hereby  so  modified  as  to  conform  to  the  provisions  hereof:  And 
provided  further,  That  nothing  contained  herein  shall  affect  the  authority  of 
courts  over  the  security,  where  such  bonds  are^taken  as  security  in  judicial 
proceedings,  or  the  authority  of  any  administrative  officer  of  the  United 
States  to  receive  United  States  bonds  for  security  in  cases  authorized  by 
existing  laws.  The  Secretary  may  prescribe  rules  and  regulations  necessary 
and  proper  for  carrying  this  section  into  effect. 

Prior  Acts  and  Parts  of  Acts  Repealed. 

8076    (Law.)    Sec.  1400  [of  the  Revenue  Act  of  1921].    (a)  That  the 
following  parts  of  the  Revenue  Act  of  1918  are  repealed,  to  take 
effect  (except  as  otherwise  provided  in  this  Act)  on  January  1,  1922,  sub- 
ject to  the  limitations  provided  in  subdivision  (b) : 

Title  II  (called  "Income  Tax")  as  of  January  J,  1921; 

Title  III  (called  "War-Profits  and  Excess-Profits  Tax")  as  of  January 
1,  1921; 

Title  IV  (called  "Estate  Tax")  on  the  passage  of  this  Act; 

Title  V  (called  "Tax  on  Transportation  and  other  Facilities,  and  on 
Insurance"); 

Sections  628,  629,  and  630  of  Title  VI  (being  the  taxes  on  soft  drinks,  ice 
cream,  and  similar  articles); 

Title  VII  (called  "Tax  on  Cigars,  Tobacco  and  Manufactures  Thereof"); 

Title  VIII  (called  "Tax  on  Admissions  and  Dues"); 

Title  IX  (called  "Excise  Taxes"); 

Title  X  (called  "Special  Taxes"); 

Title  XI  (called  "Stamp  Taxes"); 

Title  XII  (called  "Tax  on  Employment  of  Child  Labor")  as  of  J?      ,  y 
1921;  and 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1621  SERVICE 


1-2-22. 

MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


Sections  1314,  1315,  1316,  1317,  1319,  and  1320  of  Title  III  (being 
certain  administrative  provisions)  on  the  passage  of  this  Act. 

Extent  to  which  Prior  Acts  or  Parts  of  Acts  Remain  in  Force. 

807  7  (b)  The  parts  of  the  Revenue  Act  of  1918  which  are  repealed  by 
this  Act  shall  (unless  otherwise  specifically  provided  in  this  Act) 
remain  in  force  for  the  assessment  and  collection  of  all  taxes  which  have 
accrued  under  the  Revenue  Act  of  1918  at  the  time  such  parts  cease  to  be  in 
effect,  and  for  the  imposition  and  collection  of  all  penalties  or  forfeitures 
which  have  accrued  or  may  accrue  in  relation  to  any  such  taxes.  In  the  case 
of  any  tax  imposed  by  any  part  of  the  Revenue  Act  of  1918  repealed  by  this 
Act,  if  there  is  a  tax  imposed  by  this  Act  in  lieu  thereof,  the  provision  im- 
posing such  tax  shall  remain  in  force  until  the  corresponding  tax  under  this 
Act  takes  effect  under  the  provisions  of  this  Act.  The  unexpended  balance 
of  any  appropriation  heretofore  made  and  now  available  for  the  administra- 
tion of  any  such  part  of  the  Revenue  Act  of  1918  shall  be  available  for  the 
administration  of  this  Act  or  the  corresponding  provision  thereof. 

Short  Titles. 

Yd  b^shodJuE  rii  ft'nvo^?.  io\  ?hnod  sst&tS  fiblinU  sviso&i  01  asifuS 

Revenue  Act  of  1916. 

8078  (Law.)     Sec.  1403  [of  the  Revenue  Act  of  1918].    That  the 
Revenue  Act  of  1916  is  hereby  amended  by  adding  at  the  end 

thereof  a  section  to  read  as  follows: 

8079  "Sec.  903.    That  this  Act  may  be  cited  as  the  'Revenue  Act 
of  1916/ " 

Revenue  Act  of  1917. 

8080  (Law.)     Sec.  1404  [of  the  Revenue  Act  of  1918].    That  the 
Revenue  Act  of  1917  is  hereby  amended  by  adding  at  the  end 

thereof  a  section  to  read  as  follows: 

8081  "Sec.  1303.   That  this  Act  may  be  cited  as  the  'Revenue  Act 
of  1917.'  " 

Revenue  Act  of  1918. 

8082  (Law.)    Sec.  1405  [of  the  Revenue  Act  of  1918].  That  this  Act 
may  be  cited  as  the  "Revenue  Act  of  1918." 

Revenue  Act  of  1921. 

8083  (Law.)    Sec.  1  [of  the  Revenue  Act  of  1921].    That  this  Act  may 
be  cited  as  the  "Revenue  Act  of  1921." 

General  Definitions. 

8084  (Law.)    Sec.  2  [of  the  Revenue  Act  of  1921].    That  when  used  in 

this  Act — 

8085  (1)  The  term  "person"  includes  partnerships  and  corporations,  as 
well  as  individuals; 

Copyright  1922,  by  The  Corporation  T rust  Company. 
WAR  TAX  1622  SERVICE 


1-2-22 

MISCELLANEOUS  LAW  PROVISIONS  AND  REGULATIONS. 


8086  (2)  The  term  "corporation"  includes  associations,  joint-stock  com- 
panies, and  insurance  companies; 

8087  (3)  The  term  "domestic"  when  applied  to  a  corporation  or  partner- 
ship means  created  or  organized  in  the  United  States; 

8088  (4)  The  term  "foreign"  when  applied  to  a  corporation  or  partnership 
means  created  or  organized  outside  the  United  States; 

8089  (5)  The  term  "United  States"  when  used  in  a  geographical  sense 
includes  only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and 

the  District  of  Columbia; 

8090  (6)  The  term  "Secretary"  means  the  Secretary  of  the  Treasury; 

8091  (7)  The  term  "Commissioner"  means  the  Commissioner  of  Internal 
Revenue; 

8092  (8)  The  term  "collector"  means  collector  of  internal  revenue; 

8093  (9)  The  term  "taxpayer"  includes  any  person,  trust  or  estate  subject 
to  a  tax  imposed  by  this  Act. 

8094  (10)  The  term  "military  or  naval  forces  of  the  United  States"  includes 
the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  Female, 

and  the  Navy  Nurse  Corps,  Female,  but  this  shall  not  be  deemed  to  exclude 
other  units  otherwise  included  within  such  terms;  and 

8095  (11)  The  term  "government  contract"  means  (a)  a  contract  made 
with  the  United  States,  or  with  any  department,  bureau,  officer, 

commission,  board,  or  agency,  under  the  United  States  and  acting  in  its 
behalf,  or  with  any  agency  controlled  by  any  of  the  above  if  the  contract  is 
for  the  benefit  of  the  United  States,  or  (b)  a  subcontract  made  with  a  con- 
tractor performing  such  a  contract  if  the  products  or  services  to  be  furnished 
under  the  subcontract  are  for  the  benefit  of  the  United  States.  The  term 
"government  contract  or  contracts  made  between  April  6,  1917,  and  Novem- 
ber 11,  1918,  both  dates  inclusive"  when  applied  to  a  contract  of  the  kind 
referred  to  in  clause  (a)  of  this  subdivision,  includes  all  such  contracts  which, 
although  entered  into  during  such  period,  were  originally  not  enforceable, 
but  which  have  been  or  may  become  enforceable  by  reason  of  subsequent 
validation  in  pursuance  of  law. 

Saving  Clause  in  Event  of  Unconstitutionality. 

8096  (Law.)  Sec.  1403  [of  the  Revenue  Act  of  1921].  That  if  any  pro- 
vision of  this  Act,  or  the  application  thereof  to  any  person  or  cir- 
cumstances, is  held  invalid,  the  remainder  of  the  Act,  and  the  application  of 
such  provision  to  other  persons  or  circumstances,  shall  not  be  affected 
thereby. 

General  Effective  Date  of  Act. 

8097  (Law.)    Sec.  1404  [of  the  Revenue  Act  of  1921].    That  except  as 
otherwise  provided,  this  Act  shall  take  effect  upon  its*passage. 

Approved  by  the  President,  November  23,  1921,  at  3:55  P.  M. 

Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  1623  SERVICE 


03 


reos 

seo8 
eeos 

*eos 


» 

I 


i 


FORMS,  FINDER,  ETC. 


TABLE  OF  CONTENTS. 

Page 

Forms.— Table  of  "War  Tax"  Forms   1703 

Cases.— Table  of  Court  Cases   1705 

1918  Revenue  Act  Sections. — Table  of  sections  reproduced  in  this  Service  with 

paragraph  references   1707 

1921  Revenue  Act  by  Sections. — Giving  reference  to  the  War  Tax  Service  paragraphs 

at  which  the  sections  are  reproduced   1708 

Laws. — Table  of  laws  reproduced  in  this  Service   1710 

Regulations. — Table  of  "Regulations"  reproduced  in  this  Service   1710 

Revised  Statutes  Sections. — Giving  reference  to  the  sections  of  the  Revised  Statutes 

of  the  United  States  reported  herein   1710 


Collectors  of  Internal  Revenue. — Table  of  Internal  Revenue  Collection  Districts, 

including  names  and  addresses  of  Collectors  and  location  of  branch  offices   1711 


Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  TAX  1701  SERVICE 


FORMS,  FINDER,  ETC. 

TABLE  OF  CONTENTS. 

Page- 
Forms. — Table  of  "War  Tax"  Forms   170." 

Cases.— Table  of  Court  Cases   1  70- 

1918  Revenue  Act  Sections.— Table  of  sections  reproduced  in  t hi?  Service  with 

paragraph  references    ..  ..  '.*8?PIW?W*.PVWWW  1707 

1921  Revenue  Act  by  Sections.- — Giving  reference  to  the  War  Tax  Service  paragra? A ■< 

at  which  the  sections  are  reproduced     170* 

Laws. — Table  of  laws  reproduced  in  this  Service  •   17lf> 

Regulations. — Table  of  "Regulations"'  reproduced  in  this  Service  JT;  L  .  . -.^Aoilslifg^ft) 

Revised  Statutes  Sections.— (jiving  reference  to  the  sections  of  the  Revised  Statutes 

of  the  United  States  reported  herein  tf iwrl.  t>?no/p.i.  39*A*&  v:  i   1710 

Collectors  of  Internal  Revenue. —  Table  of  Internal  Revenue  Collection  District?, 

including  names  and  addresses  of  Collectors  and  location  of  branch  offices   171  i 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1702  SERVICE 


FORMS,  FINDER,  ETC. 


FORMS. 


MISCELLANEOUS. 

No.                                                   Designation  Page 

843         Claim  for  refund:  Claim  for  abatement:  Claim  for  credit   1609 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX. 

1120       Corporation  income  and  profits  tax  return   425 

1120S      Government  contracts  profits  tax  return  Insert  to  face  page  425 

1122       Information  return  of  subsidiary  or  affiliated  corporation   424 

ESTATE  TAX. 

704         Executor's  60-day  notice  (resident  estates). — 1918  Act   27 

704  Executor's  2-month  notice  (resident  estates). — 1921  Act   223 

705  Executor's  60-day  notice  (non-resident  estates) — 1918  and  1921  Acts.  ...  29 

706  Return  of  Gross  Estate — 1918  and  1921  Acts   11 

714         Transfer  agents'  notice:  Non-resident  decedents — 1918  and  1921  Acts.  ...  218 

Old  Form  714  (page  31)  superseded  by  above. 

760         Affidavit  of  Ownership  of  Bonds   88 


787  Insurance  companies'  60-day  notice:  Resident  decedent — Not  reproduced. 

See  f20l.    [Not  in  use  under  1921  Act.] 

788  Insurance  companies'  60-day  notice:  Non-resident  decedent — Not  repro- 

duced.   See  1[207.    [Not  in  use  under  1921  Act.] 

791  Application  for  release  of  estate  tax  lien — Not  reproduced.    See  ^278  (1918 

Act)  and  H753  (1921  Act). 

792  Certificate  releasing  estate  lien — Not  reproduced.    See  ^"277^(1918  Act) 

and  1[752  (1921  Act). 

793  Claim  for  military  exemption  from  estate  tax. — Not  reproduced.    See  ^[55 

(1918  Act)  and  «[[597  (1921  Act). 

STAMP  TAXES. 

A         Clearing-house  and  ex-clearing-house  transactions   719 

B         Sales  of  products  or  commodities   726 

741         Statement  for  registration — Not  reproduced.    See  ^[3704. 

743  Order  for  stamps:  stock  certificates — Not  reproduced.    See  ^3736. 

744  Order  for  stamps:  sale  of  products — Not  reproduced.    See  ^[3736. 


EXCISE  TAXES. 

728  Return  of  manufacturer's  excise  taxes   907 

728A       Return  of  miscellaneous  excise  taxes   909 

TELEGRAPH  AND  TELEPHONE 

727         Return  of  tax  on  telegraph  and  telephone  messages   1103 

ADMISSIONS  AND  DUES. 

729  Return  of  tax  on  admissions  and  dues   1305 


729A       Tax  return  on  brokers'  sales — Not  reproduced.    See  ^[6826. 

752  Application  for  registry — Not  reproduced.    See  ^[6817. 

753  Certificate  of  registry — Not  reproduced.    See  ^[6817. 

754  Notification  by  lessor  where  lessee  is  responsible  for  collection  of  the  tax — 

Not  reproduced.    See  ^6827. 

755  Affidavit  claiming  exemption:  admissions.    Not  reproduced.    See  ^[6777. 
755  A       Notification  by  Collector  of  allowance  or  disallowance  of  claim  for  exemption. 

Not  reproduced.    See  ^6779. 


SPECIAL  TAXES. 

11         Special-tax  return   1507 

1 1 A      Brokers' special  tax  return   1509 

725         Receipt  form  for  tax  on  pleasure  boats — Not  reproduced.    See  ^[7634. 

732         Return  for  special  tax  on  pleasure  boats  and  automobiles   1511 

CAPITAL  vSTOCK  TAX. 

707  Annual  return  of  domestic  corporations   603 

708  Annual  return  of  foreign  corporations   607 


Copyright  1922,  by  The  Corporation  Trust  Company. 
war'tax        1703  SERVICE 


FORMS,  FINDER,  ETC. 


[In  blank.] 


WAR  TAX         1764  SERVICE 


FORMS,  FINDER,  ETC. 


TABLE  OF  CASES. 

The  references  are  to  page  numbers. 

W  Page 

Baker  &  Co..  Malley  vs.  (C.  C.  of  A.,  First  Circuit,  May  16,  1922)   946 

l£iit i more  Talking  Board  Co.,  Inc.  vs.  Miles-  (280  Fed.  658).  .  .  9  15,  952 

Buckeye  Cotton  Oil  Co.  vs.  U.  S.  (T.  D.  3377)   1 1 18 

Ca'rtiet  Holland  Lumber  Co.  vs.  Dovle  (269  Fed.  647).  .Dec.  1920  Cum.  Bull.  p.  337. 

Reversed,  C.  C.  of  A.,  Sixth  Circuit  (277  Fed.  150)   417 

Casey  vs.  Howard  (C.  C.  of  A.,  First  Circuit,  June  6,  1922).   631 

Central  Union  Trust  Co.  vs.  Edwards  (U.  S.  D.  C,  May  25,  1922)   640 

"N        Cole  et  al.  vs.  Ralph  (252  U.  S.  286)  !                             .  .   749 

Congdon  vs.  Lvnch  (T.  D.  3324)   153 

Cothran  and  Connally  vs.  U.  S.  (4th  C.  C.  of  A.,  Oct.  21,  1922)   1537 

Crocker  vs.  Malley  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

D.  L.  &  W.  R.  R.  Co.:  W.  U.  Telegraph  Co.  vs.  (T.  D.  3369)   1117 

DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell  (268  Fed.  377)   386 

Dodge  vs.  Osborn  (240  U.  S.  118)   1613 

Dovle:  Cartier  Holland  Lumber  Co.  vs.  (269  Fed.  647) .  .  Dec.  1920  Cum.  Bull.  p.  337. 

'  Reversed,  C.  C.  of  A.,  Sixth  Circuit  (277  Fed.  150)   417 

Doyle:  Shwab  vs.  (U.  S.  Supreme  Court,  May  1,  1922)   113 

ft        Duffy:  Marconi  Wireless  Telegraph  Company  of  America  vs.  (273  Fed.  197)   763 

Edwards:  Central  Union  Trust  Co.  vs.  (U.  S.  D.  C,  May  25,  1922)   640 

Edwards:  Lincoln  Chemical  Co.  vs.  (272  Fed.  142)   389 

Edwards:  Martin  vs.  (T.  D.  3334)   462 

Edwards:  Slocum  et  al.,  executors  (Sage  Estate)  vs  .(U.  S.  D.  C,  June  20,  1922).  . .  .  220 

I'M  wards:  Title  Guarantee  and  Trust  Co.  (Teets)  vs.  (T.  D.  3319)   142 

Eisner:  New  York  Trust  Co.  vs.  (41  Sup.  Ct.  506)   117 

Fidelity  Trust  Co.  vs.  Lederer  (276  Fed.  51)   766 

Field:  U.  S.  vs.  (255  U.  S.  257)   120 

Gaston:  Nichols  vs.  (U.  S.  C.  C.  of  A.,  First  Circuit,  March  21,  1922)   136 

Greiner  vs.  Lewellyn  (U.  S.  Supreme  Court,  April  10,  1922)  ,   142 

Hecht  vs.  Malley  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

Howard  vs.  Casey  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

Z-        Howard  vs.  Malley  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

W        Iredell:  DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs.  (268  Fed.  377)   386 

Knox  (estate  of  Kissam)  vs.  McElligott  (U.  S.  Supreme  Court,  May  1,  1922)   152 

Kohlhamer  vs.  Smietanka  (239  Fed.  408)   163  5 

La  Belle  Iron  Works  vs.  U.  S.  (41  Sup.  Ct.  528)   379 

Lederer:  Fidelity  Trust  Co.  vs.  (276  Fed.  51).   766 

Levy  vs.  Wardell  (U.  S.  Supreme  Court,  May  1,  1922)   150 

Lewellyn:  Greiner  vs.  (U.  S.  Supreme  Court,  April  10,  1922)   142 

Lincoln  Chemical  Co.  vs.  Edwards  (272  Fed.  142)   389 

Lynch:  Congdon  vs.  (T.  D.  3324)   153 

Malley  vs.  Baker  &  Co.  (281  Fed.  41)   946 

Malley  vs.  Crocker  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

Malley  vs.  Hecht  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   63  i 

Malley  vs.  Howard  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

/         Marconi  Wireless  Telegraph  Company  of  Am.  vs.  Duffy  273  (Fed.  197)   763 

Martin  vs.  Edwards  (T.  D.  3334)   462 

McElligott:  Knox  (estate  of  Kissam)  vs.  (U.  S.  Supreme  Court,  May  1,  1922)   152 

Miles:  Baltimore  Talking  Board  Co.,  Inc.,  vs.  (280  Fed'.  658)  945,  952 

New  York  Trust  Co.  vs.  Eisner  (41  Sup.  Ct.  506)   1  17 

Nichols  vs.  Gaston  (281  Fed.  61)  •   136 

Osborn :  Dodge  vs.  (240  U.  S.  118)   1613 

Polk  vs.  Page  (276  Fed.  128.    Also  U.  S.  D.  C,  December  21,  1921)   106,  135 

1st  C.  C.  of  A.  (281  Fed.  74)  !   155 

f        Proctor  &  Gamble  Co.  vs.  U.  S.  (T.  D.  3377)   11  18 

Ralph:  Cole  et  al.  vs.  (252  U.  S.  286)   749 

Shwab  vs.  Doyle  (U.  S.  Supreme  Court,  May  1,  1922)   143 

Slocum  et  al.,  executors  vs.  Edwards  (Sage  Estate)  (U.  S.  D.  C,  June  20,  1922)   220 

Smietanka:  Kohlhamer  vs.  (239  Fed.  408)  ,  1615 

Smietanka  vs.  Ullman  (275  Fed.  814)   79 

Title  Guarantee  and  Trust  Co.  (Teets)  vs.  Edwards  (T.  D.  3319)   142 

Ullman:  Smietanka  vs.  (275  Fed.  814)   79 

Union  Trust  Company  (Lachman)  vs.  Wardell  (U.  S.  Supreme  Court,  May  1,  1922)  147 

4        U.  S.:  Buckeye  Cotton  Oil  Co.  vs.  (T.  D.  3377)..   1118 

U.  S.:  Cothran  and  Connally  vs.  (4th  C.  C.  of  A.,  Oct.  21,  1922)   1537 


FORMS,  FINDER,  ETC. 


TABLE  OF  CASES.— Concluded. 
The  references  are  to  page  numbers. 

Page 

tL  S.  vs.  Field  (255  U.  S.  257)  ;   120 

U.  S.:  UBelle  Iron  Works  vs.  (41  Sup.  Ct.  528)   37« 

U.  S.:  Proctor  &  Gamble  Co.  vs.  (T.  D.  3377)   1118 

U.  S.:  Washington  Water  Power  Co.  vs.  (56  Ct.  Clms. — Opinion  No.  34092)   627 

W.  U.  Telegraph  Co.  vs.  D.  L.  &  W.  R.  R.  Co.  (T.  D.  3369)   1117 

Wardell:  Levy  vs.  (U.  S.  Supreme  Court,  xMay  1,  1922)   150 

Wardel! :  Union  Trust  Co.  (Lachman)  vs.  (U.  S.  Supreme  Court,  May  1,  1922)   147 

Washington  Water  Power  Co.  vs.  U.  S.  (56  Ct.  Clms. — Opinion  No.  34092)   627 


WAR  TAX         1 706         SS KVIC  Z 


l-i-22.     (2)  6-22-22.    (3)  8-3-22. 

FORMS,  FINDER,  ETC. 


1918  REVENUE  ACT  SECTIONS. 

Reproduced  in  this  Service. 

Title  II.— Income  Tax. 

Sec.  200  (in  part)  H501,  502,  504  Sec.  231   11667 

201   505  236  (a),  (in  part)   726 

213  (b),  (4),  (in  part)   726  240   587 


Sec.  300  

301  

302  

303  

304  

305  

306  to  309. — No  such. 

310  

311  

312  

313  to  319. — No  such. 

320  

321  to  324. — No  such. 


Title  III— Excess-Profits  Tax. 

  ^500          Sec.  325.... 

  510  326.... 

  523  327.... 

  524 

  525 

  528 


529 
530 
541 


543 


H548 
555 
565 


328   570 

329.  — No  such. 

330   575 

331   579 

332  to  334.— No  such. 

335   580 

336   585 

337   586 

338  to  399— No  such. 


Title  IV. 


Sec.  400   Hi 

401   4 

402   7 

403   14 

404   27 

405   29 


Estate  Tax. 


Sec.  406   H30 

407   31 

408   33 

409   35 

410   37 


411  to  499.— No  such. 


Title  XIV.— General  Provisions. 

Sec.  1403  1f8078  Sec.  1405  f8082 

1404.   8080 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1707  SERVICE 


1-2-22.     (2)  6-22-22.    (3)  8-3-22. 

FORMS,  FINDER,  ETC. 


1921  REVENUE  ACT  BY  SECTIONS. 

Title  I. — General  Definitions. 

Sec.  1  H8083 

2   8084 

3  to  199. — No  such. 

Title  II.— Income  Tax. 

(Not  included  herein  except  as  shown  below.) 

Sec.  200  (in  part)  ^1002,  1004  Sec.  231  ^1059 

201   1005  236  (a),  (in  part)   726 

213  (b),  (4),  (in  part)   726  240   1074 

229   1082  262   1083 


Title  III.— Excess-Profits  Tax. 

Sec.  300  fllOOO  Sec.  326  1)  1035 

301   1011                327   1044 

08£    302   1019                 328   1049 

303   1020  329  to  330.— No  such. 

304   1021                331   1053 

305   1024  332  to  334.— No  such. 

306  to  311— No  such.                                      335   1054 

312   1025                 336   1056 

313  to  319.— No  such.                                     337   1057 

320   1027                338   1058 

321  to  324— No  such.  339  to  399.— No  such. 

325   1028 

Title  IV.— Estate  Tax. 

Sec.  400  U416  Sec.  407   ^451 

401   421  408   454 

402   424  409   456 

403   431  410   458 

404   446  411   460 

405                                             448  412  to  499.— No  such. 

406   449 

Title  V. — Telegraph  and  Telephone  Messages. 

Sec.  500  H5500  Sec.  502  115506 

501   5505  503  to  599 —No  such. 

Title  VI. — Beverages. 

Sec.  600  to  603. — Not  included  herein. 
Sec.  604  to  700 —No  such. 

Title  VII— Cigars,  Tobacco,  etc. 

Sec.  700  to  704. — Not  included  herein. 
Sec.  705  to  799. — No  such. 

Title  VIII. — Admissions  and  Dues. 

Sec.  800  116500  Sec.  802  ^6512 

801   6509  803  to  S99.— No  such. 


Copyright  1922.  by  The  Corporation  Trust  Company. 
WAR  TAX  1708  SERVICE 


6  19  22    (2)  6-22-22. 


FORMS,  FINDER,  ETC. 


1921  REVENUE  ACT  BY  SECTIONS. — Concluded. 

Title  IX.— Excise  Taxes. 

*ec  900  H4500  Sec.  904  114521 

901   4517  905   4528 

902   4518  906   4531 

903                                          4519  907  to  999.— No  such. 

Title  X.— Special  Taxes. 

Sec,  1000  113000  Sec.  1004  H7693 

1001                                          7661  1005   to   1007. — Narcotic  Act  (not 

1002                                          7676  included  herein). 

1003                                        7689  1008  to  1099— No  such. 

Title  XL— Stamp  Taxes. 

Sec.  1100  H3500  Sec.  1105  %35\4 

1101   3501  1106   3516 

1102   3502  1107   3517 

1103   3507  Schedule  A   3520 

1104                                        3513  1108  to  1199— No  such. 

Title  XII.— Child  Labor.* 

Sec.  1200  to  1207. — Not  included  herein 
Sec.  1208  to  1299.— No  such. 

*Title  XII.— -Tax  on  child  labor,  declared  unconstitutional,  U.  S.  Supreme  Court 
(Bailey  vs.  The  Drcxel  Furniture  Company,  May  15,  1922). 

Title  XIIL — Administrative. 

Sec.  1300  .  f8000  Sec.  1317.— Not  included  herein. 

1301   8012  1318  H8048 

1302                                          8014                 1319   8051 

1303                                          8009                 1320   8052 

1304  4539,  8018                 1321   8053 

1305  4538,  8021                 1322   8013 

1306                                          8019                 1323   8046 

1307                                          8001                 1324   8036 

1308                                          8002                 1325   8020 

1309   8006  1326   4537 

1310   8003  1327  — Not  included  herein. 

1311   8060  1328,   1089 

1312   8007  1329   8075 

1313   8008  1330.— Not  included  herein. 

1314   8011  1331   1079 

1315  ]  .  .   8022  1332   1093 

1316   8056  1333  to  1399.— No 'such. 


Title  XIV.— General  Provisions 

Sec.  1400  1l463,  1099,  8076  See.  1403  1[80£6 

1401.  — Not  included  herein.  1  104....-   8097 

1402.  — Not  included  herein.  1404  is  the  last  section 


Copyright  1922,  by  The  Corporation  Trust  Company, 
WAR  TAX  1709  SERVICE 


5-19-22.     (6)  6-22-22. 


FORMS,  FINDER,  ETC. 


LAV/S 


Revenue  Act  of  1918  See  p.  1707 

Revenue  Act  of  1921  See  p.  1708 

Act  of  May  12,  1900  as  amended  by  Act  of  June  30,  1902   ^[8024 

Liberty  and  Victory  Loan  Act — Exemption  provisions   H727 

Section  4  W76,  733 

Second  Liberty  Bond  Act  (Sec.  14)  as  amended  by  Third  Liberty  Bond  Act   U"236 


REVISED  STATUTES  SECTIONS 

Sec.  3164  ^8061  Sec.  3220  ^8023 

Sec.  3165  H8062  Sec.  3224  ^8038 

Sec.  3167  f8063  Sec.  3225  ^[8047 

Sec.  3 1 72  1[8064  Sec.  3226  ^8049 

Sec.  3173  1j8065  Sec.  3227  f  805 1 

Sec.  3176...  118071  Sec.  3228.  <[8057 

Sec.  3184  ,  117658  Sec.  3229  ^8059 


REGULATIONS 

The  articles  of  each  of  the  "Regulations"  listed  below  are  -printed  in  numerical  order  where 
the  regulations  appear  in  the  Service  and  the  "Article"  number  is  printed  in  boldface  type  in 
each  case.  Usually  the  articles  are  tabulated  in  a  table  of  contents  beginning  on  the  page 
indicated  below: 

Regulations  Beginning 
Number  Subject  Covered  on  page 

37  Estate  Tax   33 

40  Stamp  Taxes:  Sales  and  transfers  of  stock,  and  sales  of  products 

for  future  delivery   709 

43 — Part  I  Tax  on  Admissions   1321 

43— Part  II  Tax  on  Dues   1307 

45— Part  II  B      Excess  Profits  Tax:  1918  Act  (For  1921  Act  see  Reg.  62  below.) .  316 

47  Excise  Taxes — Sales  by  manufacturer   910 

48  Works  of  Art  and  Jewelry  Taxes   934 

55  Stamp  Taxes — Documents  ,#   737 

57  Tax  on  Telephone,  Telegraph,  Radio,  and  Cable  Facilities   1103 

59  Special  Taxes  upon  Businesses  and  Occupations  and  upon  the 

use  of  Boats   1513 

62— Part  II  B  Excess" Profits  Tax:  1921  Act  (For  1918  Act  see  Reg.  45  above.)  431 
64  Capital  Stock  Tax   609 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1710  SERVICE 


5  19  22    (2)  6-22-22.    (3)  8-7-22. 

FORMS,  FINDER,  ETC. 


1921  REVENUE  ACT  BY  SECTIONS. — Concluded. 

Title  IX —Excise  Taxes. 

Sec.  900  ^[4500  Sec.  904  ^4521 

901   4517  905   4528 

902   4518  906   4531 

903                                             4519  907  to  999.— No  such. 

Title  X.— Special  Taxes. 

Sec.  1000   13000  Sec.  1004  ^7534 

10C  i .....  ,                                  7501  1005   to   1007.— Narcotic   Act  (nor 

1002  ,                            7516  included  herein). 

1003                                           7528  1008  to  1099— No  such. 

Title  XL— Stamp  Taxes. 

Sec.  1100...   ^3500  Sec.  1105  <J3514 

1101   3501  1106   3516 

1102   3502  1  107  ,   3517 

1103  +   3507  Schedule  A   3520 

1104....   3513  1108  to  1199.— No  such. 

Title  XII.— Child  Labor.* 

Sec.  1200  to  1207. — Not  included  herein 
Sec.  1208  to  1299.— No  such. 

*Title  XII.— Tax  on  child  labor,  declared  unconstitutional,  U.  S.  Supreme  Court 
(Bailey  vs.  The  l^rexel  Furniture  Company,  May  15,  1922). 

Title  XIII.— Administrative. 

S  c.  1300  H8000  Sec.  1317.— Not  included  herein. 

1301  .  .  .  8012  1318  U8048 

1302                                        8014  1319   8051 

1303...                                      8009  1320   8052 

1304  .4539,  8018  1321   8053 

1305  4538,  8021  1322   8013 

1306...                                      8019  1323   8046 

1307                                          8001  1324   8036 

1308                                          8002  1325   8020 

1309                                          8006  1326   4537 

1310   8003  1327. — Not  included  herein. 

1311   8060  1328   1089 

1312   8007  1329   8075 

1313...   8008  1330.— Not  included  herein. 

1314   8011  1331   1079 

1315   8022  1332  *   1093 

1316  -   8056  1333  to  1399.— No  such. 


Title  XIV. — General  Provisions 

i3,  10995  8  0  7  6         Sec.  1403  . . . . 

rein.  1404  

1402. — Not.  included  herein.  !404  is  the  last  section 


Sec.  1400  <[463,  1099,  8076  Sec.  1403  ^8056 

1401. — Not  included  herein.  1404   8097 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1709  SERVICE 


2-10-22. 


FORMS,  FINDER,  ETC. 


IDAHO    (Comprising  the  State  of  Idaho), 
Collector:    Evan  Evan*  Boise. 
Div.  Hdqrs.  at:  Pocatello. 

ILLINOIS 

First  District. — Comprising  that  part  of  the  State  of  Illinois  included  in  the  followin  counties: 
Boone,  Bureau,  Carroll,  Cook.  Dekalb,  Dupage,  Grundy,  Henderson,  Henry,  Jo  Daviess, 
Kane,  Kankakee,  Kendall,  Knox,  Lake,  LaSalle,  Lee,  McHenry,  Marshall,  Mercer, 
Ogle,  Peoria,  Putnam,  Rock  Island,  Stark,  Stephenson,  Warren,  Whiteside,  Will,  and 
Winnebago. 

Collector:    John  C.  Cannon,  Chicago. 

Div.  Hdqrs.  at:    Chicago  (five),  Joliet,  Rock  Island,*  Peoria,*  Rock- 
ford,  Aurora. 

eighth  District. — Comprising  that  part  of  the  State  of  Illinois  included  in  the  following  counties: 
Adams,  Alexander,  Bond,  Brown,  Calhoun,  Cass,  Champaign,  Christian,  Clark,  Clay,  Clin- 
ton, Coles,  Crawford,  Cumberland,  Dewitt,  Douglas,  Edgar,  Edwards,  Effingham,  Fayette, 
Ford,  Franklin,  Fulton,  Gallatin,  Greene,  Hamilton,  Hancock,  Hardin,  Iroquois,  Jackson, 
Jasper,  Jefferson,  Jersey,  Johnson,  Lawrence,  Livingston,  Logan,  McDonough,  McLean, 
Macon,  Macoupin,  Madison,  Marion,  Mason,  Massac,  Menard,  Monroe,  Montgomery, 
Morgan,  Moultrie,  Perry,  Piatt,  Pike,  Pope,  Pulaski,  Randolph,  Richland,  St.  Clair, 
Saline.  Sangamon,  Schuyler,  Scott,  Shelby,  Tazewell,  Union,  Vermilion,  Wabash,  Washing- 
ton, Wayne,  White,  Williamson,  and  Woodford. 

Collector:    George  W.  Schwaner,  Springfield. 

Div.  Hdqrs.  at:    East  St.  Louis,*  Cairo,  Centralia,  Danville,*  De- 
catur,* Bloomington,  Quincy.* 
Stamp  Offices  at:    Pekin,  Jacksonville,  Canton. 

INDLANA    (Comprising  the  State  of  Indiana), 

Collector:    M.  Bert  Thurman,  Indianapolis. 

Div.  Hdqrs.  at:     Gary,  South   Bend,*  Ft.   Wayne,*  Logansport, 

Lafayette,*  Muncie,  New  Albany,  Evansville,*  Terre  Haute.* 
Stamp  Office  at:  Lawrenccburg. 

IOWA    (Comprising  the  State  of  Iowa), 

Collector:    Lars.  E,  Biadine,  Dubuque, 

Div.  Hdqrs.  at:    Davenport,*  Des  Moines,*  Ottumwa,*  Sioux  City,* 

Cedar  Rapids,  Council  Bluffs,  Mason  City. 
Stamp  Office  at:  Burlington. 

KANS&.S    (Comprising  the  State  of  Kansas), 

Collector:    Harvey  H.  Motter,  Wichita. 

Div.  Hdqrs.  at:    Kansas  City,*  Parsons,  Topeka>  Salina. 

KENTUCKY    (Comprising  the  State  of  Kentucky), 
Collector:    Robert  H  Lucas,  Louisville. 

Div.  Hdqrs.  at:    Ashland,  Paducah,*  Owensboro,*  Lexington,*  Cov- 
ington.* 

Stamp  Offices  at:    Danville,  Frankfort. 

LOUISIANA    (Comprising  the  State  of  Louisiana), 

Collector:    Joseph  H.  Hynson,  Jr.  (Acting},  New  Orleans. 
Div.  Hdqrs.  at:    Shreveport,  Baton  Rouge. 

MAINE    (Comprising  the  State  of  Maine), 

Collector:  Frank  J.  Ham,  Augusta. 
Div.  Hdqrs.  at:    Portland,  Bangor. 

MARYLAND    (Comprising  the  State  of  Maryland  and  the  District  of  Columbia), 
Collector:    Galen  L.  Ta-t,  Baltimore. 

Div.  Hdqrs.  at:    Washington,  D.  C.,*  Hagerttowa,  Salisbury. 
"Stamp*  sold. 

Copyright  1922,  by  lhr  Corporation   TtiM  Company 
WAR  TAX  J  712  SERVICE 


2-10-22. 


FORMS,  FINDER,  ETC. 


MASSACHUSETTS    (Comprising  the  State  of  Massachusetts), 
Collector:    Malcolm  E.  Nichols,  Boston. 

Div.  Hdqrs.  at:    Springfield,  Worcester,  Fall  River,  Lawrence. 

MICHIGAN 

First  District. — Comprising  that  part  of  the  State  of  Michigan  included  in  the  following 
counties:  Alcona,  Alpena,  Arenac,  Bay,  Branch,  Calhoun,  Cheboygan,  Clare,'  Clinton, 
Crawford,  Genesee,  Gladwin,  Gratiot,  Hillsdale,  Huron,  Ingham,  Iosco,  Isabella,  Jackaon 
Lapeer,  Lenawee,  Livingston,  Macomb,  Midland,  Monroe,  Montmorency,  Oakland, 
Ogemaw,  Oscoda,  Otsego,  Presque  Isle,  Roscommon,  Saginaw,  Sanilac  Shiawassee, 
St.  Clair,  Tuscola,  Washtenaw  and  Wayne. 

Collector:    Fred  L.  Wood  worth,  Detroit. 

Div.  Hdqrs.  at:    Bay  City,*  Jackson,  Flint. 

Stamp  Office  at:  Saginaw. 

Fourth  District. — Comprising  that  part  of  the  State  of  Michigan  included  in  the  following 
counties:  Alger,  Allegan,  Antrim,  Baraga,  Barry,  Benzie,  Berrien,  Cass,  Charlevoix, 
Chippewa,  Delta,  Dickinson,  Eaton,  Emmet,  Gogebic,  Grand  Traverse,  Houghton, 
Ionia,  Iron,  Kalamazoo,  Kalkaska,  Kent,  Keweenaw,  Lake,  Leelanau,  Luce,  Mackinac, 
Manistee,  Marquette,  Mason,  Mecosta,  Menominee,  Missaukee,  Montcalm,  Muskegon, 
Newaygo,  Oceana,  Ontonagon,  Osceola,  Ottawa,  St.  Joseph,  Schoolcraft,  Van  Bur-en. 
Wexford. 

Collector:    Emanuel  J.  Doyle,  Grand  Rapids. 
Div.  Hdqrs.  at:    Kalamazoo,  Marquette. 
MINNESOTA    (Comprising  the  State  of  Minnesota), 
Collector:    Levi  M.  Willcuts,  St.  Paul. 

Div.  Hdqrs.  at:    Minneapolis,*  Duluth,*  Winona,  Mankato,  St.  Cloud. 

MISSISSIPPI    (Comprising  the  State  of  Mississippi), 
Collector:    George  L.  Donald,  Jackson. 
Div.  Hdqrs.  at:    Meridan,  Greenwood. 

MISSOURI 

First  District. — Comprising  that  part  of  the  State  of  Missouri  Included  in  the  following  counties: 
Adair,  Audrain,  Bollinger,  Boone,  Butler,  Callaway,  Cape  Girardeau,  Carter,  Clark, 
Crawford,  Dent,  Dunklin,  Franklin,  Gasconade,  Howard,  Iron,  Jefferson,  Knox,  Lewis, 
Lincoln,  Linn,  Macon,  Madison,  Maries,  Marion,  Mississippi,  Montgomery,  Monroe, 
New  Madrid,  Oregon,  Osage,  Pemiscot,  Perry.  Phelps,  Pike,  Pulaski,  Ralls,  Randolph, 
Reynolds,  Ripley,  St.  Charles,  St.  Francois,  Ste.  Genevieve,  St.  Louis,  Schuyler,  Scot- 
land, Scott,  Shannon,  Shelby,  Stoddard,  Warren,  Washington,  and  Wayne. 

Collector:    John  S.  Leahy,  St.  Louis. 

Div.  Hdqrs.  at:  Hannibal,  Cape  Girardeau. 
Sixth  District. — Comprising  that  part  of  the  State  of  Missouri  Included  In  the  following 
counties:  Andrew,  Atchison,  Benton,  Barry,  Barton,  Bates,  Buchanan,  Caldwell,  Camden, 
Carroll,  Cass,  Cedar,  Charlton,  Christian,  Clay,  Clinton,  Cole,  Cooper,  Dade,  Dallas, 
Daviess,  Dekalb,  Douglas,  Gentry,  Greene,  Grundy,  Harrison,  Henry,  Hickory,  Holt, 
Howell,  Jackson,  Jasper,  Johnson,  Laclede,  Lafayette,  Lawrence,  Livingston,  McDonald, 
Mercer,  Miller,  Moniteau,  Morgan,  Newton,  Nodaway,  Ozark,  Pettis,  Platte.Polk, 
Putnam,  Ray,  St.  Clair,  Saline,  Stone,  Sullivan,  Taney,  Texas,  Vernon,  Webster,  Worth, 
Wright. 

Collector:    Geo.  F.  Crutchley,  Kansas  City. 
Div.  Hdqrs.  at:    St.  Joseph,*  Springfield. 
Stamp  Office  at:  Joplin. 

MONTANA    (Comprising  the  State  of  Montana), 

Collector:    Charles  A.  Rasmusson,  Helena. 
Div.  Hdqrs.  at:    Butte,*  Great  Falls,  Billings, 

NEBRASKA    (Comprising  the  State  of  Nebraska), 
Collector:   Arthur  B.  Allen,  Omaha. 
Div.  Hdqrs.  at:    Lincoln,  Grand  Island. 

NEVADA    (Comprising  the  State  of  Nevada), 

Collector:   Louis  A.  Spellicr,  Reno. 
NEW  HAMPSHIRE    (Comprising  the  State  of  New  Hampshire), 

Collector:   John  H.  Field,  Portsmouth. 

Stamp  Office  at:  Manchester. 
•Stamps  sold. 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1713  SERVICE 


2-10-22. 


FORMS,  FINDER,  ETC. 


NEW  JERSEY 

Flmt  District. — Comprising  that  part  of  the  State  oi  New  Jers-y  Included  in  the  following 
counties:  Atlantic,  Burlington,  Camden,  Cape  May,  Cumberland,  Gloucester,  Mercer, 
Monmouth,  Ocean,  and  Salem. 

Collector:    Edward  L.  Sturgess,  Camden. 

Div.  Hdqrs.  at:  Trenton. 

Fifth  District. — Comprising  that  part  of  the  State  of  New  Jersey  included  In  the  following 
counties:  Bergen,  Essex,  Hudson,  Hunterdon,  Middlesex,  Morris,  Passaic,  Somerset, 
Sussex,  Union,  Warren. 

Collector:    Frank  C.  Ferguson,  Newark. 

Div.  Hdqrs.  at:    jersey  City,*  Paterson,*  Elizabeth,  Morristown. 
Stamp  Office  at:    New  Brunswick. 


NEW  MEXICO    (Comprising  the  State  of  New  Mexico), 

Collector:    Benigno  C  Hernandez,  Albuquerque 


NEW  YORK 

Fl  st  District. — Comprising  that  part  of  the  State  of  New  York  included  in  the  following 
counties:  Kings,  Nassau,  Queens,  Richmond  and  Suffolk, 

Collector:   John  T.  Rafferty  Brooklyn. 

Div.  Hdqrs.  at:  Patchogue. 

Second  District. — Comprising  the  County  of  New  York,  N.  Y.,  and  those  three  certain  islands 
situated  in  the  East  River  known  as  Randalls  Island,  Wards  Island  and  Blackwells 
Island. 

Collector:    Frank  K.  Bowers,  New  York. 

Div.  Hdqrs.  at:   4  Union  Square,  1416  Broadway,  1819  Broadway.* 

310  Lenox  Ave.* 
Stamp  Office  at:    San  Juan,  P.  R. 

Foorteesth  District. — Comprising  that  part  of  the  State  of  New  York  included  in  the  following 
counties:  Albany,  Bronx  (formerly  the  23rd  and  24th  wards  of  New  York  City),  Clinton, 
Columbia,  Dutchess,  Essex,  Fulton,  Greene,  Hamilton,  Montgomery,  Orange,  Putnam, 
Rensselaer,   Rockland,   Saratoga,   Schenectady,  Schoharie,   Sullivan,  Ulster,  Warren. 

Washington,  and  Westchester. 

Collector:    Cyrus  Durey,  Albany. 

Div.  Hdqrs.  at:    Schenectady,  Troy,  Newburgh,  Bronx,*  1932  Arthur 

Ave.,  N.  Y.  City,  Poughkeepsie. 
Stamp  Office  at:  PeekskilL 

Twenty-first  District.— Comprising  that  part  of  New  York  included  in  the  following  counties: 
Broome,  Cayuga,  Chenango,  Cortland,  Delaware,  Franklin,  Herkimer,  Jefferson,  Lewis, 
Madison,  Oneida,  Onondaga,  Oswego,  Otsego,  St.  Lawrence,  Schuyler,  Seneca,  Tioga, 
Tompkins,  and  Wayne.) 

Collector:    Jesse  W.  Clarke,  Syracuse. 

Div,  Hdqrs.  at:    Utica,*  Binghamton,*  Watertown. 

Twenty-eighth  District. — Comprising  that  part  of  New  York  included  in  the  following  counties: 
Allegany,  Cattaraugus,  Chautauqua,  Chemung,  Erie,  Genesee,  Livingston,  Monroe, 
Niagara,  Ontario,  Orleans,  Steuben,  Wyoming,  and  Yates. 

Collector:    Bert  P.  Gage,  Buffalo 

Div.  Hdqrs.  at:    Rochester,*  Elmira,*  Jamestown. 

NORTH  CAROLINA    (Comprising  the  State  of  North  Carolina), 
Collector:    Gilliam  Grissom,  Raleigh. 

Div.  Hdqrs.   at:     Washington,    Wilmington,   Charlotte,  Asheville, 
Winston-Salem.* 

Stamp  Offices  at:    Durham,  Reidsville,  Statesville,  Greensboro 


NORTH  DAKOTA    (Comprising  the  State  of  North  Dakota), 
Collector:    Gunder  Olson,  Fargo! 
Div,  Hdqrs.  at:    Grand  Forks. 

•Stamps  sold, 


Copyriglit  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1714  SERVICE 


t-10-22. 


FORMS,  FINDER,  ETC. 


OHIO 

First  District. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  following  counties: 
Brown,  Butler,  Clarke,  Clermont,  Clinton,  Payette,  Greene,  Hamilton,  Highland,  Miami, 
Montgomery,  Preble,  and  Warren. 

Collector:    Charles  M.  Dean,  Cincinnati. 

Div.  Hdqrs.  at:  Dayton.* 

Stamp  Offices  at:    Middletown,  Hamilton. 

Tenth  District. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  following  counties: 
Allen,  Auglaize,  Champaign,  Crawford,  Darke,  Defiance,  Erie,  Fulton,  Hancock, 
Hardin,  Henry,  Huron,  Logan,  Lucas,  Mercer,  Ottawa,  Paulding,  Putnam,  Sandusky, 
Seneca,  Shelby,  Van  Wert,  Williams,  Wood,  and  Wyandot. 

Collector:    Charles  H.  Nauts,  Toledo. 
Eleventh  District. — Comprising  that  part  of  the  State  of  Ohio  Included  in  the  following 
counties:  Adams,  Athens,  Coshocton,  Delaware,  Fairfield,  Franklin,  Gallia,  Guernsey, 
Hocking,  Jackson,  Knox,  Lawrence,  Licking,  Madison,  Marion,  Meigs,  Morgan,  Morrow, 
Muskingum,  Noble,  Perry,  Pickaway,  Pike,  Ross,  Scioto,  Union,  Vinton,  and  Washington. 

Collector:  Newton  M.  Miller,  Columbus. 
Div.  Hdqrs.  at:    Portsmouth,  Zanesville. 

Eighteenth  District. — Comprising  that  part  of  the  State  of  Ohio  included  in  the  following 
counties:  Ashland,  Ashtabula,  Belmont,  Carroll,  Columbiana,  Cuyahoga,  Geauga, 
Harrison,  Holmes,  Jefferson,  Lake,  Lorain,  Mahoning,  Medina,  Monroe,  Portage,  Rich- 
land, Stark,  Summit,  Trumbull,  Tuscarawas,  and  Wayne. 

Collector:    Carl  F.  Routzahn,  Cleveland. 

Div.  Hdqrs.  at:    Akron,  Canton,  Youngstown,  Stcubenville. 

OKLAHOMA    (Comprising  the  State  of  Oklahoma), 

Collector:    Acel  C.  Alexander,  Oklahoma. 

Div.  Hdqrs.  at:    Tulsa,  Muskogee,  McAlester,  Enid. 

OREGON    (Comprising  the  State  of  Oregon), 

Collector:    Clyde  G.  Huntley,  Portland. 
Div.  Hdqrs.  at:    Eugene,  Pendleton. 

PENNSYLVANIA 

First  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  in  the  following 
counties:  Adams,  Bedford,  Berks,  Blair,  Bucks,  Chester,  Cumberland,  Dauphin,  Dela- 
ware, Franklin,  Fulton,  Huntingdon,  Juniata,  Lancaster,  Lebanon,  Lehigh,  Mifflin, 
Montgomery,  Perry,  Philadelphia,  Schuylkill,  Snyder,  and  York. 

Collector:    Blakely  D.  McCaughn,  Philadelphia. 

Div.  Hdqrs.  at:  Philadelphia  (2),  Allentown,*  Altoona,  Chester, 
Harrisburg,*  Lancaster,*  Norristown,  Pottsville,*  Reading,* 
York.* 

Twelfth  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  in  the  following 
counties:  Bradford,  Carbon,  Center,  Clinton,  Columbia,  Lackawanna,  Luzerne,  Lycoming, 
Monroe,  Montour,  Northampton,  Northumberland,  Pike,  Potter,  Sullivan,  Susquehanna, 
Tioga,  Union,  Wayne,  Wyoming. 

Collector:    David  W.  Phillips,  Scranton. 

Div.  Hdqrs.  at:    Wilkesbarre,*  Easton,*  Shamokin. 
Twenty-third  District. — Comprising  that  part  of  the  State  of  Pennsylvania  included  in  the 
following  counties:  Allegheny,  Armstrong,  Beaver,  Butler,  Cambria,  Cameron,  Clarion, 
Clearfield,  Crawford,  Elk,  Erie,  Fayette,  Forest,  Green,  Indiana,  Jefferson,  Lawrence, 
McKean,  Mercer,  Venango,  Warren,  Washington,  and  Westmoreland. 

Collector:    Daniel  B.  Heiner,  Pittsburgh. 

Div.  Hdqrs.  at:    Erie,*  Uniontown,*  New  Castle,  Du  Bois,  Johnstown. 

RHODE  ISLAND    (Comprising  the  State  of  Rhode  Island), 
Collector:    Frank  A.  Page,  Providence 

SOUTH  CAROLINA    (Comprising  the  State  of  South  Carolina), 
Collector:    Wm.  R.  Bradley  (Acting),  Columbia. 

SOUTH  DAKOTA    (Comprising  the  State  of  South  Dakota), 
Collector:    Leslie  Jensen,  Aberdeen. 
Div.  Hdqrs.  at:    Sioux  Falls. 

TENNESSEE  (Comprising  the  State  of  Tennessee), 
Collector:  Louis  P.  Brewer,  Nashville, 
Div.  Hdqrs.  at:    Memphis,*  Chattanooga,*  Knoiville.* 

*Stamps  sold. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1715  SERVICE 


2-10-22. 


FORMS,  FINDER,  ETC. 


TEXAS 

First  District. — Comprising  that  part  of  the  State  of  Texas  included  in  the. following  counties: 
Aransas,  Atascosa,  Austin,  Bandera,  Bastrop,  Bee,  Bell,  Bexar,  Blanco,  Bosque,  Brazoria, 
Brazos,  Brewster,  Brooks,  Burleson,  Burnet,  Caldwell,  Calhoun,  Cameron,  Chambers, 
Colorado,  Comal,  Coryell,  Culberson,  Dewitt,  Dimmit,  Dunn,  Duval,  Edwards,  El  Paso, 
Falls,  Fayette,  Fort  Bend,  Freestone,  Frio,  Galveston,  Gillespie,  Goliad,  Gonzales,  Grimes, 
Guadalupe,  Hamilton,  Hardin,  Harris,  Hays,  Hidalgo,  Hill,  Hudspeth,  Jackson,  Jasper, 
Jeff  Davis,  Jefferson,  Jim  Hogg,  Jim  Wells,  Karnes,  Kendall,  Kerr,  Kimble,  Kinney, 
Kleberg,  Lampasas,  La  Salle,  Lavaca,  Lee,  Leon,  Liberty,  Limestone,  Live  Oak,  Llano, 
McCulloch,  McLennan,  McMullen,  Madison,  Mason,  Matagorda,  Maverick,  Medina, 
Milam,  Montgomery,  Newton,  Nueces,  Orange,  Pecos,  Polk,  Presidio,  Real,  Reeves, 
Refugio,  Robertson,  San  Jacinto,  San  Patricio,  San  Saba,  Somervell,  Starr,  Terrell, 
Travis,  Trinity,  Tyler,  Uvalde,  Val  Verde,  Victoria,  Walker,  Waller,  Washington,  Webb, 
Wharton,  Willacy,  Williamson,  Wilson,  Zapata,  Zavalla. 

Collector:    James  W.  Bass,  Austin. 

Div.  Hdqrs.  at:    San  Antonio,*  Houston,*  El  Paso,  Waco.* 

Second  District. — Comprising  that  part  of  the  State  of  Texas  included  in  the  following  counties: 
Anderson,  Andrews,  Angelina,  Archer,  Armstrong,  Bailey,  Baylor,  Borden,  Bowie, 
Briscoe,  Brown,  Callahan,  Camp,  Carson,  Cass,  Castro,  Cherokee,  Childress,  Clay, 
Cochran,  Coke,  Coleman,  Collin,  Collingsworth,  Comanche,  Concho,  Cooke,  Cottle, 
Crane,  Crockett,  Crosby,  Dallam,  Dallas,  Dawson,  Deaf  Smith,  Delta,  Denton,  Dickens, 
Donley,  Eastland,  Ector,  Ellis,  Erath,  Fannin,  Fisher,  Floyd,  Foard,  Franklin,  Gaines, 
Garza,  Glasscock,  Gray,  Grayson,  Gregg,  Hale,  Hall,  Hansford,  Hardeman,  Harrison, 
Hartley,  Haskell,  Hemphill,  Henderson,  Hockley,  Hood,  Hopkins,  Houston,  Howard, 
Hunt,  Hutchinson,  Irion,  Jack,  Johnson,  Jones,  Kaufman,  Kent,  King,  Knox,  Lamar, 
Lamb,  Lipscomb,  Loving,  Lubbock,  Lynn,  Marion,  Martin,  Menard,  Midland,  Mills, 
Mitchell,  Montague,  Moore,  Morris,  Motley,  Nacogdoches,  Navarro,  Nolan,  Ochiltree, 
Oldham,  Palo  Pinto,  Panola,  Parker,  Parmer,  Potter,  Rains,  Randall,  Reagan,  Red 
River,  Roberts,  Rockwall,  Runnels,  Rusk,  Sabine,  San  Augustine,  Schleicher,  Scurry, 
Shackelford,  Shelby,  Sherman,  Smith,  Stephens,  Sterling,  Stonewall,  Sutton,  Swisher, 
Tarrant,  Taylor,  Terry,  Throckmorton,  Titus,  Tom  Green,  Upshur,  Upton,  Van  Zandt, 
Ward,  Wheeler,  Wichita,  Wilbarger,  Winkler,  Wise,  Wood,  Yoakum  and  Young. 

Collector:    George  C.  Hopkins,  Dallas. 

Div.  Hdqrs.  at:   Wichita  Falls,  Fort  Worth,  Abilene,  Tyler. 

UTAH    (Comprising  the  State  of  Utah), 

Collector:    James  H.  Anderson,  Salt  Lake  City. 
Stamp  Office  at:  Ogden, 

VERMONT    (Comprising  the  State  of  Vermont), 

Collector:    Robert  W.  McCuen,  Burlington. 

VIRGINIA    (Comprising  the  State  of  Virginia), 

Collector:   John  C.  Noel,  Richmond. 

Div  Hdqrs.  at:    Norfolk,*  Lynchburg,*  Roanoke,*  Alexandria.* 
Stamp  Offices  at:    Petersburg,  Martinsville,  Danville. 

WASHINGTON    (Comprising  the  State  of  Washington  and  the  Territory  of 
Alaska), 

Collector:    Burns  Poe,  Tacoma. 
Div.  Hdqrs.  at:    Seattle,*  Spokane. 

WEST  VIRGINIA    ^Comprising  the  State  of  West  Virginia), 
Collector:    Albert  B  White,  Parkersburg. 

Div.  Hdqrs.  at:    Wheeling,*  Charleston,  Huntington,*  Clark«burg. 

Stamp  Offices  at:  Fairmont. 

WISCONSIN    (Comprising  the  State  of  Wisconsin), 

Collector:    Alonzo  H.  Wilkinson,  Milwaukee. 

Div.  Hdqrs.  at:    Madison,*  Green  Bay,  Oshkosh,  Superior,  La  Crosse, 

Racine. 

WYOMING    (Comprising  the  State  of  Wyoming), 

Collector:    Marshall  S.  Reynolds,  Cheyenne. 
'Stamps  sold. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1716  SERVICE 


8-3-22. 

Sec.  326.    Art.  333.-7. 

of  lOx  dollars  for  the  payment  of  these  notes,  and  it  should  have  reduced  its  surplus  accord- 
ingly. 

It  might  be,  as  between  the  stockholders  and  creditors  of  the  corporations,  that  the 
stockholders  would  be  held  estopped  from  denying  that  they  still  owe  these  notes  to  the 
corporation,  but  that  is  extremely  doubtful,  and  could  be  determined  only  upon  the  hap- 
pening of  that  contingency.  However  that  may  be,  such  an  estoppel  would  not  set  up 
these  notes  as  valid  and  legal  obligations,  but  would  only  estop  the  stockholders  from 
claiming  that  they  had  already  been  paid. 

It  is  suggested,  therefore,  that  the  surplus  account  of  the  corporation  be  reduced  each 
year  by  the  amount  which  it  paid  as  a  dividend  in  satisfaction  of  these  notes  as  they  fell 
due.  This  conclusion  necessarily  reduced  the  corporation's  invested  capital  by  40a;  dollars 
prior  to  the  year  1917,  and  requires  an  adjustment  on  account  of  the  IQx  dollar  note  paid 
on  June  1,  1917. 

In  view  of  the  foregoing  quoted  opinion,  with  which  the  Committee  is  i  i 
accord,  it  is  recommended  that  the  surplus  account  of  the  corporation  be 
reduced  each  year  by  the  amount  which  was  paid  as  a  dividend  in  satisfaction 
of  these  notes  as  they  fell  due,  and  that  the  corporation's  invested  capital  be 
reduced  by  40x  dollars  prior  to  the  year  1917  and  a  further  adjustment  of 
invested  capital  be  made  as  of  June  1,  1917,  on  account  of  the  note  paid 
through  the  medium  of  a  special  dividend  on  that  date.  Accordingly,  it  is 
recommended  that  the  action  of  the  Income  Tax  Unit  be  sustained  and  the 
taxpayer's  appeal  be  denied. 
3 

V  1  

\  I  ('22)-31-444:    I.  T.  1409. 

Revenue  Acf  of  1918. 

Section  8632  of  the  Ohio  General  Code,  which  provides  that  at  the  time 
of  making  a  subscription  10  per  cent  on  each  share  subscribed  for  shall  be 
paid,  and  which  provides  that  the  residue  shall  be  paid  in  such  installments 
at  the  times  and  places  and  to  such  persons  as  the  directors  require,  has  been 
construed  by  the  Ohio  courts  as  merely  marking  the  time  when  the  first 
installment  shall  be  payable  upon  a  stock  subscription  and  as  providing  the 
mode  for  determining  the  time  at  which  the  residue  shall  become  payable. 
(Chamberlain  v.  Railroad,  15  Ohio  State,  249.)  Stock  issued  without  the 
payment  of  the  first  10  per  cent  at  the  time  of  making  the  subscription  is 
not  invalid.  (Smith  v.  Railroad,  15  Oh^>  State,  336,  and  Henry  v.  Railroad, 
13  Ohio  Reports,  187.)  A  note  given  for  such  10  per  cent  is  enforceable 
(Latham  v.  Insurance  Co.,  1  Bull.,  127.) 

In  view  of  the  above  interpretation,  it  is  held  that,  under  the  provisions 
of  section  8632  of  the  Ohio  General  Code,  promissory  notes  of  subscribers 
may  legally  be  received  in  respect  of  the  entire  amount  of  stock  subscribed. 
Consequently,  it  follows  that  all  the  notes  received  by  the  M  Company 
upon  stock  subscriptions  may  be  included  in  the  company's  invested  capital 
to  the  extent  of  their  fair  market  value  at  the  time  paid  in  under  the  pro- 
visions of  article  833  of  Regulations  45,  provided  they  were  received  in  abso- 
lute payment  and  not  as  conditional  payment  only. 


\ 

\ 


Supplementary  Bulletin  Rulings. 


12-21-22. 

Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 


The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding. 


The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling,"  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  1921  Act  (If  1083)  are  grouped 
with  foreign  corporations  for  the  purposes  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)/ is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (1921  Act)  Reg.  45.  (1918  Act) 

No  corresponding  Article.  ..J.  to  Article  712 

Article  712  is  the  same  as,  therefore  refer  to,  Article  713 
"  713  "  "  "  "  "  "  "  "  714 
n  j\4  "  "  "  <<  «  «  «  «  T\§ 
i*  a  a     a     tt        tt        it     n  tt 

No  corresponding  Article.   .to  Article  717 

Article  716  is  the  same  as,  therefore  refer  to,  Article  719 

tt  a    a       it       tt  |         tt  it      a         a  713 

a       yjg  tt    tt       tt       ttj  u  tt      tt  tt 

No  corresponding  Article?.  1   , ...  to  Article  869 

Article  869  is  the  same  as,  therefore  refer  to,  Article  870 

tt       gjQ  tt    tt       tt       a  a  a      tt  a  gyj 

Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 
(  The  list  is  always  up-to-date,) 


i 


Law  Article  Last 


Section         Number  Ruling  k    Section        Number  Ruling  y 

/ .    mi  712  1  * 


300  701  None 

301  711  1  / 

712  None/ 


iNone  v/ 

714  11  V, 

715  .21!  * 

716.  None  / 


Law  Article  Last 


302  732  1 

733  None  /, 

303  741  2 


713  Nbne  4  \    "  742  None  ✓ 

743  None  ✓ 

1  304  751  ....None  ✓ 

752  None  ✓ 

717  None*>      "  753....  None  / 

718   .None<     305  761   None  ' 

310  771  1  y/ 

'  7 


719  .....1  / 

720   None  f 


311  781  3 


302  ........  731.  ..A      7i      **  782  ....None 


Law 
Section 
311.  ..  . 


312 

320 

h 

325 


326 

it 


Article 
Number 
..783.., 
784... 


Last 
Ruling 

1  / 

.  .None  / 


785  None  / 


.791 
.801 
802 
.811 
812, 
813. 
814 
815. 
816 
817. 
818. 
831. 
832. 
833. 
834. 
835. 
836. 
837. 
838. 
839. 
840. 
841. 
842  . 
843. 
844. 
843. 


.3 
.1 
.1 
.2 
.3 
9 

None 

9 

1 

1 

3 

41 

None 

,4 


1 

3 
16 
5 

10 
4 
10 
5 


✓ 
y 

\ 

% 

y 

i 


845 A  (See  845) 

846.......  .4 


/ 

i 

t 

I 

None  *  | 

1  i 


S47  ...None7/ 

848..  None  ^ 

849  None  *] 

850  .....2  / 

851  6  l\ 

853  1      /  I 


Law 

Section 

326.... 


«( 

it 
it 
it 

a 
a 
u 
a 
a 
a 
it 
it 
a 
it 
it 
a 
a 

327 

328 
u 

u 

a 

330, 

CI 


331 
335 


a 
a 

it 

336 

ti 

337, 
« 

338, 


Article  Last 
Number  Ruling^ 

•  8554::;::::::::i  ✓ 

856..  None^ 


857, 
858 
859, 
860, 
861. 
862, 
863. 
864. 
865. 
866. 
867. 
868. 
869. 


5 

10 
1 


None  / 


None 
3 

None 
None 
None 
None 
None 
None  ^ 
1 


870  None^ 

/ 

y 
y 

P 
/ 

v 


871, 
.901 
911, 
912 
913. 
914. 
931. 
932. 
933. 
934. 
941. 
951, 
952. 
953. 


.1 

.30 
.2 
.3 
.1 

.2 
.4 
.1 
.7 

.None 
.17 

.Non? 


J 

/ 

i  y 

None  ^ 

954  None  / 

955  None  ✓ 

961  None  / 


962 
971 


None  / 

2  I 


972.  None 


981. 


None 


Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

.  AW  VOLUME  I  (1922),  No.  51 

Later  Bulletins,  since  issued  (if  any ),  contain  no  rulings  bearing  on  the 

1918  or  1921  excess-profits  tax  laws. 


Insert  this  page  to  face  blue  page  401. 


1-2-22.     (2)  6-12-22. 

STAMP  TAX  REGULATIONS. — 1922. 


are^called  for  because  some  railroad  or  other  transportation  company  is  in 
need  of  rolling  stock  or  other  equipment  and  is  without  funds  or  credit  with 
which  to  supply  itself,  and  there  is  a  legal  or  other  difficulty  in  the  way  of  a 
direct  pledge  of  the  property.  They  are  issued  under  a  number  of  different 
plans.  The  one  with  which  we  are  concerned  is  known  as  the  Philadelphia 
plan.  Those  willing  to  share  in  the  venture  are  invited  to  place  their  contribu- 
tions in  the  hands  of  an  acceptable  trustee.  The  rolling  stock,  or  other 
property  is  then  purchased  in  the  name  of  this  trustee  as  owner.  The  trustee 
then  enters  into  a  form  of  bailment  or  conditional  sale  agreement  with  the 
carrier,  the  periodical  and  final  payments  upon  which  are  sufficient  to  pay  the 
interest  on  the  investment  and  the  principal  at  maturity.  The  contributors 
in  the  meantime  hold  the  certificates  or  acknowledgment  of  the  trustee  of  their 
respective  shares  in  the  venture. 

4013  It  will  thu^  be  seen  that  in  strictness  the  only  obligation  in  the 
nature  of  a  debt  or  promise  to  pay  money  is  the  obligation  and  agree- 
ment of  the  carrier  to  pay  the  agreed  price  for  the  hire  and  use  of  the  property 
or  the  rentals  as  they  are  commonly  termed.  The  trustee  is  a  mere  purse, 
and  only  in  a  secondary  sense  can  be  said  to  owe  anything  to  any  one  other 
than  faithfulness  to  its  trust  obligations,  and  is  not  a  debtor  even  in  this 
secondary  sense  unless  and  until  and  as  the  moneys  which  belong  to  the 
contributors  come  into  its  hands.  The  certificate  is  not  within  the  literal 
verbiage  [sic]  of  the  Act  of  Congress  not  being  "a  certificate  of  indebtedness 
issued  by  any  person"  nor  "an  instrument  issued  by  any  corporation."  If 
the  taxing  hand  has  been  laid  only  upon  these  specific  forms  of  what  are 
generally  known  as  securities,  it  must  be  withdrawn  from  the  "trust  certi- 
ficates" now  under  view.  This  would  mean  th£t  they  are  the  exceptions 
among  this  general  class  of  securities  and  are  exen/pt  because  of  the  very  effort 
made  in  the  framing  of  the  law  to  include  all  forr/is  of  securities  of  this  general 
character  has,  in  verbal  nicety,  excluded  them,  ^he  Act  of  Congress,  however, 
includes  more  than  the  two  kindi  of  securities/mentioned  above,  because  we 
think  it  includes  everything  "Mnown  generally  as  corporate  securities." 
That  these  trust  certificates  are  st  known  would  not  be  denied.  The  denial 
would  be  of  the  correctness  of  tliis  construction  of  the  Act  of  Congress. 
There  are  two  obstacles  to  be  surmounted  before  reading  this  construction. 
One  is  that  the  rule  of  the  nearest  Antecedent  makes  the  quoted  phrase  relate 
to  and  serve  as  a  definition  of  thi  described  kinds  of  "instruments  issued 
by  corporations,"  and  the  other  ischajf  the  finding  of  a  meaning  to  tax  all 
instruments  "commonly  known  aslcofporate  securities"  involves  presence 
of  a  grammatical  error  in  the  Act  elf,;  Congress.  Neither  of  these  obstacles 
are  however  insurmountable,  if  thisjjfwas  the  meaning  of  Congress,  and  we 
so  find.  Nor  do  we  see  any  conflict 'between  a  ruling*  that  these  certificates 
are  taxable  and  the  doctrine  of  the  leases  to  which  we  have  been  referred 
that  there  is  no  such  thing  as  a  doi/Dtlul  tax.   U.  S.  vs.  Isham,  84  U.  S.,  496. 

4014  The  question  now  presented  is  admittedly  a  close  one,  but  this 
does  not  necessarily  make  for  the  taxpayer.    The  true  doctrine  is 

that  neither  the  Executive  nor  tfie  Judicial  Departments  nor  both  can  levy 
a  tax.  This  can  only  be  done  $y  Congress.  When,  however,  Congress  has 
acted  and  the  tax  questioned  is  found  to  have  been  levied,  the  mere  fact 
that  in  the  light  of  the  particular  case  in  which  the  question  is  raised  the 
meaning  of  Congress  might  have  been  more  clearly  expressed,  does  not 
justify  refusal  to  give  that  meaning  effect.  The  real  truth  back  of  the  whole 
discussion  is  that  if  these  certificates  are  not  taxable,  it  is  because  of  the 
accidental  circumstance  of  a  wholly  nominal  separation  of  the  security  held 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  767  SERVICE 


1-2-22.       (2)  6-12-22. 

STAMP  TAX  REGULATIONS.— 1922. 


by  the  taxpayer  from  the  obligation  of  debt  entered  into  by  the  carrier 
corporation.  The  real  security  is  the  promise  not  of  one  corporation  but  of 
two  to  pay  to  the  certificate  holders  the  sums  due  them.  The  real  trans- 
action is  the  request  of  the  carrier  company  made  to  the  certificate  holders 
to  advance  the  money  required  for  equipment,  in  consideration  of  which  the 
carrier  agrees  to  pay  back  the  sum  advanced,  with  interest.  This  it  is  true 
was  not  the  form  of  the  promise,  but  such  it  was  in  substance  because  it  was 
a  promise  to  pay  a  sum  which  was  the  exact  (and  not  accidental  but  prefixed) 
equivalent  of  the  advances,  with  interest.  It  is,  however,  and  none  the  less 
true,  that  if  for  any  reason  Congress  has  not  included  these  certificates,  no 
tax  can  be  imposed.  The  impression  to  this  effect  made  by  the  argument  at 
bar  has  been  removed  by  what  seems  to  us  to  be  the  sufficiently  expressed 
will  of  Congress  to  tax  them. 

4015    We  have  disposed  of  the  case  as  if  on  trial  hearing  with  all  the  facts 
which  enter  into  the  discussion  established,  understanding  such  to 
be  the  wish  of  all  parties,  it  being  conceded  that  all  these  facts  are  in  the 
record. 

Rule  for  judgment  discharged 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  768  SERVICE 


12-6-22. 

Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 


The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding, 
The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling,"  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act), 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  eicept  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  th|b  1921  Act  (If  1083)  are  grouped 
with  foreign  corporations  for  the  purpose^  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  Essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  i>f  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  thati  except/as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulipgs,  tjre  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (1921  Ait)/  Reg.  45,  (1918  Act) 

No  corresponding  Arti/le   .  .to  Article  712 

Article  712  is  the  same  as,  therefore  refer  to,  Article  713 
n  723  "  "  <jjr  <<  <<  a  a  a  714 
«     J\4  "  "    f\    "        <<        <<    a  a 

<<       yj^  u    a     ftt\     a  tt  a      a         a  J]fi 

No  corresponding  Article  to  Article  717 

Article  716  is  the/sami  as,  therefore  refer  to,  Article  719 

a"     718  "  /     "  1  "        "        "     "       "  720 

No  correspondmg  Artidle  to  Article  869 

Article  869  is  Jthe  sameks,  therefore  refer  to,  Article  870 
870  "/  "  l"         ii         ii     "       "  871 

otherwise 

Art.  of  Reg.  62  is  sam^  as,  therefole  refer  to,  same  numbered  Art.  of  Reg.  45 
(The  list  isxdways  up-to-date?) 


Law 
Section 
300.... 
301 ... . 


302 


Article  I 
Number 
..701../, 
. .711  . 

712..., 

713... 

714.... 

715... 

716..., 

717... 

718.... 

719.... 

720.... 
..731... 


Law 

Section 

302.... 


304 


Article 

Number 

..732... 

733... 
..741... 

742... 

743... 
..751... 

752... 

753... 
..761  . 
..771... 
..781... 

782... 


Last 
Ruling 
.  .1 

. .  None 
..2 

.  .None 
. .  None 
. .  None 
. .  None 
. .  None 
. .  None 
..1 
..3 

,  .None 


(Over) 


Law 

Article 

Last 

Section 

Number 

Ruling 

•211 

i 

tt 

784 

None 

tt 

312 

791 

o 

320 

801 

'  f  TL'SV. 

n 

802 

1 

325 

81 ! 

2 

« 

81? 

3 

tt 

81  * 

9 

tt 

814 

None 

a 

Q 

it 

816 

1 

tt 

817 

None 

it 

818 

.3 

326 

831 

41 

<« 

832 

.  None 

«< 

833 

.4 

it 

834 

1 

tt 

835 

% 

u 

836 

.  .  15 

tt 

837 

5 

tt 

838 

. .  .10 

tt 

839 

 4 

tt 

840 

.  .10 

a 

841 

.5 

a 

842 

 None 

tt 

843 

2 

tt 

844 

t 

€i 

845 

8 

U 

845  A 

fS'-e  845) 

tt 

846 

4 

tt 

None 

tt 

848 

None 

tt 

849 

.  . .  .None 

it 

850 

 2 

it 

851 

 6 

it 

852 

 1 

it 

853 

 1 

Law 

Article 

Last 

Section 

Number 

Ruling 

326  

...  854  

.  2 

tt 

855  

,  1 

tt 

856  

 None 

tt 

857.. 

5 

a 

858.  

10 

u 

859  

1 

it 

860  

.  .  . .  None 

tt 

861 .. . 

None 

a 

862. . 

3 

n 

863  

None 

•  fit  i  tA  uru  1 1 

864  

 None 

tt 

865  

None 

<i 

866. . . 

None 

it 

867  

 None 

a 

is 

1 

tt 

870  

. . . .  None 

it 

871  

1 

327 ..... . 

 901  

30 

Q1  1 

o 

tt 

912  

3 

a 

913  

1 

tt 

914  

2 

Oil 

A 

si 

1 

tt 

933..  

7 

it 

934,  

.  .None 

oi.i 

17 

335  

 951...... 

 None 

tt 

1 

953  

 None 

a 

a 

955  

 None 

336 

961 

it 

962  

 None 

337 

. . . .971,  

2 

972  

338  

....981  

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  0921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  49. 

Later  Bulletins,  since  issued  (if  any),  contain  no  rulings  bearing  on  the 
1918  or  1921  excess-profits  tax  laws. 

Insert  this  page  to  face  blue  page  401. 


10-30-22. 

OCCUPATIONS  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 

under  the 

Occupations  Tax  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
**~v  Date  of  Issue,  and  Paragraph  References. 

T.  D.  Subject  Paragraph 

1921  Law  Provisions   7500 

Reg.  59  Regulations  under  1921  law  (issue  of  July  20,  1922)  relating  to 

the  special  taxes  on  businesses  and  occupations 
and  on  the  use  of  boats.    (See  exhaustive  Table 

of  Contents  beginning  on  page  1513.)   7537 

Ar*.  22,  Reg.  59  (1918  Act),  amended.— Theater 

Special  tax:  population  (March  20,  1922)   7663 

Arts.  6(g)  and  7,  Reg.  59  (1918  Act),  amended.— 
Brokers:  Persons  liable  and  not  liable  to  tax 

(May  13,  1922)   7665 

Decision  Cathran   &  Connally  vs.  U.  S.  4th  Circuit  Court 

ol  Appeals.- — Tobacco  warehousemen  as  brokers 
;((Vt.  21,  1922)   7667 


Insert  this  page  immediately  before  the  yellow  guide  card  "Miscellaneous  Matters.' 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Occupations  Taxes  Supplementary  Page  1. 


1-2-22.  (2)2-28-22. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


TAX  OS  TELECRAPH  AND  TELEPHONE  n^l'£,K--('Tli!e  V.  it-'i  -  SOO,  Revreue  Ad  of_lS2l) 

CHARACTF.B  OF  TAX 


i  RATE  OF  TAX  AMOUNT  Of  TAX 


(e)  Tele&aplt,  telephone,  and  ro</7c  mcsiaia   

(I)  I*uec/  WfM  (/ekprwne  or  telegraph)  


/  juwar  (of  <#rcn)  t/W  <Ac  /orejorrtf  /j  a  frue  rftarn  0/  t/W 
cmouri  of  tax  cvUcctcd  en  fAe  aiooc-mcretcntd  sertlcu  for  tic  month 


of    ,  19!.. 

overpayment  is  allowable  iy  law. 


and  that  the  cmouni  deducted  for 


Nam 

No.  and  Sheet 
City  and  State 


Trial  tax  collided  

Less  octrpaymtnt  for  month  of . 
Totcl  amount  of  la  du; 

Penalty  ?$%  

Penalty  y'/c  —  

Interest  

Total  amount  due  




&.W-.  U  mi  *iKrll*J  id—  ™til,  ~ 


(N«m<)  or  (Witness)        (See  paragraph  ; 

(TUie)  or  (Witness) 


Betnrn  with  remittance  should  be  sent  to  the  Collector  01  Internal 
Uetenue  fur  roar  district  and  not  to  tbe  Commissioner  of  Interna) 
Kevenoe,  at  Washington,  D.  C.   (See  Instructions,  par.  4,  on  reverse 
form.)  It  500  nave  nothing  to  report,  mike  notation  I 
tie  Collei 


this  form  and  return  to 


lector  of  Internal  lie  venae. 


[Obverse  of  Form  727  J 


ft  i 


INSTRUCTIONS 

instructions,  see  Regulations  Xo.  57,  Revised) 

Section  600  of  the  Revenue  Act  of  1021  imposes  the  folldwing  taxes  upon  telegraph  and  telephone  meseages: 

(o)  In  tho  case  of  each  telegraph,  telephone,  cable,  er  radio,  dispatch,  message,  or  conversation,  which  originates  within  the  United  States,  and 
for  the  transmission  of  which  the  charge  is  more  than  14  cents  and  not  more  than  50  cents,  a  tax  of  5  cents;  and  if  the  charge  is  more  than 
50  cents,  a  tax  cf  10  cents. 

(6)  A  ttx  of  10  per  centum  of  the  amount  paid  to  any  telegraph  or  telophone  company  for  any  leased-wire  or  talking-circuit  special  service  fur- 
nished. This  subdivision  shall  not  apply  to  the  amount  paid  for  so  much  of  such  service  as  is  utilized  (1)  in  the  collection  and  dissem- 
ination of  news  through  the  public  press,  or  (2)  in  the  conduct,  by  a  common  carrier  or  telegraph  or  telephone  company,  of  its  business 
as  such. 

1.  COMPUTATION  05"  TAX.— The  tax  is  imposed  and  must  bo  computed  and  collected  upon  each  separate  service  rendered  and  not  upon  the 
aggregate  of  charges  made. 

2.  RETURNS  AND  PAYMENT  OF  TAX. — Return  with  remittance  covering  taxes  collected  in  any  month  must  be  in  the  hands  of  the  Col- 
lector of  Internal  Revenue  (cr  his  authorized  representative)  of  the  district  in  which  the  principal  office  or  place  of  business  of  the  person  making  the 
return  is  located  on  or  beforo  the  last  day  of  the  succeeding  month.  Returns  must  be  signed  and  sworn  to  before  an  officer  authorized  to  administer 
oaths,  but  if  the  tax  is  less  than  $10  the  return  may  be  signed  or  acknowledged  before  two  subscribing  witnesses. 

CREDITS. — In  case  of  any  overpayment  of  tax  due  to  an  error  in  Calculation,  credit  may  be  taken  therefor  against  taxes  due  upon  any  subse- 
quent monthly  return.  Credit  may  also  be  taken  as  outlined  in  the  regulations.  A  complete  and  detailed  record  of  such  overpayment  mustDe  kept 
by  the  person  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return,  full  information  must  be 
attached  showing  the  reasons  therefor  and  designating  tho  kind  of  tlx,  and  the  month  for  which  tho  previous  return  was  filed  and  the  date  of  payment. 

i.  RECORDS. — Ever.-  person,  corporation,  partnership,  or  n.-sociation  required  to  make  this  return  must  keep  such  records  as  will  clearly  show 
all  charges  upon  which  tax' is  required  to  be  collected,  in  order  that  returns  may  be  easily  verified  by  revenue  officers. 

5.  PENALTIES. — Failure  to  file  on  time,  2">  per  cent  of  tax.  Failure  to  pay  on  time,  5  per  cent  cf  tax  and  1  per  cent  interest  a  month.  Severe 
penalties  for  iaiiure  t.>  file  returns  or  for  false  < :  fraudulent  returns.  o2— nss       G.  r.  o. 


[Reverse  of  Form  727.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         1 103  SERVICE 


2-28-22.  Reg.  57,  Rev.,  1922. 

TELEGRAPH  AND  TELEPHONE  REGULATIONS. — 1921  ACT. 


REGULATIONS  57,  REVISED. — 1921  ACT. 

[Promulgated  February  15,  1922.] 
[Released  for  publication  February  28,  1922.] 
RELATING  TO  THE 
TAX  ON  TELEGRAPH,  TELEPHONE,  RADIO,  AND  CABLE  FACILITIES 

UNDER  THE  ^ 
REVENUE  ACT  OF  1921. 
TABLE  OF  CONTENTS. 
PART  I. 

TRANSMISSION  OF  DISPATCHES,  MESSAGES,  AND  CONVERSATIONS. 
IMPOSITION  OF  TAX. 

Paragraph 

Article    1.  Imposition  of  tax — Transmission   5510 

2.  Imposition  of  tax — Carrier   5512 

ORIGIN  OF  MESSAGE  DETERMINES  TAXABILITY. 

3.  Origin  within  United  States   5514 

4.  Reversed  or  collect  messages   5517 

5.  Effective  date  of  law   5518 

BASIS,  RATE  AND  COMPUTATION  OF  TAX. 

6.  Basis  for  computation' — Amount  of  charge   5519 

7.  Franks   5523 

8.  Overtime  telephone  messages   5524 

9.  Messages  transmitted  under  contract   5525 

EXEMPTIONS. 

10.  Business  of  transmitting  carrier   5526 

11.  Charges  of  14  cents  or  less   5527 

12.  Services  rendered  to  the  United  States,  or  to  any  State  or  Territory,  or  to 

the  District  of  Columbia   5528 

13.  Political  subdivisions  of  State  or  Territory   5529 

14.  Government  agencies   5530 

15.  Evidence  of  right  to  governmental  exemption   5531 

16.  Foreign  diplomats   5535 

17.  Evidence  of  right  to  exemption  of  foreign  diplomats  *  5538 

PART  II. 

LEASED  WIRE  AND  TALKING  CIRCUIT  SPECIAL  SERVICE. 

IMPOSITION  OF  TAX. 

18.  Imposition  of  the  tax' — Meaning  of  leased  wire  and  talking  circuit  special 

service   5539 

19.  Private  branch  exchange  service   5544 

20.  Tie  lines   5545 

21.  Private  lines  and  extension  lines   5546 

22.  Intercommunication  and  interior  systems  5547 

23.  Long-distance  terminals   5548 

BASIS,  RATE  AND  COMPUTATION  OF  TAX. 

24.  Basis  for  computation  of  tax   5549 

25.  Computation  of  tax — Effective  date  

26.  Computation  of  tax — Service  performed  between  a  point  within  and  a 

point  without  the  United  States   5553 

Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX         1104  SERVICE 


10-30-22. 

SALES  (EXCISE)  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Sales  and  Excise  Taxes  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.  Subject  Paragraph 

Law  Provisions   4500 

Reg.  47  Manufacturer's  and  producer's  excise  taxes  (revision  of  January  6, 

1922).    (Indexed  on  the  blue  sheets  following.) .. .  4540 
Reg.  48  Works  of  art  and  jewelry  taxes  regulations  (revision  of  January  1 2, 

1922).    (See  exhaustive  Table  of  Contents  on  page 

934.)   4700 

3307  Art.  4,  Reg.  47,  amended.— Cash  discounts  (March  20,  1922)   4758 

3312  Court  decision,  1918  Act.    Ouija  boards  held  to  be 

taxable  (April  5,  1922)  J  4766,  4795 

Decision  Malley  vs.  Walter  Baker  &  Co.,  Ltd.,  1918  Act.  Sweet 

chocolate  as  candy  (May  16,  1922)   4768 

3344  Treasury  Decision  designation  for  Malley  vs.  Walter 

Baker  &  Co.,  Ltd.,  case  (H4768).    (June  10,  1922)  4793 
3358  Art.  4,  R£g.  47,  restored  to  original  form.— T.  D.  3307  (H4758] 

revoked. — Cash  discounts  and  expenses  (June  22,  1922)  4794 
\  Correcting  typographical  errors  in  T.  1).  3312  above...  4795 


Irserl  this  page  immediately  before  the  blue  "Sales  Taxes"  index. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Sales  (Excise)  Taxes  Supplementary  Page  1. 


11-22-22. 

Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 

The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding. 

The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling,"  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  \dentical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section!  262  of  the  1921  Act  HJ1083)  are  grouped 
with  foreign  corporations  for  the^  purposes  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  lijce  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (Jl921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin\Rulings,|  the  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (1921  Act)  Reg.  45,  (1918  Act) 

No  corresponding  Article  to  Article  712 

Article  712  is  the  same  as,  therefore  refer  to,  Article  713 

a       713"    <c       ti       u  c<  it      ti         tt  714 

«  714  "  '!  \*  I  >  4<  '*  £<  u  715 
«     715  u   **        I  **  u  **  716 

No  corresponding  Article  to  Article  717 

Article  716  is  the  samfb  as,  therefore  refer  to,  Article  719 
"  717  "  "  "^  i  "  "  "  "  "  718 
"     718  "   "         I"        "        "     "       "  720 

No  corresponding  Aiiicff  to  Article  869 

Article  869  is  the  same  as,  therefore  refer  to,  Article  870 
"     870  "   "     ^     it'       "        "     *'  871 
Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 
(  The  list  is  always  up-to-date.) 


Law 

Section 
300. . . . 
301.... 
J  " 
u 

ti 

« 

" 

ti 
tt 


Article 
Number 
..701.... 
..711.... 

712.... 

713.... 

714.... 

715.... 

716... 

717.... 

718.... 

719.... 

720.... 
..731.... 


Last 
Ruling 
. .  None 

.1 

i .  None 
. .  None 
.  .11 

1.2 

.  .None 
.  .None 
. .  None 
.  .1 

.  .None 
..1 


Law 

Section 
-302. .. . 
A" 

303.... 

« 

304.... 


305 
310 
311 


Article 

Number 

..732... 

733... 
..741... 

742... 

743... 
..751... 

752... 

753... 
..761  . 
..771... 
..781... 


Last 
Ruling 

 1 

 None 

 2 

 None 

 None 

 None 

 None 

 None 

 None 

 1 

 3 

,  None 

(Over) 


Law 

Section 
311.... 

312.... 
320.... 


« 
325. 

« 
« 

v  « 

326, 
« 

« 
« 

« 

« 
?  «< 
^«« 

Su 
i/tt 

tt 


... 


Article 
Number 
..783... 

784... 

785 
..791.... 
...801.... 

802.... 
..811.... 

812.... 

813 

814 

815 

816 

817 

818 
...831 

832 

833 

834 

835 

836 

837 

838 

839 

840 

841 

842 

843 

844 

845 





Last 

Ruling 

 1 

 None 

 None 

 3 

.1 
.1 
.2 
.3 
.9 

.None 
.9 
.1 

.None 
.3 
.40 

.None 
.4 
.1 
.3 
.15 
.5 
.10 
.4 
.9 
.5 

.None 
.2 
.1 
.8 







845 A  (See  845) 

846   4 

847  None 


848. 


None 


849  None 

850  2 

851  6 

852  1 

853  1 


Law 

Section 
326.... 


a 
« 

« 

a 
it 

it 
« 
tt 
(( 

tt 
tt 
a 
a 
it 
tt 

327. 
328. 

it 
a 
tt 

330. 

a 
tt 
tt 

331. 

335, 
tt 

tt 

tt 

336. 
« 

337. 
tt 

338. 


Article  Last 
Number  Ruling 

..854  2 yy 

855  1 

856  None^ 

858:::::::::::io^ 


859. 
860. 
861. 
862 


1 

.None 
None 

3  : 


863  None^ 


864 
865 
866 
867 
868 
869 
870 
871 
.901 
.911 
912 
913 
914 
.931 
932 
933 
934 
.941 
.951 
952 


None 
None 
None 
None 
.None 
1 


J 


 None 

 1  - 

 30 

 2  ? 

 3  9 

 1  % 

 2 

 4 

 1  ' 

 7     '  j 

 None  ■ 

 17  ^ 

 None' 

 1  s 

953  None- 

954  None  ' 

955  None  " 

961  None  " 

962  None  * 

971  2 

972  None 

981  None 


Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  beon  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  luted  above  is 

VOLUME  I  (1922),  No.  47. 

Later  Bulletins ,  since  issued  (if  any),  contain  no  rulings  bearing  on  the 
1918  or  1921  excess-profits  tax  laws. 


Insert  this  page  to  face  blue  page  401. 


4-14-22. 


Sec.  326.    Art.  840.  -11. 


I  ('22)-15-219:    I.  T.  1278. 


Revenue  Act  of  1921. 


Inquiry  is  made  as  to  whether  the  cost  of  rotogravure  supplements  comes 
within  the  purview  of  A.  R.  M.  141  [Ruling  No.  8,  above],  which  permits 
taxpayers  engaged  in  the  publication  of  newspapers  to  include  in  their  in- 
vested capital,  for  tax  purposes,  moneys  expended  /out  of  earned  surplus  or 
current  earnings  for  the  sole  purpose  of  building  up/ the  circulation  structure. 
It  is  stated  that  newspaper  publishers  employ  /rotogravure  supplements 
largely  as  a  circulation  stimulant.  / 

The  question  to  be  determined  in  cases  affected  by  the  ruling  above 
referred  to  is  whether  the  amounts  claimed  as  an  addition  to  invested  capital 
can  be  identified  as  having  been  expended  out  of  earned  surplus  or  current 
earnings  for  the  sole  purpose  of  building  up  the  circulation  structure.  It 
is  believed  that  rotogravure  supplements  constitute  a  part  of  the  news 
service  furnished  by  newspapers  to  their  subscribers  and  are  not  of  such  a 
nature  that  the  expense  thereof  can  be  said  to  be  incurred  solely  for  the 
purpose  of  building  up  the  circulation  structure.  It,  therefore,  follows  that 
the  moneys  expended  therefor  may  not  be  added  to  invested  capital. 


9 


Supplemcntarp  Bulletin  Rulings. 


Sec.  326.    Art.  831.-25. 


I  ('22)-33-459:  I.  T.  1420. 
Revenue  Acts  of  1917,  1918,  and  1921. 

In  1885  certain  persons  organized  a  corporation  and  a  certificate  of 
incorporation  was  issued  to  them.  In  1911,  in  pursuance  of  the  advice  of 
an  attorney,  the  company  was  reorganized  in  order  to  cure  defects  in  its 
original  organization,  and  the  powers  of  the  corporation  were  broadened,  its 
capital  increased,  and  its  existence  made  perpetual.  In  1914  the  name  of 
the  corporation  was  changed  ana  thereupon  all  of  the  assets  standing  in  the 
then  name  of  the  corporation  were  transferred  by  a  deed  having  a  covenant 
of  warranty  to  the  corporation  designated  by  its  new  corporate  name. 

Held,  that  the  copy  of  the  jbriginal  charter  of  the  corporation  and  of  the 
renewed  charter,  and  the  othe/  evidence  submitted  by  the  taxpayer,  disclose 
that  the  amendmen  of  its  cr/arter  and  the  subsequent  change  in  its  name 
did  not  create  a  new  corporation,  nor  cause  any  change  in  its  existing  cor- 
porate organization.  The  iiwested  capital  of  the  corporation,  accordingly, 
must  be  computed  in  the  s£me  manner  as  though  the  invested  capital  of 
the  corporation  originally  formed  in  1885  was  being  determined.  The  values 
of  the  assets  on  hand  at  the/beginning  of  1917  and  later  years  must  be  deter~ 
mined  by  their  values  at  tire  time  of  their  original  acquisition,  as  limited  and 
defined  by  the  Revenue  Acts  applicable  to  the  taxable  years  involved,  and 
their  values  at  the  date  of  the  amendment  of  the  corporation's  charter  or 
at  the  date  of  its  change  of  name  can  not  be  considered  for  such  purpose. 


Supplementary  Bulletin  Rulings. 


0* 


t 


6-1-22.     (2)  6-26-22. 


(3)  10-30-22. 

EXCISE  TAXES  REGULATION; 


made,  it  is  difficult  to  see  how  candy  can  be  taxed  at  all;  for,  as  already  stated, 
candy  is  in  its  main  characteristics  sugar  compounds  intended  for  luxury, 
taste-gratifying,  consumption.   When  somewhat  less  than  half  of  a  toothsome 
sweet  is  chocolate — also  a  common  ingredient  of  candy  compounds — the 
resultant  is  not  transmuted  into  food  within  the  fair  meaning  of  this  tax 
statute,  if  the  compound  is  sold  and  consumed  as  confectionery  or  candy. 
4731    The  eighteenth  assignment  of  error  brings  before  us  the  refusal  of 
the  court  below  to  submit  to  the  jury  the  question  of  what  proportion 
of  the  sweet  chocolate  in  question  was  used  for  cooking  or  domestic  purposes. 
This  assignment  must  be  sustained.   The  burden  of  proof  is  on  the  plaintiff 
to  show  that  the  taxes  collected  was  illegal  or  the  assessments  excessive. 
Anderson  v.  Farmers'  Loan  &  Trust^Co.,  241  Fed.  322; 
New  York  Life  Ins.  Co.  v.  Jnderson\263  Fed.  527,  530; 
Germantown  Trust  Co.  v.  Lederer,  2631  Fed.  672; 
Bailey  v.  R.  ]L  Co.,  22  Wall.  604,  63*  ; 

Black  Fed.  Cases,  sec.  547; 
Shafer  v.  Craft\Collector,  144  Fed.  90  r,  909; 
South.  Pacific  \\Lowe,  Collector,  328  Fed.  847,  849; 
Cohen  v.  Lowe,  Collector,  234  Fed.  47ft,  476. 
4792    The  plaintiff  is  not  entitled  to  recover  more  than  the  amount  that  it 
can  show  it  fiaid  as  a  tax  on  such  portions  of  the  product  in  question 
as  were  not  sold  and  used  as  candy  wmihin  the  meaning  of  the  Department's 
regulation.  \  / 

The  judgment  of  the  "District  Court  lis  reversed  and  the  case  is  remanded  to 
that  court  for  further  proceedings  not  {inconsistent  with  this  opinion;  and  the 
plaintiff  in  error  recovers 


sis  in  this  iourt. 


(T.  b.  3344.) 


4793    [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Malley 
4768     vs.  Walter  Baker  &  Coktpany,  Limited,  which  is  reproduced  in  full, 
above,  beginning  at  1f47^| — The  Corporation  Trust  Company.] 


nf.  D.  3358.) 


47S4  Discounts  and  Expense*. — Revocation  of  T.  D.  3307. — Treasury 
4553  Decision  3307  [1f4758]  isj  herebV  revoked  as  of  date  July  1,  1922, 
4758  and  Article  4  of  Regulations  47\revised  Deeember,  1921  [^4553])  is 
restored  to  read  as  it  stpod  priorVto  the  promulgation  of  the  above 

mentioned  Treasury  Decision.  ffT.  D.  333§,  signed  by  Commissioner  D.  H. 

Blair,  and  dated  June  22,  1922. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  951  SERVICE 


1 0-30-22. 


EXCISE  TAXES  REGULATIONS. 


PP.  D.  3401.) 

47  95  Revenue  Act  of  1918. — Decision  of  Court. — Ouija  boards  held  to  be 
4766  taxable  as  games. — [This  Treasury  Decision  (Oct.  18,  1922)  reprints 
the  decision  of  the  4th  Circuit  Court  of  Appeals  in  the  case  of  Balti- 
morelTalking!  Board  Co.  (Inc.)  vs.  Miles,  Collector,  (280  Fed.  658),  as 
reported  in  T.  D.  3312  [^|4766]  "for  the  purpose  of  correcting  typographical 
errors  in  T.  D.  3312/'  merely,  adding,  incidentally,  that  "Certiorari  was 
denied  in  U.  S.  Supreme  Court,  6-5-22,  42  Sup.  Ct.  590." — The  Corporation 
Trust  Company.] 


Copyright  19ZI,  by  I  he  Corpot <itton  Crust  Lotuf  any 
WAR  TAX  952  SERVICE 


10-30-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS. — 1922. 


{Decision.) 

Revenue  Act  of  1918. 

(October  21,  1922.) 

Tobacco  Warehousemen  as  Brokers. 

United  States  Circuit  Court  of  Appeals 
Fourth  Circuit. 


Cothran  &  Connally,  Plaintiffs  in  Error, 

versus 

The  United  States  of  America,  Defendant  in  Error. 

In  Error  to  the  District  Court  of  the  United  States  for  the 
^  Western  District  of  Yakima,  at  Lynchburg. 


7667  WooDS,\}Circuit  Judge:  A  srcwement  of  the  case  will  demonstrate 
7556     the  correctness  of  the  judgngafit  of  the  District  Court. 

7668  The  petitioners,  Cothran  &/j|pfnnally,  tobacco  warehousemen,  brought 
this  proceeouag  under  paru^/aph  20,  sec.  24  of  Judicial  Code  to  recover 

$52.05,  tax  and  penary  collected  /fom  them  under  the  following  section  of 
the  Act  of  February  Wk  1919,  (4fiMtat.  1126): 

"Sec.  1001.  That  cVi  and  £fjkr  January  1,  1919,  there  shall  be  levied, 
collected  and  paid  annuVly  mm  following  special  taxes:  (1)  Brokers  shall 
pay  fifty  dollars.  Every  p^rspflr  whose  business  it  is  to  negotiate  purchases 
or  sales  of  stocks,  bonds,  exWajfge,  bullion,  coined  money,  bank  notes,  prom- 
issory notes,  other  securitielL/produce  or  merchandise,  for  others,  shall  be 
regarded  as  a  broker."        /  JL 

76S9  The  petitioners  coJcm^Sa  tobacco  warehouse  in  the  town  of  Brook- 
neal,  Virginia.  Ppifuce^sold  their  tobacco  through  the  warehouse. 
The  tobacco  was  placed  Am  pilesNon  the  warehouse  floor,  ticketed  with  the 
owner's  name,  lot  numtfef  and  wwght.  Periodically  sales  were  conducted 
by  the  auctioneer  of  tl^/proprietor\of  the  warehouse.  The  owners  of  the 
tobacco  usually  attendfea  the  sale.  I\  the  highest  bid  was  not  satisfactory 
to  the  owner  he  had  1p#privilege  of  rVusing  it.  If  accepted  the  warehouse- 
men paid  the  owner  /h«  amount  of  priqe  offered,  less  3%  commission.  The 
warehousemen  afterw|/ds  invoiced  the  V)bacco  in  their  own  name  and  at 
their  own  risk  to  thc^Miyer,  who  paid  the  Vice  to  them.  There  was  no  direct 
contractural  relaticAJbetween  the  buyer  arm  the  owner  of  the  tobacco. 

7670  It  is  too  ]Mi  for  discussion  that  mpacco  is  produce,  and  that  the 
pet'*tionerjhyere  engaged  in  negotiatiimthe  sale  of  it  as  brokers,  under 

the  controlling  ddjffition  of  the  statute. 

7671  In  earlienr/tatutes,  enacted  at  diilcr_ lifetimes  from  1864  to  1914,  a 
tax  wasJJpied  on  brokers  negotiating  tnV  sale  of  goods,  wares,  pro- 
duce or  merchandise,  and  on  commission  merchanr^receiving  into  possession 
for  sale,  good //wares  or  merchandise.  In  these  same  statutes  dealers  in 
tobacco  were  distinguished  and  a  special  and  different  tax  levied  on  them. 
This  special  tax  on  dealers  in  tobacco  was  repealed  in  the  statute  of  1916. 
(39  Stat.  790.)  The  argument  of  petitioners'  counsel  is  that  this  course  of 
past  legislation  imposing  the  special  tax^on  dealers  in  tobacco  indicated 
an  intention  to  maintain  a  distinction  between  tobacco  and  other  produce 
and  merchandise  in  future  legislation,  however  broad  in  terms;  and  that, 

Copyright  1922,  by  The  Corporation  Trust  Company. 

WAR  tax        1537  service.. 


10-30-22. 

SPECIAL  TAXES  ON  OCCUPATIONS  REGULATIONS.— 1922. 


too,  although  such  future  tax  legislation  repealed  the  special  tax  on  dealers 
in  tobacco. 

7  672  We  think  the  true  view  is  that  by  the  Acts  of  1916  and  1919  the 
Congress  expressed  as  clearly  as  possible  the  intention  to  abolish 
the  distinction  in  tax  legislation  between  dealings  in  tobacco  and  other 
produce  and  merchandise  by  omitting  the  tax  on  dealers  in  tobacco  as  such; 
and  by  the  Act  of  1919  to  put  tobacco  in  the  same  class  with  other  produce 
and  merchandise  by  exacting  a  tax  on  brokers,  that  is  all  persons  who  nego- 
tiate the  sale  of  any  produce  or  merchandise,  including  tobacco. 
7673  We  can  see  no  ground!  whatever  fqr  holding  that  the  Congress  meant 
to  make  persons  who  negotiated  the  sale  of  tobacco  a  privileged 
class,  exempt  from  the  tax  impqsed  on  those  who  negotiated  the  sale  of  wheat, 
corn  or  other  produce.  \  j 


\ 


\ 


Affirmed. 


i 

i 


\ 


\ 


Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX  f$W&  SBRVie-r 


•-1S-22. 


Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 

The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding. 

The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling,"  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  1921  Act  (HlQ$3)  are  grouped 
with  foreign  corporations  for  the  purposes  of  the  1921  .excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  rj/bvisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there/ are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918yAct).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  sa^ne  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1°48  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 
under  either  Act. 

'Act) 
Article . 

same  as,  there$6re  refer  to,  Article  713 

it        it  it 

"  "  "  715 
"     "       "  716 


Reg.  62  (192: 
No  corresponds 
Article  712  is  tl 
"     713  < 
«     714  * 
"     715  * 


Reg.  45,  (1918  Act) 
,/.  to  Article  712 


No  corresponding  Article.  .J.  to  Article  717 

Article  716  is  ihe  same  as,/herefore  refer  to,  Article  719 
"  717  "/  "  "  "/  "  "  "  "  1  718 
"  718  "/  "  "  /  "  "  "  tStt  720 
N  o  corresponding  Articje   .  to  Article  869 


Article  869  is 
"  870 


the  same/as,  therefore  refer  to,  Article  870 

H  <«  /    <(  it  H         (<  U  $J  [ 

Otherwise 


Art.  of  Reg.  62  is  same\as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 


( The  list  is  always  up-to-date.) 


Law 

/Section 
'300.... 
1/301.... 

f 

v; 

/>02 


11.530 


no 


Article 
Number 

..701  

711  

712  

713  

714  

715  

716  

717  

718  

719  

720  

 731  


Last 
Ruling 
. .  None 
.1 

. .  None 
;  .None 
.11 
..2 

.  .None 
.  .None 
.  .None 
.1 

.  .None 
.1 


Law 
Section 

"  ' 

<403 .... 
ifii 

305 
£410 


Article 
Number 
732 


741 

742. 

743. 

751 

752, 

753. 

761 

771. 


^311  781 

"  782, 


Last 
Ruling 
.  .1 

.  .None 

.  .2 

,  .None 
, .  None 
. .  None 
.  .None 

.None 

.None 

.1 

.3 

.None 


(Ow) 


Article  Last 
Number  Ruling 

. .. .:783..  1 

"  784  None 

"  785....  None 

¥  312  791  3 

320....  801  1 

802  1 

325  811  2 

"  812  3 

813  9 

814  None 

815  9 

816  1 

817  None 

818  3 

1/326.  831  40 

tm  832  None 

//•  833  4 

/<l  834  1 

*0*  835  3 

*  f  836  15 

837  5 

K"  838  10 

yu  839  4 

*  «  840  9 

841  5 

^"  842  None 

843  2 

844  1 

845  8 

845A  (See  845) 

*f  846  4 

847  None 

848  None 

849  ...None 

850  2 

851  6 

852...  1 

853  1 


Law  Article  Last 

Section         Number  Ruling^ 

326  ...854  ,  .2 

855  1      *S  . 

856....  None  ' 

857  5  i/ 

858...  10  ^ 

859  1 

860   .None  ^ 

861  None  ' 

862  3  ' 

863  None 

864  None  ^ 

865  None  ' 

866  None  S 

867  None 

868  None  ✓ 

869  1  S 

870  None  / 

871  1 

327  901  29  V 

328  911  2  V, 

912  3  ^ 

913  1  *S 

914  2  ✓ 

330  931  4  S 

932  1  1 

933  7  ^ 

934  None  ^ 

331   941  17  If, 

335  951  None  * 

952  1  S 

953  None  ^ 

954.  None  iS 

955  None 

336  961  None  S 

962  None  ^ 

337  971  2  ^ 

972  None  ^ 

338  981  None  is 


—  : — 

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 


Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  37. 

3XIO>l  -  tt\  jfi*    [     *n0**  ^' * 

Later  Bulletins,  since  issued  {if  any)y  contain  no  rulings  bearing  on  the 

1918  or  1921  excess-profits  tax  laws. 


Insert  this  page  to  face  blue  page  401. 


4-6-22. 


Sec.  327.    Art.  001.— 41.  ] 


not  be  computed  upon  the  basis  of  or  in  direct  relation  to  cost,  but  in  either  case  it  satisfies 
the  term  "plus."  This  interpretation  appears  to  be  in  accord  with  the  common  under- 
standing of  the  term  "cost-plus  basis"  by  the  governmental  departments  charged  with 
war  contracting,  as  appears  from  the  recommendations  of  the  Interdepartmental  Cost 
Conference  held  on  July  31,  1917.  (See  full  reprint  of  such  recommendations  in  Nicholson 
&  Rohrbach  on  Cost  Accounting,  p.  488,  et  seq.^  Accordingly,  this  office  holds  that  the 
"cost-plus  basis"  of  contracting  within  the  meaning  of  the  statute  applies  to  those  cases 
wherein  the  contractor  is  to  be  reimbursed  the  actual  cost  of  operations  and  is  to  be  paid 
in  addition  (or  "plus")  an  assured  profit,  determined  by  any  of  the  methods  above  men- 
tioned, whereby  the  burden  of  the  cost  of  production  is  put  upon  the  Government. 

As  appears  above,  the  method  of  compensation  agreed  upon  by  the  parties  to  the 
contract  here  considered  consisted  of  a  reimbursement  to  the  contractor  of  its  total  actual 
cost  of  operations  and  the  payment  in  addition  thereto  of  a  fixed  profit  of  a  definite  sum 
for  each  and  every  pound  of  product  delivered  and  accepted,  with  a  provision  for  the 
payment  of  an  additional  profit  of  50  per  cent  of  a  so-called  saving  in  case  the  contractor 
produced  the  product  at  an  actual  cost  of  production  in  an  amount  less  than  the  estimated 
cost  of  production  as  determined  under  the  contract.  Income  derived  upon  this  basis 
or  method  of  compensation  is  "income  derived  on  a  cost-plus  basis." 

In  view  of  the  foregoing  opinion  of  the  Solicitor,  in  which  the  Committee 


I  concurs,  it  is  recommended  that  the  action  of  the  Income  Tax  Unit  in  rejecting 
the  corporation's  application  for  assessment  of  the  profits  tax  for  1919  under 
the  provisions  of  sections  327  and  328  of  the  Revenue  Act  of  1918  be  affirmed, 
and  accordingly  that  the  appeal  of  the  taxpayer  be  denied,  inasmuch  as  50 
per  cent  or  more  of  the  gross  income  of  the  corporation  for  the  taxable  year 
consists  of  gains,  profits,  commissions,  or  other  income  derived  on  a  cost-plus 
basis  from  a  Government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive. 


1 
J 


29 


Supplementary  Bulletin  Rulings. 


,irioiq  i 
to  iZOJ  2 


baa 


7-27-22. 


FORMS,  FINDER,  ETC. 


TABLE  OF  CASES. 

The  references  are  to  page  numbers. 

Page 

Baker  &  Co.:  Matley  vs.  (C.  C.  of  A.,  First  Circuit,  May  16,  1022)   946 

Baltimore  Talking  Board  Co.,  Inc.  vs.  Miles  (T.  D.  3312)   945 

Buckeye  Cotton  Oil  Co.  vs.  U.  S.  (T.  D.  3377)   1118 

Cartier  Holland  Lumber  Co.  vs.  Doyle  (269  Fed.  647).  .Dec.  1920  Cum.  Bull.  p.  337. 

Reversed,  C.  C.  oft  A.,  Sixth  Circuit  (277  Fed.  150)   417 

Casey  vs.  Howard  (C.  fc.  of  A.,  First  Circuit,  June  6,  1922)   631 

Central  Union  Trust  Cb.  vs.  Edwards  (U.  S.  D.  C,  May  25,  1922)   640 

Cole  et  al.  vs.  Ralph  (252  U.  S.  286)   749 

Congdon  vs.  Lynch  (TAD.  3324)   153 

Crocker  vs.  Malley  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

D.  L.  &  W.  R.  R.  Co.:  \W-  U.  Telegraph  Co.  vs.  (T.  D.  3369)   1117 

DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs.  Iredell  (268  Fed.  377)   386 

Dodge  vs.  Osborn  (240  U.  S.  118)   1613 

Doyle:  Cartier  Holland  Lumber  Co.  vs.  (269  Fed.  647) .  .  Dec.  1920  Cum.  Bull.  p.  337. 

Reversed,  C.  C.  of  A.ASixth  Circuit  (277  Fed.  150)   417 

Doyle:  Shwab  vs.  (U.  S,  Supreme  Court,  May  1,  1922)   143 

Duffy:  Marconi  Wireless  Telegraph  Company  of  America  vs.  (273  Fed.  197)   763 

Edwards:  Central  Union  Trus\  Co.  vs.  (U.  S.  D.  C,  May  25,  1922)   640 

Edwards:  Lincoln  Chemical  C\  vs.  (272  Fed.  142)    '  389 

Edwards:  Martin  vs.  (T.  D.  3334)   462 

Edwards:  Slocum  et  al.,  executory  (Sage  Estate)  vs  .(U.  S.  D.  C,  June  20,  1922).  ..  .  220 

Edwards:  Title  Guarantee  and  Trust  Co.  (Teets)  vs.  (T.  D.  3319)   142 

Eisner:  New  York  Trust  Co.  vs.  (41  Sup.  Ct.  506)   117 

Fidelitv  Trust  Co.  vs.  Lederer  (276\Fed.  51)   766 

Field:  U  S.  vs.  (255  U.  S.  257).... \   120 

Gaston:  Nichols  vs.  (U.  S.  C.  C.  of  R.,  First  Circuit,  March  21,  1922)   136 

Greiner  vs.  Lewellyn  (U.  S.  Supreme\Court,  April  10,  1922)   142 

Hecht  vs.  Malley  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

Howard  vs.  Casey  (C.  C.  of  A.,  First  VCircuit,  June  6,  1922)   631 

Howard  vs.  Malley  (C.  C.  of  A.,  Firstt  Circuit,  June  6,  1922)   631 

Iredell:  DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs.  (268  Fed.  377)   386 

Knox  (estate  of  Kissam)  vs.  McElligoit  (U.  S.  Supreme  Court,  May  1,  1922)   152 

Kohlhamer  vs.  Smietanka  (239  Fed.  4(|8)   1615 

La  Belle  Iron  Works  vs.  U.  S.  (41  SupiCt.  528)   379 

Lederer:  Fidelity  Trust  Co.  vs.  (276  F$d.  51)   766 

Levy  vs.  Wardell  (U.  S.  Supreme  Court  May  1,  1922)   150 

Lewellyn:  Greiner  vs.  (U.  S.  Supreme  (fourt,  April  10,  1922)   142 

Lincoln  Chemical  Co.  vs.  Edwards  (272|Fed.  142)   389 

Lynch:  Congdon  vs.  (T.  D.  3324)  I   153 

Malley  vs.  Baker  &  Co.  (C.  C.  of  A.,  FiVst  Circuit,  Mav  16,  1922)   946 

Malley  vs.  Crocker  (C.  C.  of  A.,  First  Circuit,  June  6,  1922)   631 

Malley  vs.  Hecht  (C.  C.  of  A.,  First  Cir<|uit,  June  6,  1922)   631 

Malley  vs.  Howard  (C.  C.  of  A.,  First  Grdjuit,  June  6,  1922)   631 

Marconi  Wireless  Telegraph  Company  on  Am.  vs.  Duffy  273  (Fed.  197)   763 

Martin  vs.  Edwards  (T.  D.  3334)  I   462 

McElligott:  Knox  (estate  of  Kissam)  vs.|(U.  S.  Supreme  Court,  May  1,  1922)   152 

Miles:  Baltimore  Talking  Board  Co.,  Inclvs.  (T.  D.  3312)   945 

New  York  Trust  Co.  vs.  Eisner  (41  Sup.  ft.  506)   117 

Nichols  vs.  Gaston  (U.  S.  C.  C.  of  A.,  FirSt  Circuit,  March  21,  1922)   136 

Osborn:  Dodge  vs.  (240  U.  S.  118)  |   1613 

Polk  vs.  Page  (276  Fed.  128.    Also  U.  S.  I).  C,  December  21,  1921)   106  135 

C.  C.  of  A.  (May  16,  1922)  ]   '  155 

Proctor  &  Gamble  Co.  vs.  U.  S.  (T.  D.  3317)   1118 

Ralph:  Cole  et  al.  vs.  (252  U.  S.  286)  1   749 

Shwab  vs.  Doyle  (U.  S.  Supreme  Court,  May  1,  1922)   143 

Slocum  et  al.,  executors  vs.  Edwards  (Sage  Estate)  (U.  S.  D.  C,  June  20,  1922)   220 

Smietanka:  Kohlhamer  vs.  (239  Fed.  408). 1    1615 

Smietanka  vs.  Ullman  (275  Fed.  814)  \   79 

Title  Guarantee  and  Trust  Co.  (Teets)  vs.      wards  (T.  D.  3319)   142 

Ullman:  Smietanka  vs.  (275  Fed.  814)  \.   79 

Union  Trust  Company  (Lachman)  vs.  Wardell  (U.  S.  Supreme  Court,  May  1,  1922)  147 

U.  S.:  Buckeye  Cotton  Oil  Co.  vs.  (T.  D.  3377)   1118 

U.  S.  vs.  Field  (255  U.  S.  257)   120 

U.  S.:  LaBelle  Iron  Works  vs.  (41  Sup.  Ct.  528)   379 

WAR  TAX         .1705  SERVICE 


FORMS,  FINDER,  ETC. 


TABLE  OF  CASES.-  Concluded. 

The  references  are  to  page" numbers. 

Page 

U.  S.:  Proctor  &  Gamble  Co.  vs.  (T.  D.  3377)   1  1  18 

U.  S.:  Washington  Water  Power  Co.  vs.  (56  Ct.  Clms. — Opinion  No.  34092)   627 

W.  U.  Telegraph  Co.  vs.  D.  L.  &  W.  R.  R.  Co.  (T.  D.  3369)   1117 

Wardell:  Levy  vs.  (U.  S.  Supreme  Court,  May  1,  1922)   150 

Wardell:  Union  Trust  Co.  (Lachman)  vs.  (U.  S.  Supreme  Court,  May  t,  1922)   147 

Washington  Water  Power  Co.  vs.  U.  S.  (56  Ct.  Clms. — Opinion  No.  34092)   627 


WAR  TAX  1706  SERVICE 


8-2-22. 


OCCUPATIONS  TAXES. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 

under  the 

Occupations  Tax  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  References. 

T.  D.  Subject  Paragraph 

1921  Law  Provisions   A   7500 

Reg.  59  Regulations  under  1921  law  (issue  of  July/io,  1922)  relating  to 

the  special  taxes  on  businesses  and  occupations 
and  on  the  use  of  boats./'  (See  exhaustive  Table 

of  Contents  beginning  on/page  1513.)   7537 

3309  Art.  22,  Reg.  59  (1918 /Act),  amended.— Theater 

special  tax:  population  (March  20,  1922)   7663 

3331  Arts.  6(g)  and  7,  Reg/59  (1918  Act),  amended.— 

Brokers:  Persons  Uable  and  not  liable  to  tax 
(May  13,  1922)../.   7665 


Insert  this  page  immediately  before  the  yellow  guide  card  *  'Miscellaneous  Matters.'! 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Occupations  Taxes  Supplementary  Page  1. 


6-26-22. 

SALES  (EXCISE)  TAXES.— RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Sales  and  Excise  Taxes  Law  Provisions. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.  Subject  Paragraph 

Law  Provisions  J.   4500 

Reg.  47  Manufacturer's  and  producer's  excise  taxes  (revision  of  January  6, 

1922).    (Indexed  on  the  blue  sheets  following).  ..  .  4540 
Reg.  48  Works  of  art  and  jewelry  taxes  regulations  (revision  of  January  12, 

1922).    (pee  exhaustive  Table  of  Contents  on  page 

934.)../   4700 

3307  Art.  4,  Reg.  47,  amende^.— Cash  discounts  (March  20.  1922)   4758 

3312  Court  dec/sion,  1918  Act.    Ouija  boards  held  to  be 

taxable  (April  5,  1922)   4766 

Decision  Malley  vjt.  Walter  Baker  &  Co.,  Ltd.,  1918  Act.  Sweet 

cho/olate  as  candy  (May  16,  1922)   4768 

V       Treasury  Decision  designation  for  Malley  vs.  Walter 

B^ker  &  Co.,  Ltd.,  case  (1f4768).    (June  10,  1922)  4793 
Art.  4,\Reg.  47,  Restored  to  original  form.— T.  D.  3307  ffl4758] 

revoked. — Cash  discounts  and  expenses  (June  22,  1922)  4794 


Insert  this  page  immediately  before  the  blue  "Sales  Taxes"  index 


Copyright  1922,  by  The  Corporation  trust  Company. 
WAR  TAX  SERVICE 
Sales  (Excise)  Taxes  Supplementary  Page  1. 


■ 


6-1-22.     (2)  6-26-22. 

EXCISE  TAXES  REGULATIONS. 


made,  it  is  difficult  to  see  how  candy  can  be  taxed  at  all;  for,  as  already  stated, 
candy  is  in  its  main  characteristics  sugar  compounds  intended  for  luxury, 
taste-gratifying,  consumption.  When  somewhat  less  than  half  of  a  toothsome 
sweet  is  chocolate — also  a  common  ingredient  of  candy  compounds — the 
resultant  is  not  transmuted  into  food  within  the  fair  meaning  of  this  tax 
statute,  if  the  compound  is  sold  and  consumed  as  confectionery  or  candy. 
4791  The  eighteenth  assignment  of  error  brings  before  us  the  refusal  of 
the  court  below  to  submit  to  the  jury  the  question  of  what  proportion 
of  the  sweet  chocolate  in  question  was  used  for  cooking  or  domestic  purposes. 
This  assignment  must  be  sustaine/i.  The  burden  of  proof  is  on  the  plaintiff 
to  show  th^t  the  taxes  collected  V-as  illegal  or  the  assessments  excessive. 

Anderson  v.  Farmers'  Loan  &  Trust  Co.,  241  Fed.  322; 

New  York  Life  Ins.  Co.  v.  Anderson,  263  Fed.  527,  530; 

Germantown  Trust  Co.  v.  Ltderer,  263  Fed.  672; 

Bailey  v.  R.  R.  Co.,  22  Wall.  604,  638; 

Black  Fed.  Cases,  sec.  547; 

Shafer  v.  Craft,  Collector,  144  Fed.  907,  909; 

South.  Pacific  v.  Lowe /Collector,  238  Fed.  847,  849; 

§phen  v.  Lowe,  Collector,  234  Fed.  474,  476. 
4792,^   The  plaintiff  is  not  entitled  to  recover  more  than  the  amount  that  it 
\  can  show  it  pain  as  a  tax  on  such  portions  of  the  product  in  question 
as  wereX  not  sold  and  ldsed  as  candy  within  the  meaning  of  the  Department's 
regulation. 

The  judgment  of /the  District  Court  is  reversed  and  the  case  is  remanded  to 
that  court  for  further  proceedings  not  inconsistent  with  this  opinion;  and  the 
plaintiff  ii%  error  recovers  costs  in  this  court. 


(T.  D.  3344.) 

47  93    [This  Treasury  Decision  consists  of  a  reprint  of  the  opinion  in  Malley 
4768     vs.  Walter  Baker  &  Company,  Limited,  which  is  reproduced  in  full, 
above,*- beginning  at  ^[4768. — The  Corporation  Trust  Company.] 

— 

(T.  D.  3358.) 

47S4  Discounts  and  Expenses. — Revocation  of  T.  D.  3307. — Treasury 
4553  Decision  3307  ff4758]  is  hereby  revoked  as  of  date  July  1,  1922, 
4758  and  Article  4  of  Regulations  47  (revised  December,  1921  [^[4553]  is 
restored  to  read  as  it  stood  prior  to  the  promulgation  of  the  above 

mentioned  Treasury  Decision.    (T.  D.  3358,  signed  by  Commissioner  D.  H. 

Blair,  rnd  dated  June  22,  1922.) 


r. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         951  SERVICE 


i 


i 


2-1-22. 


EXCISE  TAXES  REGULATIONS. 


z  

E  

3  Section  902— 

I—  Siulptot,  ficlnlir.it.  statuary,  art  tmtdalra,  J 

|,j  Section  905— 

fti  Jtwtlry.  reof  or  Imitation,  pttclam  jjW  jgjMj 


MISCELLANEOUS  EXCISE  TAXES 

(Title  IX,  Sections  902  and  905,01  the  Revenue  Act  0119-31) 


CHARACTER  OF  TAX. 


AMOUNT  Cf  TAX 


J  /  juwoi  (or  o^rir)  £Arf  tit^nplng  It  4  but  rthtm  t]  lit  amount  of  tax  Jut  on  lata  a!  tkt  cioee-mcnltar.oJ 

%  ml.'tlu  fat  tnt  month  of  ,  IMU~,  end  Hat  tit  amount  loiucUifot  txopaymtnl  It  aSLaUt 

o 

E   

o 


Total  tax  collcclcj  .. 
I  ocu  pay  men!  for  month  of  . 

Total  amount  of  tax, 
alto.  2S%  


/Vo.  an</  S</te  ( 
City  en  J  Stilt 


l  anj  tuotcrileJ  iefcrt 


Ketorn  with  remittance  9hnalil  be  sent  to  the  Collector  of  Internal 
Revenue  for  your  district  and  not  to  the  Commissioner  of  I&teraal 
Bi-?caoe  at  Washington,  D.  C.  (See  tastroetloos.  per.  8,  on  reverse 
of  this  form.)  If  yon  b-ve  unthlne,  to  repoit,  make  i.oUt!na  to  tiat 
effect  oe  thta  foiui  and  retain  to  tie  Collector  of  Inu.nu;  Kevenne. 


[Obverse  of  Form  728-A.] 


INSTRUCTIONS. 

instructions  see  Regulations  No.  48,  Revised.) 


1.  TAX. — Section  902  of  the  Revenue  Act  of  1921  provides:  "That  there  aha!!  be  levied,  assessed,  collected,  and  paid  upon  sculpture,  paintings, 
statuary,  art  porcelains,  and  bronzes,  sold  by  any  person  other  than  the  artist,  a  tax  equivalent  to  5  per  centum  of  the  price  lor  which  bo  sold.  This 
section  shall  not  apply  to  the  sale  of  any  such  article  (1)  tb  an  educational  institution  or  public  art  museum,  or  (2)  by  any  dealer  in  such  articles  to 
another  dealer  in  f  uch  articles  for  resale.  ;  \ 

Section  905  of  the  Revenue  Act  of  1921  provides:  '  'That  «n  and  after  January  1,  1922,  there  shall  be  levied,  assessed,  collected,  and  paid  (in  lieu  of 
the  tax  imposed  by  section  905  of  the  Revenue  Act  of  1913)  %pon  all  articles  commonly  or  commercially  known  aa  jewelry,  whether  real  or  imitation; 
pearls,  precious  and  semiprecious  stones,  and  imitations  thereof;  articles  made  of,  or  ornamented,  mounted  or  fitted  with,  precious  metals  or  imitations 
thereof  or  ivory  (not  including  surgical  instruments,  eyeglass*  and  spectacles);  watches;  clocks;  opera  glasses;  lorgaot  tea;  marine  glasses;  fieid  glasses; 
and  binoculars-  upon  any  of  the  above  when  soKI  by  or  for  a  dealer  or  his  estate  for  consumption  or  uso,  a  tax  equivalent  to  5  per  centum  of  the  price 
for  which  eo  sold. 

2.  COMPTjrTATION  OP  TAX. — Any  person  other  than  the  artist  who  sells  any  of  i)  if  articles  enumerated  in  section  902  is  required  to  make  returns 
based  on  sales.   Any  dealer  who  sells  any  of  the  articles  enumerated  in  section  905  is  required  to  make  returns  based  on  sales. 

3.  RETURNS  AND  PAYMENT  OP  TAX. — Return  with  remittance  covering  taxes  collected  in  any  month  must  be  in  the  hands  of  the  Collector 
of  Interna!  Hs\  enue  (or  his  authorized  representative)  of  the  district  i;.  which  the  principal  office  or  place  of  business  of  the  person  making  the  return 
is  located  on  or  before  tho  last  day  of  the  succeeding  month.  Retiiraa  must  be  signed  ana  sworn  to  before  an  officer  authorized  to  administer  oaths,  but 
if  the  tax  is  less  than  $10  the  return  may  be/eigned  or  acknowledged  before  two  subscribing  witnesses. 

4.  CREDITS. — In  case  of  any  overpayment  of  tax  due  to  an  error  in  calruiauon,  credit  may  be  taken  therefor  against  taxes  due  upon  any  subse- 
quent monthly  return.  Credit  may  also  be  taken  as  outlined  in  the  regulations.  A  complete  and  detailed  record  of  such  overpayment  must  be  kept 
by  the  person  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return,  full  information  must  be 
attached  showing  the  reasons  therefor  an<f  designating  the  kind  of  tax,  the  month  for  which  the  previous  return  was  filed,  and  the  due  of  payment. 

5.  RECORDS. — Every  person  required  to  make  returns  under  sections  902  and  905  must  keep  such  records  aa  will  clearly  show  each  taxable  trans- 
action, iit  order  that  returns  may  be  easily  verified  by  revenue  officers. 

6.  PENALTIES.— Failure  to  file  on  time,  25  per  cent  of  tax.  Failure  to  pay  on  time,  5  per  cent  of  tax  and  1  per  cent  interest  a  month.  Severe 
penalties  for  failure  to  file  returns  or  for  false  or  fraudulent  returns.         \  <u— hot       o.p.  o. 


[Reverse  of  Form  728-A.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         909  SERVICE 


2-1-22. 


Reg.  47,  Rev.  Manufacturer's  Sales  Taxes. 

EXCISE  TAXES  REGULATIONS. 


REGULATIONS  47 

Relating  to  the 

EXCISE  TAXES  ON  SALES  BY  THE  MANUFACTURER 

Under 

Sections  900  and  904  of  Title  IX  of  the  Revenue  Act  of  1921. 


[Promulgated  January  6,  1922.] 
[Released  for  publication  February  1,  1922.] 


CONTENTS. 

Paragraph. 

Sections  900  and  904.   Imposition  of  tax: 

Article    1.  Effective  date   4540 

2.  Use  of  terms   4541 

3.  Basis  of  tax   4542 

4.  Discounts  and  expenses   4553 

5.  Exchanges   4558 

6.  Credit  for  taxes  already  paid   4562 

7.  Who  is  a  manufacturer   4564 

8.  Tax  payable  by  manufacturer   4570 

9.  When  tax  attaches   4576 

10.  Sales  to  the  Government  or  a  State   4581 

Section  900  (1)  (2).  Automobiles: 

Article  11.  Automobiles:  Scope  of  tax   4582 

12.  Automobile  trucks  and  automobile  wagons   4587 

13.  Other  automobiles  and  motor  cycles   4595 

Section  900  (3).  Automobile  parts  and  accessories: 

Article  14.  Tires,  inner  tubes,  parts  and  accessories  sold  to  manufacturers   4601 

15.  Definition  of  "parts"   4611 

16.  Definition  of  "accessories"   4623 

Section  900  (4).  Cameras: 

Article  17.  Cameras   4630 

Section  900  (5).  Films: 

Article  18.  Photographic  films  and  plates   4631 

Section  900  (6).  Candy: 

Article  19.  Candy   4632 

Section  900  (7).  Firearms: 

Article  20.  Firearms,  shells,  and  cartridges   4635 

Section  900  (8)  (9).    Hunting  knives: 

Article  21.  Hunting  knives,  dirk  knives,  dagger.,  etc   4636 

Section  900  (10).    Smokers'  articles: 

Article  22.  Cigar  and  cigarette  holders,  pipes,  humidors,  and  smoking  stands..  .  4637 
Section  900  (11).    Slot  machines: 

Article  23.  Automatic  slot-device  machines   4638 

Section  900  (12).  Liveries: 

Article  24.  Liveries  and  livery  boots  and  hats   4639 

Section  900  (13).    Hunting  garments: 

Article  25.  Hunting  and  shooting  garments  and  riding  habits   4640 

Section  900  (14).    Pleasure  boats: 

Article  26.  Yachts  and  motor  boats   4641 

Section  900 — Continued.    Manufacturer  also  retailer: 

Article  27.    Manufacturer  also  retailer   4643 

Section  900 — Continued.    Repeal  of  former  taxes: 

Article  28.  Repeal  of  former  taxes   4651 

Section  901.    Colorable  sales: 

Article  29.  Colorable  sales   4652 

Section  904: 

Article  30.  Carpets  and  rugs   4654 

31.  Trunks   4658 

32.  Valises   4659 

33.  Purses   4660 

34.  Portable  lighting  fixtures   4061 

35.  Fans   4662 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         910  SERVICE 


THE 

WAR  TAX  SERVICE 
1922 


Reporting 
Estate/Taxes 
War-Profits  and  Kxcess-Profits]Taxes 
Capita/  Stock  Tax 
StataiplTaxes 
S$lej/ (Excise)  Taxes 

h  and  Telephone  Messages 
Tax  oA\  Admissions  and  Dues 
al  jTaxes  on  Occupations 


Cspyrighi  1922  by 

37  Wall  Street,  New  York 
Affiliated  with 

Sty*  (Korpnraltim  SIntBt  Ofnmpatuj 

SYSTEM 

Organized  189? 


i 


Jersey  City,  15  Exchange  Place  / 
Boston,  53  State  Street  V 

(Corporation  Registration  Company) 
Chicago,  112  W.  Adams  Street  \J 

Los  Angeles,  Title  Insurance  Bldg.  V  '  ^ 

Pittsburgh,  Oliver  Bldg. 

V         Albany  Agency,  158  Stat 


Washington,  D.  C,  Colorado  Bldg 
Philadelphia,  Land  Title  Bldg. 
Portland,  Me.,  281  St.  John  Street 
St.  Louis,  Federal  Reserve  Bank  Bldg. 
Wilmington,  duPont  Bldg. 
(Corporation  Trust  Co.  of  America 
Street 


1-2-22 


CONTENTS 

Pages 

Estate  Taxes: 

1918  Act  -  3 
1921  Act  -  124 
War-Profits  and  Excess-Profits  Taxes  :* 

1918  Act  -  -  -  301 

1921  Act  -  -  -  401 

Capital  Stock  Tax  on  Corporations : 

1918  Act  -  -  601 

1921  Act  -  -  629 

Stamp  Taxes  -  -  701 

Sales  (Excise)  Taxes  -  901 

Tax  on  Telegraph  and  Telephone  Messages  -  1101 

Tax  on  Admissions  and  Dues    -  -      -  -  1301 

Special  Taxes  on  Occupations : 

1918  Act  -  -  1501 

1921  Act  -  -      -  1535 

Miscellaneous  Law  Provisions  and  Regulations  having  a 

General  Application  -  -  1601 

Forms,  Finder,  etc. : 

Table  of  Forms,  Guides  to  Revenue  Acts  of  1918  and 
1921  by  Sections,  Table  of  Court  Cases,  List  of 
Internal  Revenue  Districts  and  Collectors,  etc.  1701 


Running  Table  of  Contents  for  Each  Subject — Yellow  Supplementary 

Page  1,  at  the  Back  of  Each  Division  of  the  Book. 
Indexes— Blue  Pages  Throughout  the  Book. 


♦SPECIAL  EXCESS-PROFITS  TAX  RULINGS. 

See  the  white  pages  immediately  following  the  blue-page  1918  Act 
Index  in  the  excess-profits  tax  division  of  the  book.  Please  read  the  foreword 
to  these  supplementary  rulings. 


Copyright  1922,  by  The  Corporation  Trust  Company 
WAR  TAX         2  SERVICE 


1-23-22. 


TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


i  AX  OH  AD^'ONS  A  Mi:  t'UES 


*0'.«?5.'0»S-Crt\»*.:TSB  f»»  TJK 


r^Es-rPAOACiTfi  c?  tax 


JSC**  Tiete'.b-'ic-'-  r.rc  r-:tr  r.-r  •-•  ■  :•- 
athtsta-in.  Taxnsdnetnim^achDroVi  > 
-tu.  be  roprrUd  on  Fan:  726-i,  P.e\i'V. 


(a)  Admissions  ^  

(•5)  L«srs,  ttc.of  beset  aia?  scab  

\c)  Roof  itriem,t*Smli,  arJ  slaiier  tnialalnmali  

(i)  Excess  oTtr  tzU'-lishi'  prjr.es — Bct*f!ee  salts  

/  sHeaf  (or  ejfrr.*'  O-.s'.  the.  fwefetni  is  a  trot  it''rm  of tbi  arrxttr-.t a/ tax  ccllisttj  cn 

adntiiifas  and  dues  for  the  menthof  ,  192     ,  and  thai  Hp  MMMt  tt\*»  lW 

/»>  osvfsa'jmfil  is  aZoaa'U  iy  leu. 


J  (>*)  5u«  

J  {/)  IrJSleUaifca. 
Jj  (<)  I;/. 


^M<-icn.  07  duly  ftntKrrind  UMcK  g 
Al'cm 

Ins  raj  .$<>*.« 


Tc'ol  iix  collected.. 


ntrv<r}Trj!rii  for  month  of  

7V><«f  orr^u-,1  of  lex  due.. 

PvkMj  2*$    

/W.'y  5/r    

Interest  

Total  amotmi  dve.. 


i  h  ends c&saftejfsjec 


icy  of.. 


I  Uek) 


(T.U.. 


ii  lecjiiaiico  tiicBid  b?  neat  to  ttf-  Catlrrior  of  Intel  sal 
r  joci  ct^lct  aid  Bit  to  lh(-  CotaaiMiorer  of  latere! 
I  Washington,  D.  C.  ifwo  [natraettona,  par,  e,  on  revet™ 
If  yon  have  notMo?  to  rep:  r>,  -sr.t  notation  to  thit 
ii  for*  and  retmm  io  tke  CoH«c:«r  n'  Inu.'Kal  Kevocjc. 


>•.«•*.....•;:••••  t  . » not  to ttport u.x 
<  n  thi  •  torn.  Taxe?  •  !««  from  such  brotars 
mturf  be  rerwrtsd  o.;  Form  72»-A,  Revised. 


j£  (*)  Adn-.tssioni  

[jj  (')  Leasts,  etc,  of  boxes  and  teats — 
C  {<)  Roof  larderj; cabarets,  and  similitr  entertainments 
(d)  £r;<a»  re;?  established  prints — fjcz~of.ee  sn'r.- .... 
^     /  sitter  {or  affirm)  that  the  foregoing  is  a  true  ;ea.m  of  the  amount  of  tax  eoliitej  an  j 

f3  admissions  end  dots  for  the  month  of  .  192      .  end  O.atthe  erraar.t  itauctri 

jj  far  bocizoyrrttnt  it  apMoao'e  by  lav. 
ft 

D  Sicncd   

0 


Penalty  25%.-  

I         I       Penalty  Sf,  

 \   

*~  \\%  Toicl  ansunt 


(die be  T  betber  iadivldoat  c 


A'o.  n?J  St'vt 
City  i 


and  sthcriltd  hefort  me  (his  . 


.  day  of. 


(Till.)  or  ( 


Bctorn  with  reirJttaiice  should  be  eent  to  the  Collector  of  Internal 
Revenue  for  year  district  ana  aot  to  the  CoranJuloner  of  Internal 
Bevfime,  at  WasblaTion,  D.  C.  (See  lnstrortlo^s,  par.  8,  on  reverse 
or  this  form.)  If  yon  have  nothing  to  report,  Quae  heUtion  to  that 

effect  on  ifcis  fm-«  aao  rftarn  to  the  Collector  Of  internal  I 


[Obverse  of  Form  729.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  1305  SERVICE 


1-23-22 

TAX  ON  ADMISSIONS  AND  DUES  REGULATIONS. 


INSTRUCTIONS. 

{For  foJl  HWtraotfaai,  sue  Regulations  No.  43,  Parts  1  and  2,  RertwL) 
Pccticms  800-S02  of  the  Revenue  Act  of  1021  impose  the  following  taxes  upon  admissions  and  dues: 

1.  ADMISSIONS. — (a)  Regular  admissions.  One  cent  for  each  10  cents  or  fraction  thereof  of  the  amount  paid  for  admission  to  any  plac«.  Tint 

tax  shall  not  be  imposed  where  the  amount  paid  for  admission  is  10  cents  or  less. 

(6)  Ticix'x  sold  at  news  stands,  hotels,  ana  places  other  than  die  ticket  offices  of  theaters,  operas,  or  other  places  of  amusement,  at  an  advance  o!  not  more 
than  60  cents  in  excess  cf  the  established  mice,  5  per  cent  of  such  excess;  when  sold  for  more  than  50  cents  advance.  50  per  cent  of  such  excess,  in 
addition  to  the  tax  imposed  by  (o)  above.  (SUCH  TAX  MUST  BE  REPORTED  ON  FORM  729- A,  REVISED.  COMPLETE  INSTRUCTIONS 
ARE  GIVEN  ON  FORM  729-A,  REVISED,  FOR  REPORTING  THIS  TAX.) 

■(e)  Tickets  sold  by  Qiealers  in  excess  of  the  eetablished  price,  50  per  cunt  of  eucii  excess,  in  addition  to  tax  imposed  by  (a)  above. 

(a)  Leases  of  boiues  and  seats.  In  lieu  of  tax  imposed  by  (a)  above,  a  tax  of  10  per  cent  of  the  amount  for  which  a  similar  box  or  seat  is  sold  for 
each  performance  »t  Trhich  box  or  scat  is  used  or  reserved. 

(e)  faborets.  One  and  one-half  cents  for  each  10  cents  or  fraction  thereof  of  the  admission  price;  admission  price  is  deemed  to  be  20  per  cent  of  the 
araountpaid  for rcr.nce and  rneirhandise. 

2.  BOTES. — (a)  Ten  per  cent  of  amount  paid  to  any  social,  athletic,  or  spurting  organization,  whore  the  dues  of  an  active  resident  annual  mem- 
ber are  in  exceed  of  $10. 

(b)  Initiation  fees.  Ten  per  cent  of  the  amount  paid  to  any  social^  athletic,  or  sporting  organization,  (1)  if  such  fees  exceed  $10,  or  (2)  if  dues  of  an 
jictivo  resident  annual  member  exceed  $10. 

((.•)  Life  members.  Tax  equivalent  to  that  of  active  resident  annual  member  to  be  paid  at  the  time  of  payment  of  dues  by  such  resident  member? 

3.  EXEMPTIONS.-— (s)  Dues  or  fees  paid  to  fraternal  societies  operating  under  the  lodge  system. 

(fr)  Admisciorts,  ali  tho  proceeds  of  which  inure  (a)  exclusively  to  the  benefit  of  religious,  educational,  or  charitable  institutions,  societies,  or 
organizations,  any  post  of  the  American  Legion  or  the  women's  &u:uliary  units  thereof,  societies  for  the  prevention  of  cruelty  to  children  or axMHK 
or  societies  or  organizations  conducted  for  the  sole  purpose  cf  maintaining  symphony  orchestras  and  receiving  substantial  support  from  voluntary  con- 
tributions, or  of  improving  any  city,  town,  village,  or  other  municipality,  or  of  maintai  ning  a.  cooperative  or  community  center  mo  ving-picture  theater— i  f 
no  part  of  tho  net  e?j-nu2gauieruof  inures  to  the  bcuolitoi  tiny  private  stockLoldercr  individual;  or  (t)  exclusively  to  the  benefit  ol  persons  in  the  military 
or  naval  forces  of  the  United  States;  or  (c)  exclusively  to  the  benefit  of  persons  who  have  eorved  in  such  forces  and  are  in  need;  or  (2)  any  atlmif sicca 


to  agricultural  fairs  if  no  part  of  tho  net  earning  thereof  inures  to  the  benefit  of  any  stockholders  or  members  of  the  association  conducting  tho  same,  or 
admissions  to  any  exhibit,  entertainment,  or  other  pay  feature  conducted  by  such  atssoci&tion  as  part  of  any  such  fair,  if  tho  proceeds  therefrom  are  used 
'  clnshc'y  ::         -•  ■  :■■.•<■■■::    •,  ~  ,  •  ■ r<  r        >-h  n<>    ni'nr  i  ■  ■  !>in,  r;o'v*v«r,  must  be  made  tor  exeraption  on  Form  7f\ 

4.  "WHO  MUST  SLAKE  KETTTR5T,  CGMJSCt,  AND  I? A"?  TAX. — Any  pcrcou  or  organization  receiving  payment  for  admissions  or  dues 
or  being  a  club  ami  having  taxable  life  members  •.vuA  collect  the  tax  from  the  poreon  poying  admission,  dues  or  fees,  except  in  1  (6)  and  1  (c)  above, 
vsQcuveridor  must  pay  tax  on  the  «>Nre*s  charge. 

6/^60 MPTTTATION  OF  TAX.— fast  on  admissions  i?  irnncsed  on  each  payment,  or  upon  each  single  admission.  Tn  the  case  of  admissions  by 
K-ason  ticket  or  subscription,  the  tax  applies  to  the  wnOffit  para  fox  each  reason  ticket  or  subscription. 

6.  EETTJRNS  AND  PAxMENl  OF  TAX. — Return  with  remittance  covering  taxes -collected  in  any  month  must  be  in  tho  hands  of  the 
Collector  of  Internal  Revenue  (or  iris  authorized  representative)  of  tho  district  in  which  the  principal  ofnoe  or  place  of  business  of  tho  person  mating 
the  return  is  located  on  or  before  tho  last  day  or  tho  succe«iin2  month.  Separate  re'nrn  of  tax  on  admissions  must  be  made  for  each  place  operated. 
Returns  must  be  signed  and  sworn  to  before  on  officer  authorized  to  adnvniptsr  oaths,  but  if  tho  tax  is  less  than  $10  the  return  may  bo  signed  or 
acknowledged  before  two  subscribing  witnesses. 

7.  CREDITS.— In  case  oi  overpayment  ot  tax  due  to  an  error  in  calculation,  credit  may  be  taken  therefor  upon  any  subsequent  monthly  return. 
Credit  may  also  be  taken  as  outlined  in  the  iegukt:6n3.  A  complete  and  detailed  record  of  such  overpayment  must  be  kept  by  the  person  taking 
credit  therefor.  In  caso  credit  is  taken  on  this  return  for  an  ove.paj  rne.it  made  on  a  previous  return,  fui  information  must  be  attached  shown;:  ttia 
reasons  therefor  and  designating  the  kind  of  tax,  and  ihe  month  for  which  tho  previous  return  was  fi'ed  and  the  date  of  payment.      _  ■ 

8.  RECORDS.— Every  person  or  organization  rcqjnjrad  to  make  a  return  must  keep  such  records  zs  rill  saw  ail  payments,  admits  k.ns,  or  mem- 
bers upon  which  tax  is  reamred  to  be  collected,  in  order  that  rctvrrhs  may  be  essilv  verified  by  revenue  of.icera.  * 

.  9/ ADMISSION  HX05ETS.— The  price  of  tho.ticket  sL>aP  be  conspicucualy  8'id  indelibly  printed,  stamped,  or  written  on  the  fs.ee  or  back  of 
that  part  of  the  ticket  which  is  to  be  taken  up  by  the  management  of  the  thea  ter,  opera,  or  other  place  of  amusement,  together  with  the  muse  of  the 
vendor,  if  sold  other  than  at  the  ticket  office  of  tho  theater,  opera,  cr  other  place  ci  amueement.  Penalty  of  not  more  than  5100  for  violation  of  the 
clause.  ■■■  •  •  •  •■  ■    -  .  . 

10.  PENA^iTDaa.— Failure  to/<« "on  time,  25  per  cent  of  tax.  Failure  to  pay  on  U:uc,  5  per  cent  of  tax  and  1  per  ce.it  interest  a  month."  Severe 
penalties  for  faihure  io  £lc  returns  cr  for  fai?o  or  fraudulent, returns.  ■  e.*.o. 


[Reverse  of^Form  729. j 


(  fpyrighi  1922,  by  7  he  Corporation   /ritJi  Lompony. 
WAR  TAX  1306  SERVICE 


2-1-22. 


EXCISE  TAXES  REGULATIONS. 


MANUFACTURER'S  EXCISE  TAXES 


CHARACTER  OP  TAX 


Camera,  andlenaca  

Pl.otocrafik!c  film,  arid  puUs 

6)  Candg   

7)  Ftrearna.  Mh,  etc  


£Xr$  knlfj.  dour",  otc  

1)  Cl  tor  holder  a,  de  

)  Automatic  tending  machine! 


I})  Uecrla.-ie.  

13)  Hanlln4itma1Sj.dc. 
J 4)  Yacht.,  mote,  ioaU.  d 


Total  amount  tllox  due  

«%>J%   


AMOUNT  OF  TAX 


Mr  (or  tfirm)  Uo/tfi/arcpfei  b  a  (rue  rdarn  of  the 
eh,  lam.  5Mrrrkm/niK>/M»</orimcUlj.... 


tallaiJuttn  raput  to  the  aioewnaiUono/  <rrtfc/e>  /or  t»«  mwilA  o/„ 
.-.*•«»•/    „/M 


,  end  thoLlh,  omxnl  iedudcJIo,  . 


ItilmlYoT  (Wiiaessj (Sob  paragraph  4  onbecir.) VTlti"e~)~or  (Witness) 


Name 

No.  ani  Strut 
City  ar.i  State 


Betum  with  remittance  ehonld  be  seat  to  tke  Collector  of  Internal 
Revenue  (or  your  district  and  not  to  the  Commissioner  of  Internal 
Revenue,  at  Washington,  D.  C.  (Sri  Instructions,  par.  4,  on  revera* 
"hta*  to  report,  nuke  notation  to  that 
i  Collector  of  Internal  Bevenna. 


MANUFACTURER'S  EXCISE  TAXES 


CHARACTER  OP  TAX 


CHARACTER  OF  TAX 


AMOUNT  OF  TAX 


SECTION  900: 
(0  Automobile  truck,, 

fit  . 

i*)  Camera  end  I  ernes  

5)  Phobtrephte  film,  and  filala 

.6)  Candy  

(7)  Firearm,,  Mb.  dc  ... 


9)  Dt,k  knitter,  doner,,  dc  

[10)  C(/.r  AoWer..  dc  _ 

70  Automatic  vending  machine, 
axlghlne  machine, 


(12,  LlKrla.de   

(13)  HmUnt  iarmmli.de.. 
(.14)  YacLii.  male  coah.  eU. 


OT  VoUk,.  jolt  cam.  dc.  . 


Total  amount  of  lea  due  . 

attaii%  


PtnaH,S%  


Total  amount  due . 


I  tutor  (.at  affirm)  lUtth-Jorejclnt  I,  a  true  return  of  tie  a 
uahle  iu  law.      intern  to  and, uloathed  kef  art  rm  IhU  


 m     .end  that  tke  amount  deducted  Jo,  , 


(SeVpara^phVon  back) 


(Title)  ot  (Witness) 


Name 

No.  ani  Street 

,Clty  ani  Stale 

Eetoxxi  with  remittance  should  be  sent  to  the  Collector  of  Internal 
Revenue  for  your  district  and  not  to  the  Commissioner  of  Internal 
Bovenne,  at  Washington,  D.  C.   (8ee  Instructions,  par.  4,  on  reverse 


t,  mafce  notation  to  that 


[Obverse  of  Form  728.J 


Copyright  1922,  by  The  Corporation  Trust  Compmny. 
WAR  TAX        907  SERVICE 


2-1-22. 


EXCISE  TAXES  REGULATIONS. 


INSTRUCTIONS 

(For  foil  Instruction,  seo  Regulations  No.  47,  Rirtaed)  -  _  -  . 

I.  TAX. — Section  900  of  the  Revenue  Act  of  1921  provides:  "That  from  and  after  January'  1,  1922,  there  shall  ho  levied,  aasceeed,  collected,  and 
id  upon  the  following  articles  sold  or  leased  by  the  manufacturer,  producer,  or  importer,  a  tax  equivalent  to  the  following  percentages  of  the  pric* 
which  so  sold  or  leased : 

"(1)  Automobile  trucks  and  automobile  wagons  (including  tires,  inner  tube3,  parts,  and  accessories  therefor,  sold  on  or  in  Rale. 

connection  therewith- or  with  the  sale  thereof)   r   ■  3  per  cent. 

"(2)  Other  automobiles  and  motor  cycles  (including  tires,  inner  tubes,  parts,1  and  accessories  therefor,  sold  on  or  in  con- 
nection therewith  or  with  the  sale  thereof),  except  tractors       5  per  cent. 

"(3)  Tires,  inner  tubes,  parts,  or  accessories  for  any  of  the  articlea  enumerated  in  subdivision  ( I)  or  (2),  sold  to  any  person 

other  than  a  manufacturer  or  producer  of  any  of  tho  articles  enumerated  in  subdivision  (1)  or  (2)   5  per  cent. 

"(4)  Cameras,  weighing  not  more  than  100  pounds,  and  lenses  for  such  cameras    ,   10  per  cent. 

"(6)  Photographic  films  and  plates  (other  tian  moving-picturo  films)  „   „   ...     5  per  cent. 

"(6)  Candy    _   a  3  per  cent. 

"(7)  Firearms,  shells,  and  cartridges,  except  those  sold  for  the  use  of  tho  United  States,  any  State,  Territory,  or  possession 

of  the  United  States,  any  political  subdivision  thereof,  or  the  District  of  Columbia   ■  10  per  cent. 

"<$)  Hunting  and  bowie  knives      _  —      ,  ..  10  per  cent. 

"(9)  Dirk  knives,  daggers,  sword  canes,  stilettos,  and  brass  or  metallic  knuckles  1   100  per  cent. 

"(10)  ttgar  or  cigarette  holders  and  pipes,  compc-ed  wholly  or  in  part  of  meerschaum  or  amber,  humidors,  and  smoking  stands  10  percent. 

"(11)  Automatic  slot-device  vending  machines.  _    5  per  cent. 

Automatic  slot-device  weighing  machines.  _    10  per  cent. 

(If  the  manufacturer,  producer,  or  importer  of  any  such  machine  operates  it  for  profit,  he  shall  pav  a  tax  in  respect 
to  each  tucb.  machine  put  into  operation  equivalent  to  5  per  centum  of  its  fair  market  value  in  the  case  of  a  vend- 
ing machine,  and  10  per  centum  of  ita  fair  market  value  in  the  case  of  a  weighing  machine.) 

"(12)  Liveries  and  hvery  boots  and  hats  _    10  per  cent. 

"(13)  Hunting  and  shooting  garments  and  riding  habits   ,   10  per  cent. 

"(14)  Yachts  and  motor  boats  not  designed  for  trade,  fishing,  or  national  defense;  and  pleasure  boats  and  pleasure  canoes 

if  sold  for  more  than  5100        10  per  cent." 


2.  Section  904  of  the  Revenue  Act  of  1921  provides:  "That  from  ted  after  January  1,  1922,  there  shall  be  levied,  assessed,  collected,  and  paid,  in 
lieu  of  the  taxes  imposed  by  section  904  of  the  Revenue  Act  of  1918,  upon  the  following  articles  sold  or  leased  by  the  manufacturer,  producer,  or  importer, 
•  tax  equivalent  to  5  per  centum  of  so  much  of  the  price  for  which  so  sold  or  leased  as  is  in  excess  of  the  price  hereinafter  sperified  as  to  each  euch  article: 

"(1)  Carpets  and  rugs,  including  fibre,  on  the  amount  in  excesB  of  $4.50  per  square  yard  in  the  case  oi  carpets  and  $6.00  per  square  yard  in 

the  case  of  rugs; 
"(2)  Trunks,  on  the  amount  in  excess  of  $35  each; 

"(3)  Valises,  traveling  bags,  suit  cases,  hat  boxes  used  by  travelers,  and  fitted  toilet  cases,  on  the  amount  in  excess  of  $25  each; 
•''(4)  Purses,  pocketbooks,  shopping  and  hand  bags,  on  the  amount  in  excess  of  $5  each ; 

"(5)  Portable  lighting  fixtures,  including  lamps  of  all  kinds  and  lamp  shades,  on  the  amount  in  excess  of  $10  each; 
"(6)  Fans,  on  the  amount  in  excess  of  $1  each." 

3.  COMPUTATION  OF  TAX.— The  tax  under  sections  900  and  904  is  based  on  the  sale  price  of  the  goods  sold  and  should  be  computed  on  earh 
transaction. 

4.  RETURNS  AND  PAYMENT  OP  TAX. — Return  with  remittance  covering  taxes  due  in  anv  month  must  be  in  the  hands  of  the  Collector 
of  Internal  Revenue  (or  his  authorized  representative)  of  the  -district  in  which  the  principal  office  or  place  of  business  of  the  person  making  thn  ret  irn 
is  located  on  or  before  the  last  day  of  the  succeeding  month.  Returns  must  be  signed  and  6worn  to  before  an  officer  authorized  to  administer  oaths, 
but  if  the  tax  is  less  than  $10  the  return  may  be  signed  or  acknowledged  before  two  subscribing  witnesses. 

5.  CREDITS. — In  case  of  any  overpayment  of  tax  due  to  an  error  in  calculation,  credit  may  be  taken  therefor  against  taxes  due  upon  any  sub- 
sequent monthly  return.  Credit  may  also  be  taken  as  outlined  in  the  regulations.  A  complete  and  detailed  record  of  such  overpayment  must  be  kept 
by  the  person  taking  credit  therefor.  In  case  credit  is  taken  on  this  return  for  an  overpayment  made  on  a  previous  return,  full  information  must  be 
attached  showing  the  reasons  therefor  and  designating  the  kind  of  tax,  the  month  for  which  the  previous  return  was  filed,  and  the  date  of  payment. 
In  the  case  of  illegal  or  erroneous  payment,  such  as  exports,  nontaxable  articles,  etc.,  claim  for  refund  on  Form  46  must  be  filed. 

6.  RECORDS. — Every  manufacturer,  producer,  onimporter  required  to  make. returns  must  keep  such  records  as  will  clearly  show  earh  ta\.il>lp 
transaction,  in  order  that  returns  may  be  easily  verified  By  revenue  officers. 

7.  PEN  AX  TIES. —Failure  lof.lt  on  time,  25  per  cent  of  tax.   Failure  to  pay  on  time,  5  percent  of  tax  and  1  per  cent  interest  a  month 
penalties  for  failure  to  file  returns  or  for  false  or  fraudulent  returns. 


[Reverse  of  Form  728.] 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         908  SERVICE 


8-2-22. 

ADMISSIONS  AND  DUES  TAX.— RUNNING  TABLE  OF  CONTENTS. 


Giving 
T.  D. 


Reg.  43 
Pt.  2 

3282 

3285 
Reg.  43 
Pt.  1 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

Admissions  and  Dues  Tax  Law  Provisions  of  the  Revenue  Act  of  1921. 

(The  Law  appears  at  paragraphs  6500  to  6512.) 

Treasury  Decision  Number  or  other  Designation,  Date  of  Issue,  and  General 
Subject  Content. 

Subject  Paragraph 

Law  Provisions   6500 

)  Dues  Regulations  (revision  of  January  11,  1922)  under  the  Revenue 

)  Act  of  1921.    (Fully/Indexed  on  the  blue  index, 

following)  /   6513 

Revenue  Act  of  1918.— /Amendment  to  Art.  12,  Reg. 

43,  Part  II  (February  11,  1922)   6583 

Arts.  9,  10,  11,  and  12,  Reg.  43,  Pt.  M  amended  (February  11,  1922)  6584 
I           Admissions  Regulations  (revision  hi  February  15,  1922).  (Fully 
)  indexed  on  the  bliile  sheets  following)   6589 


Insert  this  page  immediate 


e  blue  Dues  Tax  Index. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Admissions  and  Dues  Taxes  Supplementary  Page  I. 


8-17-22. 

ESTATE  TAX.— RUNNING  TABLE  OF  CONTENTS.— Continued. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 
Estate  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 

T.  D.  Subject  Paragraph 

3319  Title  Guarantee  and  Trust  Co.  (Teets)  vs.  Edwards. 

U.  S.  District  Court  Decision.    Bequest  or  devise 

in  lieu  of  dower  (April  5,  1922)   495 

Decision  Greiner  vs.  Lewellyn,  U.  S.  Supreme  Court.    Value  of 

State  and  municipal  bonds  to  be  included  in  value 
of  gross  estate  (April  10,  1922)   497 

Decisions  (1)  Shwab  vs.  Doyle   499 

(2)  Union  Trust  Co.  vs.  Wardell   518 

(3)  Levy  vs.  Wardell   537 

(4)  Knox  vs.  McElligott   551 

(1),  (2),  (3),  and  (4).  The  text  of  the  1916  Act  is 
not  to  be  construed  as  applying  to  transfers  in 
contemplation  of  death,  etc.,  completed  before 
the  passage  of  the  Act.  (U.  S.  Supreme  Court, 
May  1,  1922.)  / 

3324  Congdon  vs.  Lynch.  /XL  S.  District  Court  decision, 

1916  Act.  The  ,4916  Act  is  retroactive,  apply- 
ing to  trusts  created  prior  to  the  passage  of  the 
Act  to  take  effect  in  possession  or  enjoyment  at 
or  after  the  trustor's  death.  (T.  D.  dated  May 
8,  19i2.)  /   562 

3325  Reprint  of  -Nichols  Ars.  Gaston  opinion  (^467,  herein) .  .  567 

3326  Reprint  of  Greiner/vs.  Lewellyn  opinion  (1[497,  herein) .  568 
Decision  Page  vs.  Polk,  reversing  Polk  vs.  Page,  ^[3 15  q.  v.  above 

(C.  C.  ofU.,Ast  Circuit,  May  16,  1922)  . . . .  569 

3338  Reprint  of  Union/ Trust  Company  vs.  Wardell  opinion 

(1F518  heretr/)    577 

3339  Reprint  of  Shwalb  vs.  Doyle  opinion  (1[499  herein).  .  .  .  578 

3348  Reprint  of  Page*'  vs.  Polk  opinion  (1f569  herein)   578a 

Reg.  63  Regulations  63^ — -1921  Act.    Complete  regulations  re- 

lating to  ijne  Revenue  Act  of  1921,  fully  indexed 
beginning/ on  page  207,  and  with  complete  table 

of  contents  beginning  on  page  158   579 

Reg.  37  Regulations  37— 1918  Act.    Amended   776 

Decision  Slocum  et  all,  executofes  (Sage  estate)  vs.  Edwards. — 

Deductible  amounts  of  charitable  bequests  out  of 
residual  estate  out  6f  which  State  succession  and 

Federal  estate  taxes  a\e  paid  (June  20,  1922)   778 

3383  Department  Circular  225  extended  and  made  applicable 

to  receipt  of  Treasury^  Notes  for  Estate  Taxes 
(August  9,  1922)  A   787 


Insert  this  page  immediately  before  the  yellow  guide  card  4 'Excess  Profits  Tax." 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Estate  Tax  Supplementary  Page  3. 


ESTATE  TAX  REGULATIONS,  ETC. — 1922. 


(T.  D.  3383) 

7  87      Receipt  of  Liberty  Bonds,  Victory  Notes,  and  Treasury  Notes  for 
231      Estate  or  Inheritance  Taxes. — The  appended  [*f 788]  department 
236      circular,  issued  under  date  of  June  30,  1922,  with  reference  to  receipt 
265      of  Treasury  notes  of  the  United  States  in  payment  of  Federal  estate 
and  inheritance  taxes,  is  published  for  the  information  of  internal- 
revenue  officers  and  others  concerned.    This  circular  supplements  Depart- 
ment Circular  No.  225,  dated  January  31,  1921  (T.  D.  3144)  [1(265].    (T.  D. 
3383,  signed  by  Commissioner  D.  H.  Blair,  and  dated  August  9,  1922.) 
7  88       1.    The  provisions  of  Department  Circular  No.  225,  dated  January 
31,  1921,  prescribing  regulations  governing  the  receipt  of  Liberty 
bonds  and  Victory  notes  for  Federal  estate  or  inheritance  taxes  are  hereby 
extended  and  made  applicable  to  Treasury  notes  of  the  United  States  now 
or  hereafter  issued  under  authority  of  Section  18  of  the  Second  Liberty 
Bond  Act,  as  amended  and  supplemented,  bearing  interest  at  a  higher  rate 
than  4  per  centum  per  annum,  and  any  such  Treasury  notes  shall  accordingly 
be  receivable  by  the  United  States  at  par/and  accrued  interest  in  payment 
of  any  estate  or  inheritance  taxes  imposed/by  the  United  States,  under  or  by 
virtue  of  any  present  or  future  law,  upon/  the  same  terms  and  conditions  as 
provided  in  said  Department  Circular  Jno.  225,  dated  January  31,  1921, 
with  respect  to  the  acceptance  of  Liberw  bonds  and  Victory  notes  bearing 
interest  at  a  higher  rate  than  4  per  centum  per  annum. 

789      2.    The  issues  of  Treasury  not<?s  at  this  date  outstanding,  bearing 
interest  at  a  higher  rate  than  4  per  centum  per  annum,  are: 


Description  j  |  Date  of  Issue 


Short  Title 


(a)  5%  per  cent  notes,  payable  Tune!  15,  1924   June  15,  1921  Series  A-1924 

(b)  5 per  cent  notes,  payable  Sept..  15,  192/1   Sept.  15,  1921  Series  B-1924 

(c)  4%  per  cent  notes,  payable  Mar.  15,  1925   Feb.     1,  1922  Series  A-1925 

(d)  4%  per  cent  notes,  payable  Mar.  \5,  19£6  I  Mar.  15,  1922  Series  A-1926 

(e)  4 3g  per  cent  note?,  payable  Dec,  ff,  1^25   J  June  15.  1922  Series  6-1925 

780  3.  For  the  calculation  of  ^.dcrued  interest  on  the  current  coupons  of 
Treasury  notes  tendered  in  payment  of  estate  or  inheritance  taxes 
under  this  circular,  the  method  outlined  in  Exhibit  B  [^[261-262]  to  Depart- 
ment Circular  No.  225,  dated  Janufty  31,  1921,  should  be  followed.  Interest 
tables  at  the  various  rates  borne  h\  Treasury  notes  may  be  obtained  from 
the  Treasury  Department,  DivislonXof  Loans  and  Currency,  Washington, 
The  interest  tables  appropriate /for  Vise  in  connection  with  the  issues  of 
Treasury  notes  at  present  outstanding^  re  as  follows: 

Form  General  1017,  for  Semes  A-\924  (interest  dates  June  15  and 
December  15). 

Form  General  1016,  for  Series  B-19^4  (interest  dates  March  15  and 
September  15). 

Form  L.  &  C.  369,  for  Series  A-192^  prior  to  September  15,  1922 

(interest  during  this  period  is  on  ^annual  365-day  basis). 
Form  L.  &  C.  435,  for  Juries  A-1925 \subsequent  to  September  15, 

1922  (interest  dates/March  15  and  September  15). 
Form  L.  &  C.  435,  for  Series  A-1926  (\nterest  dates  March  15  and 
September  15).  I 
791       Interest  tables  or  decimals  for  computing  interest  as  may  be  re- 
quired for  other  or  future  issues  may  be  obtained  from  the  Treasury 
Department,  Division  of  Loans  and  Currency,  Washington,  upon  request. 
(Extension  of  Department  Circular  No.  225,  signed  by  Secretary   A;  W. 
Mellon,  dated  June  30,  1922  and  appended  to  T.  D.  3383.) 

Cupy)ig)it  1922,  by  The  Corporation  Trust  Co'mpanfr 
WAR  TAX         225  SERVICE 


9-8-22. 


Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 

The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding. 

-The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling, "  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  L&21  Act  (1)1083)  are  grouped 
with  foreign  corporations  for  the  purposes  ot  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 


under  either  Act. 

Reg.  62  (1921  Act) 
No  corresponding  An 
Article  712  is  the  same 
"  713 
"  714 
"  715 


ie 


Reg.  45,  (1918  Act) 
 to  Article  712 


therefore  refer  to,  Article  713 

it      tt  it 
it      u         tt  715 

"      "         "  716 

No  corresponding  Article.  \.  to  Article  717 

Article  716  is  the  same  as,  therefore  refer  to,  Article  719 
it     717  f*   "     "     "        u  \     "     "       "  718 

"     718  "   "     "     "        "     \  "     "       "  720 

No  corresponding  Article  \. .  .  .to  Article  869 

Article  869  is  the  same  as,  therefore  refer  to,  Article  870 

it  870  (i  ii  "  **  "  "  \. "  "  871 
Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 
( The  list  is  always  up-to-date.) 


Article 
Number 
. .701.... 
..711.... 

712.... 

713.... 

714... 

715.... 


/  Last 
Ruling 
.  .None 
.  .1 

.  .None 
.  .None 
.11 
..2 


716  1  None 


S02 


Law 
Section 
302 ... . 


304 


305 
310 
311 


Last 
Ruling 
.  .1 

.  .  None 
.  .2 

. .  None 
.  .None 
.  .None 
. .  None 
.  .None 
.  .None 
.1 
..3 

.  .None 


(Ortr) 


Law 

Section 

311 

Article 
Number 
....783  

Last 

Law 

Article 

Last 
Ruling 

2 

Ruling 
1 

Section 
326 

Number 

....854  

<< 

784 

. .  .  .None 

ft 

855  

1 

M 

785 

.  ,  ,  None 

tt 

856  

 None 

312 

 791  

3 

tt 

857 

5 

320 

. . . .801  

1 

a 

858  

10 

« 

802 

1 

tt 

859  

1 

325 

....811  

2 

it 

860  

ti 

812  , 

3 

tt 

861  

«< 

813 

8 

tt 

862  

3 

<< 

814 

tt 

863  

« 

815 

9 

tt 

864  

 None 

816, 

1 

tt 

865  

« 

817 

it 

866  

 None 

 None 

ti 

818 

3 

tt 

867 

326  

 831  

40 

tt 

868  

 None 

<« 

832 

,  ,  None 

tt 

869  

1 

« 

833 

4 

tt 

870 

834  . 

1 

tt 

871 

1 

" 

835 

3 

327  

. . . .901  

29 

u 

836 

15 

328  

....911  

2 

<< 

837 

5 

<{ 

912  

3 

« 

838 

10 

n 

913  

1 

839 

4 

tt 

914  

2 

840 

9 

330  

 931  

4 

841 

5 

a 

932  

1 

842. 

tt 

933  

7 

843 

2 

tt 

934  

....  None 

844 

1 

331  

. . . .941  

17 

845 

8 

335  

. . . .951  

845A 

(See  845) 
4 

a 

952  

1 

« 

846 

tt 

953  

None 

847 

tt 

954  

848 

tt 

955  

None 

849 

336  

 961  

« 

850 

2 

tt 

962  

.  .  .  .None 

851  , 

6 

337  

. . . .971  

2 

852 

1 

tt 

972  

853 

1 

338  

....981  

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  36. 

Later  Bulletins,  since  issued  (if  any),  contain  no  rulings  bearing  on  the 
1918  or  1921  excess-profits  lax  laws. 


Insert  this  page  to  face  blue  page  401. 


S-10-22. 


FORMS,  FENDER,  ETC 


FORMS- 

MISCELLANEOUS. 

No.  Designation  Page 
843         Claim  for  refund:  Claim  for  abatement:  Claim  for  credit   1609 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX. 

1120       Corporation  income  and  profits  tax  return   425 

1120S     Government  contracts  profits  tax  return  Insert  to  face  page  425 

1122       Information  return  of  subsidiary  or  affiliated  corporation   424 

ESTATE  TAX. 

704         Executor's  60-day  notice  (resident  estates). — 1918  Act   27 

704  Executor's  2-month  notice  (resident  estates). — 1921  Act   223 

705  Extcutor's  60-day  notice  (non-resident  estates)   29 

706  Return  of  Gross  Estate   11 

714         Transfer  agents'  60-day  notice:  Non-resident  decedents   3i 

760         Affidavit  of  Ownership  of  Bonds   82 

787  Insurance  companies'  60-day  notice:  Resident  decedent — Not  reproduced. 

See  1f201.    [Not  in  use  under  1921  Act.] 

788  Insurance  companies'  60-day  notice:  Non-resident  decedent — Not  repro- 

duced.   See  ^207.    [Not  in  use  under  A 921  Act.] 

791  Application  for  release  of  estate  tax  lien — Not  reproduced.    See  ^[278  (1918 

Act)  and  ^753  (1921  Act). 

792  Certificate  releasing  estate  liqar— Not  reproduced.    See  ^277  (1918  Act) 

and  ^752  (1921  Act).       '  \ 

793  Claim  for  military  exemption  from  estate  tax. — Not  reproduced.    See  ^[55 

(1918  Act)  and  f597  (1921  AVt)? 

stam^Ataxes. 

A         Clearing-house  and  ex-clearing-h^usfe  transactions   720 

B         Sales  of  products  or  commodities/.  .  .\   727 

741         Statement  for  registration — Not/reproduced.    See  %3704. 

743  Order  for  stamps:  stock  certificates — r<ot  reproduced.    See  ^3736. 

744  Order  for  stamps:  sale  of  products — >4ot  reproduced.    See  ^3736. 

EXCISE  TAXES. 

728  Return  of  manufacturer's  excise  taxes.  \   907 

728A       Return  of  miscellaneous  excisp  taxes  1   909 

TELEGRAPH  AND  TELEPHONE 

727         Return  of  tax  on  telegratdf  and  telephone! message?     1103 

AMISSIONS  AN4  DUES- 

729  Return  of  tax  on  admissions  and  dues.  ...  \   .  .  130-5 

729A       Tax  return  on  bro kefs'  sales — Not  reproduced.    See  ^682^. 

752  Application  for  registry — Not  reproduced.    See  116817. 

753  Certificate  of  redCtry — Not  reproduced.    See  1168 1 7. 

754  Notification  by/fessor  where  lessee  is  responsible  for  collection  of  the  tax- — 

Not  reproduced.    See  ^6827, 

755  Affidavit  claiming  exemption:  admissions.    Not  reproduced.    See  ^67  7  7. 
755A       Notification  by  Collector  of  allowance  or  disallowance  of  claim  for  exemption. 

Not  reproduced.   S<^e  U6779, 

SPECIAL^  TAXES. 

1 1         Special-tax  return   1507 

11 A      Brokers'  special  tax  return..  ..  ,   !50o 

725         Receipt  form  for  tax  on  pleasure  boats—Not  reproduced.    See  fl7636, 

732         Return  for  special  tax  on  pleasure  boats  and  automobile?..   1511 

CAPITAL  STOCK  TAX. 

707  Annual  return  of  domestic  corporations   603 

708  Annual  return  of  foreign  corporations   607 

Copy  tight  1922,  by  The  Corporation  (rust  Company. 
WAJtTAX      .170  3  SERVICE 


FORMS,  FINDER,  ETC. 


[In  blank.] 


WA*.  TAX 


1704 


lEJb  H  B 


6-2-22. 

Sec.  325.    Art.  813.  -13. 

case  such  interest  payments  are  to  be  treated  as  if  received  by  the  subscribers 
and  immediately  reinvested  by  applying  them  to  the  purchase  price  of  the 
new  stock. 
8 


Supplementary  Bulletin  Rulings. 


1-2-22.     (2)  8-4-22.      (3)  8-10-22. 


ESTATE  TAXES 


1918  Law  Provisions.— In  effect  after  6:55  P.  M.,  Frb.  24,  1919  Page  3 

♦Regulations  No.  37  (1918  Act)  etc  Page  33 

Index  Blue  pages  following  page  124 

Forms: 

704  Executor's  60-day  notice  (resident  estates)  Page  27 

705  Executor's  60-day  notice  (nonresident  estates)..  .....  .Page  29 

706  Return  of  gross  estate  Page  11 

714         Transfer  agents'  60-day  notice:  Non-resident  decedents. Page  31 

Superseded  by  Form  714  reproduced  on  page  218. 
760        Affidavit  of  Ownership  of  Bonds.^  Page  88 

787  Insurance  companies'  60-day  notice:  Resident  decedent 

See  ^201.    [Not  in  use  under  1921  Act.] 

788  Insurance   companies'   60-day   notice:  Non-resident 

decedent.   See  ^[207.   [Not  in  use  under  1921  Act.] 

791  Application  for  release  of  estate  tax  lien — Not  repro- 

duced.   See  1f278. 

792  Certificate  releasing  estate  tax  lien — Not  reproduced. 

u  See  H277. 

793  Claim  for  military  exemption  from  estate  tax. — Not 

reproduced — See  ^[55. 

♦Important  Caution  Notice. — See  amendments  to  Regulations  37  (1918  Act)  noted  at 
11776.    These  are  reflected  in  the  revised  table  of  contents  beginning  on  page  33. 


1921  Law  Provisions.— In  effect  after3:55  P.  M.,  Nov.  23, 1921  Page  125 

Regulations  No.  63  (1921  Act)  Page  158 

Index  to  Regulations  No.  63  Page  207 

Forms: 

704  Executor's  2-month  notice  (resident  estates)  Page  223 

705  Executor's  2-month  notice  (nonresident  estates)  Page  000 

706  Return  of  gross  estate  Page  000 

714        Transfer  agent's  notice:  Estate  of  nonresident  Page  218 

760        Affidavit  of  ownership  of  bonds  or  notes  Page  88 

791  Application  for  release  of  estate  tax  lien. — Not  repro- 

duced.   See  H753. 

792  Certificate  releasing  estate  tax  lien. — Not  reproduced 

See  1752. 

793  Claim  for  exemption  on  account  of  military  service/ — 

Not  reproduced.    See  ^597. 


Copyright  1922,  by  The  Corporation  Trust  Comp*my. 
WAR  TAX  SERVICE 

Estate  Tax  Fore-Page 


9-1-22. 

Perpetual  Check  List 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 


The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding. 
The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling,"  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  -These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  tl^at  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  1921  Act  fl[1083)  are  grouped 
with  foreign  corporations  for  the  purposes  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  idejhtical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (19^21  Act)  Reg,  45,  (1918  Act) 

No  corresponding  Article.  |  to  Article  712 

Article  712  is  the  same  as,  /therefore  refer  to,  Article  713 
a  713  "  (i  '  "  "  '  "  **  "  "  714 
«     714  "  "     f<      *        (i        "     "       "  715 

it       7jcj  a    a       it      tt  n  a      tt         tt  Jia 

No  corresponding  Articl^.  to  Article  717 

Article  716  is  the  same  gs,  therefore  refer  to,  Article  719 
a  717  "  "  "  "  "  '*  "  **  718 
n     713  "   "     "  i"        "        "     "       "  720 

No  corresponding  Article  to  Article  869 

Article  869  is  the  samer  as,  therefore  refer  to,  Article  870 

a       gyQ  tt    a       tt  *   a  tt    V     a      tt         tt  gyj 

Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 
( The  list  is  always  up-to-date,) 


Law  Article  Last 

Section         Number  Ruling 

300  701  None 

301  711  ...1 

712  None 

713  None 

714  11 

715  2 

716  None 

717  None 

718  None 

719  1 

720  None 

302  731...  1 


Law  Article  Last 

Section        Number  Ruling 

302  732  None 

733  None 

303  741  2 

"  742  None 

"  743  None 

304  751...  None 

752  None 

753  None 

305  761   None 

310  771  1 

311  781  3 

"  782  None 

(Oyer) 


Law  Article  Last 

Section        Number  Ruling 

311  783  1 

"  784  None 

"  785  None 

312  791  3 

320  801  1 

802  1 

325  811  2 

"  812  3 

813  8 

814  None 

815  9 

816  1 

"  817  None 

818  (  3 

326  831....  ■  40 

832  None 

833  4 

834  1 

"  835  3 

"  836  15 

"  837  5 

"  838  9 

839  4 

"  840  9 

841  5 

842  None 

843  2 

844  1 

845  8 

845A  (See  845) 

846  4 

847  None 

848  None 

"  849  None 

850  2 

851  6 

852  1 

853  1 


Law 

Article 

Last 

1  >  l-lil  JLkJCI 

n  li  n  o 

X.  v  U  i  1 1 1  £ 

326 

854 

2 

tt 

855 

1 

n 

856  

tt 

857  

5 

tt 

858 

10 

ft 

859 

1 

tt 

860  

 None 

tt 

861  

 None 

tt 

862  

tt 

863  

 None 

tt 

864  

 None 

tt 

865 

 None 

tt 

866 

 None 

tt 

867  

 None 

tt 

868 

 None 

tt 

869 

1 

tt 

870 

None 

tt 

871 

1 

327 

.,..901  

29 

328 

.  . . .911  

2 

tt 

912 

3 

tt 

913 

1 

it 

914 

2 

330 

. . . .931  

4 

tt 

932 

1 

a 

933 

7 

ct 

934 

331 

. . . .941  

17 

335 

. . . .951  

 None 

tt 

952 

1 

tt 

953 

None 

■  it 

954 

tt 

955 

None 

336 

. . . .961  

tt 

962  

 None 

337 

. . . .971  

2 

tt 

972 

338 

....981  

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.  The  first  Article  is  701, 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  35. 

Later  Bulletins,  since  issued  {if  any)>  contain  no  rulings  bearing  on  the 
1918  or  1921  excess-profits  tax  laws. 

Insert  this  page  to  face  blue  page  401. 


6-26-22. 

Sec.  326.    Art.  838.— 15. 

books  at  the  beginning  of  the  taxable  year  at  an  amount  in  excess  of  their 
actual  value  at  that  time  and  quoted  with  approval  the  following  from  article 
839  of  Regulations  45  (1920  edition): 

Adjustments  in  respect  of  depreciation  or  depletion  in  prior  years  will  be  made  or 
permitted  only  upon  the  basis  of  affirmative  evidence  that  as  at  the  beginning  of  the 
taxable  year  the  amount  of  depreciation  or  depletion  written  off  in  prior  years  was  in- 
sufficient or  excessive,  as  the  case  may  be. 

And  in  an  informal  memorandum  the  Committee  has  expressed  an  opinion 
that: 

No  reduction  in  earned  surplus  should  be  made  in  any  case  where,  because  of  repairs, 
renewals  and  replacements,  the  property  as  a  whole  Remains  unimpaired  either  in  intrinsic 
value  or  efficiency. 

The  principle  last  stated  is  peculiarly  applicable  to  obsolescence.  Ob- 
solescence, of  which  the  case  here  presented  is  typical,  is  not  like  depre- 
ciation, a  matter  of  decrease  in  earning  power  or  in  absolute  efficiency,  but 
only  in  relative  efficiency.  It  has  its  origin  in  the  fact  that  although  the  orig- 
inal efficiency  be  maintained,  yet,  owing  to  improvements  in  the  art  or  changed 
economic  conditions,  a  device  or  factor  in  production  will  eventually  have  to 
be  discarded.  The  loss  is  a  future  loss,  but  for  equitable  reasons  the  statute 
permits  it  to  be  spread  over  the  period  for  which  it  can  be  foreseen,  and  allows 
the  portion  assignable  to  the  period  subsequent  to  December  31,  1917,  to  be 
deducted  pro  rata  over  such  period. 

In  the  instant  case  the  vessels  of  the  5,000-ton  class  will  to-day  net  x  cents 
freight  per  mile,  as  when  they, were/first  constructed.  Their  intrinsic  value 
is  unimpaired,  but,  because  the  ne{wer  and  larger  type  will  earn  from  six  to 
eight  times  as  much,  it  is  evident  that,  when  the  number  of  larger  vessels 
becomes  sufficient  to  handle  the  Carrying  trade  of  the  Great  Lakes,  the  smaller 
vessels  will  become  economically^impossible  of  operation  and  will  necessarily 
be  discarded  or  junked.  Under/tjie  principle  laid  down  in  A.  R.  M.  106,  as 
subsequently  explained,  therefore,  there  is  neither  justification  nor  reason  in 
requiring  the  reduction  of  tl^e  invested  capital  in  the  case  of  these  bulk 
freighters  prior  to  the  time  such  deductions  were  actually  taken  in  the  com- 
putation of  net  income.  / 

It  is,  therefore,  recommended,  upon  reconsideration  of  A.  R.  R.  27,  that 
obsolescence  upon  bulk-freight  vessels  upon  the  Great  Lakes  be  accepted  as 
established  by  the  evidence  now  on  file;  that  such  obsolescence  be  computed 
in  the  case  of  the  various  types  and  sites  of  such  vessels  in  accordance  with 
the  above  recommendation;  that  Solicitor's  Opinion  114  be  adhered  to;  and 
that  the  owners  of  such  bulk-freight  vessels  be  not  required  to  readjust  their 
invested  capital  to  allow  for  the  obsolescence  accrued  up  to  and  including 
December  31,  1917. 

9 


Supplementary  Bulletin  Rulings. 


S-17-22. 


Perpetual  Checklist 
Supplementary  Rulings  Reprinted  from  the  Internal  Revenue  Bulletins. 

The  Supplementary  Rulings  are  printed  on  the  pages  immediately  preceding 

The  Foreword  to  the  Supplementary  Rulings  should  be  read. 


Key. — The  word  "none,"  in  the  column  headed  "Last  Ruling/*  signifies 
in  each  case  that  there  are  no  special  rulings  bearing  on  the  particular  Article 
of  Regulations  45  (1918  Act)  or  of  Regulations  62  (1921  Act). 

The  numeral,  in  each  case,  shows  how  many  serially  numbered  special 
rulings  bearing  on  the  particular  Article  have  been  reproduced,  and  indicates 
the  last  serial  number  of  the  group.  These  serial  numbers  appear  in  bold  face 
type  at  the  end  of  the  special  rulings  themselves,  within  the  Supplement. 

Caution. — To  the  extent  of  the  imposition  of  the  excess-profits  tax  for 
1921,  the  1918  and  1921  laws  are  identical,  except  that  domestic  corporations 
entitled  to  the  benefits  of  Section  262  of  the  1921  Act  C^j  1083)  are  grouped 
with  foreign  corporations  for  the  purposes  of  the  1921  excess-profits  tax. 
To  much  the  same  extent,  with  like  qualifications,  the  provisions  of  Regula- 
tions 62  (1921  Act)  are  essentially  identical  (there  are  frequent  verbal 
changes)  to  the  provisions  of  Regulations  45  (1918  Act).  The  numbering 
of  the  Articles  of  Regulations  62  (1921  Act)  is  the  same  as  that  of  the  respec- 
tive corresponding  Articles  of  Regulations  45  (1918  Act),  except  as  noted 
below.  It  follows  then,  that,  except  as  noted  below,  for  the  purposes  of  the 
Supplementary  Bulletin  Rulings,  the  Article  reference  number  is  the  same 
under  either  Act. 

Reg.  62  (1921  Act)                Reg.  45,  (1918  Act) 
No  corresponding  Article  to  Article  712 


snoH 
J 

a  n  o  54 

3flO>i 

^norA 


Article  7I3js  the  same  as,  therefore  refer  to,  Article  713 
n     713  V*   '*  /    u     '*         '*        '*     "       \*  714 


714 A  "/  "  "  "  "  "  •  715 
715  "YJ     "     "      *  "  *     "     "     dgg  716 

No  corresponding  Article  to  Article  717 

Article  716  is  tnfe  same  as,  therefore  refer  to,  Article  719 

"     ,718  "  r  V"     "         "         "     "       "  720 

No  corresponding  Article  to  Article  869 

Article  869  is  the  sarne  as,  therefore  refer  to,  Article  870 
a     870  "  f  **      "  \  "         ii         *'*     ((       "  871 

Otherwise 

Art.  of  Reg.  62  is  same  as,  therefore  refer  to,  same  numbered  Art.  of  Reg.  45 


3ffoVf 


(The  list  is  always  up-to-date.) 


Law 
Section 
i^300.  .  .  . 

^301.... 

is' a 

s  it 

,  a 


Article 
Number 
. .701... J  . 
..711  

712  

713.....  . 

714  

715  

716  

717  

718  

719,... .  . 

720  


Last 
Ruling 
.  .None 
.  .1 

.  .  None 
.  .  None 
.11 
.  .2 

.  None 
. .  None 
, .  None 

.1 

None 


^302  731...  1 


Law 
Section 
302 ... . 


Article 
Number 

. .732  

733 


303 .. . 
n 

a 

304. . . 
« 


305  

310  

311  


741 
742 
743 
751 
752 
753 
761 
771 
781 


Last 
Ruling 
.  .  None 
.  .  None  ^ 

.  .2  es 
.  None 
.  None  *" 
.  .  None  - 
.  .  None  - 
.  .  None 
.  .  None 

1  ^ 

.3 


"  782  None 

(Over) 


Law 

Section 

311.... 


312 
320 

M 

325 


326 


Article 
Number 
. .783... 

784... 

785... 
..791... 
. .801... 

802... 
. .811... 

812... 

813... 

814... 

815... 

816 


Last 
Ruling 
.  .1 

.  .None 
.  .None 

.  .3 
.  .1 
.1 

.  .2 
.  .3 
.  .8 

.  .  None  i 


J/ 


817  None^ 


818  

,831  

832  

833  

834  

835  

836  

837  

838  

839  

840. 
841 


3  * 
.40*' 
NoneJ 
.4 


3  V 
15 

.5 
9 

4  ^ 
9 

5  * 


842  None*' 

843  2  ^ 

844  1  V 

845  8  *s 

845A  (Sec  845)  ^ 

846  4 

847  None£ 

848  None  < 

849....  None  ^ 

850  2 

851  6 

852  1  * 

853  1  ! 


Law  Article  Last 

Section        Number  Ruling 

326  854  2 

855  1 

856  None^ 

857  5  ^ 

858  10  r 

859  1  S 

860..  None  A" 

861  None  u 

862  3  + 

863  None 

864  None  , 

865  None 

866  None  ^ 

867  None  ^ 

868  None*- 

869  1  / 

870  None 

871  1 

327  901  29 

328  911  2  A 

912  3 

913  1  X 

914  2  *T 

330  931  4 

932  1  V 

933  7  ' 

934  None 

331   941  17  ^ 

335  951  None 

952  1  ^ 

"  953  None 

954  None 

955  None 

336  961  None 

962  None 

337  971  2  * 

972  None 

338  981  None 


:     :   >  •  '  i  • "  .      .  y,  -:u>;g  g«  \d  .S3.M  TO  .  IT  A 

Every  Article  of  Regulations  45  (1918  Act)  and  of  Regulations  62  (1921 
Act)  bearing  specifically  on  the  war-profits  and  excess-profits  tax  is  listed  in 
the  foregoing  table.   The  first  Article  is  701. 

Missing  Article  numbers  such  as  702  to  710  have  not  yet  been  used. 


The  last  weekly  Bulletin  from  which  rulings  have 
been  reproduced  hereinbefore  and  as  listed  above  is 

VOLUME  I  (1922),  No.  33. 

Later  Bulletins since  issued  (if  any),  contain  no  rulings  bearing  on  the 
1918  or  1921  excess-profits  tax  laws. 


Insert  this  page  to  face  blue  page  401. 


1-81-22. 


Sec.  325.    Art  815<~3. 


40-21-1857:  O.  D.  1057. 

Inquiry  if  made  whether  4  per  cent  bonds  of  the  Government  of  the 
Philippine  Islands  are  to  be  considered  admissible  or  inadmissible  assets 
in  computing  invested  capital. 

Section  325  (a)  of  the  Revenue  Act  of  1918  provides  that: 

The  term  "inadmissible  assets"  means  stocks,  bonds  and  other  obligations  (other  than 
obligations  of  the  United  States),  the  dividends  or  interest  from  which  is  not  included  in 
computing  net  income    *    *  *. 

It  is  further  provided  in  section  213(b)  4  of  the  Act  that  interest  upon 
obligations  issued  by  a  possession  of  the  United  States  is  exempt  from  Federal 
income  tax. 

The  bonds  referred  to  are  not  obligations  of  the  United^States,  but  on 
the  contrary  are  obligations  of  a  possession  of  the  United  States.  Accordingly, 
it  is  held,  that  4  per  cent  bonds  of  the  Government  of  the  Philippine  Islands 
are  inadmissible  assets  within  the  meaning  of  section  325  (a)  of  the  Revenue 
Act  of  1918.  / 


42-21-1875:  O.  D.  1069. 
Since  the  income  from  Federal  land  ba£tk  bonds  is  tax  free  and  since  such 
bonds  are  not  obligations  of  the  United  States,  they  are  inadmissible  assets 
within  the  meaning  of  section  325(a)  of  the  Revenue  Act  of  1918,  and  should 
be  so  treated  in  computing  the  invested  capital  of  a  corporation. 

7  ,  / 


(See  I  ('22)-4-48: 
corporate  stock. 
8 


Section  3 26\  Article  831.    Ruling  No.  32.)  Foreign 


Supplementary  Bulletin  Rulings. 


7-12-22. 

EXCESS  PROFITS  TAX. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

War-Profits  and  Excess-Profits  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 
T.  D.  Subject  Paragraph 

1918  Law  Provisions   500 


Special 
Special 
Decision 


Di 


Decision 


596 


86: 


865 
869 
875 


Reg.  45,  Pt.  II-B  Regulations  under  1918  Act  (revision  of  January  28,  1921)  as 

amended    and   supplemented   to   December  20, 

1921  

Special  Relief  for  1919  under  Sec.  328  not  determined:  compu- 

tation and  payment  of  tax  for  1920.    (March  23, 

1921.)   i  

3220  Amended  returns  required  within  90  days  when  inflated 

values  have  been  used  in  determining  invested 

capital.    (August  26,  1921.)  

Mim.  2848  Interpretation  of  the  foregoing.    (October  19,  1921.).. 

3243  Extension  of  time  for  foregoing.    (November  14,  1921.) 

A.  R.  M.  106  Surplus  and  undivided  profits:  Adjustments  because  of 

alleged  failure  to  charge  off  depreciation.  (Febru- 
ary 26,  1921.)   877 

Explanation  of  the  foregoing.    (July  6,  1921.)...  .:  ..  .  879 
Supplementing  the  foregoing.    (November  1,  1921.)...  885 
La  Belle  Iron  Works  vs.  U.  S.    U.  S.  Supreme  Court 
decision,  Act  of  1917.    Invested  capital.  (May 

16,  1921.).   889 

DeLaski  &  Thropp  Circular  Woven  Tire  Co.  vs. 
Iredell,  pistrict  Court  decision,  Act  of  1917.  A 
corporation  whose  entire  income  is  derived  from 
royalties 'on  patents  in  which  it  has  no  investment 
is  entitled  to  assessment  undeT  Section  209  as  being 
engaged?  in  a  trade  or  business  having  no  invested 
eapita\]or  not  more  than  a  nominal  capital. 

(November  9,  1920.)   .  

Lincoln  Chpnical  Co.  vs.  Edwards.  District  Court 
decision,  |9 17  Act.  Additions  to  surplus  account: 
Earned|  surplus  expended  in  developing  and  im- 
proving a  sVcret  process,  or  used  to  repay  borrowed 
moneyjso  expended.    (T.  D.  3183,  June  24,  1921.) 

The  matters  listed  above  are  fully  ir.dexedNon  the  blue  index  following  page  393. 


913 


926 


For  running  table  of  contents  of  matters  relating  to  the  1921  Act,  and  to  all  matters 
issued  since  the  passage  of  that  Act,  see  Excess-Profits  Tax 
Supplementary  Page  2,  over. 


Copyright  1922,  by  'The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess-Profits  Tax  Supplementary  Page  1. 


7-12-22. 

EXCESS  PROFITS  TAX. — RUNNING  TABLE  OF  CONTENTS. 


Rulings,  Regulations,  Opinions  and  Decisions 
under  the 

War-Profits  and  Excess-Profits  Tax  Laws. 

Giving  Treasury  Decision  Number  or  other  Designation,  General  Subject  Content, 
Date  of  Issue,  and  Paragraph  Reference. 
T.  D.  Subject  Paragraph 

The  regulations,  rulings,  etc.,  listed  below,  are  those  issued  during  1922. 

1921  Law  Provisions   1000 

I)«cision  Cartier-Holland  Lumber  Co.,  vs.  Doyle.    U.  S.  Circuit 

Court  of  Appeals  decision,  1917  Act.  Borrowed 
capital  in  relation  to  the  "no  invested  capital  or  not 
more  than  a  nominal  capital"  provision  of  Sec.  209 
of  the  1917  Act.    (December  15,  1921.)  .    1101 

Special  Allocation  of  tax:  partnership-s  and  corporations  in  con- 
solidated cases  under  1917-1921  Acts  (Jan.  16, 
1922)   1126 

Reg.  62,  Pt.  II-B  Regulations  under  1921  Act  (1922  Edition).  Promulgated  Febru- 
ary 15,  1922.  Released  for  publication  March  1, 
1922   1133 

Special  Consolidated  returns  for  1917  (A.  R.  R.  855)   1265 

3328  Arts.  27  and  46,  Reg.  41  (1917  Act)  amended.— Divi- 

dends received  from  foreign  corporations;  stock 
holdings  in  foreign  corporations  (May  12,  1922)  1266 

3334  Court  decision,  1917  Act. — Invested  capital:  Selling 

agent:  Taxability  under  Sec.  209  (May  25,  1922)  1270 

Special  Consolidated  returns  for  1917  (A.  R.  R.  942)   1272 

3367  Art.  836,  Regs.  45  and  62  amended. — Tangible  property  paid  in; 

value  in  excess  of  par  value  of  stock   1288 


Insert  this  page  immediately  before  the  blue  Excess-Profits  Tax — 1921  Act — Index. 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  SERVICE 
Excess-Profits  Tax  Supplementary  Page  2. 


6-30-22.  '  (2)  7-12-22. 

WAR-PROFITSfAND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC.— 1922. 


companies  in  acquiring  and  disposing  of  their  stock  and  it  seems  equally- 
clear  that  the  State  statutes  gave  to  them  the  right  to  such  independence. 
The  absence  of  any  ulterior  motive  on  the  part  of  the  stockholders  has  also 
been  fully  established.  The  Committee,  therefore,  is  of  the  opinion  that 
because  of  the  disparity  of  stockholdings  of  the  stockholders  in  these  three 
corporations  the  Bureau  would  be  unable  to  compel  the  corporations  to  pay  a 
tax  based  upon  a  consolidated  return  of  net  income  unless  the  corporations 
voluntarily  paid  such  tax,  and  that,  therefore,  consolidated  returns  in  this  case 
should  neither  be  required  nor  permitted. 

1287  It  is  therefore  recommended,  in  the  appeal  of  the  M  Company,  the 
O  Company,  and  the  P  Company,  that  the  ruling  of  the  Income  Tax 
Unit  that  these  companies  were  affiliated  and  should  file  consolidated  returns 
for  the  years  1917,  1918,  and  1919,  jbe  reversed,  and,  accordingly,  that  the 
appeal  be  sustained.    (1-26-373:  A.  R.  R.  942.— Bulletin  I  ('22)-26.) 


(T./D.  3367.) 

1288    Article  836,  Regulations  45,  (1920  edition)  and  Article  836,  Reg- 
757     ulations  62,  amended. — Afticle  836,  Regulations  45,  (1920  edition) 
1192     and  Article  836,  Regulations  62,  are  hereby  amended  to  read  as 
follows:  \  / 

Article  836.  Tangible  prope^y  paid  in;  value  in  excess  of  par  value  of 
stock. — The  paid-in  surplus  allowM  in  any  case  is  confined  to  the  value  def- 
initely known  or  accurately  ascertainable  at  the  time  the  property  is  paid  in. 
Evidence  offered  to  support  a  cliim  for  a  paid-in  surplus  must  be  as  of  the 
date  of  the  payment.  It  may  consist  among  other  things  of  (a)  an  appraisal 
of  the  property  by  disinterested  authorities;  (b)  a  certificate  of  the  assessed 
value  in  the  case  of  real  estate  or,  (c)  evidence  of  a  market  price  in  excess  of 
the  par  value  of  the  stock  or  shares.  Opinion  evidence,  expert  or  otherwise, 
of  the  value  of  property  as  of  a  prior  date  will  not  be  accepted.  Retrospective 
appraisals  submitted  in  support  of  a  claim  for  a  paid-in  surplus  will  not  be 
accepted  in  any  case  where  other  reasonably  satisfactory  evidence  is  available 
and  in  any  case  will  be  accepted  only  after  rigid  scrutiny  and  will  be  followed 
only  to  the  extent  to  which  their  reasonableness  is  fully  established.  The 
property  which  was  paid  in  is  the  basis  of  the  appraisal,  and  the  appraisal 
must  reconcile  the  accounts  so  as  to  reflect  accurately  the  actual  value  on  the 
date  as  of  which  the  appraisal  is  made  and  the  depreciation  sustained.  Proper 
consideration  must  in  all  cases  be  given  to  depreciation  and  the  expired  and 
remaining  serviceable  life  of  the  property  must  be  shown.  To  be  acceptable 
retrospective  appraisal  must  show:  (1)  the  history  of  the  business  and  manner 
in  which  the  information  or  data  was  acquired;  (2)  the  manner  in  which  the 
appraisals  were  constructed;  (3)  the  inventory  on  the  date  of  the  appraisal 
in  detail;  (4)  the  date  of  acquisition  of  all  items  remaining  in  the  inventory 
as  of  the  date  of  appraisal;  (5)  the  elimination  from  the  inventory  of  all 
items  acquired  subsequent  to  the  date  as  of  which  the  appraisal  is  made  and 
how  this  was  effected  (all  items,  the  date  of  acquisition  of  which  can  not  be 
definitely  determined,  should  be  listed  separately  and  all  the  facts  bearing 
upon  the  date  of  acquisition  given);  (6)  the  replacement  cost  at  the  date  as  of 
which  the  appraisal  is  made  of  each  item  accepted  as  on  hand  on  that  date 
determined  upon  competent  data,  with  a  statement  of  the  method  employed 
in  arriving  at  such  cost  (estimate  and  general  statements  will  not  be  accepted); 
(7)  the  rate  and  total  amount  of  depreciation  as  shown  by  the  books;  (8)  the 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         465  SERVICE 


7-12-22. 

WAR-PROFITS  AND  EXCESS-PROFITS  TAX  REGULATIONS,  ETC. — 1922. 
 1 

rate  and  total  amount  of  depreciation  taken  upon  each  item  included  in  the 
appraisal  for  the  purposes  of  the  appraisal  (if  other  than  normal  rates  of 
depreciation  are  used  the  reason  therefor  and  the  method  of  computing 
depreciation  must  be  fully  explained);  (9)  the  actual  cost  when  ascertainable 
of  each  item  included  in  the  appraisal;  (10)  the  book  value  on  the  date  as  of 
which  the  appraisal  is  made  of  all  the  items  included  in  the  appraisal,  and 
(11)  a  detailed  statement  of  all  plant  facilities  and  additions,  represented  by 
capital  expenditures  previously  written  off,  which  were  still  in  use  on  the  date 
as  of  which  the  appraisal  was  made  and  all  the  depreciation  actually  sustained 
or  accrued  on  such  items.  No  claim  will  be  allowed  for  paid-in  surplus  in 
any  case  in  which  the  addition  of  value  has  been  developed  or  ascertained 
subsequent  to  the  date  on  which  the  property  was  paid  in  to  the  corporation, 
or  in  respect  of  property  which  the  stockholders  or  their  agents  on  or  shortly 
before  the  date  of  such  payment  acquired  at  a  bargain  price,  as  for  instance, 
at  a  receiver's  sale.  Generally,  allowable  claims  under  this  article  will  arise 
out  of  transactions  in  which  there  has  been  no  substantial  change  of  beneficial 
interest  in  the  property  paid  in  to  the  corporation  and  in  all  cases  the  proof 
of  value  must  be  clear  and  explicit.  (T.  D.  3367,  signed  by  C.  P.  Smith, 
Acting  Commissioner  of  Internal  Revenue,  and  dated  July  10,  1922.) 

[Comment:  All  in  amended  Article  836,  as  printed  above,  relating  to 
retrospective  appraisals  is  new.  Otherwise  no  change  in  effect  except  that 
the  word  "evidence"  in  (c)  in  the  third  sentence  was  formerly  "proof." — 
The  Corporation  Trust  Company.] 


Copyright  1922,  by  'I  tie  Corporation  Trust  Company. 
WAR  TAX         466  SERVICE 


8-4-22. 


ESTATE  TAX  INDEX. — REGULATIONS  63:  1921  ACT. 


The  references  are  to  paragraph  numbers. 

Reservation  of  annuity  or  income  from  property  transferred.  .647 
Resident  decedent: 

Definition.  .  583 

See  also  Section  403b  and  section  41 L  .444,  460 

Presumption.  .  584 

Specific  exemption.  .582,  700 
Return: 

Beneficial  interest,  person  holding,  when  to  make  return.  .  722,  72') 
Commissioner  or  collector — 

Securing  evidence.  .  769,  770 

When  to  make.  .  725 
Deductions.  .  665 

Delay  in  filing,  none  authorized.  .721 

See  also  Penalties. 
Executor  to  file.  .722,  725,  729 
Extension  of  time  for  filing.  .721 
False  and  fraudulent,  penalty  for.  .757 
Nonresident  estates.  .705-707,  729,  730 
Not  filed  in  good  faith.  .744,  757 
Penalties,  delinquency  in  filing.  .725,  755,  758 

For  false  or  fraudulent  return.  .755,  757 
Persons  liable  for  return — 

Nonresident  estates.  .  729 

Resident  estates.  .722 
Privileged  character  of  return.  .732,  733 
Tax  shown  by,  payment  of.  .  736-744 
Transfers  presumed  to  be  taxable.  .643 
Verification  of.  .  726,  736,  769,  770 
When  required — 

Nonresident  estates.  .  729 

Resident  estates.  .721 
Revenue  agents  in  charge,  list  of  offices  of.  .777 

Revocation,  reservation  in  connection  with  transfer — of  power  of.  .  649 
Revoked  articles  of  Regulations  No.  37.  .  776 
Rugs,  oriental,  valuation  of.  .625 

Safe  deposit  companies,  duty  with  respect  to  nonresident  estates.  .716 
Sale  of  property  as  determining  value  at  time  of  death.  .  608,  609 
Sale  of  property  subject  to  power  of  appointment.  .  656 
Sale,  when  cost  of,  is  an  administration  expense.  .676 
Scope  of  repeal  of  1918  revenue  act.  .775 
Securities  of  nonresident  decedent: 

Person  in  possession  of.  .716 

Transfer  on  order  of  foreign  executor.  .717 
Settlement  of  estate: 

Losses  during.  .  682 

Support  of  dependents  during.  .683 
Shares  of  stock  (see  Stocks  and  bonds).  .610 
Shipwreck,  losses  from.  .682 
Silverware,  valuation  of.  .621,  625 
Situs  of  property.  .604,  701 
Special  power  of  appointment.  .657 
Specific  exemption.  .582,  700 

None  in  nonresident  estates.  .582,  703 
Spouse  surviving.  .641,  653 
State  bonds,  transfer  of,  taxable.  .605 
Statements,  executor's  duty  to  render.  .773 
Statuary,  valuation  of.  .625 

Statutes  (see  Table  of  Contents,  for  analysis  of  Revenue  Act,  1921,  page  15S).  .57^,  588 
Stock  dividends,  when  included.  .  606 
See  also  Nonresident  estates.  .717 
Stock  of  nonresident  decedent,  transfer  of,  after  giving  bond.  .719 
Stock  owned  by  nonresident  decedent,  situs  of.  .701 
Stocks  and  bonds,  valuation  of.  .610 

Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX  215  SERVICE 


8-4-22. 

 ESTATE  TAX  INDEX.— REGULATIONS  63:  1921  ACT, 


The  references  are  to  paragraph  numbers. 

Storms,  losses  from.  .682 

Suit,  collection  of  tax  by.  .771 

Superseded  articles  of  Regulations  No.  37.  .776 

Supplemental  data  to  be  filed  with  return.  .724 

Nonresident  estates.  .730 
Support  of  dependents.  .683 
Surrogates'  fees.  .676 

Surviving  partner  succeeding  to  interest  of  the  decedent.  .614 

Surviving  spouse.     (See  Dower;    Curtesy;    Support  of  dependents;     Tenant-;  by  the 
entirety.) 

Survivorship,  property  passing  by  right  of.  .651,  653 

Table  of  Contents  (see  page  158). 
Tables,  annuity  and  remainder.  .639,  640 

Tax  rates.  .588,  590 
Tax,  estate: 

Additional.  .  726 

Collection'of.  .747,  771 

Computation  of.  .587-590 

See  also  Nonresident  estates.  .  70S 

Executor  shall  pay  the  tax.  .741 

See  also  Nonresident  estates.  .711 

Liability,  manner  of  determining.  .587 

Liability  of  certain  persons.    See  Personal  liability. 

Lien  for.  .749,  752 

Life  insurance  proceeds  subject  to  lien  for.  .  750 
Life  insurance,  to  provide  for  payment  of.  .661 
Nature  of.  .  581 

Payment  essential  to  deduction  of  previously  taxed  property.  .  >  ; ' 
Payment  of  (for  analysis  see  Payment  of  tax). 
Rates  of.  .588,  590 

Refund  of  tax  and  penalties.  .  760,  764,  765 
Tax,  Federal  income.  .680,  728 
Tax-free  securities,  transfer  of,  taxable.  .  605 

Taxation,  local,  assessment  for,  not  determinative  of  value.  .  609 

Taxes,  rules  determining  deductibilty.  .  678 

Tenants  in  common,  joint,  or  by  the  entirety.  .651,  653 

Tenants,  life.  .601,  629,  656 

Termination  of  World  War.  .  596 

Testimony,  taking.  .  769,  770 

Theft,  losses  from.  .  682 

Time  for  payment  of  tax.  .  736 

Time,  limitation  of — for  filing  claim  for  abatement  of  additional  tax.  .  76  > 
Time  of  transfer.  .  642-646 

Title  vested  in  decedent  and  one  or  more  other  persons.  .651,  653 
Tombstone.  .  667 
Trade-marks,  valuation  of.  .617 

Transfer  agent,  nonresident  estate,  when  to  give  notice  of.  .717 

Transfer  of  life  insurance,  when  taxable.  .  663 

Transfer  of  net  estate  taxed,  not  the  property.  .581 

Transfer  of  securities  directed  by  foreign  executor,  agent's  notice.  .717 

Transfers,  by  will  or  under  intestate  laws.  .580 

Transfers  made  by  decedent  in  his  lifetime: 

Additions  to  property  transferred.  .  650 

Betterments  to  property  transferred.  .  650 

Checks  outstanding  at  date  of  death.  .616 

Consideration  for.  .  642-647 

Date  of  transfer.  .  642-647 

Deductibility  of  value,  included  in  gross  estate.  .691,  694 

See  also  Nonresident  estates.  .  707 
General.  .580 

In  contemplation  of  death.  .  643 

Income  of  property  transferred,  payable  to  third  person.  .648 
Insurance  policy.  .663 

Intended  to  take  effect  in  possession  or  enjoyment  at  or  after  death.  .  646-6")  1 


Copyright  1922,  by  The  Corporation  Trust  Company. 
WAR  TAX         216  SERVICE 


37  Wall  Street, 


New  York 


oAffiliated  with 

Wtyt  Corporation  3Drti£ft  Company 

SYSTEM 


Organized  1892 


Jersey  City,  15  Exchange  Place 
Boeton,  53  State  Street 

(Corporation  Registration  Co.) 
Chicago,  112  W.  Adams  Street 
Pittsburgh,  Oliver  Bldg. 
Washington,  Colorado  Bldg. 
Lea  Angeles,  Title  Insurance  Bldg. 


fconpoBATten 

1  TRUST 

ff  Company 

I  AH9  AFflUATXO 


Philadelphia,  Land  Title  Bldg. 
Portland,  Me.,  281  St.  John  Street 
St.  Louis,  Federal  Reserve  Bank  Bldg. 
Wilmington,  du  Pont  Bldg. 

(Corporation  Trust  Co.  of  America) 
Albany  Agency,  158  State  Street 


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These  are  loose  leaf  binder  Services  containing,  in  addition  to  the  respective  Acts  as  amended  and  now  in  effect, 
all  official  matters,  in  force,  issued  since  the  passage  of  the  respective  original  Acts,  compiled,  cross-referenced, 
and  indexed,  and  kept  up  to  date  at  all  times  by  means  of  additional  sequentially  numbered  printed  pages  sent 
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lower  court  cases  are  embodied  in  the  Tax  Services. 

FEDERAL  INCOME  TAX  SERVICE— Reports  the  Federal  Income  Tax  Law  and  the 
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CORPORATION  DEPARTMENT— Assists  attorneys  in  the  organization  of  corporations 
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and  subsequently  furnishes  annual  statutory  representation  service,  including  office  or 
agent  required  by  statute. 

REPORT  AND  TAX  DEPARTMENT  —Notifies  attorneys  of  the  time  to  file  corporation 
reports  and  attends  to  tax  matters  in  every  state  and  in  the  provinces  of  Canada. 

LEGISLATIVE  DEPARTMENT— Reports  on  pending  legislation;  furnishes  copies  of  bills 
and  of  new  laws  enacted  by  Congress. 

TRUST  DEPARTMENT — Acts  as  trustee  under  deed  of  trust,  custodian  of  securit  ies,  escrow 
depository  and  depository  for  reorganization  committees. 

TRANSFER  DEPARTMENT— Acts  as  registrar  and  transfer  agent  of  stocks,  bonds  and 
notes.  ' 

FEDERAL  DEPARTMENT— Reports  decisions  of  the  United  States  Supreme  Court,  rulings 
of  the  Interstate  Commerce  Commission,  Federal  Trade  Commission,  Bureau  of  Internal 
Revenue  and  Federal  Reserve  Board. 

Furnishes  agent  at  Washington  for  common  carriers  to  accept  service  of  orders,  process, 
etc.,  of  Interstate  Commerce  Commission,  j 


